Lindon Company is the exclusive distributor for an automotive product that sells

Question

Lindon Company is the exclusive distributor for an automotive product that sells for $56.00 per unit and has a CM ratio of 30%. The company’s fixed expenses are $411,600 per year. The company plans to sell 29,300 units this year.

Required:

1. What are the variable expenses per unit?

2. What is the break-even point in unit sales and in dollar sales?

3. What amount of unit sales and dollar sales is required to attain a target profit of $243,600 per year?

4. Assume that by using a more efficient shipper, the company is able to reduce its variable expenses by $5.60 per unit. What is the company’s new break-even point in unit sales and in dollar sales?

Explanation / Answer

Answer 1.

Selling Price = $56.00
CM Ratio = 30%

Contribution Margin per unit = Selling Price * CM Ratio
Contribution Margin per unit = $56.00 * 30%
Contribution Margin per unit = $16.80

Contribution Margin per unit = Selling Price - Variable Expenses per unit
$16.80 = $56.00 - Variable Expenses per unit
Variable Expenses per unit = $39.20

Answer 2.

Breakeven Point in unit sales = Fixed Expenses / Contribution Margin per unit
Breakeven Point in unit sales = $411,600 / $16.80
Breakeven Point in unit sales = 24,500

Breakeven Point in dollar sales = Fixed Expenses / CM Ratio
Breakeven Point in dollar sales = $411,600 / 0.30
Breakeven Point in dollar sales = $1,372,000

Answer 3.

Target Profit = $243,600

Required Sales in unit sales = (Fixed Expenses + Target Profit) / Contribution Margin per unit
Required Sales in unit sales = ($411,600 + $243,600) / $16.80
Required Sales in unit sales = 39,000

Required Sales in dollar sales = (Fixed Expenses + Target Profit) / CM Ratio
Required Sales in dollar sales = ($411,600 + $243,600) / 0.30
Required Sales in dollar sales = $2,184,000

Answer 4.

Selling Price = $56.00

Variable Expenses per unit = $39.20 - $5.60
Variable Expenses per unit = $33.60

Contribution Margin per unit = Selling Price - Variable Expenses per unit
Contribution Margin per unit = $56.00 - $33.60
Contribution Margin per unit = $22.40

CM Ratio = Contribution Margin per unit / Selling Price
CM Ratio = $22.40 / $56.00
CM Ratio = 0.40

Breakeven Point in unit sales = Fixed Expenses / Contribution Margin per unit
Breakeven Point in unit sales = $411,600 / $22.40
Breakeven Point in unit sales = 18,375

Breakeven Point in dollar sales = Fixed Expenses / CM Ratio
Breakeven Point in dollar sales = $411,600 / 0.40
Breakeven Point in dollar sales = $1,029,000

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