a) The Easy Company manufactures and sells spotlights. Each spotlight sells for

Question

a) The Easy Company manufactures and sells spotlights. Each spotlight sells for $71.25. The variable cost per unit is $48.75, and Easy company’s total fixed costs are $37,500 per year. Budgeted sales are 8,000 units. What is the contribution margin per unit?

b) A company with a single product has a contribution rate of 24%. If total fixed costs are $84,000, what is the company’s sales volume in dollars at break-even?

c) A company has a goal of earning $50,000 net income after taxes. The company must pay $14,000 income tax if it achieves the goal. The contribution rate is 30%. What sales level must be achieved to reach the goal if fixed costs are $32,000?

Explanation / Answer

(a)

Contribution margin per unit = Selling price per unit – variable cost per unit.

$71.25 – $48.75 = $22.5

(b)

Sales volume in dollars at break-even = Fixed cost x 100 / Contribution.

= $84000 x 100 / 24 = $350000

(c)

Sales level to reach a goal of earning $50,000 net income after taxes =

(Fixed cost + desired profit + tax) x 100 / Contribution

= (32000 + 64000) x 100 / 30

= 96000 x 100 / 30 = $320000

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