Super Sales Company is the exclusive distributor for the revolutionary bookbag.

Question

Super Sales Company is the exclusive distributor for the revolutionary bookbag. The product sells for $60 per unit and has a CM ratio of 40%. The company's fixed expenses are $360,000 per year. The company plans to sell 17,000 bookbag this year. What are the variable expenses per unit? Using the equation method: What is the break-even point in units and in sales dollars? What sales level in units and in sales dollars is required to earn and annual profit of $90,000? Assume that through negotiation with the manufacturer the Super Sales Company is able to reduce its variable expenses by $3 per unit. What is the company's new breakeven point in units and in sales dollars? Repeat (2) above using the formula method.

Explanation / Answer

Answer:

1.

2) equation method:

a) Profit = Unit contribution margin * Breakeven quantity - Fixed cost

=> 0 = 24* Breakeven quantity - 360,000

=> Breakeven quantity = 15,000 units

Breakeven sales dollar = 15,000 units * $60 = $900,000

b) target Profit = Unit contribution margin * Breakeven quantity - Fixed cost

=> $90,000 = 24* required quantity - 360,000

=> Required qty = 18,750 units

Required sales dollar = $18,750 *$60 = $1,125,000

c)

Profit = Unit contribution margin * Breakeven quantity - Fixed cost

=> 0 = 27* Breakeven quantity - 360,000

=> Breakeven quantity = 13,333 units

Breakeven sales dollar = 13,333 units * $60 = $800,000

3. Formula method:

a) Breakeven point (Units) = Fixed cost/Contribution margin = $360,000/$24 = 15,000 units

Breakeven point (sales dollar) = Fixed cost/Contribution margin ratio = $360,000/40% = $900,000

b)

Sales level (unit) = (Required profit+Fixed cost) / Contribution margin = ($90,000+$360,000)/$24 = $18,750

Sales level (sales dollar) = (Required profit+Fixed cost) / Contribution margin ratio

= ($90,000+$360,000)/40% = $1,125,000

c)

Breakeven point (Units) = Fixed cost/Contribution margin = $360,000/$27 = 13,333 units

Breakeven point (sales dollar) = Fixed cost/Contribution margin ratio = $360,000/45% = $800,000

Particulars in $ Sales per unit 60 CM ratio 40% Less: Contribution margin 24 Variable cost 36

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