Exercise 5-14 Break-Even and Target Profit Analysis [LO5-3, LO5-4, LO5-5, LO5-6]

Question

Exercise 5-14 Break-Even and Target Profit Analysis [LO5-3, LO5-4, LO5-5, LO5-6]

Lindon Company is the exclusive distributor for an automotive product that sells for $38.00 per unit and has a CM ratio of 30%. The company’s fixed expenses are $228,000 per year. The company plans to sell 23,000 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 $114,000 per year?

4. Assume that by using a more efficient shipper, the company is able to reduce its variable expenses by $3.80 per unit. What is the company’s new break-even point in unit sales and in dollar sales?

Explanation / Answer

1 variable expenses per unit = 38*(1-0.3)= $26.6 2 Break-even point in unit sales=228000/(38-26.6)= 20000 Break even in dollar sales=20000*38= $760000 3 Unit sales =(228000+114000)/(38-26.6)= 30000 Dollar sales = 30000*38= $1140000 4 New break-even point in unit sales =228000/(38-26.6+3.8)= 15000 Dollar sales = 15000*38= $570000

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