Tanner Company\'s most recent contribution format income statement is presented

ID: 2524357 • Letter: T

Question

Tanner Company's most recent contribution format income statement is presented below: Sales.. Variable expenses. ..45.00 Contribution margin $75,000 45,000 30,000 .36,000 Fixed expenses Net operating loss$6.000) The company sells its only inventories. product for $15 per unit. There were no beginning or ending a. Compute the company's break-even point in units sold. b. Compute the total variable expenses at the break-even point. c. How many units would have to be sold to earn a target profit of $9,000? d. The sales manager is convinced that a $6,000 increase in the advertising budget woul increase total sales by $25,000. Would you advise the increased advertising outlay?

Explanation / Answer

Total units sold = 75000/15 = 5000

Variable cost per unit = 45000/5000 = $9 per unit

Break-even point is the level of sales that a company must achieve to reach at no profit no loss situation,

The formula to calculate BEP (in units) = Total Fixed cost/(selling price per unit - variable cost per unit)

Where,

Fixed cost = $36000

Selling price = 15 per unit

Variable cost = 9 per unit

Let's put all the values in the formula to get the BEP in units,

BEP = 36000/ (15 - 9)

BEP = 36000/6

BEP = 6000 Units

So to reach the BEP company must sell 6000 units

At the breakeven point total variable cost = 6000* 9 = 54000

Sale required to achieve desired profit = (Fixed cost + Desired profit)/ (Sales price per unit - Variable cost per unit)

Where,

Fixed cost = $36000

Selling price = $15

Variable cost = $9

Desired profit = $9000

Let's put all the values in the formula,

Required sale = (36000 + 9000)/ (15 - 9)

= 45000/ 6

= 7500

So to reach desired profit of $9000 required units that must be sold is 7500 units

Sale (75000 + 25000)

100000

60000

Gross profit

40000

Fixed Exp (36000 + 6000)

42000

Net profit

-2000

So it is not advisable to spend on advertisement

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