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 $22.00 per unit and has a CM ratio of 30%. The company’s fixed expenses are $105,600 per year. The company plans to sell 17,400 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 $39,600 per year?

4. Assume that by using a more efficient shipper, the company is able to reduce its variable expenses by $2.20 per unit. What is the company’s new break-even point in unit sales and in dollar sales?

Explanation / Answer

1) Here it is given CM ratio us 30%. Which means Contribution margin/ Revenue=30%

CM/22=30%

CM= 22×30%=6.6

So Variable cost per unit= Sales per unit- Contribution margin per unit

= 22-6.6=15.4

2)At BEP there will be no profit and no sales.

BEP= Fixed expenses/ CM per unit

=105600/6.6=16000 units

BEP sales in $=16000×22=352000

3) Target profit=39600.

Fixed expenses=105600

Total target contribution=145200

So No of unit sales for the above target= 145200/6.6=22000

And Sales in $=22000×22=484000

4) If Variable expenses is reduced by 2.2 per unit. That means the Contribution per unit increases by 2.2 per unit. So new Contribution per unit=6.6+2.2=8.8

New BEP in units= Fixed exp/Contribution per unit=105600/8.8=12000 Units

New BEP IN $= 12000×22=264000

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