A company sells Product X for $30 per unit. The Direct Material Cost, Direct lab

Question

A company sells Product X for $30 per unit. The Direct Material Cost, Direct labor cost, and Variable MFO costs total $21 per unit. Fixed costs to product the product are $135,000.

How many units of Product X must the company sell in order to break even?

What is the contribution margin ratio for product X?

How many units of Product X must be sold in order for the company to earn a $50,000 profit?

If the company was selling 25,000 units what would be its margin of safety in dollars?

If the company is selling 25,000 units, what would be the operating leverage?

If the company's sales of 25,000 units declinded by 20%, what would be the % decrease in its income from operations?

Explanation / Answer

Given,

selling price per unit = $30

total fixed cost = $1,35,000

direct material+direct labour+variable mfo per unit = $21(total variable cost)

Therefore from the given information we can find contribution per unit as follows

Contribution per unit = sale price per unit- variable cost per unit

= $30-$21

= $9

~Calculation of BREAKEVEN PIONT at this level:

we know that ,BREAKEVEN PIONT(units) = FIXED COST ÷ CONTRIBUTION PER UNIT

= $1,35,000 ÷ $9

= 15,000 units

Therefore 15,000 units are required to be sold by the company in order to be Breakeven.

~Calculation of contribution margin ratio:

we know that Contribution ratio = contribution per unit ÷ sale price per unit ×100

= $9 ÷ $30 ×100

= 30%

~Calculation of sale units whe profit is $50,000.

From Income statement we can derive that

Total Contribution = profit at that level + fixed cost

= $50,000 + $1,35,000

= $1,85,000

As we arrived that contribution ratio is 30%

then total sales value at $50,000 profit = $1,85,000÷30%

= $6,16,667

Therefore sale units at $50,000 profit = $6,16,667 ÷ $30

= 20,555 units

~Calculation of Operating leverage when company is selling 25,000 units:

we know that Operating leverage = contribution ÷ EBIT

• INCOME STATEMENT

sales (25,000 × $30) = $7,50,000

less: variable cost(25,000×$21) = ($5,25,000)

°Contribution = $2,25,000

less: fixed cost = ($1,35,000)

°EBIT/PROFIT = $90,000

Now Operating leverage = $2,25,000 ÷ $90,000

= 2.5   

~Calculation of percentage decrease in income when sale units of 25,000 were declined by 20%

Therefore new sale units = 25,000-20%

= 20,000 units

•INCOME STATEMENT

Sales value (20,000 ×30) = $6,00,000

less:variable cost(20,000×21) = $4,20,000

°Contribution = $1, 80,000

less: fixed cost = $1,35,000

°EBIT/PROFIT = $45,000

here we can observe that profit at 25,000 units= $90,000

Profit at 20,000 units = $45,000

percentage of decrease in income =( $90,000-$45,000) ÷90,000

= 50%

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