Lindon Company is the exclusive distributor for an automotive product that sells
ID: 2557506 • Letter: L
Question
Lindon Company is the exclusive distributor for an automotive product that sells for $42.00 per unit and has a CM ratio of 30%. The company’s fixed expenses are $264,600 per year. The company plans to sell 24,400 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 $138,600 per year?
4. Assume that by using a more efficient shipper, the company is able to reduce its variable expenses by $4.20 per unit. What is the company’s new break-even point in unit sales and in dollar sales?
Explanation / Answer
1. Variable Expense Ratio= 1- CM Ratio
= 1-30%
= 70%
Hence Variable Expense = 70 % * Sales Price Per Unit
= 70 % * $ 42
= $ 29.40
Hence the correct answer is $ 29.40
2.
Break Even Point (Dollars)= Fixed Cost / Contribution Margin Ratio
= $ 264,600 / 30%
= $ 882,000
Break Even Point (units)= Fixed Cost / Contribution Margin
= Fixed Cost / ( Sales * 0.3)
= $ 264,600 / ( $ 42 *0.3)
= 21,000 Units
3.
Required Contribution = Target Profit + Fixed Cost
= $ 138,600 + $ 264,600
= $ 403,200
Sales Unit Required = Required Contribution / Contribution Margin Per Unit
= $ 403,200 / ( $ 42*0.3)
= 32,000 Units
Sales Dollar Required = Required Contribution / Contribution Margin Ratio
= $ 403,200 / 0.3
= $ 1,344,000
4.
Sales Price = $ 42
Less: Variable Cost ( $ 29.40- $ 4.20) = 25.20
Contribution Margin = $ 16.80
Contribution Margin Ratio = Contribution Margin / Sales *100
= $ 16.80 /$ 42 *100
= 40%
Break Even Point (Dollars)= Fixed Cost / Contribution Margin Ratio
= $ 264,600 / 40%
= $ 661,500
Break Even Point (units)= Fixed Cost / Contribution Margin
= $ 264,600 / ( $ 16.80)
= 15,750 Units
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