Lindon Company is the exclusive distributor for an automotive product that sells
ID: 2569328 • Letter: L
Question
Lindon Company is the exclusive distributor for an automotive product that sells for $46.00 per unit and has a CM ratio of 31%. The company's fixed expenses are $199,640 per year. The company plans to sell 15,000 units this year. Required 1. What are the variable expenses per unit? (Round your answer to 2 decimal places.) ariable expenses per unit 2. Use the equation method: a. What is the break-even point in unit sales and in dollar sales? (Do not round intermediate calculations.) Break-even point in unit sales Break-even point in dollar sales b. What amount of unit sales and dollar sales is required to earn an annual profit of $71,300? (Do not round intermediate calculations.) Sales level in units Sales level in dollarsExplanation / Answer
Answer to Requirement 1.
CM Ratio = Contribution Margin / Sales * 100
31 = Contribution Margin / 46 * 100
Contribution Margin = $14.26
Contribution Margin = Sales – Variable Expense
$14.26 = $46 – Variable Expense
Variable Expense = $31.74
Answer to Requirement 2-a.
At Break Even Point, the Profit is Zero.
Profit = Sales – Variable Expenses – Fixed Cost
Let the Units sold to achieve Break Even Point be “x units”.
$0 = ($46*x) – ($31.74 * x) - $199,640
$199,640 = $14.26 * x
x = 14,000 units
Break Even Point in Unit Sales = 14,000 units
Break Even Point in Dollar Sales = Break Even Point in Unit Sales * Selling Price per unit
Break Even Point in Dollar Sales = 14,000 * $46
Break Even Point in Dollar Sales = $644,000
Answer to Requirement 2-b.
Profit = Sales – Variable Expenses – Fixed Cost
Let the No. of Units to be sold to achieve a Target Profit of $71,300 be “x Units”
$71,300 = ($46* x) – ($31.74*x) - $199,640
$270,940 = $14.26x
x = 19,000 units
Therefore, 19,000 units are required to be sold to earn an Annual Profit of $71,300.
Sales Level in Dollars = Sales Level in units * Selling Price per unit
Sales Level in Dollars = 19,000 * $46
Sales Level in Dollars = $874,000
Answer to Requirement 2-c.
At Break Even Point, the Profit is Zero.
Revised Variable Cost per unit = $31.74 - $3.80 = $27.94
Profit = Sales – Variable Expenses – Fixed Cost
Let the Units sold to achieve Break Even Point be “x units”.
$0 = ($46*x) – ($27.94 * x) - $199,640
$199,640 = $18.06 * x
x = 11,054 units
New Break Even Point in Unit Sales = 11,054 units
Break Even Point in Dollar Sales = Break Even Point in Unit Sales * Selling Price per unit
Break Even Point in Dollar Sales = 11,054 * $46
New Break Even Point in Dollar Sales = $508,484
Answer to Requirement 3-a.
Break Even Point (in units) = Fixed Cost / Contribution Margin per unit
Break Even Point (in units) = 199,640 / 14.26
Break Even Point (in units) = 14,000 units
Break Even Point (in Dollar Sales) = Fixed Cost / Contribution Margin Ratio
Break Even Point (in Dollar Sales) = 199,640 / 0.31
Break Even Point (in Dollar Sales) = $644,000
Answer to Requirement 3-b.
Required Units Sales = (Fixed Cost + Target Profit) / Contribution Margin per unit
Required Units Sales = (199,640 + 71,300) / 14.26
Required Units Sales = 270,940 / 14.26
Required Units Sales = 19,000 units
Required Dollar Sales = (Fixed Cost + Target Profit) / Contribution Margin Ratio
Required Dollar Sales = (199,640 + 71,300) / 0.31
Required Dollar Sales = 270,940 / 0.31
Required Dollar Sales = $874,000
Answer to Requirement 3-c.
Revised Variable Cost per unit = $31.74 - $3.80 = $27.94
Revised Contribution Margin = $46 - $27.94 = $18.06
Contribution Margin Ratio = 18.06 / 46 * 100 = 39.2609
Break Even Point (in units) = Fixed Cost / Contribution Margin per unit
Break Even Point (in units) = 199,640 / 18.06
Break Even Point (in units) = 11,054 units
Break Even Point (in Dollar Sales) = Fixed Cost / Contribution Margin Ratio
Break Even Point (in Dollar Sales) = 199,640 / 39.2609
Break Even Point (in Dollar Sales) = $508,496
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