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 $24.00 per unit and has a CM ratio of 30%. The company's fixed expenses are $118,800 per year. The company plans to sell 18,100 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 $46,800 per year? 4. Assume that by using a more efficient shipper, the company is able to reduce its variable expenses by $2.40 per unit. What is the company's new break-even point in unit sales and in dollar sales? 1. Variable expense per unit 2. Break-even point in units Break-even point in dollar sales 3. Unit sales needed to attain target profit Dollar sales needed to attain target profit 4. New break-even point in unit sales New break-even point in dollar sales Doller sales needed to attain target profit

Explanation / Answer

1)CM ratio = contribution per unit /price per unit

     .30 = contribution /24

        contribution per unit = 24*.30 = $ 7.2

Variable expense per unit =Price -contribution

                  = 24-7.2

                  = $ 16.80

2)Break even point in Unit = Fixed cost /contribution per unit

         = 118800/7.2

          = 16500units

BEP ($) =Fixed cost / CM ratio

       = 118800/.30

         = $ 396,000

3)Target sales In unit = [Fixed cost+ target profit]/contribution per unit

           =[118800+46800]/7.2

           = 23000

Target sales in $ =[Fixed cost+target profit]/CM ratio

         =[118800+46800]/.30

          = 552000

4)Decrease In variable cost by $ 2.40 will increase contribution per unit By $2.4 so new contribution per unit : 7.2+2.4= $9.60

CM ratio (revised) =9.6/24 = .40 or 40%

New BEP(units) = 118800/9.6

          = 12375 units

New BEP ($)= 118800/.40

           = $ 297000

Dollar sales needed to attaint target profit = [118800+46800]/.40

                                      = $ 414000

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