Clock Company sells a single product. The company\'s sales and expenses for a re
ID: 448332 • Letter: C
Question
Clock Company sells a single product. The company's sales and expenses for a recent month follow:
TOTAL PER UNIT
Sales $600,000 $40
Les Variable Expenses 420,000 28
Contribution Margin 180,000 $12
Less fixed expenses 150,000
Net Operating Income $30,000
a.) What is the monthly break-even point in units sold AND in sales dollars?
b.) Without resorting to computations, what is the total contribution margin at the break even point?
c.) How many units would have to be sold each month to earn a minimum target profit of $18,000? Use the Contribution Margin Method. Verify your answer by Preparing a Contribution Income Statement at the target level of sales.
d) What is the company's CM ratio? If monthly sales increase by $80,000 and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?
Explanation / Answer
a) Break-even point in units = Fixed costs / Contribution per unit = $150,000 / $12 = 12,500 units.
In Sales = 12,500 x $40 = $500,000
b) At break-even point, there is no profit, no loss, that is, the contribution is equal to fixed costs leading to no profit of no loss. So, at break-even point, Contribution = Fixed Costs = $150,000.
c) Units to be sold to earn a profit of $18,000 = (Fixed Costs + Desired profit) / Contribution per unit
= ($150,000 + $18,000) / $12 = 14,000 units.
d) Contribution Margin ratio = Contribution / Sales = $12 / $40 = 30%
If Sales increase by $80,000, Contribution or Profits (Since there is no change in fixed costs, so every dollar of contribution will add to profits) will increase by $80,000 x 30% = $24,000.
Calculations Particulars Amount $ A Units sold 14000 B = A x $40 Total Sales 560000.00 C = A x $28 Less: Variable expenses 392000.00 D = B - C Contribution 168000.00 E Fixed Costs 150000.00 F = D - E Profits 18000.00Related Questions
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