This is a practice problem for my upcoming midterm Please sh

This is a practice problem for my upcoming midterm. Please show all formulas and calculations so I can learn how to apply the concepts on my test.

Speed, Inc. is the exclusive distributor for a weight-loss product. The product sells for $40 per unit and has a CM ratio of 30%. The company’s fixed expenses are $180,000 per year.

REQUIRED:

a. What are the variable expenses per unit?

b. What is the break-even point in units and in sales dollars?

c. What sales level in units and in sales dollars is required to earn an annual profit of $60,000?

d. Assume that by using a more efficient shipper, the company is able to reduce its variable expenses by $4 per unit. What is the company’s new break-even point in units and in sales dollars?

Solution

Answer a Variable Expense per unit = Selling price per unit * (1 - CM ratio) Variable Expense per unit = $40 * (1-0.30) = $28 Answer b Break even point in Sales dollar = Fixed Expenses / CM ratio = $180000 / 30% = $6,00,000 Break even point in units = Break even point in sales dollar / Selling price per unit = $6,00,000 / $40 = 15000 units Answer c Sales dollars required to earn a annual profit of $60000 = [Fixed Expenses + Required annual profit] / CM ratio Sales level in Sales dollars required to earn a annual profit of $60000 = [$180000 + $60000] / 30% = $8,00,000 Sales level in Sales units required to earn a annual profit of $60000 = Sales level in sales dollar required to earn profit of $60000 / Selling price per unit Sales level in Sales units required to earn a annual profit of $60000 = $8,00,000 / $40 = 20000 units Answer d Revised Variable Expense per unit = $28 - $4 = $24 per unit New break even point in sales units = Fixed cost / (Selling price per unit - Variable cost per unit) New break even point in sales units = $180000 / ($40 - $24) = 11250 units New break even point in sales dollars = New break even point in sales units * selling price per unit New break even point in sales dollars = 11250 units * $40 = $4,50,000