XERCISE 516 BreakEven and Target Profit Analysis LO3 LO4 LO5

XERCISE 5-16 Break-Even and Target Profit Analysis [LO3, LO4, LO5, LO6 Super Sales Company is the exclusive distributor for a revolutionary book bag. The product sells for S60 per unit and has a CM ratio of 40%. The company\'s fixed expenses are S360.000 per year The company plans to sell 17.000 bookbags this ycar Required 1. What are the variable expenses per unit? 2. Using lhe?uation method: a. What is the break-even point in units and in sales dollars b. What sales level in units and in sales dollars is required to earn an annual profit of $90,000? Assume that through negotiation with the manufacturer the Super Sales Company is able to reduce its variable expenses by S3 per unt. What is the company\'s new break-even point in units and in sales dollars? c. 3. Repeal (2) above using the formula method

Solution

1 Per unit Sales 60 Variable expense 36 (60-24) Contribution margin 24 (60*40%) Fixed expense 360000 Contribution margin ratio = Contribution margin / sales CM ratio 24/60 40% 2a Break even in units = Fixed expense / contribution margin per unit Fixed expense 360000 Contribution per unit 24 Break even in units 15000 Units Breakeven in dollars = Fixed expense / contribution margin ratio Fixed expense 360000 Contribution margin ratio 40% Break even in Dollars 900000 (360000/40%) 2b Sales in units = (Net profit + Fixed expense) / contribution margin per unit Fixed expense 360000 Net profit 90000 Total 450000 Contribution per unit 24 Sales in units 18750 (4500000/24) Sales in units 18750 Sales price per unit 60 Sales in dollars 1125000 2c Per unit Sales 60 Variable expense 33 (60-24) Contribution margin 27 (60*40%) Fixed expense 360000 Contribution margin ratio = Contribution margin / sales CM ratio 27/60 45% Break even in units = Fixed expense / contribution margin per unit Fixed expense 360000 Contribution per unit 27 Break even in units 13333 Units Breakeven in dollars = Fixed expense / contribution margin ratio Fixed expense 360000 Contribution margin ratio 45% Break even in Dollars 800000 (360000/45%)