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Exercise 4.3

Exercise 4.3. Weber, inc. sells its one product for 120 per unit. The variable cost per unit is $30. The fixed cost per year is $900,000 A. What is the contribution margin per unit? Selling price – variable cost = contribution margin SP – VC = CM $120- $30 = $90

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Exercise 4.3

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  1. Exercise 4.3 Weber, inc. sells its one product for 120 per unit. The variable cost per unit is $30. The fixed cost per year is $900,000 A. What is the contribution margin per unit? Selling price – variable cost = contribution margin SP – VC = CM $120- $30 = $90 B. What is the breakeven point in units? Fixed cost / Contribution margin FC/CM 900,000/90 = 10,000 units C. What is the contribution margin ratio? Contribution Margin/Selling price CM/SP 90/120 = .75 or 75% D. What is the breakeven point in dollars? Fixed costs/contribution margin ration FC/CMR 900,000/.75= 1,200,000 or 10,000 * 120 = 1,200,000

  2. Exercise 4.4 • Meeker Company is developing a new product. The selling price has not yet been determined, nor are the variable costs per unit known. The fixed costs are $600,000. Management plans to set the selling price so that variable cost is 55 percent of the selling price. • What is the contribution margin ratio? • The formula is CM/SP but it hasn’t been determined. What you do know is that they are going to spend 55 cents on every dollar. • 1-.55 = .45 (contribution margin ratio) • What is the breakeven point in dollars? • Fixed costs/contribution margin ratio • FC/CMR • 600,000/.45= $1,333,333 • If management desires a profit of $50,000, what will total sales be? • Fixed cost + Profit / contribution margin ratio • FC + Profit /CMR • 600,000+50,000/.45= $1,444,444.44

  3. Exercise 4.5 • Crow, Inc. a not-of-profit company, has a product contribution margin of $40. The fixed costs are $800,000. Crow, Inc. has set a target profit of $35,000 per year. • A. What is the breakeven points in units? • Fixed costs/contribution margin • FC/CM • 800,000/40= 20,000 • How many units must be sold to achieve the target profit? • Fixed costs + Profit/ contribution margin • FC + Profit/CM • 800,000 + 35,000 / 40 = 20,875 • C. If fixed costs decrease 10 percent, how many units must be sold to achieve the target price? • Fixed cost is 800,000 and to decrease it by 10 percents – 800,000 *.10 = 80,000 • 800,000 – 80,000 = 720,000 • FC + Profit / CM • 720,000 + 35,000 / 40 = 18,875

  4. Exercise 4.6 • Longpre Company distributes insect repellent. Each can of repellent sells for $4.00. The variable cost per can of repellent is $.75. The fixed selling and distribution costs are $80,000. The after-tax target profit level is $15,000. Longpre Company is subject to an income tax rate of 20 percents. • What is the breakeven point in units? • Fixed cost/ contribution margin • FC/CM • 80,000/3.25 = 24,615.38 – you can’t have .38 and you can’t go below because you won’t break even so you have to round up 24, 616 • What is the breakeven point in dollars? • Fixed costs/contribution margin ratio --- CMR (CM/SP) 3.25/4.00 = .8125 • FC/CMR • 80,000/.8125 = $98,461.54 • C. To achieve the profit goal, what must the before-tax profit be? • If the tax rate is 20% and it is $15,000 after the 20% • $15,000/ (1-.20) = $18,750 • How many units must be sold to achieve the profit goal after taxes? • Fixed cost + Profit before taxes/Contribution margin • FC + Profit before taxes/CM • (80,000 + $18,750)/3.25 = 30,384.6 or 30,385

  5. Exercise 4.7 • Gorman Company has the following cost-volume – profit relationships. • Breakeven point in units sold 1,000 • Variable cost per unit $2,000 • Fixed cost per period $750,000 • What is the contribution margin per unit? • SP – Variable Costs • SP – VC = CM • Breakeven is • FC/CM = Breakeven • 750,000/CM= 1,000 • 750,000/1000 = 750 • 750= contribution margin • What is the selling price per unit? • Selling Price – 2,000 = Contribution Margin • SP – 2,000 = 750 • SP = 750+2000 • SP = 2750 • C. What is the total profit if 1,001 units are sold? • If 1000 is breakeven, 1001 has to be 750

  6. Exercise 4.8 • Ukaegbu, Inc. currently sells its product for $3.25 per unit. The variable cost per unit is $0.60 and fixed costs are $90,000. Purchasing a new machine will increase fixed costs by $6,000, but variable costs will be cut by 20 percent. • What is the breakeven point before the new machine is purchased? • FC/CM = Breakeven • 90,000/2.65 = 33,962.26 (33,963 units) • What is the breakeven point after the new machine is purchased? • (90,000 + 6,000 = 96,000) • (3.25 - .48) = 2.77 • 96,000 / 2.77 = 34,657.04 (34,658) • Should Ukaegbu, Inc., purchase the new machine? Why or why not? • We must determine when the costs of the two machines are equal: • 2.65 * Q – $90,000 = $2.77 * Q - $96,000 • Q – 90,000 = 2.77 – 2.65 – 96,000 • Q = .12 – 6000 • 6000 = .12 • 6000/ .12 = 50,000 • If the company believes it will sell more than 50,000 units, it should purchase the new machine because the variable costs are less.

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