Question

The income statement for Callister Company for 2017 appears below. CALLISTER COMPANY Income Statement For the Year Ended December 31, 2017

Sales (40,000 units) ................................................................................... $1,000,000

Variable expenses ..................................................................................... 700,000

Contribution margin .................................................................................... 300,000

Fixed expenses .......................................................................................... 360,000

Net income (loss) ....................................................................................... $ (60,000)

Show computations using the contribution margin technique to support your answers:

1. What was the company's break-even point in sales dollars in 2017?

2. How many additional units would the company have had to sell in 2018 in order to earn net income of $45,000?

3. If the company is able to reduce variable costs by $2.50 per unit in 2018 and other costs and unit revenues remain unchanged, how many units will the company have to sell in order to earn a net income of $45,000

Answer 1

1. Contribution margin ratio = Contribution margin/Sales = 300,000/1,000,000 = 30% Breakeven point in sales dollars = Fixed cost/Contribution margin ratio = 360,000/30% = $1,200,000

Contribution margin per unit = 300,000/40,000 units = 7.50 per unit Units to be sold = (Fixed costs + Target profit)/Contribution margin per unit = (360,000+45,000)/7.50 = 54,000 units should be sold Additional units to be sold = 54,000 - 40,000 = 14,000 units

New contribution margin per unit = 7.50 + 2.50 = 10 per unit Units to be sold = (Fixed costs + Target profit)/Contribution margin per unit = (360,000+45,000)/10 = 40,500 units

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