Question

The income statement for Callister Company for 2017 appears below. CALLISTER COMPANY Income Statement For the...

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

Homework Answers

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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