Question

The following information relate to AAA Company

Sales price per unit	$      50
Variable costs per unit	30
Total fixed costs	40,000

Required:

1- Calculate Contribution margin per unit          

2- Calculate Contribution margin ratio   

3- Calculate required units to achieve target profit $460,000    

4- Calculate required units to breakeven

5- Calculate required sales dollars to breakeven

6- Prove your answer in requirements 4

Answer 1

1)

Contribution margin per unit = sale price - variable cost per unit

= $50 - $30

= $20.

2)

Contribution margin Ratio = Contribution margin / Sale price

= $20 / $50

= 40%

3)

Break even unit to achieve target profit = (Fixed cost + Target profit ) / Contribution margin per unit

= ($40000 + $460000) / $20

= $500000 / $20

= 25000 units.

4)

Break Even units = Fixed cost / Contribution margin per unit

= $40000 / $20

= 2000 units.

5)

Break even sales in Dollars =  Fixed cost / Contribution margin ratio

= $40000 / 40%

= $100000.

6)

Sales Revenue (25000 units x $50)	$1250000
Less: Variable cost (25000 units x $30)	$750000
Contribution margin	$500000
Less: Fixed cost	$40000
Net Operating Income	$460000