Question

Polk Company developed the following information for its product:

Per unit
Sales price $90
Variable cost 63
Contribution margin $27
Total fixed costs $1,080,000

Instructions
Answer the following independent questions and show computations using the contribution margin technique to support your answers.
1. How many units must be sold to break even?
2. What is the total sales that must be generated for the company to earn a profit of $60,000?
3. If the company is presently selling 45,000 units, but plans to spend an additional $108,000 on an advertising program, how many additional units must the company sell to earn the same net income it is now making?
4. Using the original data in the problem, compute a new break-even point in units if the unit sales price is increased 20%, unit variable cost is increased by 10%, and total fixed costs are increased by $210,000.

Answer 1

1
Unit break even = Total fixed costs/Unit Contribution margin = 1080000/27=							40000
2
Contribution margin ratio = 27/90 = 30%
Total sales = (Fixed costs+Profit)/Contribution margin ratio = (1080000+60000)/30%=							3800000
3
Additional units = 108000/27=			4000
4
Sales price = 90*1.2 = 108
Variable cost = 63*1.1 = 69.3
Contribution margin = 108-69.3=			38.7
Unit break even = Total fixed costs/Unit Contribution margin =(1080000+210000)/38.7=							33333