Question

Contribution Margin Ratio, Break-Even Sales Revenue, Sales Revenue for Target Profit

Schylar Pharmaceuticals, Inc., plans to sell 140,000 units of antibiotic at an average price of $17 each in the coming year. Total variable costs equal $761,600. Total fixed costs equal $7,500,000.

Required:

1. What is the contribution margin per unit? Round your answer to the nearest cent.
$

What is the contribution margin ratio? Round your answer to two decimal places. (Express as a decimal-based answer rather than a whole percent amount.)

2. Calculate the sales revenue needed to break even. Round your answer to the nearest dollar.
$

3. Calculate the sales revenue needed to achieve a target profit of $235,000. Round your answer to the nearest dollar.
$

4. What if the average price per unit increased to $18.50? Recalculate the following:

a. Contribution margin per unit. Round your answer to the nearest cent.
$

b. Contribution margin ratio. Enter your answer as a decimal value (not a percentage), rounded to four decimal places.

c. Sales revenue needed to break even. In your computations, use your rounded answer from part (4-b) above for the contribution margin ratio, and round your final answer to the nearest dollar.
$

d. Sales revenue needed to achieve a target profit of $235,000. In your computations, use your rounded answer from part (4-b) above for the contribution margin ratio, and round your final answer to the nearest dollar.
$

Answer 1

Variable cost per unit = Total Variable cost/Number of Units

= 761,600/140,000

= $5.44

Contribution Margin per Unit = Selling price per unit – Variable cost per unit

= 17-5.44

= $11.56

CM Ratio = Contribution Margin/Sales

= 11.56/17

= 0.68

2.Break even sales revenue = Fixed costs/CM ratio

= 7,500,000/0.68

= $11,029,411.76

3.Sales revenue required = (Target Profit+ Fixed costs)/CM Ratio

= (235,000 + 7,500,000)/0.68

= $11,375,000

4.Contribution Margin per Unit = 18.50-5.44 = $13.06

CM Ratio = 13.06/18.50

= 0.7059

Break even revenue = 7,500,000/0.7059

= $10,624,734

Sales Revenue required = (235000+7,500,000)/0.7059

= $10,957,643