Question

Johnson, Inc. projects sales for next year will be 55,000 units if the sales price is $27.50. At this level, unit fixed costs will be $8.30 while total variable costs will be $693,000. The vice president of marketing advises management to reduce sales price to $26.00 and to undertake a national advertising campaign costing $12,000.

1. What is the breakeven point for the company in terms of dollars and units before giving effect to the vice president's plan?
2. What is the breakeven point in units after giving effect to the plan?
3. The vice president believes that his plan will result in a before tax earnings of $56,000. How many units must be sold to reach this earnings level?

Answer 1

a.Break even point=Fixed cost/Contribution margin per unit

Contribution margin per unit=Selling price per unit-Variable cost per unit

Variable cost per unit=$693,000/55,000=$12.6

Contribution margin per unit=$27.5-$12.6

Contributiin margin per unit=$14.9
Fixed cost=$8.30*55,000=$456,500

BEP in units=$456,500/$14.9

BEP in units=30,638 units(rounded off)

BEP in dollars=30,638*$27.5=$842,545

b.After the plan:

contribution margin per unit=$26-$12.6

contribution margin per unit=$13.4

Fixed cost=$456,500+$12,000=$468,500

BEP in units=$468,500/$13.4

BEP in units=34,963 units(rounded off)

c.Expected contribution=Fixed cost+Expected profit

Expected contribution=$468,500+$56,000=$524,500

Number of units to achieve target earnings=Contribution/Contribution per unit

Number of units to achieve target earnings=$524,500/$13.4

Number of units to achieve target earnings=39,142 units rounded off)