Question

Break-Even Units: Units for Target Profit Jay-Zee Company makes an in-car navigation system. Next year, Jay-Zee plans to sell 16,000 units at a price of $320 each. Product costs include: Direct materials $68

Direct labor $40

Variable overhead $12

Total fixed factory overhead $500,000

Variable selling expense is a commission of 5 percent of price; fixed selling and administrative expenses total $116,400.

Required:

1. Calculate the sales commission per unit sold. Calculate the contribution margin per unit.

2. How many units must Jay-Zee Company sell to break even? Prepare an income statement for the calculated number of units.

3. Calculate the number of units Jay-Zee Company must sell to achieve target operating income (profit) of $333,408.

4. What if the Jay-Zee Company wanted to achieve a target operating income of $322,000? Would the number of units needed increase or decrease compared to your answer in Requirement 3? Compute the number of units needed for the new target operating income.

Answer 1

Answer for 1)

Sales commission per units sold:$320×5%=$16

Contribution margin per unit=

Sales -variable costs(direct material,labour,variable costs,commission)

=$320-$68-$40-$12-$16

=$184 per unit.

Answer for 2)

Break even sales:

(factory fixed overhead+fixed selling and administration cost)/Contribution

=($500000+$116400)/$184=3350 units

Income statement for break even sales:

Particulars	($)	($)
Sales[3350 units×$320]		1072000
(Less)variable costs:
Direct material[3350units×$68]	(227800)
Direct labour[3350×$40]	(134000)
Variable costs [3350units×$12]	(40200)
Variable selling expenses [$3350units×$16]	(53600)
Total variable costs		(455600)
Contribution		616400
(Less)Fixed costs:
Fixed factory overhead	(500000)
Fixed selling and administration overhead	(116400)
Total fixed costs		(616400)
Profit/(lossl		0

Answer for 3)

Sales for reaching targeted profit:

(Targeted profit+fixed costs)/Contribution

=($333408+$616400)/$184=5162 units

Answer for 4)

The units needed to be decreased as compared to requirement 3 as there is decrease in profit expected:

Sales at targeted profit of $322000:

($322000+$616400)/$184

=$5100 units