Question

Long Construction makes and sells tool cabinets. The current selling price is $400 per cabinit. Varible costs are $300 per cabinet, and fixed expenses total $25,000 per year. Sales volume for 2016 was 450 cabinets.

1) Prepare a Contribution Margin Income Statement for Long Construction for 2016.

2) Calculate the break-even point in units.

3) How many cabinets would Lee Contruction need to sell to earn a target profit of $60,000?

Answer 1

1) The correct answer is :

Contribution Margin Income Statement
Sales	1,80,000
Less : Variable Cost	1,35,000
Contribution Margin	45,000
Less : Fixed Cost	25,000
Net Income	20,000

Note :

1. Sales = $ 400 * 450 Cabinets

2. Variable Cost = $ 300 * 450 Cabinets

2)

break-even point in units = Fixed Cost / Contribution Margin Per Unit

= $ 25,000 / ( Selling Price Per Unit - Variable Cost per Unit)

= $ 25,000 / ( $ 400 -$ 300)

= 250 Units

Hence the correct answer is 250 Units

3) Required Contribution Margin = Fixed Cost + Required profit

= $ 25,000 + $ 60,000

= $ 85,000

Contribution Margin Per Unit = $ 100

Hence, Cabinets to be sold to earn target profit = Required Contribution Margin / Contribution Margin Per Unit

= $ 85,000 / $ 100

= 850 Cabinets

Hence the correct answer is 850 cabinets.