Rush Company developed the following information for its product: Per Unit Sales price $90 Variable cost $54 Contribution margin $36 Total fixed costs $1,080,000 Instructions: Answer the following independent questions and show computations using the contribution margin technique to support your answers. (Partial credit will be awarded if you show your work.)
How many units must be sold to break even?
What is the total sales that must be generated for the company to earn a profit of $60,000?
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?
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 $135,000.
| Requirement | ||||||||||
| Break even points in units | ||||||||||
| = | Total Fixed Costs / Contribution margin per unit | |||||||||
| =1080000/36 | ||||||||||
| = | 30000 | Units | ||||||||
| Requirement | ||||||||||
| Total sales company would generate to earn profit of 60000 | ||||||||||
| Contribution | = | Total fixed cost + Profit | ||||||||
| = | 1080000+60000 | |||||||||
| = | 1140000 | |||||||||
| Contribution per unit given = | 36 | |||||||||
| Total sales in unit to earn a profit of 60000 | ||||||||||
| = | Total contribution / contribution per unit | |||||||||
| = | 1140000/36 | |||||||||
| = | 31666.67 | |||||||||
| Total sales in dollars = | Total sales in unit * selling price per unit | |||||||||
| = | 31666.67*90 | |||||||||
| = | 2850000 | |||||||||
| Requirement | ||||||||||
| With 45000 units company is making a profit of | ||||||||||
| = | Total contribution - Total fixed cost | |||||||||
| =45000*36 -1080000 | ||||||||||
| = | 540000 | |||||||||
| With increase in $108000 in advertsing, its fixed cost will be | ||||||||||
| =1080000+108000 | = | 1188000 | ||||||||
| And now compnay wants to earn same net iincome of 540000 with increase in advertising | ||||||||||
| So, revised contribution | = | 1188000+540000 | ||||||||
| = | 1728000 | |||||||||
| Contribution per unit | = | 36 | ||||||||
| Total sales in units with revised total contribution | ||||||||||
| = | 1728000/36 | |||||||||
| = | 48000 | |||||||||
| 3000 additional units (48000-45000) Company should sell to earn the same profit with sale of 45000 units | ||||||||||
| Requirement | ||||||||||
| New break even sales in units after changing the original data | ||||||||||
| Original | Revised | |||||||||
| Sales | 90 | 108 | =90*120% | |||||||
| Variabel cost | 54 | 59.4 | =54*110% | |||||||
| Contribution margin | 36 | 48.6 | ||||||||
| Fixed cost | 1080000 | 1215000 | =1080000+135000 | |||||||
| Net Income | ||||||||||
| Break even points in units | ||||||||||
| = | Total Fixed Costs / Contribution margin per unit | |||||||||
| =1215000/48.6 | ||||||||||
| = | 25000 | Units | ||||||||
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