Question

A Company sells only one product at a regular price of £10.00 per unit. Variable expenses...

A Company sells only one product at a regular price of £10.00 per unit. Variable expenses are 60 percent of sales and fixed expenses are £60,000. Management has decided to decrease the selling price to £8.75 in the hope of increasing its volume of sales.

What is the contribution / sales % when the selling price is reduced to £8.75 per unit?

What is the new break-even point in units for Style Company when the selling price is £8.75?

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Homework Answers

Answer #1

Given,

Selling Price = £10.00 per unit

Variable expenses = 60% of sales

So,

Variable expense = 60 % * £10

= £6 per unit

Therefore,

Contribution = Sales - Variable Cost

= £10 - £6

= £4 per unit

Revised

Selling Price = £8.75

Variable expense = £6 per unit (as computed above)

So,

Contribution Margin = Sales - Variable expense

= £8.75 - £6

= £2.75 per unit

The formula to compute the Contribution Margin Ratio (CMR) as:

CMR = Contribution Margin / Sales * 100

= £ 2.75 / £8.75 * 100

= £ 31.42%

New break even point in units

The formula to compute the new break even point as:

New Break even point = Fixed Cost / Contribution Margin

=  £ 60,000 / 40%

New break even point = £150,000

Working Note:

Contributio Margin = Sales - Variable expense

Contributio Margin + Variable expense = Sales

Contributio Margin + 60% = 100%

Contribution Margin = 100% - 60%

Contribution Margin = 40%

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