Question

Smith Automotive is a company that produces component parts for automobile engines. A margin of $4 per unit produces fixed expenses of $80 million. The market demand for the component parts is 400 million per year.

1. Determine the required volume if the company's operating income is $20 million.

1. 10 million units

2. 20 million units

3, 25 million units

4, 30 million units

2. Determine the margin per unit if the company needs to sell 40 million units in order to break even.

1. $10 per unit

2. $8 per unit

3. $4 per unit

4. $2 per unit

3. Calculate the break-even market share if the break-even volume is 40 million units.

1. 5%

2. 10%

3. 12.5%

4. 15%

Answer 1

Answer to Part 1:

Operating Income = Contribution Margin – Fixed Cost
Let the Required volume for Operating Income of $20 Million be “x units”

Contribution Margin = $4 per Unit
Fixed Cost = $80 Million

Operating Income = Contribution Margin – Fixed Cost
$20 Million = ($4 * x) - $80 Million
$100 Million = $4 * x
x = 25 Million Units

25 Million Units are required to be sold to achieve Operating Income of $20 Million.

Answer to Part 2:

Break Even Point (in Units) = Fixed Cost / Contribution Margin per Unit
40 Million units = $80 Million / Contribution Margin per Unit
Contribution Margin per Unit = $2 per unit

Answer to Part 3:

Break Even Market Share = Market Demand / Break Even Voulume
Break Even Market Share = 400 Million / 40 Million
Break Even Market Share = 10%