Exercise 4.3

1
Exercise 4.3
Weber, inc. sells its one product for 120 per
unit. The variable cost per unit is 30. The
fixed cost per year is 900,000 A. What is the
contribution margin per unit? Selling price
variable cost contribution margin SP VC
CM 120- 30 90 B. What is the breakeven
point in units? Fixed cost / Contribution
margin FC/CM 900,000/90 10,000 units C. What
is the contribution margin ratio? Contribution
Margin/Selling price CM/SP 90/120 .75 or
75 D. What is the breakeven point in
dollars? Fixed costs/contribution margin
ration FC/CMR 900,000/.75 1,200,000 or 10,000
120 1,200,000
2
Exercise 4.4

• Meeker Company is developing a new product. The
  selling price has not yet been determined, nor
  are the variable costs per unit known. The fixed
  costs are 600,000. Management plans to set the
  selling price so that variable cost is 55 percent
  of the selling price.
• What is the contribution margin ratio?
• The formula is CM/SP but it hasnt been
  determined. What you do know is that they are
  going to spend 55 cents on every dollar.
• 1-.55 .45 (contribution margin ratio)
• What is the breakeven point in dollars?
• Fixed costs/contribution margin ratio
• FC/CMR
• 600,000/.45 1,333,333
• If management desires a profit of 50,000, what
  will total sales be?
• Fixed cost Profit / contribution margin ratio
• FC Profit /CMR
• 600,00050,000/.45 1,444,444.44

3
Exercise 4.5

• Crow, Inc. a not-of-profit company, has a product
  contribution margin of 40. The fixed costs are
  800,000. Crow, Inc. has set a target profit of
  35,000 per year.
• A. What is the breakeven points in units?
• Fixed costs/contribution margin
• FC/CM
• 800,000/40 20,000
• How many units must be sold to achieve the target
  profit?
• Fixed costs Profit/ contribution margin
• FC Profit/CM
• 800,000 35,000 / 40 20,875
• C. If fixed costs decrease 10 percent, how many
  units must be sold to achieve the target price?
• Fixed cost is 800,000 and to decrease it by 10
  percents 800,000 .10 80,000
• 800,000 80,000 720,000
• FC Profit / CM
• 720,000 35,000 / 40 18,875

4
Exercise 4.6

• Longpre Company distributes insect repellent.
  Each can of repellent sells for 4.00. The
  variable cost per can of repellent is .75. The
  fixed selling and distribution costs are 80,000.
  The after-tax target profit level is 15,000.
  Longpre Company is subject to an income tax rate
  of 20 percents.
• What is the breakeven point in units?
• Fixed cost/ contribution margin
• FC/CM
• 80,000/3.25 24,615.38 you cant have .38 and
  you cant go below because you wont break even
  so you have to round up 24, 616
• What is the breakeven point in dollars?
• Fixed costs/contribution margin ratio --- CMR
  (CM/SP) 3.25/4.00 .8125
• FC/CMR
• 80,000/.8125 98,461.54
• C. To achieve the profit goal, what must the
  before-tax profit be?
• If the tax rate is 20 and it is 15,000 after
  the 20
• 15,000/ (1-.20) 18,750
• How many units must be sold to achieve the profit
  goal after taxes?
• Fixed cost Profit before taxes/Contribution
  margin
• FC Profit before taxes/CM

5
Exercise 4.7

• Gorman Company has the following cost-volume
  profit relationships.
• Breakeven point in units sold 1,000
• Variable cost per unit 2,000
• Fixed cost per period 750,000
• What is the contribution margin per unit?
• SP Variable Costs
• SP VC CM
• Breakeven is
• FC/CM Breakeven
• 750,000/CM 1,000
• 750,000/1000 750
• 750 contribution margin
• What is the selling price per unit?
• Selling Price 2,000 Contribution Margin
• SP 2,000 750
• SP 7502000
• SP 2750

6
Exercise 4.8

• Ukaegbu, Inc. currently sells its product for
  3.25 per unit. The variable cost per unit is
  0.60 and fixed costs are 90,000. Purchasing a
  new machine will increase fixed costs by 6,000,
  but variable costs will be cut by 20 percent.
• What is the breakeven point before the new
  machine is purchased?
• FC/CM Breakeven
• 90,000/2.65 33,962.26 (33,963 units)
• What is the breakeven point after the new machine
  is purchased?
• (90,000 6,000 96,000)
• (3.25 - .48) 2.77
• 96,000 / 2.77 34,657.04 (34,658)
• Should Ukaegbu, Inc., purchase the new machine?
  Why or why not?
• We must determine when the costs of the two
  machines are equal
• 2.65 Q 90,000 2.77 Q - 96,000
• Q 90,000 2.77 2.65 96,000
• Q .12 6000
• 6000 .12
• 6000/ .12 50,000