Variable expenses 700,000

Contribution margin300,000

Fixed expenses 330,000

Net income (loss)$ (30,000)

1.What was the company's break-even point in sales dollars in 2008? 2.How many additional units would the company have had to sell in 2009 in order to earn net income of $30,000? 3.If the company is able to reduce variable costs by $2.50 per unit in 2009 and other costs and unit revenues remain unchanged, how many units will the company have to sell in order to earn a net income of $35,000? Solution

1.$330,000

———— = $1,100,000

30%

Breakeven point in units = Fixed Costs / (Sales – Variable costs) Variable cost per unit = 60% x $10 = $6

Breakeven point in units= 1,920,000 / ($10 -$6) = 1,920,000 / 4 = 480,000 units needed to sell to break-even Breakeven point in dollars = Breakeven point in units x sales price = 480,000 x $10 = $4,800,000

2.$330,000 + $30,000

————————— = $1,200,000 Total sales needed.

30%

$1,200,000

————— =48,000total units to be sold

$25

40,000actual units sold

8,000additional units to be sold

3.2008Variable cost per unit =$17.50($700,000 ÷ 40,000 units)

Variable cost reduction = 2.50

2009Variable cost per unit$15.00

Expected contribution margin $10 ($25 – $15)

$330,000 + $35,000

————————— = 36,500 units

$10

Keller Company estimates that variable costs will be 60% of sales and fixed costs will total $1,920,000. The selling price of the product is $10, and 600,000 units will be sold.

Instructions

Using the mathematical equation,

(a)Compute the break-even point in units and dollars.

(b)Compute the margin of safety in dollars and as a ratio.

(c)Compute net income.

a-

Breakeven point in units = Fixed Costs / (Sales – Variable costs) Variable cost per unit = 60% x $10 = $6

Breakeven point in units= 1,920,000 / ($10 -$6) = 1,920,000 / 4 = 480,000 units needed to sell to break-even Breakeven point in dollars = Breakeven point in units x sales price = 480,000 x $10 = $4,800,000

b-

Margin of Safety = Total sales − Break even sales

Total sales = 600,000 units x $10 per unit = $6,000,000; Breakeven sales from above = $4,800,000 Margin of safety in dollars = $6,000,000 – 4,800,000 = $1,200,000 Margin of Safety ratio = Margin of safety in dollars / Total sales = $1,200,000 / 6,000,000

=0.2 = 20%

(c)Net Income

Sales$6,000,000

Variable Costs(3,600,000)

Fixed Costs(1,920,000)

Net Income$ 480,000

The fixed costs for the department are $50,000, with $1 per unit variable costs. A paper doll and one set of clothes sell for $3. The maximum volume is 80,000 units. With the increased volume, Mr. Dibson is considering two options to improve profitability. One would reduce variable costs to $0.75, and the other would reduce fixed costs to $35,000.

Profit = (selling price × maximum units) – (variable costs × maximum units) - fixed costs

Current Profit= ($3 × 80,000) – ($1 × 80,000) – $50,000

= $240,000 – $80,000 – $50,000

= $110,000

Option 1:

The profit from reducing variable costs to $0.75

= ($3 × 80,000) – ($0.75 × 80,000) – $50,000

= $240,000 – $60,000 – $50,000

= $130,000

Option 2:

The profit from reducing fixed costs to $35,000

= ($3 × 80,000) – ($1 × 80,000) – $35,000

= $240,000 – $80,000 – $35,000

= $125,000

From the above calculations we can see that option 1 "reducing variable costs to $0.75 per unit" will ensure maximum profitability of the paper doll product line

Distinguish between variable and fixed costs.

Fixed Costs: These are those costs which remain fixed up to certain range of work capacity no matter how much product you produce within that capacity range. Like factory building rent. You pay the rent no matter that did you use that building for making the products or not. Variable Costs: These...