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The following information provided by Lenovo Inc
The following information provided by Lenovo Inc. for one of its products: Units sold (Q) 16,000 Variable expenses per unit (V) $82 Selling price per unit (P) $100 Fixed expenses $230,000 Required: 1. Calculate unit contribution margin and contribution margin ratio 2. Calculate break-even point in units 3. Calculate sales in dollar amount to achieve net income of $90,000 4. Calculate margin of safety. 5. Increasing selling price by 25% will require using high quality components that will increase variable expense by 8 $/unit. This proposal also requires renting new show room for 90,000 $/year. Do you recommend the proposal? Why?
Expert Solution
Ans.
1. Unit Contribution Margin = Selling Price per unit - Variable Cost per unit
Unit Contribution Margin = $ 100 - $ 82 = $ 18
Contribution Margin Ratio = Selling Price per unit - Variable Cost per unit / Selling Price *100
Contribution Margin Ratio = $100 - $82 / $100 *100= 18%
2.
Break even points in units = Fixed Expenses / Contribution per unit
Break even points in units = $ 230,000 / $ 18 = 12,777.77 or 12,778 units
3.
To achieve target income of $ 90,000
Sales (in dollars )= Target Income + Fixed Expenses / Contribution Margin Ratio
Sales (in dollars )= $ 90,000 + $ 230,000 / 18% = $1,777,777.77 or $1,777,778
4.
Margin of Safety (in units) = Current sales unit - Break Even point
Margin of Safety (in units) = 16,000 - 12,778 = 3,222 units
Margin of Safety % =Current sales unit - Break Even point / Current Sales units *100
Margin of Safety % =16,000 - 12,778 / 16,000 * 100 = 20.1375 % or 20.14%
5.
| Units Sold (Q) | 16,000.00 |
| Selling Price | $ 125.00 |
| Variable Cost ( $ 82 + $ 8) | $ (90.00) |
| Contribution per unit | $ 35.00 |
| Contribution ( 16,000 * $ 35 ) | $ 560,000.00 |
| Fixed Cost ( $230,000 + $90,000 ) | $(320,000.00) |
| Profit | $ 240,000.00 |
So this proposal should be accepted as it will increase the profits.
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