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1) A company sells small motors as a component part to automobiles
1) A company sells small motors as a component part to automobiles. The Model 101 motor sells for $850 and has per-unit variable costs of $400 associated with its production. The company has fixed expenses of $90,000 per month. In August, the company sold 425 of the Model 101 motors.
- Calculate the contribution margin per unit for the Model 101.
- Calculate the contribution margin ratio of the Model 101.
2)
James Motors sells a single product with a selling price of $400 with variable costs per unit of $160. The company's monthly fixed expenses are $36,000.
- What is the company's break-even point in units?
- What is the company's break-even point in dollars?
- How many units will James need to sell in order to realize a target profit of $48,000?
- What dollar sales will James need to generate in order to realize a target profit of $48,000?
Expert Solution
Exercise 1:
1) Computation of Contribution Margin per Unit for the Model 101:
Contribution Margin per Unit = Selling Price per Unit - Variable Cost per Unit
= $850 - $400
Contribution Margin per Unit = $450
So, Contribution Margin per Unit for the Model 101 is $450.
2) Computation of Contribution Margin Ratio for the Model 101:
Contribution Margin Ratio = Contribution Margin per Unit / Selling Price per Unit
= $450/$850
Contribution Margin Ratio = 52.94%
So, Contribution Margin Ratio for the Model 101 is 52.94%.
Exercise 2:
1) Computation of Company's Break-even Point in Units:
Break-even Point in Units = Fixed Cost/Contribution Margin per Unit
Here,
Contribution Margin per Unit = Selling Price per Unit - Variable Cost per Unit
= $400 - $160
Contribution Margin per Unit = $240
Break-even Point in Units = $36,000/$240 = 150 units
2) Computation of Company's Break-even Point in Dollars:
Break-even Point in Dollars = Fixed Cost/Contribution Margin Ratio
Here,
Contribution Margin Ratio = Contribution Margin per Unit / Selling Price per Unit
= $240/$400
Contribution Margin Ratio = 60%
Break-even Point in Dollars = $36,000/60% = $60,000
3) Computation of Number of Units James will need to sell in order to realize a target profit of $48,000:
Required Number of Units to Sell = (Fixed Cost + Target Profit)/Contribution Margin per Unit
= ($36,000+$48,000)/$240
= $84,000/$240
Required Number of Units to Sell = 350 units
4) Computation of Dollar Sales James will need to sell in order to realize a target profit of $48,000:
Required Sales = (Fixed Cost + Target Profit)/Contribution Margin Ratio
= ($36,000+$48,000)/60%
= $84,000/60%
Required Number of Units to Sell = $140,000
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