Johnson, Inc. projects sales f
Johnson, Inc. projects sales for next year will be 55,000 unitsif the sales price is $27.50. At this level, unit fixed costs willbe $8.30 while total variable costs will be $693,000. The vicepresident of marketing advises management to reduce sales price to$26.00 and to undertake a national advertising campaign costing$12,000.
- What is the breakeven point for the company in terms of dollarsand units before giving effect to the vice president’s plan?
- What is the breakeven point in units after giving effect to theplan?
- The vice president believes that his plan will result in abefore tax earnings of $56,000. How many units must be sold toreach this earnings level?
Answer:
| Working Note1: | |||||
| Total | Per Unit | ||||
| No. of Units | 55,000 | ||||
| Sales | 1,512,500 | 27.50 | |||
| Less: Variable cost | 693,000 | 12.60 | |||
| Contribution margin | 819,500 | 14.90 | |||
| Less: Fixed cost | 456,500 | ||||
| Net Income | 363,000 | ||||
| Contribution margin ratio | 54.18% | ||||
| a) Break Even (Dollars) = Fixed cost /contribution margin ratio | |||||
| =456600/54.18% | |||||
| 842,534 | |||||
| Break Even (Unit ) = Fixed cost /contribution margin per unit | |||||
| =456600 /14.9 | |||||
| 30,644 | Units | ||||
| Working Note2: After Affect of Vicepresident | |||||
| Total | Per Unit | ||||
| No. of Units | 55,000 | ||||
| Sales | 1,430,000 | 26.00 | |||
| Less: Variable cost | 693,000 | 12.60 | |||
| Contribution margin | 737,000 | 13.40 | |||
| Less: Fixed cost | 468,500 | ||||
| Net Income | 268,500 | ||||
| Contribution margin ratio | 51.54% | ||||
| b) Break Even (Dollars) = Fixed cost /contribution margin ratio | |||||
| =468500/51.54% | |||||
| 909,030 | |||||
| Break Even (Unit ) = Fixed cost /contribution margin per unit | |||||
| =468500 /13.4 | |||||
| 34,963 | Units | ||||
| c) Target Units = (Total fixed cost +Target income / contribution margin per unit) | |||||
| =(468500 +56000)/13.4 | |||||
| 39,142 | Units | ||||
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