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Alternate Demo Problem Twenty-One
Problem #1
Trimble Company sells an electronic toy for $40. The variable cost is $24
per unit and the fixed cost is $32,000 per year. Management is considering
the following changes:
Alternative #1
Lease a new packaging machine for $4,000 per year, which will reduce
variable cost by $1 per unit.
Alternative #2
Increase selling price 10 percent to counteract an expected 25 percent
increase in fixed cost.
Alternative #3
Reduce fixed cost by 25 percent by moving to a lower rent location. This
would have the effect of increasing variable costs by 10 percent.
Required:
Consider and answer each of the following questions independently:
Round calculations to the nearest unit
(a) Determine the current break-even point in units and dollars.
(b)Determine the expected profit assuming alternative #1 and sales of
3,200 units.
(c) Determine the break-even point in units and dollars assuming
alternative #2.
(d)Determine the break-even point required in units and dollars
assuming alternative #3.
(e) Determine the volume of sales required to earn $23,600 assuming
alternative #3.
Alternative Demo Problem Twenty-one
Multi-product breakeven point
Problem #2
Handy Home sells window and doors in the ratio of 8:2 (windows:doors).
The selling price of each window is $200 and of each door is $500. The
variable cost of a window is $125 and of a door is $350. Fixed costs are
$900,000.
Required:
1. Determine the contribution margin for one composite unit
2. Compute the break-even point in composite units
3. Compute the number of units of each product that will be sold at the
Break-even point.
4. Compute the number of units of each product that need to be sold to
achieve a net income of $180,000.
Solution: Alternate Demo Problem Twenty-One
Problem #1
(a) Break-even point (in units) = Fixed costs/CM per unit
$32,000/($40 per unit - $24 per unit) = 2,000 units
2,000 units x $40 per unit = $80,000 dollars
(or)
Break-even point (in dollars) = Fixed costs/CM ratio
$32,000/[($40 per unit –$16 per unit)/$40 per unit] = $80,000
$80,000 dollars/$40 per unit = 2,000 units
(b) Net income = (CM per unit x number of units sold) - Fixed costs
New fixed costs = $32,000 + $4,000 = $36,000
New CM = $40 per unit - $23 per unit = $17 per unit
($17 per unit x 3,200 units) - $36,000 = $18,400
(c) Break-even point (in units) = Fixed costs/CM per unit
New fixed costs = $32,000 + $8,000 = $40,000
New CM = $44 per unit - $24 per unit = $20 per unit
$40,000/$20 per unit = 2,000 units
2,000 units x $44 per unit = $88,000
(d) Break-even point (in units) = Fixed costs/CM per unit
New fixed costs = $32,000 - $8,000 = $24,000
New CM = $40 per unit - $26.40 per unit = $13.60 per unit
$24,000/$13.60 per unit = 1,765 units
1,765 units x $40 per unit = $70,600
(e) Required sales (in units) = (Fixed costs + Target NI)/CM per unit
($24,000 + $23,600)/$13.60 per unit = 3,500 units
Solution: Alternate Demo Problem Twenty-One
Problem #2
Selling Price per Composite Unit
Windows: 8 x $200 $1,600
Doors: 2 x $500 1,000
$2,600
Variable Cost per Composite Unit
Windows: 8 x $125 $1,000
Doors: 2 x $350 700
1,700
Composite Contribution Margin $900
Breakeven point in Composite Units:
Fixed Costs $900,000 = 1,000
Composite Contribution Margin $900
Number of units of each product to sell to break even
Windows: 8 x 1,000 = 8,000
Doors: 2 x 1,000 = 2,000
Composite Units to sell to achieve target Income:
Fixed Costs+ Target Income $1,080,000 = 1,200
Composite Contribution Margin $900
Number of units of each product to sell for target income
Windows: 8 x 1,200 = 9,600
Doors: 2 x 1,200 = 2,400
