Question

Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $72,000 each month. Compute the new CM ratio and the new break-even point in unit sales and dollar sales. (Do not round intermediate calculations. Round "CM ratio" to the nearest whole percentage (i.e., 0.234 should be entered as "23") and other answers to the nearest whole number.)

Answer 1

Answer:

1. New CM RATIO =  0.4

2. BEP (unit sales) =  21,000 units

   BEP (in dollars) =  $630,000

Explanation:

The original data table is attached.

1. CM Ratio:

The contribution margin is what is left after all variable expenses is subtracted from sales.

The CM Ratio is that amount divided by sales. So we can say:

CM Ratio = (Sales - Var Expenses)/Sales

From the table, we see sales as 585,000 and variable expenses as 409,500

This is original data, but we are given that $3 variable expense per unit is LESS. So, we take that into account and find new variable expense.

Since 19,500 units accounts to variable expense of 409,500:

Var Exp Per Unit = 409,500/19,500 = 21

Now, $3 less per unit, so Var Exp Per Unit (NEW) = 21 - 3 = 18

So, total Var Exp (NEW) = 19,500 units * 18 per unit = 351,00

New CM RATIO = (585000 - 351000)/585000 = 0.4

2. BEP (units) and BEP (dollars)

The Break-Even Point has formula:

BEP (units) = Total fixed cost/ CM Per Unit

Fixed Cost previously was 180,000. Now, 72,000 increased because of automation. Hence,

Fixed Cost (NEW) = 180000 + 72000 = 252,000

Also:

CM Per Unit is Sale Price Per Unit - Var Cost Per Unit

We know Sale Price is $30 and NEW VAR COST PER UNIT is 18

So, CM Per Unit = 30 - 18 = 12

BEP (units) = 252,000/12 = 21,000 units

BEP (in dollars) = Total Fixed Cost/CM Ratio = 252000/0.4 = $630,000