XYZ plans to sell 10,000 units of finished product at $100 each in the coming year. Variable cost per unit is $75 and total fixed cost is $20,000.

Required:

A.) Calculate the variable cost ratio.

B.) Calculate the contribution margin ratio.

C.) Calculate the break-even point in sales dollars.

D.) If XYZ has a target profit of $100,000, how many units will they have to sell?

Answer:

Income Statement

A.  Calculation of variable cost ratio :

variable cost ratio = Variable Cost per unit / Selling price per unit *100

    = $ 75 / $ 100 * 100

    = 75 %

Therefore variable cost ratio is 75%

B. Calculation of contribution margin ratio :

Contribution margin ratio = Contribution Margin per unit / Selling price per unit *100

    = $ 25 / $ 100 * 100

= 25%

Therefore Contribution margin ratio is 25%.

Contribution margin per Unit = Total Contribution / Sales Units

  = $2,50,000 / 10,000

   = $ 25 per unit

C. Calculation of break-even point in sales dollars :

Break-even point in sales dollars = Fixed Cost / Contribution Margin Ratio

    = $ 20,000 / 25 %

    = $ 80,000

Therefore break-even point is $ 80,0000.

D. Calculation of Sales Units need to sell when Profit of $ 1,00,000 :

Fixed cost will remain same i.e $ 20,000

Therefore we can easily calculate Contribution Margin

Total Contribution Margin = Fixed Cost + Profit

   = $ 20,000 + $ 1,00,000

   = $ 1,20,000

Contribution margin $ 25 ( as per 2.B )

Sales (in Units ) = Total Contribution Margin / Contribution Margin Per unit

  = $ 1,20,000 / $ 25

  = 4,800 Units

Therefore Sales of 4,800 Units required in order to earn profit of $1,00,000