Blue Ridge Company manufactures a product that sells for $60 per unit. Blue Ridge incurs a variable cost per unit of $38 and $4,128,000 in total fixed costs to produce this product. It is currently selling 240,000 units.
Instructions: Complete each of the following requirements, presenting labeled supporting computations.
a) Compute and label the contribution margin per unit and contribution margin ratio.
b) Using the contribution margin per unit, compute the break-even point in units.
c) Using the contribution margin ratio, compute the break-even point in dollars.
d) Compute the margin of safety and margin of safety ratio.
e) Compute the number of units that must be sold in order to generate net income of $600,000 using the contribution margin per unit.
f) Blue Ridge is considering reducing the salary of the sales staff and paying a commission to its salesmen equal to 10% of sales. Reducing the salaries will decrease fixed costs by $400,000 and management believes the commission incentive to the sales group will increase sales volume 30%. Should Blue Ridge implement this plan? Support your answer with computations.