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Learning Journal Unit 4

Managerial Accounting (University of the People)

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Learning Journal Unit 4

For this week’s reflection, please write three complete and well composed paragraphs (in
your own words) explain how to compute the answer to the following problem:

Phan Incorporated has annual fixed costs totaling $6,000,000 and variable costs of $350 per
unit. Each unit of product is sold for $500.

Required:

a. Calculate the contribution margin per unit.

In Contribution margin per unit each additional unit sold contributes towards a firm’s fixed costs
and profit. It is calculated by comparing the sales price of one item versus the variable cost per
unit of the item. In other words, Contribution margin per unit = Selling price per unit – Variable
cost per unit (Heisinger & Hoyle, 2012). When the units of product sold are higher than the
variable cost per unit, the contribution margin per unit will be positive and increasing sales
would led to an increase in profit.
So the contribution margin per unit for Phan Incorporated will be $500 - $350 = $150. Thus,
each unit sold at $150 contributes to covering fixed costs and increasing profit.
b. Find the break-even point in units.
According to Heisinger and Hoyle (2012), the break-even point in units is the number of units
that must be sold to cover both fixed and variable cost to achieve zero profits. In some cases,
revenue may not result in profits to some companies because some products cost more to make
than the revenue they generate resulting to a loss to the company.
In this case, the break-even point in units for Phan would be $6,000,000/ $150 (contribution
margin per unit) = 40,000 units.
c. How many units must be sold to earn an annual profit of $750,000?
We will use the following formula to know how many units must be sold to earn an annual profit
Q = (F + Target Profit) ÷ (S − V)
Q = ($6,000,000 + $750,000) ÷ ($500 − $350)
Q = $6,750,000 ÷ $150
Q = 45,000 units
In this case, Phan Incorporated must make and sell 45, 000 units to an annual profit of $750,000

Reference

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Heisinger, K., & Hoyle, J. B. (2012). Chapter 6: How is cost-volume-profit analysis used for
decision making? In Accounting for Managers, pp. 389-484. Creative Commons by-NC-SA 3.0.
Retrieved from https://my.uopeople.edu/pluginfile.php/843989/mod_page/content/16/
accounting-for-managers%20CH%201-7.pdf

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