1.
Construct a cost-volume-profit chart indicating the break-even sales for last year, and verify the answer using the break-even equation.
1.
Explanation of Solution
Cost-Volume-Profit Analysis: It is a method followed to analyze the relationship between the sales, costs, and the related profit or loss at various levels of units sold. In other words, it shows the effect of the changes in the cost and the sales volume on the operating income of the company.
Construct a cost-volume-profit chart indicating the break-even sales for last year.
Figure (1)
The volume in units of sales is shown on the horizontal axis. The maximum relevant range is 2,500 units. The sales and the total costs (fixed cost and variable cost) in dollars is shown on the vertical axis. The maximum relevant range of sales and total costs is $700,000.
The total sales line is drawn right upward by connecting the first point at $0 to the second point at $625,000
The total cost line is drawn right upward by connecting the first point at $75,000 (fixed cost) on the vertical axis to the second point at $512,500
The break-even point is the intersection point where the total sales line and total cost line meet. The vertical dotted line drawn downward from the intersection point reaches at 1,000 units. It indicates the break-even sales (units). The horizontal line drawn to the left towards the vertical axis reaches at $250,000. It indicates the break-even sales (dollars).
The operating profit area is the area where the total sales line exceeds the total cost line. However, the operating loss area is the area where the total cost exceeds the total sales line.
Verify the answer using the break-even equation as follows:
Determine the break-even sales in units.
Fixed cost =$75,000
Contribution margin per unit =$75 per unit (1)
Determine the break-even sales in dollars.
Fixed cost =$75,000
Contribution margin ratio =30% (2)
Working note (1):
Compute the contribution margin per unit.
Selling price per unit =$250 per unit
Variable cost per unit =$175 per unit
Working note (2):
Determine the contribution margin ratio.
Contribution margin =$75 per unit (1)
Selling price per unit =$250 per unit
2(A)
Compute the income from operations for last year.
2(A)
Explanation of Solution
Compute the income from operations for last year as follows:
Figure (2)
Last year, the number of units sold is 2,000 units (3). The total sales is $500,000. The total cost is
Similarly, a dotted line is drawn from the total cost at $425,000 on the vertical axis towards the right and a dotted line is drawn upward for the 2,000 units sold from the horizontal axis. The two dotted line meet at a point which indicates the point of total cost at 2,000 units.
The dotted line from sales is above the dotted line for total cost. This indicates the income from operations. Thus, the area in between the two dotted lines is the income from operations of
Verify the answers using the mathematical approach to cost-volume-profit analysis.
Determine the income from operations for the last year.
Determine the income from operations for 2,000 units | ||
Particulars | Amount ($) | Amount ($) |
Sales | 500,000 | |
Less: Fixed costs | 75,000 | |
Variable costs | 350,000 | (425,000) |
Income from operations | 75,000 |
Table (1)
Working note (3):
Determine the number of units sold.
Sales =$500,000
Selling price per unit =$250 per unit
2(B)
Compute the maximum income from operations realized during the year.
2(B)
Explanation of Solution
The maximum relevant range for number of units to be sold is 2,500 units. Thus, the total sale is
Similarly, a dotted line is drawn from the total cost at $512,500 on the vertical axis towards the right and a dotted line is drawn upward for the 2,500 units sold from the horizontal axis. The two dotted line meet at a point which indicates the point of total cost at 2,500 units.
The dotted line from sales is above the dotted line for total cost. This indicates the income from operations. Thus, the area in between the two dotted lines is the income from operations of
Determine the maximum income from operations that could have been realized during the year.
Determine the income from operations for 2,500 units | ||
Particulars | Amount ($) | Amount ($) |
Sales | 625,000 | |
Less: Fixed costs | 75,000 | |
Variable costs | 437,500 | (512,500) |
Income from operations | 112,500 |
Table (2)
3.
Construct a cost-volume-profit chart indicating the break-even sales for the current year, and verify the answer using the break-even equation.
3.
Explanation of Solution
Construct a cost-volume-profit chart indicating the break-even sales for the current year as follows:
Figure (3)
The volume in units of sales is shown on the horizontal axis. The maximum relevant range is 2,500 units. The sales and the total costs (fixed cost and variable cost) in dollars is shown on the vertical axis. The maximum relevant range of sales and total costs is $700,000.
The total sales line is drawn right upward by connecting the first point at $0 to the second point at $625,000
The total cost line is drawn right upward by connecting the first point at
The break-even point is the intersection point where the total sales line and total cost line meet. The vertical dotted line drawn downward from the intersection point reaches at 1,450 units. It indicates the break-even sales (units). The horizontal line drawn to the left towards the vertical axis reaches at $362,500. It indicates the break-even sales (dollars).
The operating profit area is the area where the total sales line exceeds the total cost line. However, the operating loss area is the area where the total cost exceeds the total sales line.
Verify the answer using the break-even equation as follows:
Determine the break-even sales in units.
Fixed cost =$75,000
Increase in fixed cost (billboard advertising) =$33,750
Contribution margin per unit =$75 per unit (1)
Determine the break-even sales in dollars.
Fixed cost =$75,000
Increase in fixed cost (billboard advertising) =$33,750
Contribution margin ratio =30% (2)
4(A)
Compute the income from operations for sales 2,000 units, and verify the answers using the mathematical approach to cost-volume-profit analysis
4(A)
Explanation of Solution
Figure (4)
Last year, the number of units sold is 2,000 units (3). The total sales is $500,000. The total cost is
Similarly, a dotted line is drawn from the total cost at $458,750 on the vertical axis towards the right and a dotted line is drawn upward for the 2,000 units sold from the horizontal axis. The two dotted line meet at a point which indicates the point of total cost at 2,000 units.
The dotted line from sales is above the dotted line for total cost. This indicates the income from operations. Thus, the area in between the two dotted lines is the income from operations of
Verify the answers using the mathematical approach to cost-volume-profit analysis.
Determine the income from operations for the last year.
Determine the income from operations for 2,000 units | ||
Particulars | Amount ($) | Amount ($) |
Sales | 500,000 | |
Less: Total Fixed costs | 108,750 | |
Variable costs | 350,000 | (458,750) |
Income from operations | 41,250 |
Table (3)
4(B)
Compute the maximum income from operations that could have been realized during the year and verify the answer.
4(B)
Explanation of Solution
The maximum relevant range for number of units to be sold is 2,500 units. Thus, the total sales is
Similarly, a dotted line is drawn from the total cost at $546,250 on the vertical axis towards the right and a dotted line is drawn upward for the 2,500 units sold from the horizontal axis. The two dotted line meet at a point which indicates the point of total cost at 2,500 units.
The dotted line from sales is above the dotted line for total cost. This indicates the income from operations. Thus, the area in between the two dotted lines is the income from operations of
Verification:
Determine the income from operations for 2,500 units | ||
Particulars | Amount ($) | Amount ($) |
Sales | 625,000 | |
Less: Total Fixed costs | 108,750 | |
Variable costs | 437,500 | (546,250) |
Income from operations | 78,750 |
Table (4)
Want to see more full solutions like this?
Chapter 20 Solutions
Financial And Managerial Accounting
- Poleski Manufacturing, which maintains the same level of inventory at the end of each year, provided the following information about expenses anticipated for next year: The selling price of Poleskis single product is 16. In recent years, profits have fallen and Poleskis management is now considering a number of alternatives. Poleski wants to have a net income next year of 250,000, but expects to sell only 120,000 units unless some changes are made. The president of Poleski has asked you to calculate the companys projected net income (assuming 120,000 units are sold) and the sales needed to achieve the companys net income objective for next year. Also, compute Poleskis contribution margin per unit, contribution margin ratio, and break-even point for next year. The worksheet CVP has been provided to assist you. Note that the data from the problem have already been entered into the Data Section of the worksheet.arrow_forwardLast year Minden Company introduced a new product and sold 25,500 units of it at a price of $90 per unit. The product's variable expenses are $60 per unit and its fixed expenses are $831,300 per year. Required: 1. What was this product's net operating income (loss) last year? 2. What is the product's break-even point in unit sales and dollar sales? 3. Assume the company has conducted a marketing study that estimates it can increase annual sales of this product by 5,000 units for each $2 reduction in its selling price. If the company will only consider price reductions in increments of $2 (e.g., $68, $66, etc.), what is the maximum annual profit that it can earn on this product? What sales volume and selling price per unit generate the maximum profit? 4. What would be the break - even point in unit sales and in dollar sales using the selling price that you determined in requirement 3?arrow_forwardMusic Corporation recorded sales of $2,235,245 for the most recent year. The company's breakeven sales point (in dollars) is $1,650,000, and its margin of safety ratio (MOS%) at the current sales level is 26%. What sales (in dollars) would be needed to increase the company's MOS% to 38%? Multiple Choice $2,277,000. $2,661,290. $2,932,640. $3,024,050. $2,660,000.arrow_forward
- Last year Minden Company introduced a new product and sold 25,700 units of it at a price of $93 per unit. The product's variable expenses are $63 per unit and its fixed expenses are $839,700 per year. Required: 1. What was this product's net operating income (loss) last year? 2. What is the product's break-even point in unit sales and dollar sales? 3. Assume the company has conducted a marketing study that estimates it can increase annual sales of this product by 5,000 units for each $2 reduction in its selling price. If the company will only consider price reductions in increments of $2 (e.g., $68, $66, etc.), what is the maximum annual profit that it can earn on this product? What sales volume and selling price per unit generate the maximum profit? 4. What would be the break-even point in unit sales and in dollar sales using the selling price that you determined in requirement 3? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3…arrow_forwardLast year Minden Company introduced a new product and sold 25,700 units of it at a price of $100 per unit. The product's variable expenses are $70 per unit and its fixed expenses are $838,200 per year. Required: 1. What was this product's net operating income (loss) last year? 2. What is the product's break-even point in unit sales and dollar sales? 3. Assume the company has conducted a marketing study that estimates it can increase annual sales of this product by 5,000 units for each $2 reduction in its selling price. If the company will only consider price reductions in increments of $2 (e.g., $68, $66, etc.), what is the maximum annual profit that it can earn on this product? What sales volume and selling price per unit generate the maximum profit? 4. What would be the break-even point in unit sales and in dollar sales using the selling price that you determined in requirement 3? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 What…arrow_forwardLast year Minden Company Introduced a new product and sold 25,100 units of It at a price of $95 per unit. The product's varlable expenses are $65 per unit and its fixed expenses are $835,500 per year. Required: 1. What was this product's net operating Income (loss) last year? 2 What Is the product's break-even polnt in unit sales and dollar sales? 3. Assume the company has conducted a marketing study that estimates It can Increase annual sales of this product by 5.000 units for each $2 reduction In Its selling price. If the company will only consider price reductions in Increments of $2 (e.g. $68. $6, etc.). what is the maximum annual profit that It can earn on this product? What sales volume and selling price per unit generate the maximum profit? 4. What would be the break-even polnt In unit sales and In dollar sales using the selling price that you determined In requirement 3? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required…arrow_forward
- Help GPXVZG300 Corp. is a merchandiser that sells it's product for $36 per unit. Variable expenses are $18 per unit, and fixed expenses total $12,000 annually. (ID#80446) Assume that GPXVZG300 sold 32,700 units last year. The manager wants to increase the sales commission by $0.2 per unit. He thinks that this move, combined with some increase in advertising, would double annual unit sales. Q.) By how much could advertising be increased with GPXVZG300's profits remaining unchanged? A.) $ Prev. 12 of 25 Next > %24arrow_forwardProfit-Volume Chart For the coming year, Loudermilk Inc. anticipates fixed costs of $600,000, a unit variable cost of $75, and a unit selling price of $125. The maximum sales within the relevant range are $2,500,000. a. Determine the maximum possible operating loss. b. Compute the maximum possible operating profit. c. Construct a profit-volume chart on paper. Indicate whether each of the following levels of sales is in the operating profit area, operating loss area, or at the break-even point. 4,800 units 8,000 units 12,000 units 16,000 units 20,000 units d. Estimate the break-even sales (units) by using the profit-volume chart constructed in part (c). unitsarrow_forwardA company is making plans for next year, using cost-volume-profit analysis as its planning tool. Next year's sales data about its product are as follows Selling price P60 Variable manufacturing costs per unit 22.50 Variable selling and administrative costs 4.5 Fixed operating costs (60% is manufacturing costs) P159,500 Income tax rate 30% How much should sales be next year if the company wants to earn profit after tax of P23,100, the same amount that it earned last year?arrow_forward
- GPXVZG300 Corp. is a merchandiser that sells it's product for $36 per unit. Variable expenses are $18 per unit, and fixed expenses total $17,000 annually. (ID#45225) Assume that GPXVZG300 sold 21,600 units last year. The manager wants to increase the sales commission by $0.9 per unit. He thinks that this move, combined with some increase in advertising, would double annual unit sales. Q: By how much could advertising be increased with GPXVZG300's profits remaining unchanged? A: $ 4 of 25 Next > < Prev raw ill MacBook Proarrow_forwardDodge Ball Bearings had sales of 14,000 units at $70 per unit last year. The marketing manager projects a 15 percent increase in unit volume sales this year with a 10 percent price decrease (due to a price reduction by a competitor). Returned merchandise will represent 10 percent of total sales. What is your net dollar sales projection for this year? Net salesarrow_forwardAttica Candy Company is a wholesale distributor of candy. The company services grocery, con- venience, and drug stores in a large metropolitan area. Attica has achieved modest but steady growth in sales over the past few years, while candy prices have been increasing. The company is formulating its plans for the coming fiscal year. Following is the data used to project the current year's after-tax net income of $110,400. Average selling price 4.00 per box Average variable costs: Cost of candy Selling expenses 2.00 per box 0.40 per box 2.40 per box Annual fixed costs: $ 160,000 280,000 $ 440,000 Selling Administrative Expected annual sales volume (390,000 boxes) S1,560,000 Tax rate 40% Manufacturers of candy have announced they will increase prices of their products an aver- age of 15 percent in the coming year due to increases in raw materials (sugar, cocoa, peanuts, etc.) and labour costs. Attica Candy Company expects all other costs will remain at the same rates or levels as the…arrow_forward
- Managerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College PubCornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage LearningExcel Applications for Accounting PrinciplesAccountingISBN:9781111581565Author:Gaylord N. SmithPublisher:Cengage Learning