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Chapter 20: Q40PGA (page 1131)

National Investor Group is opening an office in Portland, Oregon. Fixed monthly costs are office rent (\(8,100), depreciation on office furniture (\)1,700), utilities (\(2,000), special telephone lines (\)1,500), a connection with an online brokerage service (\(2,500), and the salary of a financial planner (\)5,200). Variable costs include payments to the financial planner (9% of revenue), advertising (11% of revenue), supplies and postage (4% of revenue), and usage fees for the telephone lines and computerized brokerage service (6% of revenue).

Requirements

  1. Use the contribution margin ratio approach to compute National’s breakeven revenue in dollars. If the average trade leads to \(1,000 in revenue for National, how many trades must be made to break even?
  2. Use the equation approach to compute the dollar revenues needed to earn a monthly target profit of \)12,600.
  3. Graph National’s CVP relationships. Assume that an average trade leads to \(1,000 in revenue for National. Show the breakeven point, the sales revenue line, the fixed cost line, the total cost line, the operating loss area, the operating income area, and the sales in units (trades) and dollars when monthly operating income of \)12,600 is earned.
  4. Suppose that the average revenue National earns increases to $1,500 per trade. Compute the new breakeven point in trades. How does this affect the breakeven point?

Short Answer

Expert verified
  1. Diversified’s breakeven revenue in dollars is $30,000
  2. Number of trades is 48 trades
  3. Breakeven point at $30,000 30 trades.
  4. New break-even trade is 25 trades.

Step by step solution

01

Meaning of Break-Even Point

It is a stage of operation during which a business experiences revenues generated in balance with costs incurred. As a result, when a business hits its break-even point, it does not declare any profit or loss from the operation.

02

(1) Compute National’s breakeven revenue in dollars

Calculate the total percentage of variable costs and contribution margin.

Variable cost

Percentage revenue

Financial planner

9%

Advertising

11%

Supplies and postage

4%

Usage fees

6%

Total

30%

The variable cost is 30% of sales revenue. Hence, the contribution margin would be 70% of sales revenue.

Calculate total fixed costs.

Office rent

$8,100

Depreciation

$1,700

Utilities

$2,000

Telephone lines

$1,500

Brokerage services

$2,500

Salary of a financial planner

$5,200

Total fixed cost

$21,000

Calculate required sales in dollars

Required sales in dollars=Fixedcosts+Target profitContribution margin ratio=$21,000+$070%=$30,000

Calculate the required sales in units at break-even when the sales price per trade is $1,000

Required sales in unit=Required sales in dollarSales price per trade=$30,000$1,000=30 traders

03

(2) Compute the dollar revenues

Calculating the required sales in unit

Target profit=[Net sales revenue−Variable  costs]−Fixed cost$12,600=[($1,000×Number of trade)−($1,000×30%×Number of trades)]−$21,000$33,600=[($1,000×$300)×Number of trades]$39,200=$700×Number of trades

Number of trades=$33,600$700=48 trades

Compute required sales in dollars

Required sales in dollars=Required sales in units×Sales price per unit=48 trades×$1,000 trade=$48,000

04

(3) Graph National’s CVP relationships

05

(4) Compute the new breakeven point in trades

Calculate the new break-even point in the unit if sales per trade increase to $1,200.

New break-even trade=Required sales in dollarsSales price per trade=$30,000$1,200=25 trades

The Break-even point is decreased to 5 trades (30 trades – 25 trades) when the average revenue is increased to $2,000.

Hence, the break-even point is reduced by 33% as follows:30 trades−25 trades30 trades

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Most popular questions from this chapter

Question: Computing contribution margin in total, per unit, and as a ratio

Complete the table below for contribution margin per unit, total contribution margin, and contribution margin ratio:

A B C Number of units 1,720 units 14,920 units 4,620 units

Sales price per unit \( 1,800 \) 4,500 $ 5,550

Variable costs per unit 720 3,600 1,665

Calculate:                  

Contribution margin per unit                      

Total contribution margin                        

Contribution margin ratio

Use the following information to complete Short Exercises S20-16 and S20-17.

Wild Waters Swim Park sells individual and family tickets. With a ticket, each person receives a meal, three beverages, and unlimited use of the swimming pools. Wild Waters has the following ticket prices and variable costs for 2018:

Individual Family Sales price per ticket \( 50 \) 150 Variable cost per ticket 35 140

Wild Waters expects to sell one individual ticket for every four family tickets. Wild Waters’s total fixed costs are $27,500.

S20-16 Calculating breakeven point for two products

Using the Wild Waters Swim Park information presented, do the following tasks.

Requirements

1. Compute the weighted-average contribution margin per ticket.

2. Calculate the total number of tickets Wild Waters must sell to break even.

3. Calculate the number of individual tickets and the number of family tickets the company must sell to break even.

The Jacksonville Shirt Company makes two types of T-shirts: basic and custom. Basic shirts are plain shirts without any screen printing on them. Custom shirts are created using the basic shirts and then adding a custom screen printing design.

The company buys cloth in various colors and then makes the basic shirts in two departments, Cutting and Sewing. The company uses a process costing system (weighted-average method) to determine the production cost of the basic shirts. In the Cutting Department, direct materials (cloth) are added at the beginning of the process and conversion costs are added evenly through the process. In the Sewing Department, no direct materials are added. The only additional material, thread, is considered an indirect material because it cannot be easily traced to the finished product. Conversion costs are added evenly throughout the process in the Sewing Department. The finished basic shirts are sold to retail stores or are sent to the Custom Design Department for custom screen printing.

The Custom Design Department creates custom shirts by adding screen printing to the basic shirt. The department creates a design based on the customer’s request and then prints the design using up to four colors. Because these shirts have the custom printing added, which is unique for each order, the additional cost incurred is determined using job order costing, with each custom order considered a separate job.

For March 2018, the Jacksonville Shirt Company compiled the following data for the Cutting and Sewing Departments:

Department Item Amount Units

Cutting Beginning balance \( 0 0 shirts

Started in March 1,200 shirts

Direct materials added in March 1,920

Conversion costs 1,320

Completed and transferred to Sewing ??? 1,200 shirts

Ending balance 0 0 shirts

Sewing Beginning balance, transferred in, \)1,350;

conversion costs, \(650 \) 2,000 500 shirts

Transferred in from Cutting ??? ???

Conversion costs added in March 1,196

Completed and transferred to Finished Goods ??? 1,000 shirts

Ending balance, 60% complete ??? ???

For the same time period, the Jacksonville Shirt Company compiled the following data for the Custom Design Department:

Job Quantity Design Fee Printing Status

367 400 Yes 3 colors Complete

368 150 No 2 colors Complete

369 100 Yes 5 colors Complete

370 500 Yes 4 colors Complete

The Jacksonville Shirt Company has previously determined that creating and programming the design cost \(80 per design. This is a one-time charge. If a customer places another order with the same design, the customer is not charged a second time. Additionally, the cost to print is \)0.20 per color per shirt.

Requirements

1. Complete a production cost report for the Cutting Department and the Sewing Department. What is the cost of one basic shirt?

2. Determine the total cost and the average cost per shirt for jobs 367, 368, 369, and 370. If the company set the sales price at 200% of the total cost, determine the total sales price of each job.

3. In addition to the custom jobs, the Jacksonville Shirt Company sold 1,000 basic shirts (assume the beginning balance in Finished Goods Inventory is sufficient to make these sales, and the unit cost of the basic shirts in Finished Goods Inventory is the same as the unit cost incurred this month). If the company set the sales price at 125% of the cost, determine the sales price per unit, total sales revenue, total cost of goods sold, and total gross profit for the basic shirts.

4. Calculate the total revenue, total cost of goods sold, and total gross profit for all sales, basic and custom.

5. Assume the company sold only basic shirts (no custom designs) and incurred fixed costs of \(700 per month.

a. Calculate the contribution margin per unit, contribution margin ratio, required sales in units to break even, and required sales in dollars to break even.

b. Determine the margin of safety in units and dollars.

c. Graph Jacksonville Shirt Company’s CVP relationships. Show the breakeven point, the sales revenue line, the fixed cost line, the total cost line, the operating loss area, and the operating income area.

d. Suppose the Jacksonville Shirt Company wants to earn an operating income of \)1,000 per month. Compute the required sales in units and dollars to achieve this profit goal.

6. The Jacksonville Shirt Company is considering adding a new product line, a cloth shopping bag with custom screen printing that will be sold to grocery stores. If the current market price of cloth shopping bags is \(2.25 and the company desires a net profit of 60%, what is the target cost? The company estimates the full product cost of the cloth bags will be \)0.80. Should the company manufacture the cloth bags? Why or why not?

Diversified Investor Group is opening an office in Boise, Idaho. Fixed monthly costs are office rent (\(8,000), depreciation on office furniture (\)1,700), utilities (\(2,400), special telephone lines (\)1,500), a connection with an online brokerage service (\(2,500), and the salary of a financial planner (\)11,900). Variable costs include payments to the financial planner (9% of revenue), advertising (11% of revenue), supplies and postage (4% of revenue), and usage fees for the telephone lines and computerized brokerage service (6% of revenue).

Requirements

  1. Use the contribution margin ratio approach to compute Diversified’s breakeven revenue in dollars. If the average trade leads to \(800 in revenue for Diversified, how many trades must be made to break even?
  2. Use the equation approach to compute the dollar revenues needed to earn a monthly target profit of \)11,200.
  3. Graph Diversified’s CVP relationships. Assume that an average trade leads to \(800 in revenue for Diversified. Show the breakeven point, the sales revenue line, the fixed cost line, the total cost line, the operating loss area, the operating income area, and the sales in units (trades) and dollars when monthly operating income of \)11,200 is earned.
  4. Suppose that the average revenue Diversified earns increases to $2,000 per trade. Compute the new breakeven point in trades. How does this affect the breakeven point?

Complete the table below for the missing amounts:

A B C

Number of units 2,064 units (d) 2,570 units

Sales price per unit \( 250 \) 125 $ (g)

Variable costs per unit (a) 50 4,528

Contribution margin per unit 125 (e) (h)

Total contribution margin (b) 1,567,500 (i)

Contribution margin ratio (c) (f) 20%
See all solutions

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