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Chapter 20: Q45PGB (page 1134)

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?

Short Answer

Expert verified
  1. Diversified’s breakeven revenue in dollars is $40,000
  2. Number of trades is 70 trades
  3. Breakeven point at $40,000 50 trades.
  4. New break-even trade is 20 trades.

Step by step solution

01

Meaning of Contribution Margin

The contribution margin is the sum of sales revenue left over after covering the business entity's fixed costs. The inconsistency between sales income and variable costs is what determines it.

02

(1) Computing Diversified’s breakeven revenue in dollars.

Calculate the required sales in the unit at break-even when the sales price per trade is $800

Calculating the total % of variable costs and contribution margin

Financial planner % of revenue

9%

Advertising % of revenue

11%

Supplies and postage % of revenue

4%

Usage fees % of revenue

6%

Total % of variable costs and contribution margin

30%

Calculating the total fixed cost

Office rent

$8,000

Depreciation

$1,700

Utilities

$2,400

Telephone lines

$1,500

Brokerage services

$2,500

Salary of a financial planner

$11,900

Total fixed cost

$28,000



Calculating the required sales in dollar

Required sales in dollars=Fixedcosts+Target profitContribution margin ratio=$28,000+$070%=$40,000

Calculate the required sales in units at break-even when the sales price per trade is $800

Required sales in unit=Required sales in dollarSales price per trade=$40,000$800=50 traders



Therefore, the required sales in the unit at break-even when the sales price per trade is $800 are 50 traders.

03

(2) Computing the dollar revenues

Target profit=[Net sales revenue−Variable  costs]−Fixed cost$11,200=[($800×Number of trade)−($800×30%×Number of trades)]−$28,000$39,200=[($800×$240)×Number of trades]$39,200=$560×Number of trades

Number of trades=$39,200$560=70 trades

04

(3) Graph Diversified’s CVP relationships

05

Effect of breakeven point

Calculate the new break-even point in the unit if sales per trade increase to $2,000.

New break-even trade=Required sales in dollarsSales price per trade=$40,000$2,000=20 trades

The Break-even point is decreased to 30 trades (50 trades – 20 trades) when the average revenue is increased to $2,000.

Hence, the break-even point is reduced by 60% as follows: 50 trades−20 trades50 trades

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Most popular questions from this chapter

How can CVP analysis be used by companies with multiple products?

What is cost stickiness? Why do managers need to be aware of cost stickiness?

Use the following information to complete Short Exercises S20-10 through S20-15.

Funday Park competes with Cool World by providing a variety of rides. Funday Park sells tickets at \(70 per person as a one-day entrance fee. Variable costs are \)42 per person, and fixed costs are \(170,800 per month.

Refer to the original information (ignoring the changes considered in Short Exercise S20-12). Suppose Funday Park increases fixed costs from \)170,800 per month to $231,000 per month. Compute the new breakeven point in tickets and in sales dollars.

Crandall Company sells flags with team logos. Crandall has fixed costs of \(583,200 per year plus variable costs of \)4.80 per flag. Each flag sells for \(12.00.

Requirements

1. Use the equation approach to compute the number of flags Crandall must sell each year to break even.

2. Use the contribution margin ratio approach to compute the dollar sales Crandall needs to earn \)33,000 in operating income for 2018. (Round the contribution margin ratio to two decimal places.)

3. Prepare Crandall’s contribution margin income statement for the year ended December 31, 2018, for sales of 70,000 flags. (Round your final answers up to the next whole number.)

4. The company is considering an expansion that will increase fixed costs by 21% and variable costs by $0.60 per flag. Compute the new breakeven point in units and in dollars. Should Crandall undertake the expansion? Give your reasoning. (Round your final answers up to the next whole number.)

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?
See all solutions

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