Explanations 
Textbooks 
Flashcards 
91影视 AI 
Notes 
Study Plans 
Study Sets 
Find a degree 
Magazine 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
- Use the contribution margin ratio approach to compute Diversified鈥檚 breakeven revenue in dollars. If the average trade leads to \(800 in revenue for Diversified, how many trades must be made to break even?
- Use the equation approach to compute the dollar revenues needed to earn a monthly target profit of \)11,200.
- Graph Diversified鈥檚 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.
- 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
- Diversified鈥檚 breakeven revenue in dollars is $40,000
- Number of trades is 70 trades
- Breakeven point at $40,000 50 trades.
- New break-even trade is 20 trades.
Step by step solution
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.
(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
Calculate the required sales in units at break-even when the sales price per trade is $800
Therefore, the required sales in the unit at break-even when the sales price per trade is $800 are 50 traders.
(2) Computing the dollar revenues
(3) Graph Diversified’s CVP relationships
Effect of breakeven point
Calculate the new break-even point in the unit if sales per trade increase to $2,000.
The Break-even point is decreased to 30 trades (50 trades 鈥� 20 trades) when the average revenue is increased to $2,000.
Hence, the break-even point is reduced by 60% as follows:
Over 30 million students worldwide already upgrade their learning with 91影视!
