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Chapter 20: Q8SE (page 1121)

Question: Computing contribution margin, units and required sales to break even, and units to achieve target profit

Compute the missing amounts for the following table.

A B C Sales price per unit \( 200 \) 4,000 $ 5,220 Variable costs per unit 80 1,000 2,088 Total fixed costs 73,200 660,000 3,758,400 Target profit 266,760 3,000,000 3,132,000 Calculate:                          

Contribution margin per unit                          

Contribution margin ratio                          

Required units to break even                          

Required sales dollars to break even

Required units to achieve target profit

Short Answer

Expert verified

Answer

1.A=$120,B=$3,000,C=$3,1322.A=60%,B=75%,C=60%3.A=610,B=220,C=1,2004.A=$122,000,B=$880,000,C=$6,264,0005.A=2,833,B=1,220,C=2,200

Step by step solution

01

Calculation of contribution margin per unit

A

B

C

Sales price per unit

$200

$4,000

$5,220

Less: Variable cost per unit

$80

$1,000

$2,088

Contribution per unit

$120

$3,000

$3,132

02

Calculation of contribution margin ratio 

A

B

C

Sales price per unit

$200

$4,000

$5,220

Less: Variable cost per unit

$80

$1,000

$2,088

Contribution per unit

$120

$3,000

$3,132

Contribution margin ratio = Contribution margin/ net sales revenue

$120/$200 =60%

$3,000/$4,000 =75%

$3,132/$5,220 =60%

03

Calculation of required units to breakeven

A

B

C

Fixed costs

73,200

660,000

3,758,400

Contribution per unit

$120

$3,000

$3,132

Required sales in units = Fixed costs/ Contribution margin per unit

610

220

1,200

04

Calculation of required sales dollars to breakeven

A

B

C

Fixed costs

73,200

660,000

3,758,400

Contribution margin ratio = Contribution margin/ net sales revenue

$120/$200 =60%

$3,000/$4,000 =75%

$3,132/$5,220 =60%

Required sales in dollars = Fixed costs/ Contribution margin ratio

$122,000

$880,000

$6,264,000

05

Calculation of required units to achieve target profit

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Most popular questions from this chapter

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.

S20-14 Computing margin of safety

Refer to the original information (ignoring the changes considered in Short Exercises S20-12 and S20-13). If Funday Park expects to sell 8,100 tickets, compute the margin of safety in tickets and in sales dollars.

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

What effect does an increase in sales price have on contribution margin? An increase in fixed costs? An increase in variable costs?

What is the relevant range?

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?
See all solutions

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