Question

Question 1 If the number of units sold increases (quantity increases), which of the following will NOT change? Sales O Variable costs O Fixed costs Contribution margin

Answer 1

QUESTION 1

If the number of units sold increases (quantity increases), FIXED COSTS will not change.

• Sales will increase as the units sold increase. (provided selling price is not decreased)
• Variable costs are those costs that vary with the level of output. For every unit sold, variable cost is incurred.
• Contribution margin = Sales - Variable cost. Therefore, it will also change if the number of units sold is increased.

QUESTION 2

Beak-even in sales dollars: $562,500

• Breakeven point (value in $) = Fixed costs ÷ Contribution margin ratio
  • Fixed costs = $258,750
  • Contribuion margin ratio = Contribution margin ÷ Sales
    • Sales = $750 × 1,000 units = $750,000
    • Variable costs = $405 × 1,000 units = $405,000
    • Contribution margin = Sales - Variable costs = $750,000 - $405,000 = $345,000
    • Contribuion margin ratio = $345,000 ÷ $750,000 = 0.46
  • Break-even sales in dollars = $258,750 ÷ 0.46 = $562,500

Check:

The breakeven point (BEP) is the volume at which there is neither profits nor losses.

Break-even sales quantity (in units) = Fixed costs ÷ Contribution margin per unit = $258,750 ÷ ($750-$405) = 750 units

Sales (break-even) Less: variable costs Contribution margin Less: fixed costs Profit 750 units Ⓡ$750 $ 562,500 750 units $405 $ (303,750) 750 units * $345 $ 258,750 $ (258,750)

QUESTION 3

The effect on Net Income if the sales quantity increases by 100 units: $3,200 increase

Since all the fixed costs are already recovered and the firm is earning profits, the increase in profit = increase in quantity × contribution per unit = 100 units × $32 = $3,200

Check:

Sales (break-even) Less: variable costs Contribution margin Less: fixed costs net income 800 units * $80 800 units x $48 750 units $345 $ $ $ $ $ 64,000 (38,400) 25,600 (12,000) | 13,600 Net income at 700 units Increase $13,600 - $10,400 $ $ 10,400 3,200

• Fixed costs do not change with change in units sold upto a certain extent. Therefore, it is constant at $12,000

If the monthly advertising is increased by $10,000, fixed costs are affected.

The effect on Net Income if

• sales quantity increases 200 units
• sales price decreases $10
• monthly advertising expense increases by $5,000 (fixed cost)
  • $12,000 decrease

Sales (break-even) Less: variable costs Contribution margin Less: fixed costs Net loss (1000 units + 200 units) x ($60 - $10) $ (1000 units + 200 units) < $35 $ 1200 units x ($50 - $35) $ $17,500 + $5,000 $ $ 60,000 (42,000) 18,000 (22,500) (4,500) Net income before the changes Decrease in net income (4,500) - $7,500 $ $ 7,500 (12,000)