Question

Cabrera Inc. produces and sells bobblehead dolls. Last year, Cabrera sold 156,250 units. The income statement for Cabrera Inc. for last year is as follows: Sales Less: Variable costs Contribution margin Less: Fixed costs Operating income $625,000 (343,750) $281,250 (180,000) $101.250 Required: 1. Compute the break-even point in units and in revenues. Compute the margin of safety in sales revenue for last year. 2. Suppose that the selling price decreases by 10 percent. Will the break-even point increase or decrease? Recompute the break-even point in units. (Round up to the next whole unit) 3. Suppose that the variable cost per unit decreases by $0.25. Will the break even point increase or decrease? Recompute the break-even point in units. (Round up to the next whole unit) 4. Can you predict whether the break-even point increases or decreases if both the selling price and the unit variable cost decrease? Recompute the break-even point in units incorporating both of the changes in Requirements 2 and 3. (Round up to the next whole unit) 5. Assume that total fixed costs increase by $50,000 (Assume no other changes from the original data). Will break-even point increase or decrease? Recompute it (Round up to next whole unit)

intermediate cost accounting

Answer 1

Answer:

1.Calculation of Break even point in units

= Fixed cost/(Selling price per unit - Variable cost per unit)

= $180000/$1.8

= 100000 units

Calculation of Break even point in revenues = Break even point in units * selling price per unit

= 100000 units*$4

= $400000

Calculation of Margin of safety in sales revenue

= Total sales - Break even sales

= $625000-$400000 = $225000

2.If the selling price decreases by 10 percent, then the break even point will increases

Re computation of Break even point in units

= Fixed cost / (Selling price per unit-variable cost per unit)

= $180000/(($4*.9)-2.2)

= $180000/$1.4

= 128572 units

3.If the variable cost per unit decreases by $0.25 , then the break even point will also decreases.

Re computation of Break even point in units

  = Fixed cost / (Selling price per unit-variable cost per unit)

= $180000/($4-($2.2-$.25))

= $180000/$2.05

= 87805 units

4.If both the selling price per unit and variable cost per unit decreases , in such a case also break even point increases because change in selling price per unit is more than the change in variable cost per unit

Re computation of Break even point in units

  = Fixed cost / (Selling price per unit-variable cost per unit)

= $180000/($3.6-$1.95)

= $180000/$1.65

= 109091 units

5.If total fixed cost increases by $50000 , then break even point also increases

Re computation of Break even point in units

= $230000/($4-$2.2)

= $127778 units