Question

The Brewer Company manufactures and sells pens. Currently, 5,300,000 units are sold per year at $0.50 per unit. Fixed costs are $900,000 per year. Variable costs are $0.30 per unit Read the requirements. Requirements Requireme (a) Start by Operating income Consider each case separately: 1. a. What is the current annual operating income? b. What is the current breakeven point in revenues? Compute the new operating income for each of the following changes: 2. A $0.08 per unit increase in variable costs 3. A 10% increase in fixed costs and a 10% increase in units sold 4. A 40% decrease in fixed costs, a 40% decrease in selling price, a 30% decrease in variable cost per unit, and a 45% increase in units sold Compute the new breakeven point in units for each of the following changes: 5. A 10% increase in fixed costs 6. A 10% increase in selling price and a $20,000 increase in fixed costs Print Done Done

Answer 1

Solution:

1.a)

[Units sold (Selling price - Variable costs)] - Fixed costs = Operating income

=[5,300,000 units ($0.50 - $0.30)] -$900,000

=[5,300,000 units ×$0.20] - $900,000

=$1,060,000 - $900,000

=$160,000

1b.)

First we calculate, Breakeven units

Breakeven units =Fixed cost ÷ Contribution margin per unit

=$900,000 ÷ [($0.50 - $0.30) ]

=$900,000 ÷$0.20

=4,500,000 units

Breakeven units × Selling price = Breakeven revenues

4,500,0000 ×$0.50 =$2,250,000

2.) Now new variable cost =$ 0.30+ 0.08 =0.38

Now operating income = [5,300,000 units ($0.50 - $0.38)] - $900,000

[5,300,000 units × $0.12] - $900,000

$636,000 - $900,000 = $(264,000)

3.) First we calculate new fixed cost and new units sold

Fixed cost:

$900,000× 10% =$90,000

$900,000 + $90,000 =$990,000

Units sold:

5,300,000 × 10% =530,000

5,300,000 + 530,000 =5,830,000

Operating income:

[5,830,000 units ($0.50 - $0.30)] - $990,000

[5,830,000 units × $0.20] - $990,000

$1,166,000 - $990,000 =$176,000

4.) First we calculate new fixed cost, selling price, variable cost and units sold

Fixed cost:

$900,000 × 40% =$360,000

$900,000 - $360,000 =$540,000

Selling price

$0.50 ×40% =$0.20

$0.50 - $0.20 =$0.30

Variable cost:

$0.30 ×30% =$0.09

$0.30 - $0.09 =$ 0.21

Units sold:

5,300,000 ×45% =2,385,000

5,300,000 +2,385,000 =7,685,000

Operating income:

=[7,685,000 units ($0.30 -0. 21) ] - $540,000

=[7,685,000 units ×0.09] -$540,000

=$691,650 - $540,000

=$151,650

5.) Now first we calculate, new fixed cost

Fixed cost:

$900,000 ×10% = $90,000

$900,000 + 90,000 =$990,000

Break even units = Fixed cost ÷ Contribution margin per unit

$990,000 ÷ ($0.50 - $0.30)

$990,000 ÷ $0.20 =4,950,000 units

6.) Now first we calculate new selling price and fixed cost

Selling price :

0.50 ×10% = 0.05

0.50 + 0.05 =$0.55

Fixed cost

$900,000 + $20,000

=$920,000

$920,000 ÷ ($0.55 - $0.30)

$920,000 ÷ $0.25 =3,680,000 units