Question

Topic: Cost-volume-profit analysis

Max Inc. operates in an entertainment industry and one of its activities is to promote entertainment events in Indiana, USA. The company is examining the viability of a fund-raising concert in Indianapolis. Estimated fixed costs are USD180,000. These include the fees paid to performers, the hire of the venue and advertising costs. Variable costs consist of the cost of a pre-packed buffet which will be provided by a firm of caterers at a price, which is currently being negotiated, but it is likely to be in the region of USD10 per ticket sold. The proposed price for the sale of a ticket is USD30.

1. The number of tickets that must be sold to breakeven.                                                           
2. How many tickets must be sold to earn USD60,000 target profit?                                            
3. What profit would result if 10,000 tickets were sold?
4. What selling price would have to be charged to give a profit of USD60,000 on sales of 10,000 tickets, fixed costs of USD180,000 and variable costs of USD10 per ticket?
5. How many additional tickets must be sold to cover the extra cost of billboard advertising of USD8,000? (assuming selling price and variable cost per unit are constant)
6. What is the profit-volume ratio?
7. With reference to part (a), what is the margin of safety given expected sales of 10,000 tickets?    
8. Assuming that the caterer’s charges will be higher per ticket if ticket sales are below 4,000 but lower if sales exceed 12,000 tickets, what is the relevant range? What does this term mean?        

Here's is my answer:

(a) 9,000 tickets.

(b) 6,000tickets.

(c) USD20, 000

(d)USD 34

(e)400 tickets

(f)PV ratio: 66.7%

(g) The margin of safety is 1,000 units

But i'm stuck on question (h). can i use the break even formula for this, meaning TR = TC (in which TC = TFC + TVC) and then insert the value? kindly advise.

Answer 1

Your second answer (b) should be 12000 and the rest answer was perfectly given.

Explanation For Ans (b)

Units
a. Sales	30X	X is the Quantity we required to find out
b. Less VC	10X
c. cont { d+e}	240000
d. Less FC	180000
e. Net Operating Income ( Loss)	60000
	12000
You first understand the equation with the above format Sales - variable cost should be equal to Profit + Fixed Cost 1. Here Profit and Fixed cost = 240000 2. (Sales 30 - Variable cost 10 )* number of ticket Equation 1 = 2 Number of ticket = 240000/ 30-10 = 12000

Now in (h): - The question is not clear but you can answer with the fundamental concepts about Relevant Range.

1. This concept called Relevant Range. In this case, we have to take an assumption and if the activity/unit sold is outside the relevant range then cost assumption needs to be changed.

I am assumpting till 10000 Units the fixed cost will not change after that we need to change the fixed cost for additional sales.

Now at 180000 fixed we have to sale 9000 units because to achieve BEP level and at 10000 units the fixed cost will not change. Hence, We can say that the Relevant range will be

9000 units to 10000 units.