Question

The McKnight Company manufactures and sells pens. Currently, 5,000,000 units are sold per year at $0.60 per unit. Fixed costs are $880,000 per year. Variable costs are $0.40 per unit. Read the requirements. Requirements F 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 $30,000 increase in fixed costs

Answer 1

$ 30,00,000 Sales (5000000*$0.6) Less: Variable Cost (5000000*$0.4) Contribution Units Sold Sale Price Variable cost Fixed Cost Contribution margin per unit 5000000 0.60 0.40 880000 0.2 $ 20,00,000 $ 10,00,000 $ Fixed Cost Operating Income 8,80,000 1,20,000

Break Even Point Contribution Margin % = Contribution Margin/ Sales = $0.2/0.60=33.33% Break-even Point In Revenue = Fixed Cost/ Contribution Margin % =$880000/0.333333 26,40,000

2 Computation of Operating Income - If Variable Cost Increased by $0.08 $ 30,00,000 Units Sold Sale Price Variable cost Fixed Cost Contribution margin per unit Sales Revenue (5000000*$0.6) Less: Variable Cost (5000000*$0.48) Contribution Margin Less: Fixed Cost Operating Income 5000000 0.60 0.48 $ 8,80,000.00 0.12 $ 24,00,000 $ 6,00,000 $ $ 8,80,000 2,80,000

3) Computation of Operating Income - If fixed cost increased by 10% and unit sold increased by 10% $ 33,00,000 Units Sold Sale Price Variable cost Fixed Cost Contribution margin per unit Sales Revenue (5500000*$0.6) Less: Variable Cost (5500000*$0.4) Contribution Margin Less: Fixed Cost Operating Income 5500000 0.60 0.40 $ 9,68,000.00 $ 0.20 $ 22,00,000 $ 11,00,000 $ $ 9,68,000 1,32,000

4 Computation of Operating Income - IF Fixed cost decrease by 40% Selling price decrease by 40% Varibale cost decrease by 30% Unit sold inrease by 45% $ 26,10,000 Units Sold Sale Price Variable cost Fixed Cost Contribution margin per unit Sales Revenue (7250000*$0.36) Less: Variable Cost (7250000*$0.28) Contribution Margin Less: Fixed Cost Operating Income 7250000 $ 0.36 0.28 $ 5,28,000.00 $ 0.08 $ 20,30,000 $ 5,80,000 $ $ 5,28,000 52,000

25 56 5) Computation of Break Even Point If 10% increase in fixed cost Break-even Point In Unit = Fixed Cost/ Contribution Margin Per Unit =968000/0.20 =4840000 units +36) Computation of Break Even Point If 10% increase in selling price 30000 increase in fixed cost =$910000/0.26 =3500000 units