Question

2 Cleveland Browns Company is analyzing its CVP relationships for product Football. Company accountants have accumulated the following monthly information: $ Per Unit Units 50,000 Sales $ 1,250,000 $ 25.00 Variable Costs 600,000 $ 12.00 Contribution Margin 650,000 $ 13.00 Fixed Costs 481,000 Net Income $ 169,000

Break-Even Sales in Units: 37,000 Margin of Safety, Units: 13,000 Margin of Safety, Percentage (%): 26% Break-Even Sales in Dollars ($): 925,000 Margin of Safety, Dollars ($): 325,000 Operating Leverage: 3.85

Cleveland is facing increasing competition from Bengals Company. This will force Cleveland to reduce its sales price by 10%. In addition, economic conditions are deteriorating, causing a reduction in sales volume. Browns management believes unit sales will decrease by 5%. Management wants a minimum net income of $165,000. Cleveland has been working with its suppliers and has been able to reduce variable costs by $2.00 per unit. However, the company must also reduce its fixed costs. By how much must Cleveland decrease its fixed cost to achieve the desired $165,000 of net income?

Answer 1

Calculation of Revised Contribution Margin

	$ per unit	Total
Sales Revenue (50,000*0.95 = 47,500 Units)	$22.50	$1,068,750
Less: Variable Costs	$10.00	$475,000
Contribution Margin	$12.50	$593,750

Desired Income = $165,000

Hence, we can make a equation as follows to find out the reduction in fixed costs.

Contribution Margin – Fixed Costs = Desired Income

$593,750 – Fixed Costs = $165,000

Fixed Costs = $593,750 – 165,000 = $428,750

If, the company can reduce its fixed costs to $428,750 then they can meet out the desired income.

Fixed Costs at present = $481,000

Revised Fixed Costs to achieve desired income = $428,750

Reduction in Fixed Costs = $481,000 - $428,750 = $52,250

Cleveland must decrease its fixed costs by $52,250 to achieve desired income of $165,000

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