Question

Question 2: CVP relation version 2 Current sales revenue is $5,000, total variable costs are $3,000, and total fixed costs are $5,000 (no data on units). a) Compute the contribution margin ratio: CMR= b) Write down the CVP relation (version 2): profit as a function of sales revenue. Profit = * Revenue - (e.g., if profit = 0.1*Revenue-500, enter 0.1 in the first box and 500 in the second box). c) Predict profit at sales revenue of $10,000: d) Your boss gave you a profit target of $5,000. How much do you need to sell in dollars to meet this target? e) Compute the breakeven revenue: f) When sales revenue increases by $1,000 (from any initial level in the relevant range), profit increases by: O (1-CMR)*$1,000 = $600 CMR*$1,000 = $400 not enough information

Answer 1

Requirement A

Contribution Margin Ratio = Contribution Margin / Sales Revenue * 100

Contribution Margin = Sales Revenue - Variable Costs

Contribution Margin = 5,000 - 3,000 = $ 2,000

Contribution Margin Ratio = 2,000 / 5,000 * 100

Contribution Margin Ratio = 40%

Requirement B

Profit = 40% * Revenue - Fixed Costs

Fixed Costs = $ 5,000

Profit = 40% of Revenue - 5,000

Profit = 0.40 * Revenue - 5,000

Requirement C

Profit at Sales Revenue of $ 10,000 = 40% of Revenue - 5,000

Profit = 40% of 10,000 - 5,000

Profit = 4,000 - 5,000

Profit / (Loss) = ($ 1,000)

Requirement D

Sales Revenue for Target Profit of $ 5,000

Let Sales Revenue = X

Profit = 40% of Sales Revenue - 5,000

Target Profit = 5,000

5,000 = 40% of X - 5,000

5,000 + 5,000 = 0.40X

0.40 X = 10,000

X = 10,000 / 0.40

X = $ 25,000

Sales Revenue for Target Profit of $ 5,000 = $ 25,000

Requirement E

Break Even in Sales Revenue = Fixed Costs / Contribution Margin Ratio

Contribution Margin Ratio = 40%

Fixed Costs = $ 5,000

Break Even in Sales Revenue = 5,000/40%

Break Even in Sales Revenue= $ 12,500

Requirement F

The Information is not enough as the profit level is measured by all taking various components in the account so the data itself is not sufficient for that.

Option C is the Correct Answer.