Question

Answer the questions based on the graph shown below: S350,000 300,000 S250,000 5200,000 150,000 100,000 $50,000 So 100 200 300 400 500 600 Volume in units sold ---_-.) represents [B] The dotted line..) represents [C] The solid line( [D] The approximate numbers of units at the break-even point is E In a sentence or two, describe the variable expense line. If applicable, include its relation to the other lines shown on the graph. ) represents

A company sells a product with a contribution margin ratio of 20%. The company's monthly fixed expense is $400,000 and the company's monthly target profit is $100,000. The dollar sales required to attain the target profit are:

	A.	$2,500,000
	B.	$1,500,000
	C.	$625,000
	D.	$2,000,000

Sales above the break-even point will result in net profit equal to _______.

	A.	number of units above break-even times fixed cost per unit
	B.	number of units above break-even times contribution margin per unit
	C.	number of units above break-even times sales price per unit
	D.	number of units above break-even times variable cost per unit

  

Answer 1

(A) Dashed line represents fixed cost line. The fixed costs does not change with the level of activity and hence the graph is reprsented by the horizontal straight line at various levels of production. Examples are rent, taxes etc.

(B) Dotted line represents the total cost line. The total cost line starts above the fixed cost line as the fixed costs are to be borne irrespective of production. The variable costs is the slanting line represented by the dots which means that the cost changes with every change in the unit of output. Eg. direct labour, direct materials.

(C) Solid line represents the total revenue which increases with sale in each unit of output.

(D) Break even point is where the firm incurs no profit or no loss and the total cost is equal to the total revenue earned. The intersection point of the total cost line and total revenu line represents the break even point which is at 400 units of sales / production

(E) Variable costs are also called marginal cost i.e, increse in cost with increase in each unit of output. These costs are directly related to the level of production like direct labour, direct materials etc. The variable cost line starts above the fixed cost line as the fixed cost are the mandatory expenses to be borne irrecspective of the production. The area of graph where the variable / total cost line is above the revenue line means that the costs are more than revenue and hence the firm incurs losses and the area of the graph where the total cost line is below the revenue line means that the costs are less than the revenu and firm is in profit zone.

Cost allocation:

Hence the cost to be allocated to order processing cost pool is D. $84,000.

Sales required:

$Target sales = \frac{Fixed cost + Target -profit}{Contribution- margin}$

= ($4,00,000+$1,00,000) / 20% (Values substituted as provided in the question)

= $5,00,000 / 20%

= $2,500,000 (A)

Net profit

Sales above break even point would result in net profit equal to

B. number of units above break-even times contribution margin per unit

This is because at break even point total cost is equal to total revenue. For every additional unit of output there will be additional variable cost and the difference between them which is the contribution margin per unit will be the profit accrued by the firm.