Question

7-2A - CVP Analysis, "What if?" Analysis Hewins Inc's projected contribution-format income statement for the upcoming year is shown below: Sales (10,000 units) Variable expenses Contribution margin Fixed expenses Net operating income $2,000,000 1,400,000 600,000 500.000 $100.000 Required: a.) Compute the breakeven point in units. b.) Compute the breakeven point in dollars. c.) If the company wishes to earn a target profit of $300,000, how many units must be sold? d.) Compute the company's margin of safety. State your answer in both dollar and percentage terms. e.) The company's manager thinks that increasing advertising by $150,000 will increase sales by $250,000. If he is correct, what will be the net dollar advantage or disadvantage of making this change? 1.) Refer to the original data, the company's manager believes that using a slightly cheaper direct material will decrease variable expenses (per unit) by 10% will reduce units sold by 5%. If he is correct, what will be the net dollar advantage or disadvantage of making this change? g) Refer to the original data, the company's direct labour workforce received a raise that will increase variable expenses by $10 per unit. The manager wishes to maintain the exact sume contribution margin ratio as the original data. What sales price will need to be charged to maintain the same contribution margin ratio?

Answer 1

	Total	Per unit (total/no. of units)
No. of units sold	10000
Sales /SP	$       2,000,000.00	$                       200.00
Variable expenses / VC	$       1,400,000.00	$                       140.00
Contribution margin	$           600,000.00	$                         60.00
Fixed expenses	$           500,000.00
Net operating income	$           100,000.00	$                         10.00
a) Break even point in units	=fixed expenses / (SP - VC)
	=500,000 / 60
	8334 units
b) Break even point in dollars	= Fixed costs / [(SP-VC)/SP]
	=500,000/[(200-140)/200]
	$       1,666,666.67
c) Target profit $300,000	when target profit is given add it to the fixed cost and calculate the Break even point
	=(fixed expenses + profit) / (SP - VC)
	=(500,000+300,000) / 60
	13334 units
d)Margin of safety	it shows the total no. of sales above break even
in units	Current Sales Units - Breakeven Sale Units
	=10,000 - 8334
	1666 Units
in dollars	Current Sales - Break Even Sale
	=2,000,000 - 1,666,667
	$           333,333.33