Question

XLS 3-33 Breakeven; target income; CVP analysis (LO 1, 2, 3) Adam Granger oper- ates a kiosk in downtown Chicago, at which he sells one style of baseball hat. He buys the hats from a supplier for $14 and sells them for $20. Adam's current breakeven point is 15,000 hats per year. Required a. What is Adam's current level of fixed costs? b. Assume that Adam's fixed costs, variable costs, and sales price were the same last year, when he made $21,000 in net income. How many hats did Adam sell last year, assuming a 30% income tax rate? c. What was Adam's margin of safety last year? d. If Adam wants to earn $37,800 in net income, how many hats must he sell? e. How many hats must Adam sell to break even if his supplier raises the price of the hats to $15 per hat? f. What actions should Adam consider in response to his supplier's price increase? g. Adam has decided to increase his sales price to $21 to offset the supplier's price increase. He believes that the increase will result in a 5% reduction from last year's sales volume. What is Adam's expected net income?

Answer 1

Part a)

Adam's fixed cost = break even units × contribution margin per unit

= 15000×(20-14)

= $ 90000

Part b)

Actual number of units sold

= ( fixed cost + net profit before tax) ÷ contribution margin per unit

= ( 90000 + (21000÷.7))÷ (20-14)

= 20000 units

Part 3)

Margin of safety in units

= total units sold- break even units

= 20000 - 15000

= 5000 units

Margin of safety in dollars

= margin of safety in units × selling price

= 5000 × 20

= $ 100000

Part 4) number of hats to be sold

= ( desired profit before tax + fixed cost) ÷ contribution margin per unit

= ( (37800÷70%)+90000) ÷ (20-14)

= 24000 units

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