Profit-Volume Chart
For the coming year, Loudermilk Inc. anticipates fixed costs of $600,000, a unit variable cost of $75, and a unit selling price of $125. The maximum sales within the relevant range are $2,500,000.
a. Determine the maximum possible operating
loss.
$
b. Compute the maximum possible operating
profit.
$
c. Construct a profit-volume chart on paper. Indicate whether each of the following levels of sales is in the operating profit area, operating loss area, or at the break-even point
4,800 units | |
8,000 units | |
12,000 units | |
16,000 units | |
20,000 units |
d. Estimate the break-even sales (units) by
using the profit-volume chart constructed in part (c).
Answer a.
Maximum Operating Loss will occur when sale is $0.
If Sale is $0, then Variable Cost will also be $0 and Fixed Cost will be $600,000
Operating Profit = Sales – Variable Expenses – Fixed Cost
Operating Profit = - 600,000
Operating Profit = $ - 600,000
Answer b.
Maximum Operating Loss will occur when sale is $2,500,000.
Units Sold = 20,000 ($2,500,000 / 125)
If Sale is $2,500,000, then Variable Cost will also be $1,500,000 ($75*20,000) and Fixed Cost will be $600,000
Operating Profit = Sales – Variable Expenses – Fixed Cost
Operating Profit = 2,500,000 – 1,500,000 - 600,000
Operating Profit = $ 400,000
Answer c.
4,800 Units :
Operating profit = $125*4,800 - $75*4,800 – 600,000
Operating profit = $ - 360,000
8,000 units :
Operating profit = $125*8,000 - $75*8,000 – 600,000
Operating profit = $ - 200,000
12,000 Units :
Operating profit = $125*12,000 - $75*12,000 – 600,000
Operating profit = $ 0
16,000 Units :
Operating profit = $125*16,000 - $75*16,000 – 600,000
Operating profit = $ 200,000
20,000 Units :
Operating profit = $125*20,000 - $75*20,000 – 600,000
Operating profit = $ 400,000
4,800 Units |
Operating Loss Area |
8,000 Units |
Operating Loss Area |
12,000 Units |
Break-even Point |
16,000 Units |
Operating Profit Area |
20,000 Units |
Operating Profit Area |
Answer d.
Break-even Sales = 12,000 Units as there is neither operating profit nor loss.
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