(L. OBJ. 2, 3, 4) Analyzing CVP relationships [30—45 min]
Allen Company sells flags with team logos. Allen has fixed costs of $588,000 per year plus variable costs of $5.50 per flag. Each flag sells for $12.50.
Requirements
1. Use the income statement equation approach to compute the number of flags Allen must sell each year to break even.
2. Use the contribution margin ratio CVP formula to compute the dollar sales Allen needs to earn $32,200 in operating income for 2011.
3. Prepare Allen’s contribution margin income statement for the year ended December 31, 2011, for sales of 73,000 flags. Cost of goods sold is 60% of variable costs. Operating costs make up the rest of variable costs and all of fixed costs.
4. The company is considering an expansion that will increase fixed costs by 20% and variable costs by $0.60 cents per flag. Compute the new breakeven point in units and in dollars. Should Allen Company undertake the expansion? Give your reasoning.
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