Question

*** ALL QUESTIONS MUST BE ANSWERED IN FULL DETAIL AS SPECIFICALLY REQUESTED -- IF YOU CANNOT ANSWER ALL PARTS OF ALL 3 QUESTIONS, PLEASE DO NOT ANSWER ***

***ANSWERS MUST BE CLEARLY LABELED WITH SUPPORTING CALCULATIONS NEXT TO IT -- DO NOT JUST FILL IN A TABLE -- THANK YOU ***

The Downstream Company rents kayaks and transports kayaks and customers to and from their kayak trip on a local river. The trip is priced at $20 per person and has a contribution margin ratio of 30%. The company’s fixed expenses are $84,000. Last year, sales were $400,000 and profit was $36,000.

a) Provide a definition for break-even analysis, and ALSO explain how a manager would use break-even analysis to enable more effective decision making when you compare your answers from “item b” to “item c”, in the next section of this particular problem.

b) Based on the information provided in this problem, how many units need to be sold to break-even?Show all detailed supporting calculations that were used to determine the final number of units that need to be sold for this company to break-even.

c) Based on the information provided in this problem, how many units need to be sold to earn a target profit of $42,000? ALSO you are required to show all detailed supporting calculations that were used to determine the final number of units that need to be sold for this company to earn a profit of $42,000.

Answer 1

Answer B
How many units need to be sold to break-even
Selling price per unit	20
Multiplied by: contribution margin ratio	0.3
Contribution per unit	6
Fixed expenses	84,000
Divided by : Contribution per unit	6
Units need to be sold to break-even	14000
Answer C
How many units need to be sold to earn a target profit of $42,000
Target profit	42000
Add: Fixed cost	84,000
Total contribution required to achieve target profit	126,000
Divided by : Contribution per unit	6
Units need to be sold to earn a target profit of $42,000	21000
Answer A
Break-even analysis is level of sales at which neither profit nor loss.
In other word, Break-even analysis is point at which Total cost equal to Total sales.
When new product is introduced in market, at that time management want to know minimum how many units required to sell for recover at least cost.
Manager use part b (breakeven point)
Manger take decision on break-even points units, he should analyze of market condition. If company unable to sold 14000 units for achieves break-even points then manager do not start with these product or service. He must be care about break-even point for at least recover cost of company.
Manager use part C (Target profit)
Manager set target for achieve profit of 42000. Before he prepare budget of target profit of 42000, he should calculate number of units required for achieve target profit,
Based on 21000 units, he will prepare budget to meet target profit level.