Question

CVP: Ross Co sells recreational equipment. One of the company’s products is a water purifier that sells for $55 per unit. Variable expenses are $30 per purifier and fixed expenses associated with the purifier total $100,000 per month. Put your final response next to question number and work below.

1.__________ Compute break-even in UNITS per month

2.__________ Compute break-even in SALES DOLLARS per month

3.___________How many purifiers would need to be sold to reach a target operating profit of $10,000 per month? 4. If variable expenses per purifier decrease as a percentage (or as a proportion) of the selling price, will it results in a higher or lower break-even point? Briefly explain why

Answer 1

Calculation of contribution per unit per month

particulars	amount ($)
selling price	55
less: variable cost	30
contribution	25

1. Calculation of break even point (in units) per month:

formula:

Break even point = fixed expenses / contribution per unit

= $ 100,000 / $ 25

= 4000 units

2. Calculation of break even point (in dollars) per month:

formula:

Break even point = fixed expenses / contribution margin ratio

= $ 100,000 / 0.4545

= $ 2,20,022

* contribution margin is calculated by dividing contribution per unit $ 25 by the selling price $ 55 which equals 0.4545 or 45.45 %

The value of $ 2,20,022 may vary according to the rounding of points of contribution margin.

3. How many purifiers need to be sold to reach a target profit of $ 10,000 per month

formula:

no. units to be sold to reach a target profit = fixed expenses + target profit / contribution per unit

= ($ 100,000 + $ 10,000) / $ 25

= 4400 units

4. Situation where variable cost decreases as a percentage or proportional to decrease in selling price:

Where variable cost decreases as a percentage or proportional to decrease in selling price the break even point increases

This can be very well explained by an example :

suppose the selling price decreases by 10% and the variable decreases proportionally by 10%

Calculation of contribution per unit per month

particulars	amount ($)
selling price	49.5
less: variable cost	27
contribution	22.5

Calculation of break even point (in units) per month:

formula:

Break even point = fixed expenses / contribution per unit

= $ 100,000 / $ 22.5

= 4444 units

Analysis:

In the above example it is clearly seen that when the selling price and variable cost proportionally decreases the contribution per unit decreases and therefore the break even units increases.