Question

Break-Even Sales and Cost-Volume-Profit Chart

Last year, Gelbin Inc. had sales of $292,000, based on a unit selling price of $100. The variable cost per unit was $80, and fixed costs were $40,600. The maximum sales within Gelbin's relevant range are 3,700 units. Gelbin is considering a proposal to spend an additional $12,000 on billboard advertising during the current year in an attempt to increase sales and utilize unused capacity.

Required:

1. Construct a cost-volume-profit chart on your own paper, indicating the break-even sales for last year. In your computations, do not round the contribution margin percentage.

Break-even sales (dollars)
Break-even sales (units)

2. Using the cost-volume-profit chart prepared in part (1), determine (a) the income from operations for last year and (b) the maximum income from operations that could have been realized during the year. In your computations, do not round the contribution margin percentage.

Income from operations
Maximum income from operations

3. Construct a cost-volume-profit chart (on your own paper) indicating the break-even sales for the current year, assuming that a noncancelable contract is signed for the additional billboard advertising. No changes are expected in the unit selling price or other costs. In your computations, do not round the contribution margin percentage.

Dollars
Units

4. Using the cost-volume-profit chart prepared in part (3), determine (a) the income from operations if sales total 2,920 units and (b) the maximum income from operations that could be realized during the year. In your computations, do not round the contribution margin percentage.

Income from operations at 2,920 units
Maximum income from operations

Answer 1

• All working forms part of the answer
• Working #1

Sales	$                           292,000.00
Unit Sale price	$                                   100.00
Unit Sold	2920

• Working for Requirement 1 and 2 and Chart

Units	Sales Revenue	Variable Cost	Contribution margin	Fixed Cost	Net Income (loss) Profits
2030	$                     203,000.00	$      162,400.00	$        40,600.00	$                     40,600.00	$                        -
2920	$                     292,000.00	$      233,600.00	$        58,400.00	$                     40,600.00	$        17,800.00
3700	$                     370,000.00	$      296,000.00	$        74,000.00	$                     40,600.00	$        33,400.00

----Chart-----

• Requirement 1

A	Unit Sale price	$                                   100.00
B	Unit Variable cost	$                                     80.00
C=A-B	Unit Contribution margin	$                                     20.00
D = (C/A) x 100	CM Ratio	20%
E	Fixed Costs	$                             40,600.00
F = E/D	Break Even Sales (Dollars)	$                           203,000.00
G = E/C	Break Even Sale (units)	2030

• Requirement 2

Income from Operations	$                             17,800.00
Maximum Income from Operations	$                             33,400.00

• Working for Requirement 3 and 4 and Chart

Units	Sales Revenue	Variable Cost	Contribution margin	Fixed Cost	Net Income (loss) Profits
2630	$                     263,000.00	$      210,400.00	$        52,600.00	$                     52,600.00	$                        -
2920	$                     292,000.00	$      233,600.00	$        58,400.00	$                     52,600.00	$           5,800.00
3700	$                     370,000.00	$      296,000.00	$        74,000.00	$                     52,600.00	$        21,400.00

----Chart #2

• Requirement 3

A	Unit Sale price	$                                   100.00
B	Unit Variable cost	$                                     80.00
C=A-B	Unit Contribution margin	$                                     20.00
D = (C/A) x 100	CM Ratio	20%
E	Fixed Costs	$                             52,600.00
F = E/D	Break Even Sales (Dollars)	$                           263,000.00
G = E/C	Break Even Sale (units)	2630

• Requirement 4

Income from Operations	$                               5,800.00
Maximum Income from Operations	$                             21,400.00