Question

Exercise 3-2 Prepare a Cost-Volume-Profit (CVP) Graph [LO3-2]

Katara Enterprises distributes a single product whose selling price is $42 and whose variable expense is $30 per unit. The company’s fixed expense is $30,000 per month.

Required:

1.

Prepare a cost-volume-profit graph for the company up to a sales level of 3,200 units. (Use the line tool to draw a single lines (Total Sales Revenue, Fixed Expense, Total Expense). This line should only contain the two endpoints. For your graph to grade correctly, you must enter the exact coordinates. To enter exact coordinates, double click on the point and enter the values of x and y. To remove a point from the graph, drag the point off an edge of the graph.)

2.	Calculate the company’s break-even point in unit sales.

     

Answer 1

• All working forms part of the answer
• Working: Data for the graph:

Units	Sales	Variable cost	Contribution margin	Fixed Cost	Net Income (Loss)
[A]	[B = A x $ 42]	[B = A x $30]	[C = A – B]	[D]	[E = C – D]
0	$                        -	$                         -	$                          -	$                        30,000.00	$    (30,000.00)
500	$         21,000.00	$          15,000.00	$             6,000.00	$                        30,000.00	$    (24,000.00)
1000	$         42,000.00	$          30,000.00	$          12,000.00	$                        30,000.00	$    (18,000.00)
1500	$         63,000.00	$          45,000.00	$          18,000.00	$                        30,000.00	$    (12,000.00)
2000	$         84,000.00	$          60,000.00	$          24,000.00	$                        30,000.00	$      (6,000.00)
2500	$      105,000.00	$          75,000.00	$          30,000.00	$                        30,000.00	$                     -
3000	$      126,000.00	$          90,000.00	$          36,000.00	$                        30,000.00	$        6,000.00
3200	$      134,400.00	$          96,000.00	$          38,400.00	$                        30,000.00	$        8,400.00

• Graph:

• Break Even Point:

A	Unit Sale price	$          42.00
B	unit Variable cost	$          30.00
C=A-B	Unit Contribution margin	$          12.00
D	Fixed Cost	$ 30,000.00
E=D/C	Break Even point in Units	2500

----As you can see, at level of 2,500 units (Break Even units calculated), the Net Income is ‘zero’ in the graph. Also, Contribution margin line is intersecting Fixed Cost line at this level of 2500 units.