Question

Break-Even Sales and Cost-Volume-Profit Graph

Last year, Ridgecrest Inc. had sales of $4,527,600, based on a unit selling price of $440. The variable cost per unit was $250, and fixed costswere $1,396,500. The maximum sales within Ridgecrest Inc.'s relevant range are 18,000 units. Ridgecrest Inc. is considering a proposal to spend an additional $279,300 on billboard advertising during the current year in an attempt to increase sales and utilize unused capacity.

Instructions:

1. Construct a cost-volume-profit graph on your own paper and determine the break-even sales for last year.

Break-even point in dollars	$
Break-even point in units

2. Using the cost-volume-profit graph prepared in part (1), determine (a) the operating income for last year and (b) the maximum operating income that could have been realized during the year.

Operating income	$
Maximum operating income	$

3. Construct a cost-volume-profit graph (on your own paper) and determine 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, round the contribution margin ratio to one decimal place.

Break-even point in dollars	$
Break-even point in units

4. Using the cost-volume-profit graph prepared in part (3), determine (a) the operating income if sales total 11,500 units and (b) the maximum income from operations that could be realized during the year.

Operating income at 11,500 units	$
Maximum operating income	$

Answer 1

Answer

1.

Breakeven Point (In Units) = Total Fixed Cost / Contribution Margin per unit

= Total Fixed Cost / (Selling price per unit – Variable Cost per unit)

= $1,396,500 / (440 – 250)

Breakeven Point (In Units) = 7,350 Units

Breakeven Point (In Dollar) = Breakeven Point (In Units) * Selling price per unit

= 7,350 Units * $440

Breakeven Point (In Dollar) = $3,234,200

2.

Units Sold = 10,290 Units ($4,527,600 / 440)

Operating Income = Sales – Variable Cost – Fixed Cost

= $4,527,600 – (10,290 * $250) - $1,396,500

Operating Income = $558,600

Maximum Operating Income = Maximum Units * Contribution Margin – Fixed Cost

= 18,000 Units * (440 – 250) - $1,396,500

Maximum Operating Income = $2,023,500

3.

New Fixed Cost = $1,675,800 (1,396,500 + 279,300)

Breakeven Point (In Units) = Total Fixed Cost / Contribution Margin per unit

= Total Fixed Cost / (Selling price per unit – Variable Cost per unit)

= $1,675,800 / (440 – 250)

Breakeven Point (In Units) = 8,820 Units

Breakeven Point (In Dollar) = Breakeven Point (In Units) * Selling price per unit

= 8,820 Units * $440

Breakeven Point (In Dollar) = $3,880,800

4.

Units Sold = 11,500 Units

Operating Income = Sales – Variable Cost – Fixed Cost

= 11,500 Units * (440 – 250) - 1,675,800

Operating Income = $509,200

Maximum Operating Income = Maximum Units * Contribution Margin – Fixed Cost

= 18,000 Units * (440 – 250) - 1,675,800

Maximum Operating Income = $1,744,200

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