Question

create a scenario for a business or other organization and use CVP analysis to show the following:

1. Breakeven in units

2. Breakeven in dollars

3. Target sales in units for achieving a $50,000 target NI

4. Target sales in dollars for achieving a $50,000 target NI

5. You realize that your scenario’s actual capacity is limited to its breakeven number of units (BEu, as calculated in #1 above). Calculate what the new sales price (SP) should be in order to achieve a $10,000 NI using the BEu (#1 above) for sales volume (Q).

6. Same as #5, except this time calculate what the new variable cost per unit (VC) would need to be in order to achieve a $10,000 NI using the BEu (#1 above) for sales volume (Q).

Requirements:

A. Define each CVP variable for your scenario:

SP =

VC =

FC =

B. Calculate:

CM per unit =

CM ratio =

C. Calculate #1 – 6 above, showing all calculations

Answer 1

A. Let us consider the following values for our computation.

SP = $ 100

VC = $ 40

FC = $ 60,000

B. Computation of ;-

CM per unit= sale price per unit- variable cost per unit

I.e, CM per unit= $100-$40= $ 60

CM Ratio = contribution per unit/ Sale price per unit

= $60/$100

= 60%

C. Computation as per points 1 to 6

1. Breakeven point in unit= Fixed cost/ Contribution per unit

= $ 60,000/$60

= 1000 units

2. Breakeven points in dollar= Fixed cost/ Contribute Margine

= ₹ 60,000/60%

=$ 100,000

3. Calculation of targeted sale in units for required Profit

Required Profit = $ 50,000

Fixed cost = $ 60,000

Total required Contribution = $ 110,000

Targeted sale unit = Required Contribution/ Contribution per Unit

= $ 110,000/60

= 1,833.33 units i.e., 1,834 units

4. Computation of targeted sale for required Profit

Targeted sale value= Required Contribution/ Contribution Margin

= $ 110,000/60%

=$ 1,83,333.33

5. Calculation of Sale price with capacity limitation

Required Profit = $ 10,000

Fixed Cost = $ 60,000

Required Contribution = $ 70,000

Total production in units = 1000

Contribution per unit = $ 70 ( 70,00/1000)

Variable cost per unit = $ 40

New selling price per unit = $ 110 ( 70+40)

6. Calculation of Variable cost

Total sale volume = 1,000 units

Sale price = $ 100

Total sale value = $ 100,000

Required Contribution $ 70,000

Total variable cost = $ 3000 ( $100,000-$70,000)

Variable cost per unit = $ 30 ( $ 30,000/1000 units)