Question

Risky Investor Group is opening an office in​ Portland, Oregon. Fixed monthly costs are office rent ​($ 8500​), depreciation on office furniture ($ 1600), utilities ​($ 2 400​), special telephone lines ​($ 1200​), a connection with an online brokerage service ​($ 2500​), and the salary of a financial planner ​($ 18800​). Variable costs include payments to the financial planner ​(9​% of​ revenue), advertising (11 % of​ revenue), supplies and postage ​(4​% of​ revenue), and usage fees for the telephone lines and computerized brokerage service (6 % of​ revenue).

1. Use the contribution margin ratio approach to compute Risky's break even revenue in dollars. If the average trade leads to $ 1250 in revenue for Risky how many trades must be made to break​ even?

2. Use the equation approach to compute the dollar revenues needed to earn a monthly target profit of $14,000.

3. Graph Risky​'s CVP relationships. Assume that an average trade leads to $1250 in revenue for Risky. Show the breakeven​ point, the sales revenue line, the fixed cost​ line, the total cost​ line, the operating loss​ area, the operating income​ area, and the sales in units​ (trades) and dollars when monthly operating income of $14000 is earned.

4. Suppose that the average revenue Risky earns increases to $2,500 per trade. Compute the new breakeven point in trades. How does this affect the breakeven​ point?

Answer 1