3-20 Breakeven analysis; multiproduct CVP analysis (LO 1, 5) Abado Profiles provides testing services to school...

3-20 Breakeven analysis; multiproduct CVP analysis (LO 1, 5) Abado Profiles provides testing services to school districts that wish to assess students' reading and mathematical abilities. Last year Abado evaluated 60,000 math tests and 20,000 reading tests. An income statement for last year follows.

	Math Testing		Reading Testing
	Total	Per Unit	Total	Per Unit	Total Company
Sales revenue	$1,200,000	$20	$720,000	$36	$1,920,000
Variable expenses	840,000	14	360,000	18	1,200,000
Contribution margin	$ 360,000	$ 6	$360,000	$18	720,000
Fixed expenses					360,000
Operating income					$ 360,000

Required

a.What is Abado's breakeven point in sales dollars?

b.In an effort to raise the demand for reading tests, managers are planning to lower the price from $36 per test to $20 per test, the current price of the math test. They believe that doing so will increase the demand for reading tests to 60,000. Prepare a contribution format income statement reflecting Abado's new pricing and demand structure.

c.What will be Abado's breakeven point in sales dollars if this change is implemented? Do you recommend that Abado make the change?

Expert Solution


Part a	Contribution Margin Ratio($720,000/$1,920,000)	37.50%
	Break-even Sales($360,000/37.50%)	$ 9,60,000

Part b		Math Testing		Reading Testing		Total
	Sales Revenue	$ 12,00,000.00	20	$ 12,00,000.00	20	$ 24,00,000.00
	Variable expenses	$ 8,40,000.00	14	$ 10,80,000.00	18	$ 19,20,000.00
	Contribution margin	$ 3,60,000.00	6	$ 1,20,000.00	2	$ 4,80,000.00
	Fixed expenses					$ 3,60,000.00
	Operating Income					$ 1,20,000.00

Part c	Contribution Margin Ratio($480,000/$2,400,000)	20.00%
	Break-even Sales($360,000/20.00%)	$ 18,00,000
	No change is not recommended as it is reducing the Operating Income

ekkarill92 answered 1 year ago

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