Question

Break-Even Sales and Cost-Volume-Profit Chart

Last year Hever Inc. had sales of $888,000, based on a unit selling price of $370. The variable cost per unit was $277.5, and fixed costs were $101,750. The maximum sales within Hever Inc.’s relevant range are 3,100 units. Hever Inc. is considering a proposal to spend an additional $41,625 on billboard advertising during the current year in an attempt to increase sales and utilize unused capacity.

Required:

A. Construct a cost-volume-profit chart on your own paper, indicating the break-even sales for last year. In your computations, do not round the contribution margin percentage.

Break-even sales (dollars)
Break-even sales (units)

B. Using the cost-volume-profit chart prepared in part (1), determine (a) the income from operations for last year and (b) the maximum income from operations that could have been realized during the year. In your computations, do not round the contribution margin percentage.

Income from operations
Maximum income from operations

C. Construct a cost-volume-profit chart (on your own paper) indicating the break-even sales for the current year, assuming that a noncancellable contract is signed for the additional billboard advertising. No changes are expected in the unit selling price or other costs. In your computations, do not round the contribution margin percentage.

Dollars
Units

D. Using the cost-volume-profit chart prepared in part (3), determine (a) the income from operations if sales total 2,400 units and (b) the maximum income from operations that could be realized during the year. In your computations, do not round the contribution margin percentage.

Income from operations at units
Maximum income from operations

Answer 1

Lat year sales in units = $888,000 / $370 = 2,400

A. Contribution margin per unit = Selling price per unit - Variable cost per unit

= $370 - $277.5

= $92.5

Break-even sales in units = Fixed costs / Contribution margin per unit

= $101,750 / $92.5

= 1,100

Break-even sales in dollars = 1,100 units * $370

= $407,000

B. Income from operations last year = Sales - Variable costs - Fixed costs

= (2,400 * $370) - (2,400 * $277.5) - $101,750

= $120,250

Maximum income from operations = Sales - Variable costs - Fixed costs

= (3,100 * $370) - (3,100 * $277.5) - $101,750

= $185,000

C. Break-even sales in units = Fixed costs / Contribution margin per unit

= ($101,750+$41,625) / $92.5

= 1,550

Break-even sales in dollars = 1,550 units * $370

= $573,500

D. Income from operations last year = Sales - Variable costs - Fixed costs

= (2,400 * $370) - (2,400 * $277.5) - ($101,750+$41,625)

= $78,625

Maximum income from operations = Sales - Variable costs - Fixed costs

= (3,100 * $370) - (3,100 * $277.5) - ($101,750+$41,625)

= $143,375