Question

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

Breakeven in units

Breakeven in dollars

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

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

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).

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:

Define each CVP variable for your scenario:

SP =

VC =

FC =

Calculate:

CM per unit =

CM ratio =

Calculate #1 – 6 above, showing all calculations

Answer 1

Let us assume in our scenario the following:

Company is selling plastic made toys to retail customers and is into the manufacturing of same.

SP = $10 per unit

VC = $6 per unit

FC = $100,000

CM per unit = SP - VC = 10 - 6 = $4 per unit

CM ratio = 4/10 x 100 = 40%

Break even units = Fixed Cost (FC) / CM per unit

= 100,000 / 4 per unit = 25,000 units

Break even sales in dollars = Break even units x SP

= 25,000 x 10 = $250,000

Target Sales for 50,000 NI in units = (FC + Profit required) / CM per unit

= (100,000 + 50,000) / 4 = 37,500 units

Target Sales for 50,000 NI in dollars = Target sales in units x SP

= 37,500 x $10 per unit = $375,000

New Sales Price For 10,000 NI:

Let New price be x per unit

Contribution Margin = $(x - 6) per unit

Sales in units at BEU = 25,000

Total COst + Profit to be recovered from sales = $100,000 + 10,000 = $110,000

Therefore equating both we get:

(X - 6) x 25,000 = 110,000

25,000x - 150,000 = 110,000

25,000x = 260,000

x = $10.4 per unit

NEW Variable Cost calculation:

Assuming variable cost to be y and SP be $10 per unit (ie same as part 1).

Therefore again equating the equation we get:

(10 - Y) x 25,000 = 110,000

250,000 - 25,000Y = 110,000

25,000Y = 140,000

Y = $5.6 per unit.