Question

Use the below table to answer the following questions.

Selling Price = $33.00

				Sales Volume
Fixed Cost			Variable Cost		1,700			2,700			3,700			4,700			5,700
					Profitability
$	30,800		7		$	13,400		$	39,400		$	65,400		$	91,400		$	117,400
	30,800		8			11,700			36,700			61,700			86,700			111,700
	30,800		9			10,000			34,000			58,000			82,000			106,000
	40,800		7			3,400			29,400			55,400			81,400			107,400
	40,800		8			1,700			26,700			51,700			76,700			101,700
	40,800		9			–			24,000			48,000			72,000			96,000
	50,800		7			(6,600	)		19,400			45,400			71,400			97,400
	50,800		8			(8,300	)		16,700			41,700			66,700			91,700
	50,800		9			(10,000	)		14,000			38,000			62,000			86,000

Required

Determine the sales volume, fixed cost, and variable cost per unit at the break-even point.

Determine the expected profit if Benson projects the following data for Delatine: sales, 3,700 bottles; fixed cost, $30,800; and variable cost per unit, $9.

Benson is considering new circumstances that would change the conditions described in Required b. Specifically, the company has an opportunity to decrease variable cost per unit to $7 if it agrees to conditions that will increase fixed cost to $40,800. Volume is expected to remain constant at 3,700 bottles. Determine the effects on the company’s profitability if this opportunity is accepted.

Answer 1

(a)

Break even point refers to the volume of output where a firm earns no profits and suffers no losses. From the table given in the question, it can be seen that when the volume of output is 1,700 units, profit earned is 0. Hence, break even point is achieved when 1,700 units are sold.

Sales volume at break even = 1,700 x 33

= $56,100

Fixed cost at break even = $40,800

Variable cost at break even = $9 per unit

(b)

Calculation of expected profit when sales is 3,700 units

	$
Sales (3,700 x 33)	122,100
Less: Variable cost (3,700 x 9)	-33,300
Contribution margin	88,800
Less: Fixed cost	30,800
Profit	58,000

(c)

Calculation of expected profit when sales is 3,700 units

	$
Sales (3,700 x 33)	122,100
Less: Variable cost (3,700 x 7)	-25,900
Contribution margin	96,200
Less: Fixed cost	-40,800
Profit	55,400

In this case, profit will decrease by $2,600 (58,000 - 55,400)