Question

Big TimeBig Time Investor Group is opening an office in​ Portland, Oregon. Fixed monthly costs are office rent ​($$8,900​), depreciation on office furniture left parenthesis $($1,700)​, utilities ​($2,500​), special telephone lines ​($1,600​), a connection with an online brokerage service ​($2,600​), and the salary of a financial planner ​($17,700​). Variable costs include payments to the financial planner ​(88​% of​ revenue), advertising left parenthesis (13% of​ revenue), supplies and postage ​(33​% of​ revenue), and usage fees for the telephone lines and computerized brokerage service left parenthesis 6 %(6% of​ revenue).

1.	Use the contribution margin ratio approach to compute Big Time​'s breakeven revenue in dollars. If the average trade leads to  $1,000 in revenue for Big Time​, 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 $12,600.
3.	Graph Big Time​'s CVP relationships. Assume that an average trade leads to $1,000 in revenue for Big Time. 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 $12,600 is earned.
4.	Suppose that the average revenue Big Time earns increases to $2,000 per trade. Compute the new breakeven point in trades. How does this affect the breakeven​ point?

​(Round your answers to the nearest whole​ number.)

Answer 1

Q - 1

Contribution margin % = 1 - Variable cost as % of sales = 1 - financial planner cost ​- advertising - supplies and postage ​- usage fees for the telephone lines and computerized brokerage service = 1 - 8% - 13% - 3% - 6% = 70%

Fixed costs = Office rent ​+ depreciation on office furniture left parenthesis + utilities ​+ special telephone lines ​+ a connection with an online brokerage service ​+ and the salary of a financial planner = 8,900​ + 1,700 + 2,500 + 1,600 + 2,600 + 17,700 = $ 35,000

Big Time​'s monthly breakeven revenue in dollars = Monthly fixed costs / Contribution margin % = 35,000 / 70% = $ 50,000

Trades needed to breakeven monthly = 50,000 / 1,000 = 50

Q - 2

Equation for profit:

Profit = (1 - Variable cost as % of sales) x Revenue - Fixed costs

12,600 = (1 - 30%) x Revenue - 35,000

Hence, Revenue = (12,600 + 35,000) / (1 - 30%) = $ 68,000

Q - 3

The CVP relationship can be plotted using the table below:

Number of trades	Sales	Fixed cost	Total Cost
n	=1000 x n		=Sales x (1 - 30%) - Fixed cost
-	-	35,000	35,000
10	10,000	35,000	38,000
20	20,000	35,000	41,000
30	30,000	35,000	44,000
40	40,000	35,000	47,000
50	50,000	35,000	50,000
60	60,000	35,000	53,000
70	70,000	35,000	56,000
80	80,000	35,000	59,000
90	90,000	35,000	62,000
100	100,000	35,000	65,000

The graph is shown below:

Point A is the break even point. Area shaded in red line is the area of operating losses. Area shaded in green line is area of operating profit.

Q - 4

Average revenue per trade = $ 2,000 which is twice the average revenue per trade initially. Hence the break even number of trades will reduce to half. New break even trade number = 50,000 / 2,000 = 25