Risky Investor Group is opening an office in Portland. Fixed monthly costs are o

Question

Risky Investor Group is opening an office in Portland. Fixed monthly costs are office rent ($8,400), depreciation on office furniture ($1,900), utilities ($2100) , special telephone lines($1,500), a connection with an online brokerage service ($2600), and the salary of a financial planner ($11,500). Variable costs include payments to the financial planner (8% of revenue), advertising(13% of revenue), supplies and postage (3% of revenue), and usage fees for the telephone lines and computerized brokerage service (6% of revenue).

1.Use the contribution margin CVP formula to compute Risky's breakeven revenue in dollars. If the average trade leads to $800 in revenue for Risky, how many trades must be made to break even? calculate the breakeven revenue in dollars first.

2. Use the income statement equation approach to compute dollar revenues needed to earn a target monthly operating income of $11200.

3. Graph Risky's CVP relationships. Assume that an average trade leads to $800 in revenue for Risky. 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 $11200 is earned.

4. Suppose that the average revenue Risky earns increases to $2000 per trade. Compute the new breakeven point in trades. How does this affect the breakeven point?

Explanation / Answer

1. Break even revenue -

SALES = 800 p.u.

- VARIABLE COST = 240 p.u.

=CONTRIBUTION = 560 p.u.

- FIXED COST = 28,000 $

= PROFIT

BREAKEVEN = FIXED COST / CONTRIBUTION = 28000 / 560 = 50

sales = 800 x 50 = 40000

- vc = 240 x 50 = 12000

contribution = 560 x 50 = 28000

- fixed cost = 28000

profit = 0

breakeven = no profit no loss scenario..

ANS 2.& 3. Revenue ? to earn operating income of 11,200

= (DESIRED PROFIT + FIXED COST) / Profit volume ratio

= (11200 + 28000) / 0.7 = 56000

**** P/V ratio = profit volume ratio = (contribution / sales) = (560 / 800) = 0.7

ANS 3.

sales = 800 x 70 = 56000

- vc = 800 x 21 = 16800

contribution = 800 x 49 = 39200

- fc = 28000

profit = 11200

ANS 4.

sales = 2000

-vc = 600 ( 30% of sales rev)

contri = 1400

B/E = FC / CONTRI p.u. = 28000 / 1400 = 20

B/E = 20

SALES = 2000 X 20 = 40000

- VC = 600 X 20 = 12000

CONTRI = 1400 X 20 = 28000

- FC = 28000

PROFIT = 0

Thus B/E attained.

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