Lewis Enterprises management has budgeted the following amounts for its Requirem

Question

Lewis Enterprises management has budgeted the following amounts for its Requirements: if lewis Enterprises can reduce fixed expenses by $25,000, how will breakeven sales in units be affected? if lewis enterprises spends an additional $1,000 on advertising sales volume should increase by 1,000 units. What effect will this have on operating income? if lewis enterprises can reduce fixed expenses by $40,000 by how much can variable expenses per unit increase and still allow the company to maintain the original breakeven sales in units, what would be the selling price per unit have to be?

Explanation / Answer

3) Original BEP Fixed Cost 500000 Selling price per unit 1000 Less : Variable Expenses per unit 750 Contribution per unit 250 BEP = Fixed cost / Contribution per unit          = 500000 / 250          = 2000 units a) If Fixed expenses are reduced by 25000 new Fixed expenses 475000 Selling price per unit 1000 Less : Variable Expenses per unit 750 Contribution per unit 250 BEP( units) = Fixed cost / Contribution per unit          = 475000 / 250          = 1900 By reducing Fixed cost by 25000 , BEP ( units) would decrease by 100 units ie ( 2000 -1900) b) If selling expenses are increased by $ 1000 Sales volume increase by 1000 units Revenue would increase by 1000 * 1000 1000000 Less : Variable expenses 1000 * 750 750000 Contribution 250000 Less : Incremental advertising expenses 1000 Net incremental operating revenue 249000 If selling expenses are increased by $ 1000 Sales volume increase by 1000 units then operating income will increase by $249,000 c) Fixed Expenses (500000 - 40000) 460000 Selling Price 1000 Variable Expenses x Contribution per unit 1000 - x BEP required ( units) 2000 BEP( units) = Fixed cost / Contribution per unit 2000 = 460000 / 1000 - x 2000 * ( 1000 -x) = 460000 2000000 - 2000x = 460000 2000 x = 2000000 - 460000 2000x = 1540000 x = 1540000/2000    = 770 Hence, variable cost can be increased upto 770 to maintain the same level of BEP ( in units) d) Fixed Expenses increases by 25% = 500000 *125% 625000 BEP (in units) required 2000 Selling price x Variable expenses 750 Contribution x - 750 BEP( units) = Fixed cost / Contribution per unit 2000 = 625000 / x -750 2000 * ( x - 750) = 625000 2000x - 1500000 = 625000 2000 x = 1500000 + 625000 2000x = 2125000 x = 2125000/2000    = 1062.50 Hence, selling price is to be increase to 1062.50 to maintain the same level of BEP of 2000 units

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