Part 4 – CVP Analysis Seth’s Airway Cleaning Services, operating at full capacit

Question

Part 4 – CVP Analysis

Seth’s Airway Cleaning Services, operating at full capacity, sold 10,000 units at a price of $175 per unit during the year. Their income statement is as follows:
Sales ............................................... $1,750,000 Cost of goods sold ............................ 1,450,000 Gross Profit ........................................ $300,000

Expenses: Selling expenses ..................... $53,000 Administrative expenses .......... $47,000 Total Expenses ........................................................ $100,000 Income from operations ........................................... $200,000

The division of costs between fixed and variable is as follows:

Fixed Variable
Cost of goods sold 45% 55%
Selling expenses 25% 75%
Administrative expenses 50% 50%
REQUIRED: 1. Determine the total fixed costs and total variable costs for the year. 2. Determine the unit variable cost and the unit contribution margin for the year. 3. Compute the break-even sales units for the year.

The marketing manager has developed a brand extension and is wondering how the new product will affect profitability. The key figures are:

a. Projected sales increase $500,000 b. Fixed costs will go up $200,000 c. Variable costs will be unchanged in the short term.

4. Compute the break-even sales units under the proposed program.

5. Compute the amount of sales (units) that would be necessary under the proposed program to realize the $200,000 that was earned during the year.

Explanation / Answer

Answer 1

Answer 2

Answer 3

Breakeven Point (Units) = Fixed Cost / Contribution Margin per unit = 689,250 / 88.93 = 7,750.91 ~ 7,751 Units

Answer 4

Revised Fixed Cost = 689,250 + 200,000 = 889,250

Revised Breakeven Point = 889,250 / 88.93 = 10,000 Units

Answer 5

Sales (units) to earn profit of $ 200,000 = (Fixed Cost + Desired Profit) / Contribution Margin Per unit = 12,249.09 ~ 12,249 Units

Fixed Variable Total Cost of Goods Sold          6,52,500          7,97,500          14,50,000 Selling Expense             13,250             39,750                53,000 Administrative Expense             23,500             23,500                47,000 Total          6,89,250          8,60,750          15,50,000

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