CVP analysis, margin of safety. (CMA, adapted) Arvin Tax Preparation Services ha
ID: 2428014 • Letter: C
Question
CVP analysis, margin of safety. (CMA, adapted) Arvin Tax Preparation Services has total budgeted revenues for 2014 of $618,000, based on an average price of $206 per tax return prepared. The company would like to achieve a margin of safety percentage of at least 45%. The company’s current fixed costs are $327,600, and variable costs average $24 per customer. (Consider each of the following separately).
1. Calculate Arvin’s breakeven point and margin of safety in units.
2. Which of the following changes would help Arvin achieve its desired margin of safety?
a.) Average revenue per customer increases to $224.
b.) Planned number of tax returns prepared increases by 15%.
c.) Arvin purchases new tax software that results in a 5% increase to fixed costs but e-files all tax returns, which reduces mailing costs an average $2 per customer.
Explanation / Answer
1./
BREAK EVEN POINT (IN UNITS) = TOTAL FIXED COST / (SALES PER UNIT - VARIABLE COST PER UNIT)
= $327600 / ($206 - $24)
= 1800 UNITS
MARGIN OF SAFTEY IN UNITS = (ACTUAL SALES IN UNITS - BREAK EVEN SALES IN UNITS)
ACTUAL SALES IN UNITS = TOTAL SALES IN $ / AVERAGE PRICE PER SALE
= $618000 / $206
= 3000 UNITS
MARGIN OF SAFTEY IN UNITS = (3000 - 1800)
= 1200 UNITS
2./
A./ IF AVERAGE REVENUE PER CUSTOMER INCEREASE TO $224
MARGIN OF SAFTEY % =(ACTUAL SALES IN UNITS - BREAK EVEN SALES IN UNITS) / ACTUAL SALES IN UNITS
BREAK EVEN POINT (IN UNITS) = TOTAL FIXED COST / (SALES PER UNIT - VARIABLE COST PER UNIT)
= $327600 / ($224 - $24)
= 1638 UNITS
ACTUAL SALES IN UNITS = TOTAL SALES IN $ / AVERAGE PRICE PER SALE
= $618000 / $224
= 2759 UNITS
MARGIN OF SAFTEY % = (2759 - 1638) / 2759
= 0.4063 OR 40.63%
DESIRED MARGIN OF SAFTERY 45% IS NOT ACHIVED.
B./ IF PLANNED NUMBER OF TAX RETURN PREPARED INCEREASE BY 15%
MARGIN OF SAFTEY % =(ACTUAL SALES IN UNITS - BREAK EVEN SALES IN UNITS) / ACTUAL SALES IN UNITS
BREAK EVEN POINT (IN UNITS) = TOTAL FIXED COST / (SALES PER UNIT - VARIABLE COST PER UNIT)
= $327600 / ($206 - $24)
= 1800 UNITS
ACTUAL SALES IN UNITS = TOTAL SALES IN $ / AVERAGE PRICE PER SALE
= ($618000) / $206
= 3000 UNITS
SALES INCEREASDE BY 15 % NEW SALES = 3000 UNITS * 115%
= 3450 UNITS
MARGIN OF SAFTEY % = (3450 - 1800) / 3450
= 0.4783 OR 47.83%
DESIRED MARGIN OF SAFTERY 45% IS ACHIVED.
C./ PURCHASE NEW TAX SOFTWARE RESULTS 5%INCEREASE IN FIXED COST BUT REDUCES MAILING COST AN AVERAGE $2 PER CUSTOMER
MARGIN OF SAFTEY % =(ACTUAL SALES IN UNITS - BREAK EVEN SALES IN UNITS) / ACTUAL SALES IN UNITS
BREAK EVEN POINT (IN UNITS) = TOTAL FIXED COST / (SALES PER UNIT - VARIABLE COST PER UNIT)
= ($327600 * 105%) / ($206 - $22)
= 1869 UNITS
ACTUAL SALES IN UNITS = TOTAL SALES IN $ / AVERAGE PRICE PER SALE
= ($618000) / $206
= 3000 UNITS
MARGIN OF SAFTEY % = (3000 - 1869) / 3000
= 0.377 OR 37.7%
DESIRED MARGIN OF SAFTERY 45% IS NOT ACHIVED.