Cost-Volume-Profit Analysis Paulsen Company sells only one product. The regular
ID: 2453899 • Letter: C
Question
Cost-Volume-Profit Analysis
Paulsen Company sells only one product. The regular selling price is $50. Variable costs are 70% of this selling price, and fixed costs are $7,500 per month. Management decides to increase the selling price from $50 to $55 per unit. Assume that the cost of the product and the fixed operating expenses are not changed by this pricing decision.
(a) At the original selling price of $50 per unit, how many units must Paulsen sell to break even?
(b) At the original selling price of $50 per unitl, what dollar volume of sales per month is required for Paulsen to earn a monthly operating income of $5,000?
(c) At the increased selling price of $55 per unit, what dollar volume of sales per month is required to break-even?
Explanation / Answer
Solution:
(a) Number of units to be sold at regular selling price to achieve break even:
Selling price $50
Variable cost $50 * 70% = $35
Fixed cost = $7,500
Contribution = SP - VC = $50 - $35 = $15
Break even sales in units = Fixed cost / Contribution per unit
= $7,500 / $15 = 500 units
(b) Sales to earn a monthly operating income of $5,000
Sales = (Fixed cost + $5,000) / Contribution per unit
= (7,500 + 5000) / $15
= 834 units
(c) Break even point at $55 selling price:
Selling price = $55
Variable cost = $55 * 70% = $38.5
Contribution = $55 - 38.5 = $16.5
Fixed cost = $7,500
Break even sales = $7,500 / $16.5 = 455 units