Part 4 – CVP Analysis Seth’s Airway Cleaning Services, operating at full capacit
ID: 2554518 • Letter: P
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