Problem 6-21 (Algorithmic) Decision Focus: Break-Even and Target Profit ZIA Moto

Question

Problem 6-21 (Algorithmic)
Decision Focus: Break-Even and Target Profit

ZIA Motors is a small automobile manufacturer. Chris Rickard, the company's president, is currently evaluating the company's performance and is considering options that might be effective at increasing ZIA's profitability. The company's controller, Holly Smith, has prepared the following cost and expense estimates for next year, on the basis of a sales forecast of $3,080,000:

After Chris received and reviewed the cost and expense estimates, he realized that Holly had given him all the data without breaking it out into fixed and variable components. He called her, and she told him the following: "Factory overhead and selling expenses are 39 percent variable, but other administrative expenses are 24 percent variable." If required, round all interim calculations, including percentages, to two decimal places and use your rounded number in subsequent calculations. Round your answers to nearest whole number.

Required:

A. How much revenue must ZIA generate to break even?
$

B. Chris Rickard has set a target profit of $698,000 for next year. How much revenue must ZIA generate to achieve Chris's goal?
$

Direct materials $785,000 Direct labor 698,000 Factory overhead 732,000 Selling expenses 283,000 Other administrative expenses 93,000 2,591,000

Explanation / Answer

Factory overhead and selling expenses are 39 percent variable and other administrative expenses are 24 percent variable

so fixed costs = (1-0.39)*(732000+283000) + (1-0.24)*(93000) = 689830

Variable costs = 2591000 - 689830 = 1901170

Variable costs as %of sales = 1901170 / 3080000= 61.73%

A)

breakeven point revenue = total costs = 2591000

B)

Profit = revenue - variable costs - fixed costs

698000 = revenue - 61.73%*revenue - 689830

revenue = (698000 + 689830) / (1-61.73%) = 3626417.56

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