American Investor Group is opening an office in Portland, Oregon. Fixed monthly costs are office rent ($8,000), depreciation on office furniture ($1,800), utilities ($2,200), special telephone lines ($1,100), a connection with an online brokerage service ($2,700), and the salary of a financial planner ($19,200). Variable costs include payments to the financial planner (9% of revenue), advertising (11% of revenue), supplies and postage (4% of revenue), and usage fees for the telephone lines and computerized brokerage service (6% of revenue).
Requirements
1. Use the contribution margin ratio approach to compute American's breakeven revenue in dollars. If the average trade leads to $1,250 in revenue for American, how many trades must be made to break even?
2. Use the equation approach to compute the dollar revenues needed to earn a monthly target profit of $14,000.
3. Graph American's CVP relationships. Assume that an average trade leads to $1,250 in revenue for American. Show the breakeven point, the sales revenue line, the fixed cost line, the total cost line, the operating loss area, the operating income area, and the sales in units (trades) and dollars when monthly operating income of $14,000 is earned.
4. Suppose that the average revenue American earns increases to $2,500 per trade. Compute the new breakeven point in trades. How does this affect the breakeven point?