Compute breakeven, prepare CVP graph, and respond to change (Learning Objectives 1, 2, 3)

Personal Investors is opening an office in Lexington, Kentucky. Fixed monthly expenses are office rent ($2,500), depreciation on office furniture ($260), utilities ($280), special telephone lines ($600), a connection with an online brokerage service ($640), and the salary of a financial planner ($3,400). Variable expenses include pay¬ ments to the financial planner (10% of revenue), advertising (5% of revenue), supplies and postage (2% of revenue), and usage fees for the telephone lines and computerized brokerage service (3% of revenue).

Requirements 1. Use the contribution margin ratio CVP formula to compute the investment firm’s breakeven revenue in dollars. If the average trade leads to $400 in revenue for Personal Investors, how many trades must it make to break even?

2. Use the income statement equation approach to compute dollar revenues needed to earn monthly operating income of $3,840.

3. Graph Personal Investors’ CVP relationships. Assume that an average trade leads to $400 in revenue for Personal Investors. Show the breakeven point, sales revenue line, fixed expense line, total expense line, operating loss area, operating income area, and sales in units (trades) and dollars when monthly operating income of $3,840 is earned. The graph should range from 0 to 40 units (trades).

4. Assume that the average revenue that Personal Investors earns decreases to $300 per trade. How does this affect the breakeven point in number of trades?