3-20(20 min.) CVP exercises.

The Doral Company manufactures and sells pens. Currently, 5,000,000 units are sold

per year at $0.50 per unit. Fixed costs are $900,000 per year. Variable costs are $0.30 per unit.

Consider each case separately:

Required:

1. a. What is the current annual operating income?

b. What is the present breakeven point in revenues?

Compute the new operating income for each of the following changes:

2. A $0.04 per unit increase in variable costs

3. A 10% increase in fixed costs and a 10% increase in units sold

4. A 20% decrease in fixed costs, a 20% decrease in selling price, a 10% decrease in variable cost per unit, and a 40% increase in units sold

Compute the new breakeven point in units for each of the following changes:

5. A 10% increase in fixed costs

6. A 10% increase in selling price and a $20,000 increase in fixed costs

SOLUTION

1a.[Units sold (Selling price - Variable costs)] - Fixed costs = Operating income

=------------------

1b.Fixed costs Contribution margin per unit = Breakeven units

=---------------- units

Breakeven units Selling price = Breakeven revenues

----------------------------------

or,

Contribution margin ratio =

= --------------------

Fixed costs Contribution margin ratio = Breakeven revenues

---------------------

2.

=

$------------

3.

=

$-----------

4.

=

$-------------

5.

=

--------- units

6.

=

-------------- units