Break-Even Sales and Cost-Volume-Profit Graph

Last year, Ridgecrest Inc. had sales of $3,200,000, based on a unit selling price of $400. The variable cost per unit was $240, and fixed costs were $1,088,000. The maximum sales within Ridgecrest Inc.'s relevant range are 10,000 units. Ridgecrest Inc. is considering a proposal to spend an additional $160,000 on billboard advertising during the current year in an attempt to increase sales and utilize unused capacity.

Instructions:

1. Construct a cost-volume-profit graph on your own paper and determine the break-even sales for last year.

Break-even point in dollars	$
Break-even point in units

2. Using the cost-volume-profit graph prepared in part (1), determine (a) the operating income for last year and (b) the maximum operating income that could have been realized during the year.

Operating income	$
Maximum operating income	$

3. Construct a cost-volume-profit graph (on your own paper) and determine the break-even sales for the current year, assuming that a noncancelable contract is signed for the additional billboard advertising. No changes are expected in the unit selling price or other costs. In your computations, round the contribution margin ratio to one decimal place. Round your answer for the break-even point in dollars to the nearest $10,000, if necessary. For example, $1,119,000 would round to $1,120,000.

Break-even point in dollars	$
Break-even point in units

4. Using the cost-volume-profit graph prepared in part (3), determine (a) the operating income if sales total 8,000 units and (b) the maximum operating income that could be realized during the year.

Operating income at 8,000 units	$
Maximum operating income	$