Cost-Volume-Profit Analysis Randy Rajoub is evaluating a business opportunity to sell cookware of trade shows. Mr. Rajoub can buy the cookware ar a wholesale cost of 5270 per ser. He plans to sell the cookware for $350 per se. He estimates fixed costs such as pane fare, booth rental cost and lodging to be 55,600 per trade show, Required a. Determine the number of cookware sets Mr. Rajoub must sell at a trade show to break even (zero profit or loss). Use the following structure to answer this question: (1) Contribution Margin Per Unit Approach: a. Determine the amount of the contribution margin per unit. b. Show the computation of break-even in units. c. Show how to compute the break-even point in number of dollars using the break-even point in units and the selling price. d. Confirm the results by preparing an income statement. (2) Contribution Margin Ratio Approach. a. Calculate the contribution margin ratio. b. Use the ratio to calculate the break-even point in sales dollars, then use the results and the selling price to calculate the break-even point in units. b. Draw a CVP graph for Mr. Rajoub's operation at a trade show. c. Assume Mr. Rajoub desires to earn a profit of $4,900 per show. (1) Determine the sales volume in units (sets of cookware) necessary to earn the desired profit. (2) Determine the sales volume in dollars necessary to earn the desired profit. (3) Using the contribution margin format, prepare an income statement to confirm your answers to parts 1 and 2. d. Determine the margin of safety between the sales volume at the break-even point and the sales volume required to earn the desired profit. Determine the margin of safety as a percentage. After researching the market, Mr. Rajoub concludes that the $350 per set selling price is too high. Customers will likely pay only $310 per set. Mr. Rajoub believes he can obtain a cost reduction from his supplier of $20 per set (variable cost drops from $210 per set to $190 per set) and still provide the level of quality required to achieve a sales volume of 75 sets. Under these circumstances, what amount of fixed costs can Mr. Rajoub incur and still obtain the target profit of $4,900? Support your answer with appropriate computations. A. Break-even point (1) Contribution Margin Per Unit Approach (a) Determine the contribution margin per unit. Per Unit Contribution Margin Sales Price wholesale cost per units $110 (b) When the total contribution margin is sufficient to pay for the fixed costs, Mr. Rajoub will break even. The number of units required to break even can be computed as follows: Formula for Computation of Break-Even Point in Units (c) The break-even point in number of dollars can be computed as follows: Break-Even Point in Sales Dollars Sales Price Per Unit (d) Confirm the results by preparing an income statement. Income Statement Sales Net Income (2) Contribution Margin Ratio Approach (a) The contribution margin ratio is computed as follows. Contribution Margin Ratio Contribution Margin Ratio (b) Using the contribution margin ratio, calculate the break- even point in sales dollars and units. Break-Even Point in Sales Dollars Break-Even in Sales Dollars = Break-Even Point in Number of Units Break-Even in Units = B. CVP graph $15,000 $10,000 $5,000 -6. 10 20 30 40 50 Unit C. Target profit (1) Sales Volume Required to Earn a Desired Profit Formula for Computation of Sales Volume Necessary to Earn a Target Profit of $4,900 rmine the sales volume in dollars required to earn the Determine the (2) desired profit. Required Sales in Dollars Sales Price (3) Confirm the answers by preparing an income statement. Income Statement Sales Net Income D. Margin of Safety (1) Margin of Safety Expressed as a Percentage: Margin of Safety Percentage E. Target Pricing Use the Break-Even Equation and Solve for Fixed Cost: Equation Approach to Compute Fixed Cost Confirm the computations by preparing an income statement. Income Statement Sales Net Income $ 4,900