Big Time Investor Group is opening an office in Portland, Oregon. Fixed monthly costs are office rent ($8,800), 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 ($4,400). Variable costs include payments to the financial planner ( 8% of revenue), advertising ( 13% of revenue), supplies and postage ( 3% of revenue), and usage fees for the telephone lines and computerized brokerage service ( 6% of revenue). Requirement 1. Use the contribution margin ratio approach to compute Big Time's breakeven revenue in dollars. If the average trade leads to $750 in revenue for Big Time, how many trades must be made to break even? Begin by showing the formula and then entering the amounts to calculate the required sales dollars for Big Time to break even. (Abbreviation used: CM= contribution margin.) Requirement 2. Use the equation approach to compute the dollar revenues needed to earn a monthly target profit of $10,500 Begin by selecting the formula to compute the required sales in units to earn a target profit. Rearrange the formula you determined above and compute the required number of trades to earn a monthly target profit of $10,500 Big Time must make trades to earn a monthly operating income of $10,500. Now compute the dollar revenues needed to earn a monthly target profit of $10,500. Big Time needs in revenues to eam a monthly operating income of $10,500. Requirement 3. Graph Big Time's CVP relationships. Assume that an average trade leads to $750 in revenue for Big Time. 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 $10,500 is earned. We will begin graphing the CVP relationships by first plotting the two points: breakeven point and the point where monthly operating income of $10,500 is earned. (Enlarge the graph to medium size and use the point tool button displayed below to draw the graph. Be sure to select a label for each point plotted.) Next plot the following lines: the sales revenue line, fixed cost line, and the total cost line. (Enlarge the graph to medium size and use the line tool button displayed below to draw the graph. Do NOT use plot points that require rounding. [Hint: refer to your computations from Requirements 1 and/or 2, as appropriate, to assist in identifying plot points.] Be sure to select a label for each line drawn.) The final step in our graph is to determine where the operating income and the operating loss areas are on the graph that you previously prepared. Review the graphs and determine which has the correct shaded areas labeled for income and loss. (Enlarge each graph before selecting your answer.) Requirement 4. Suppose that the average revenue Big Time earns increases to $1,250 per trade. Compute the new breakeven point in trades. How does this affect the breakeven point? Under new assumptions, Big Time must make trades to break even. With the increase in the average revenue per trade, the breakeven point in number of trades Requirements 1. Use the contribution margin ratio approach to compute Big Time's breakeven revenue in dollars. If the average trade leads to $750 in revenue for Big Time, 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 $10,500. 3. Graph Big Time's CVP relationships. Assume that an average trade leads to $750 in revenue for Big Time. 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 $10,500 is earned. 4. Suppose that the average revenue Big Time earns increases to $1,250 per trade. Compute the new breakeven point in trades. How does this affect the breakeven point? (Round your answers to the nearest whole number.)
