Q1 Break Even point question.

Income statement of manufacturing operations Units $

Sales 360,000 7,500,000

Variable cost 3,500,000

Contribution Margin 4,000,000

Fixed Expenses 2,500,000

Net profit 1,500,000

1. Calculate the Sales price, Contribution margin and Variable Expenses (all per unit).
2. Calculate the company's contribution margin ratio.
3. Calculate the company's BEP in units & dollars.
4. Calculate the margin of safety for this company. Budgeted Sales - $8,500,000.
5. Assume that management wants a $2,000,000 profit next year.

How many production units must be sold to reach this goal?

6. What is the operating leverage in dollars and %? If Sales increase by 5% how much will net income increase?

7 The company president has an idea to improve operations and sales.

He believes that increasing marketing expense by $100,000 and offering an extra 2 dollars sales commission will increase

number of units by 10,000. What should the company do?

8 Next year due to increased competition selling prices will drop 5%.

Management wants to maintain the same net profit as this year ($1.5 Mill). Assuming all other costs arethe same, How many

units must be sold to reach this goal?

9 Due to expansion of the factory underway capital investments have resulted in fixed costs of additional $150,000 next year. What

is the Net profit, BEP and MOS likely from current operations? (BEP in units and dollars)

Cost Volume Profit Formulas

1. Sales - Variable Expenses = Contribution Margin

1 a. Selling Price per Unit - Variable Expenses per Unit = CM per Unit

2. Breakeven point in Units = Fixed Expenses

CM/unit

3. Breakeven point in Dollars = B/E Units x Selling Price per Unit

4. Breakeven point in Dollars = Fixed Expenses

CM Ratio

5. Contribution Margin Ratio = CM

Sales

6. Sales - Variable expenses - Fixed Expenses = Operating Profit (income)

6a. S - VE = CM; CM - Fixed = Operating Profit (Income)

7. Target Sales in Units = Fixed Expenses + Target Operating Profit

CM/unit

8. Target Sales in Dollars = Fixed Expenses + Target Operating Profit

CM ratio

9. Operating Leverage = CM

Net income

10 . Safety Margin = Budgeted Sales - Breakeven Sales