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    Break-even Analysis

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    1. What is the breakeven point for the KDJ Inn?
    2. If the fixed cost lease is traded for a variable lease of 20 percent of total sales, what is the revised breakeven point for the KDJ Inn?
    3. If (independent of #2) the variable costs increase by 10 percent, by what percentage must sales increase in order for the KDJ Inn to earn its net income of $225,000?
    4. If (independent of #2 and #3) the KDJ Inn is to earn net income of $300,000, what must its room sales equal? (Assume that the sales mix remains constant.)

    1. What is the food department's CMR?
    2. What is the weighted average CMR for ECDR?
    3. What is the breakeven point?
    4. The Casses wish to increase net income by $30,000 and feel this can be done by increasing room sales only. Determine the necessary increase in room sales to meet this requirement.
    5. Assume (independent of #4) that revenue from the stables can be increased, but only with a $500 increase in advertising (a fixed cost) for brochures to go in each room. What level of sales from the stables must be generated to cover this cost?
    6. Assume that the brochures mentioned in #5 are used as a direct mailing. The cost would now be $1,500 to cover printing and mailing, but sales for each department would increase. Assuming that room sales, food sales, and stable revenue remain at a ratio of 5 to
    2 to .05, how much must revenues increase for net income to remain constant?

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    Solution Preview

    Please see the attached file.

    Problem 14

    The contribution margin = $1,300,000/$2,000,000 = 65%. Variable costs are $700,000/$2,000,000 = 35% of revenues.

    The breakeven point occurs when the profit (net income) = 0. Since income taxes are calculated as a percentage of pretax income (income taxes = 25% of pretax income) the breakeven point also occurs when the pretax income = 0 (and thus taxes = 0 and net income = 0).

    From this we can conclude that contribution margin - fixed costs = 0  contribution margin = fixed costs. Since the fixed costs are $1,000,000 we thus need to have a contribution margin of $1,000,000. The revenue level to create a contribution margin of $1,000,000 is $1,000,000/0.65 = $1,538,462.

    Revenues $1,538,462
    Variable Costs $ 538,462 (35% of $1,538,462)
    Contribution Margin $1,000,000
    Fixed Costs $1,000,000
    Pretax income $ 0
    Income Taxes $ 0 (25% of $0)
    Net ...

    Solution Summary

    This solution looks at accounting break even questions: changes in fixed cost to variable cost lease, increases in net income.