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Cost-Volume-Profit Analysis for Companies

CVP Analysis

Single-Product:
Ellson Electronics Company

Ellson Electronics Company manufactures video cassette recorders, which it sells for $300 per unit. Variable costs are $210 per unit, and fixed costs are $630,000 a year. The tax rate is 40%.

Required:
a. How many VCRs must be sold each year for the firm to break even?
b. Determine the number of VCRs that must be sold if the firm desires an after-tax profit of $270,000.
c. In an effort to increase sales, the firm may reduce the price to $270 per unit. Calculate the number of units that must be sold to achieve an after-tax profit of $270,000.

Multiple-Products:
Lovely Linen Company

Lovely Linen Company sells a number of linen products, including sheets, towels, and tablecloths. The firm's fixed costs are $800,000 per year, and its variable costs for all products average 65% of sales. Its tax rate is 40%.

Required:
a. Calculate the firm's break-even point.
b. Determine total sales required for the firm to earn an after-tax profit of: $300,000 per year
c. Management is considering an increase in advertising of $200,000 per year. Determine total sales required for the firm to earn an after-tax profit of $500,000 per year if advertising costs are increased.

Solution Summary

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