CVP analysis
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Preppy Co. makes and sells a single product. The current selling price is $30 per unit. Variable costs are $21 per unit, and fixed expenses total $90,000 per month. Sales volume for July totaled 12,000 units. Operating income is presented below:
Volume Per unit Total %
Revenue 12,000 $30.00 $360,000 100
Variable Expense 12,000 21.00 252,000 70
Contribution Margin 12,000 $ 9.00 $108,000 30
Fixed Expenses 90,000
Operating Income $ 18,000
a. Calculate the current break-even point in units sold and total revenues.
b. Management is considering the use of automated production equipment. If this were done, variable costs would drop to $15.00 per unit, but fixed expenses would increase to $100,000 per month.
1. Calculate operating income at a volume of 12,000 units per month with the new cost structure.
2. Calculate the break-even point in units with the new cost structure.
c. Do you believe management of Preppy Co. should purchase the new equipment? Explain your answer.
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