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Evaluating Proposals with the help of CVP Analysis

Phonetronix is a small manufacturer of telephone and communications devices. Recently, company management decided to investigate the profitability of cellular phone production. They have three different proposals to evaluate. Under all the proposals, the fixed costs for the new phone would be $110,000. Under proposal A, the selling price of the new phone would be $99 and the variable cost per unit would be $55. Under proposal B, the selling price of the phone would be $129 and the variable cost would remain the same.Under proposal C, the selling price would be $99 and the variable cost would be $49.
When you have completed your spreadsheet, answer the following questions:

1. What are the break-even points in units and dollars under proposal A?

2. How did the increased selling price under proposal B impact the break-even points in
units and dollars compared to the break-even points calculated under proposal A?

3. Why did the change in variable cost under proposal C not impact the break-even points
in units and dollars as significantly as proposal B did?

Solution Preview

Please refer attached file for better clarity of tables and formulas.

Solution:

Proposal A Proposal B Proposal C
Fixed Costs F 110000 110000 110000
Variable cost per unit V 55 55 49
Price per unit P 99 129 99
Contibution Margin (P-V) 44 74 50
CM Ratio (P-V)/P 44.44% 57.36% 50.51%
Breakeven Sales Units=F/CM 2500 1486 2200
Breakeven Sales in ...

Solution Summary

Solution explains the steps for evaluating three proposals by CVP analysis.

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