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# Accounting: Break-Even Analysis

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The Circumstance

The president of your company is grateful for your quick reference guide on costs. Now she has a different request.

As she sets the company direction she needs help refining sales and production targets for next year. She has gathered the following information:

The company, a golf club manufacturer, sells six products: drivers, woods, sets of irons, hybrids, wedges, and putters.

The slowest seller is putters but there is a predictable sales mix. For each putter sold the following are sold: 2 drivers, 4 woods, 3 sets of irons, 6 hybrids, and 5 wedges.

The MSRP for each is as follows:
Putter \$129
Driver \$299
Woods \$149
Set of irons \$699
Hybrids \$ 99
Wedges \$ 79

Variable costs run consistently at 30% of the above MSRP
Fixed costs currently run \$480,000 per year

Assignment
Build a spreadsheet that allows her to change any of the following and immediately see the impact of those changes on both the required quantity of clubs and company profit. Do not show her the details (i.e. put the details and calculations on a separate worksheet).

Sales mix
Fixed costs
Manufacturing cost percent of current MSRP
Retail on anything in the sales mix
Before tax profit goal

There is no such thing a half a club or part of a mix. Your work should always work in entire mixes, therefore you will not exactly hit a goal number; rather, you will exceed it by a small amount. In other words, your profit numbers will always jump in the increment of the full profit on your mix.

#### Solution Summary

The problem set deals with issues under accounting and determining the break-even with multiple products.

\$2.19

## Managerial Accounting: Break Even Point Analysis

MSW:4-1
Cost-volume-profit analysis. Patton Company produces one type of sunglasses with the following costs and revenues for the year:
Total Revenues \$6,000,000
Total Fixed Costs \$2,000,000
Total Variable Costs \$2,000,000
Total Quantity Produced and Sold 100,000 Units

Required:
a. What is the selling price per unit?
b. What is the variable cost per unit?
c. What is the contribution margin per unit?
d. What is the break-even point in units?
e. Assume an income-tax rate of 40 percent. Assuming a relevant range, what quantity of units is required for Patton Company to make an after-tax operating profit of \$6,000,000 for the year?

MSW:4-2
Break-even and target profits; volume defined in sales dollars. The manager of Hsu's Carryout Express estimates operating costs for the year will total \$230,000 for fixed costs.

Required:

a. Find the break-even point in sales dollars with a contribution margin ratio of 40 percent.
b. Find the break-even point in sales dollars with a contribution margin ratio of 20 percent.
c. Find the sales dollars required with a contribution margin ratio of 50 percent to generate a profit of \$150,000.

MSW:4-3
CVP analysis with step costs. Techniques Company has one product: customized thumb drives with logos for various businesses. The sales price of \$18 remains constant per unit regardless of volume, as does the variable cost of \$10 per unit. The company is considering operating at one of the following three monthly levels of operations:

Volume Range
(production and sales) Total
Fixed Costs Increase in Fixed Costs from
Previous Level
Level 1 0-5,000 \$ 30,000 --
Level 2 5,001-15,000 50,000 \$20,000
Level 3 15,001-30,000 80,000 30,000

Required:

a. Calculate the break-even point(s) in units.
b. If the company can sell everything it makes, should it operate at level 1, level 2, or level 3? Support your answer.

MSW:4-4 Genia Enterprises, Inc. has the capacity to produce 12,000 units per year. Expected operations for the year are

Sales (10,000 units @ \$20) \$200,000
Manufacturing costs:
Variable \$8 per unit
Fixed \$40,000