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# Managerial Accounting: Break Even Point Analysis

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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
Variable \$3 per unit
Fixed \$20,000
REQUIRED:
a. What is the expected level of operating profits?
b. Should the company accept a special order for 1,000 units at a selling price of \$15 if variable marketing expenses associated with this special order would be \$2 per unit? Calculate the incremental profits if the order is accepted.
c. Suppose the company received a special order for 3,000 units at a selling price of \$15 with no variable marketing expenses. Calculate the impact on operating profits.

#### Solution Preview

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?
Selling price per unit = Total revenues/Quantity sold
 \$6,000,000/100,000 units
 \$60 per unit

b. What is the variable cost per unit?
Variable cost per unit = Total variable costs/Quantity produced
 \$2,000,000/100,000 units
 \$20 per unit

c. What is the contribution margin per unit?
Contribution margin per unit = Selling price per unit - Variable cost per unit
 \$60 - \$20
 \$40 per unit

d. What is the break-even point in units?
Break-even point in units = Total fixed costs/Contribution margin per unit
 \$2,000,000/\$40
 50,000 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?
Step 1: We have to first find the before-tax operating profit required to meet this target.
Before-tax operating profit = After-tax operating profit/ [1 - Tax rate]
 \$6,000,000/ [1 - .40]
 \$10,000,000
Step 2: To find the target quantity
Target units = [Fixed costs + Before tax operating profit required]/Contribution margin per unit
 [\$2,000,000 + \$10,000,000]/\$40
 300,000 units

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.
Break-even point in sales dollars = Fixed costs/Contribution margin ratio
 \$230,000/.40
 \$575,000

b. Find the break-even point in ...

#### Solution Summary

Managerial accounting for break even point analysis are provided. The cost-volume-profit analysis for Patton Company is examined.

\$2.19