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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
    Marketing and administrative costs:
    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.

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    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