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CVP Ananlysis

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Brazen, Inc. produces sound amplifiers for electric guitars. The firm's income statement showed the following:

Revenues (8,400 units) $504,000 100%
Variable expenses (302,400) 60%
Contribution margin $201,600 40%
Fixed expenses (140,400)
Operating income $61,200

An automated machine has been developed that can produce several components of the amplifiers. If the machine is purchased, fixed expenses will increase to $315,000 per year. The firm's production capacity will increase, which is expected to result in a 25 percent increase in sales volume. It is also estimated that the variable expense ratio will be reduced to half of what it is now.

I need to find out how to get these three calculations:

(a.) Calculate the firm's current contribution margin per unit and break-even point in units.
(b.) Calculate the firm's contribution margin per unit and break-even point in terms of units if the new machine is purchased.
(c.) Calculate the firm's operating income assuming that the new machine is purchased.

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Solution Summary

Solution describes the steps to calculate contribution margin and breakeven point in both the cases. It also calculates firm's operating income if new machine is purchased.

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Solution:

(a.) Calculate the firm's current contribution margin per unit and break-even point in units.
Contribution Margin per unit=(201600)/8400=$24
Break even point (Unit)=Fixed cost/CM per unit=140400/24=5850 units

(b.) Calculate the firm's ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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