# Break-even analysis

The Weaver Watch Company sells watches for $25; the fixed costs are $140,000; and variable costs are $15 per watch.

a.) What is the firm's gain or loss at sale of 8,000 watches? At 18,000 watches?

b.) What is the breakeven point? Illustrate by means of a chart.

c.) What would happen to the breakeven point if the selling price were raised to $31? What is the significance of this analysis?

d.) What would happen to the breakeven point if the selling price were raised to $31 but variale costs rose to $23 a unit?

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#### Solution Preview

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Discussion of basics

Break-even analysis is one of the tools of the managerial accounting, a device for determining the point at which sales will just cover total costs.

or the break even point for a product is the point where total revenue received equals total costs (TR=TC). A break even point is typically calculated in order to determine if it would be worthwhile to sell a proposed product, or to try to figure out whether an existing product can be made profitable.If a firm's costs were all variable, the problem of break-even volume would never arise. By having some variable and some fixed costs, the firm must suffer losses up to a given volume.

Useful in decision making

This figure can be used to make advantageous ...

#### Solution Summary

Break-even analysis is showcased.

Managerial Accounting: Break Even Point Analysis

Please see attachment.

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.