Asked by Bridgette Clark on Jun 10, 2024
Verified
Henning Co. estimates that variable costs will be 70% of sales and fixed costs will total $2160000. The selling price of the product is $10 and 750000 units will be sold.
Instructions
Using the mathematical equation
(a) Compute the break-even point in units and dollars.
(b) Compute the margin of safety in dollars and as a ratio.
(c) Compute net income.
Variable Costs
Expenses that fluctuate in proportion to the level of output or activity, such as raw materials and direct labor costs.
Fixed Costs
Expenditures that do not vary with the degree of output or sales, for instance, rental fees, wages, and insurance premiums.
Break-Even Point
The point at which total costs and total revenues are equal, meaning a business is not making a profit but also not incurring a loss.
- Understand the basics of performing a Cost-Volume-Profit (CVP) analysis.
- Compute the break-even metrics in terms of units and currency, employing a variety of input factors.
- Assess the effect of cost structure modifications on financial gains.
Verified Answer
AF
Ashlee FortenberryJun 15, 2024
Final Answer :
(a)
Break-even sales in units
$10X=$7X+$2,160,000$3X=$2,160,000X=720,000 units \begin{aligned}\$ 10 X & =\$ 7 X+\$ 2,160,000 \\\$ 3 X & =\$ 2,160,000 \\X & =720,000 \text { units }\end{aligned}$10X$3XX=$7X+$2,160,000=$2,160,000=720,000 units
Break-even point in dollars X=.3X+$2,160,0003X=$2,160,000X=$7,200,000\begin{array}{c}\text { Break-even point in dollars } \\X=.3 X+\$ 2,160,000 \\3 X=\$ 2,160,000 \\X=\$ 7,200,000\end{array} Break-even point in dollars X=.3X+$2,160,0003X=$2,160,000X=$7,200,000
(b)
Margin of safety in dollars $7,500,000−$7,200,000=$300,000 Margin of safety ratio $300,000÷$7,500,000=4%\begin{array}{l}\text { Margin of safety in dollars }\\{\$ 7,500,000-\$ 7,200,000}=\$ 300,000 \\\\\text { Margin of safety ratio }\\{\$ 300,000 \div \$ 7,500,000}=4 \%\end{array} Margin of safety in dollars $7,500,000−$7,200,000=$300,000 Margin of safety ratio $300,000÷$7,500,000=4%
(c)
Net Income Sales $7,500,000 Variable Costs (5,250,000) Fixed Costs (2,160,000) Net Income $90,000\begin{array}{lc}\text { Net Income }\\\text { Sales } & \$ 7,500,000 \\\text { Variable Costs } & (5,250,000) \\\text { Fixed Costs } & (2,160,000) \\\quad \text { Net Income } & \$ 90,000\end{array} Net Income Sales Variable Costs Fixed Costs Net Income $7,500,000(5,250,000)(2,160,000)$90,000
Break-even sales in units
$10X=$7X+$2,160,000$3X=$2,160,000X=720,000 units \begin{aligned}\$ 10 X & =\$ 7 X+\$ 2,160,000 \\\$ 3 X & =\$ 2,160,000 \\X & =720,000 \text { units }\end{aligned}$10X$3XX=$7X+$2,160,000=$2,160,000=720,000 units
Break-even point in dollars X=.3X+$2,160,0003X=$2,160,000X=$7,200,000\begin{array}{c}\text { Break-even point in dollars } \\X=.3 X+\$ 2,160,000 \\3 X=\$ 2,160,000 \\X=\$ 7,200,000\end{array} Break-even point in dollars X=.3X+$2,160,0003X=$2,160,000X=$7,200,000
(b)
Margin of safety in dollars $7,500,000−$7,200,000=$300,000 Margin of safety ratio $300,000÷$7,500,000=4%\begin{array}{l}\text { Margin of safety in dollars }\\{\$ 7,500,000-\$ 7,200,000}=\$ 300,000 \\\\\text { Margin of safety ratio }\\{\$ 300,000 \div \$ 7,500,000}=4 \%\end{array} Margin of safety in dollars $7,500,000−$7,200,000=$300,000 Margin of safety ratio $300,000÷$7,500,000=4%
(c)
Net Income Sales $7,500,000 Variable Costs (5,250,000) Fixed Costs (2,160,000) Net Income $90,000\begin{array}{lc}\text { Net Income }\\\text { Sales } & \$ 7,500,000 \\\text { Variable Costs } & (5,250,000) \\\text { Fixed Costs } & (2,160,000) \\\quad \text { Net Income } & \$ 90,000\end{array} Net Income Sales Variable Costs Fixed Costs Net Income $7,500,000(5,250,000)(2,160,000)$90,000
Learning Objectives
- Understand the basics of performing a Cost-Volume-Profit (CVP) analysis.
- Compute the break-even metrics in terms of units and currency, employing a variety of input factors.
- Assess the effect of cost structure modifications on financial gains.