Practice Calculations

P.355 #1a) the breakeven point is determined by the number of units that the company needs to sell in order to cover fixed costs. The contribution margin is the amount to which each unit sold contributes to the coverage of fixed costs. In this case: $25 - $10 = $15 contribution margin. Then divided FC/CM; so $30,000 / $15 = 2000 units.

b) the break even revenue is 2000 * $25 = $50,000

c) the profit was as follows: (3000 * 15) -- 30,000 = 45,000 -- 30,000 = $15,000

d) the break even quantity next year will be: $37,500 / 15 = 2500 units

e) the company earned $15,000 in profit last year. To sell 2500 units and make $15,000 in profit, the calculation works as follows:

( (2500 units * Price) -- (2500*15) ) - $37,500 = 15,000

2500P -- 37,500 -- 37,500 = 15,000

2500P = $90,000

P = $36 per unit

P.356 #7 a) the same formula as above is applied: ($20-$8) = $

Then $840,000 / 12 = 70,000 units is the breakeven point.

b) 1) ($20-$5) = $15; $1,200,000 / 15 = 80,000 units

2) if the company wants to sell just 70,000 units, then the price needs to be calculated again using the same formula as was used above:

70,000P -- (70,000*5) -- 1,200,000 = 0

70,000P = 1,550,000

P = $22.15

c) 1) This question is a bit silly. The formula would have one variable, x, to represent both the old and new sides:

19x -- 5x -- 1,200,000 = 20x -- 8x -- 840,000

14x -1,200,000 = 12 x -- 840,000

2x = 360,000

x = 180,000 units should give the same level of profit for either plant. The profit at this level would be:

19(180,000) -- (5)(180,000) -- 1,200,000 = $1,320,000

2) the formula for the degree of operating leverage is: % in EBIT / % in sales. The best to calculate this is to start by computing the profit for the plant at another level. We already know that for the first plant EBIT = 0 where'd = 70,000 so 1,320,000 / (180,000 -- 70,000) = 12

For the new plant, EBIT = 0 where'd = 80,000 so 1,320,000 / (100,000) = 13.2

3) if sales are projected to increase to 150,000 I would recommended against purchasing the new plant. The point at which the two plants have the same profit is 180,000 units. This implies that the old plant is more economically viable than the new plant below that point. To test this, calculate the profit at S = 150,000 for each of the plants:

Old: (150,000 * 12) -- 840,000 = $960,000

New: (150,000 * 14) -- 1,200,000 = $900,000