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Jeff Jamail is evaluating a business opportunity to sell cookware at trade shows. Mr. Jamail can buy the cookware at a wholesale cost of $210 per set. He plans to sell the cookware for $350 per set. He estimates fixed costs such as plane fare, booth rental cost, and lodging to be $5,600 per trade show.
How many cookware sets must Mr. Jamail sell in order to breakeven?
Cost-Volume-Profit Relationship
There are 3 methods to analyze: (1.) Contribution Margin per Unit (2.) Contribution Ratio (3.) Equation Method
Break-Even Point
Point where Total Revenue = Total Costs Break-even Volume in Units =
The companys first concern is if can sell enough bottles of Delatine to cover it fixed costs and make a profit!
contribution margin.
Revenue @ $36 Variable Expenses @ $24 Contribution Margin @$12 Fixed Expenses Net Income
Number of Units Sold 4,999 5,000 5,001 $ 179,964 $ 180,000 $ 180,036 (119,976) (120,000) (120,024) 59,988 60,000 60,012 (60,000) (60,000) (60,000) $ (12) $ $ 12
$12 What will be the increase in net income if units sold increase from 5,000 units to $5,600 units?
Revenue @ $36 Variable Expenses @ $24 Contribution Margin @$12 Fixed Expenses Net Income
Number of Units Sold 5,000 5,600 $ 180,000 $ 201,600 (120,000) (134,400) 60,000 67,200 (60,000) (60,000) $ $ 7,200
= 8,333.33 units
Units sold Revenue @ $36 Variable Expenses @ $24 Contribution Margin @$12 Fixed Expenses Net Income
Check Yourself
Matrix, Inc. manufactures one model of lawnmower the sells for $175 each. Variable expenses to produce the lawnmower are $100 per unit. Total fixed costs are $225,000 per month, and management wants to earn a profit in the coming month of $37,500. Matrix must sell the following number of lawnmowers: 1. 3,000. 2. 3,500. 3. 4,000. 4. 4,500. $225,000 + $37,500 = 3,500 $75
Step 2 Break-even Fixed costs + Desired profit = volume in units Contribution margin per unit
Target Costing
1. Determine the market price at which product will sell
This is the Target Price
2. Must develop the product at a cost that will enable company to be profitable selling the product at the target price
This is known as
TARGET COSTING
Step 2 Break-even Fixed costs + Desired profit = volume in units Contribution margin per unit
= 6,250 units
Units sold Revenue @ $28 Variable Expenses @ $12 Contribution Margin @$16 Fixed Expenses Net Income
Units sold Revenue @ $28 Variable Expenses @ $12 Contribution Margin @$16 Fixed Expenses Net Income
Break-even unit sales assuming no profit would be: Break-even = volume (units) $30,000 = 1,875 units $16
Management considers a new product, Delatine that has a sales price of $36 and variable costs of $24 per bottle. Fixed costs are $60,000. Breakeven is 5,000 units.
Management want to earn a $40,000 profit on Delatine. The sales volume to achieve this profit level is 8,334 bottles sold.
Marketing advocates a target price of $28 per bottle. The sales volume required to earn a $40,000 profit increases to 25,000 bottles.
Target costing is employed to reengineer the product and reduces variable cost per unit to $12. To earn the desired profit of $40,000, sales volume decreases to 6,250 units.
Target costing is applied and fixed costs are reduced to $30,000. The sales volume to earn the desired $40,000 profit is 4,375 units.
= 4,375 units
$ 25 (12) $ 13
Because budgeted income will fall by $5,000, the proposal should be rejected!
Income 5,000 $ 125,000 (60,000) 65,000 (30,000) $ 35,000
Proposed Situation
Units sold Revenue @ $25 Variable Expenses @ $12 Contribution Margin @$13 Fixed Expenses Net Income
Profit = Contribution margin Fixed cost Profit = (6,000 $16) $42,000 = $54,000 Current Situation
Units sold Revenue @ $28 Variable Expenses @ $12 Contribution Margin @$16 Fixed Expenses Net Income Income 4,375 $ 122,500 (52,500) 70,000 (30,000) $ 40,000
Proposed Situation
Units sold Revenue @ $28 Variable Expenses @ $12 Contribution Margin @$16 Fixed Expenses Net Income Income 6,000 $ 168,000 (72,000) 96,000 (42,000) $ 54,000
Proposed Situation
Units sold Revenue @ $25 Variable Expenses @ $8 Contribution Margin @$17 Fixed Expenses Net Income Income 4,200 $ 105,000 (33,600) 71,400 (22,000) $ 49,400
Bright Day expects to incur $24,000 in fixed marketing costs in connection with Multi Minerals. Lets look at the calculation of the break-even point in units and dollars.
Break-even in Dollars
Fixed costs CM ratio
Bright Day desires to earn a profit of $8,000 on the sale of Multi Minerals
$24,000 + $8,000 = 4,000 units $8 $24,000 + $8,000 = $80,000 40%
If we want to consider the desired profit of $8,000 the solution would be:
$ 20 $ 8 Units Units Units = = = $ 12 Units $ 32,000 4,000 + $ 32,000
Check Yourself
Matrix, Inc. manufactures one model of lawnmower the sells for $175 each. Variable expenses to produce the lawnmower are $100 per unit. Total fixed costs are $225,000 per month, and management wants to earn a profit in the coming month of $37,500. Use the equation method to determine how many lawnmowers Matrix must sell next month: 1. 3,000.
2. 3,500.
3. 4,000. 4. 4,500.