Homework 2

Name:

The Sock Company buys hiking socks for $6 a pair and sells then for $10. Management budgets monthly fixed
costs to be $12,000 per month.

0Required (consider each of the following questions separately):

a) What is the monthly breakeven point in units and dollars?

b) What is the monthly sales level in units required to earn a target income of $6,000?

c) Prepare a CVP graph for The Sock Company. Clearly label all pieces of the graph so management
understands it. 0

d) What is the break event point in units if management reduces the selling price to $8 a pair?

e) The Sock Company finds a new supplier for the sock who will charge one dollar less than they are paying
their current supplier. What is the breakeven point in dollars?

f) The Sock Company plans to advertise in hiking magazines. The ad campaign will increase total fixed costs
by $2,000 per month. What is the breakeven point in units?

g) In addition to selling hiking socks, The Sock Company would like to start selling sports socks. They
expect to sell one pair of hiking socks for every three pairs of sports socks. They will buy the sports socks
for $4 per pair and sell them for $8 per pair. Total fixed costs will stay at $12,000 per month. Calculate
the breakeven point in units for both hiking socks and sports socks.

Answers

a) What is the monthly breakeven point in units and dollars?

At the breaking point, Contribution Margin (CM) equal Fixed Costs (FC)

(10-6)*X = 12,000 thus, X = 12,000 / 4

X = 3,000 units for $30,000

b) What is the monthly sales level in units required to earn a target income of $6,000?

At income equal 6,000 dollars, CM – FC = 6,000

(10-6)*X – 12,000 = 6,000 Thus, X = 18,000 / 4

X = 4,500 units
 Homework 2

c) Prepare a CVP graph for The Sock Company. Clearly label all pieces of the graph so management
understands it.
Sales

ne
os fi
s Zt oZnoe
PLor CVP Analysis - The Socks Company
70000
60000
50000
40000 fixed costs level
Break-even ($)
30000 Total costs
20000 Sales
Variable costs
10000
Fixed costs
-
0 1000 2000 3000 4000 5000 6000
Break-even (units)
Units

d) What is the break event point in units if management reduces the selling price to $8 a pair?

At the breaking point, Contribution Margin (CM) equal Fixed Costs (FC)

(8-6)*X = 12,000 thus, X = 12,000 / 2

X = 6,000 units

e) The Sock Company finds a new supplier for the sock who will charge one dollar less than they are paying
their current supplier. What is the breakeven point in dollars?

At the breaking point, Contribution Margin (CM) equal Fixed Costs (FC)

(10-5)*X = 12,000 thus, X = 12,000 / 5 = 2,500 units sold at $10 each

X = $2,400

f) The Sock Company plans to advertise in hiking magazines. The ad campaign will increase total fixed costs
by $2,000 per month. What is the breakeven point in units?

At the breaking point, Contribution Margin (CM) equal Fixed Costs (FC)

(10-6)*X = 14,000 thus, X = 14,000 / 4

 Homework 2

X = 3,500 units

g) In addition to selling hiking socks, The Sock Company would like to start selling sports socks. They
expect to sell one pair of hiking socks for every three pairs of sports socks. They will buy the sports socks
for $4 per pair and sell them for $8 per pair. Total fixed costs will stay at $12,000 per month. Calculate
the breakeven point in units for both hiking socks and sports socks.

They expect to sell one pair of hiking socks for every three pairs of sports socks. Thus, sales account for
3/4 (75%) of sports socks and 1/4 (25%) of hiking socks.

At the breaking point, Contribution Margin (CM) equal Fixed Costs (FC).

[(0.25*4)+(0.75*4)]*X = 12,000

X = 12,000 / 4

X = 3,000 units of goods sold broken down as follows:

0.25*3000 = 750 units of hiking socks and 0.75*3000 = 2,250 units of sports socks.