Break-even

Break-even (units) = (Fixed Expenses)

CM/unit

Break-even ($) = (Fixed Expenses)

CM %

Target operating profit Break-even Target operating profit $10,000

Target operating profit (units) = (Fixed Expenses + $0) (Fixed Expenses + $10,000)
(Target operating profit = $0 @ break- CM/unit CM/unit
even point)

Break-even Target operating profit $10,000

Target operating profit ($) = (Fixed Expenses + $0) (Fixed Expenses + $10,000)
CM % CM %
perating profit $10,000 Target operating profit generally
Expenses + $10,000) (Fixed Expenses + Target operating profit)
CM/unit CM/unit

perating profit $10,000 Target operating profit $10,000

Expenses + $10,000) (Fixed Expenses + Target operating profit)
CM % CM %
Exercise 4-1

Part 1)

Incremental CM $ 1,500
Original operating income 15,000
New operating income $ 16,500

Part 2)

Change in CM $ (3,000)
Original operating income 15,000
New operating income $ 12,000

Part 3)

CM $ 135,000
Fixed expenses $ (135,000)
Operating income $ -

Sales $ 315,000
Variable expenses 180,000
CM 135,000
Fixed expenses (135,000)
Operating income $ -
Exercise 4-5

Part 1)

BE (units) = (Fixed expenses)/(CM/unit)

BE ($) = (Fixed expenses)/(CM %)

BE (units) = 1,400 scarfs

Part 2)
BE ($) = $ 21,000

Part 3)
New CM/unit $ 2.00

BE (units) 2,100 scarfs

BE ($) $ 29,400
BE ($) $ 29,400
Problem 4-20

Part 1) Product
Sinks Mirrors Vanities
Sales ($) as % of total sales 25% 42% 33%
In dollars % of sales In dollars % of sales In dollars
Sales $ 126,000 100% $ 210,000 100% $ 168,000
Variable expenses 37,800 30% 168,000 80% 92,400
CM 88,200 70% 42,000 20% 75,600
CM/unit $ 168 $ 40 $ 144
Fixed expenses
Operating (loss) income

Part 2)

BE ($) = $ 547,592

Part 3)

Weighted
Product CM/unit Actual Sales Mix average
CM/unit
Sinks $ 168 25% $ 42
Mirrors $ 40 50% $ 20
Vanities $ 144 25% $ 36
Total $ 352 100% $ 98

BE (units) = 2,282 (always round up)

Units to BE Rounded
Sinks 570.41 571
Mirrors 1,140.82 1,141
Vanities 570.41 571
Total 2,281.63 2,283
Vanities Total

% of sales In dollars % of sales

100% $ 504,000 100%
55% 298,200 59%
45% 205,800 40.83%

223,600
$ (17,800)
Problem 4-21

Part 1)
a) CM %
Selling price $ 25
Variable expenses 15
CM/unit $ 10 40%

BE (units) = 21,000

b)
Degree of operating leverage = CM/(Operating income) Aside
= 3.33 Assume sales increase by 10%, by how much wil
Increase in sales
Degree of operating leverage
Increase in operating income

Part 2)
CM %
Selling price $ 25
Variable expenses 18
CM/unit $ 7 28%

BE (units) = 30,000

Part 3)

Units to achieve target profit ($90,000) = (Fixed expenses)+(Target operating profit)

(CM/unit)
= 42,857 units
42,858 rounded
Round down Round up
CM $ 299,999 $ 300,006
Fixed expenses 210000 210000
Operating income $ 89,999 $ 90,006

Part 4)
Let SP be the selling price
40%*SP + 18 = SP
60%*SP = 18
SP = $ 30.00

CM %
Sales/unit $ 30.00
VE/unit 18
CM/unit $ 12.00 40%

Part 5)
Per unit %
Selling price $ 25 100%
Variable expenses 9 36%
CM $ 16 64%

BE (units) = 26,250

Part 6)

a)
Units for target profit ($90,000) = 31,875

b)
Sales $ 750,000
Variable expenses 270,000
CM 480,000
Fixed expenses 420,000
Operating income 60,000

Degree of operating leverage = 8.00

se by 10%, by how much will operating income increase?
10%
3.33
33%
Problem 4-22

Part 1)
BE (units) = 12,000
BE ($) $ 360,000 or $30/unit * 12,000 units

Part 2)
CM = fixed costs --> 216,000

Part 3)
Units for target profit ($90,000) = 17,000

Sales 510,000
Variable expenses 204,000
CM 306,000
Fixed expenses 216,000
Operating income 90,000

Part 4)
Units for target after-tax profit ($90,000) = (Fixed expenses) + (Target after-tax profit)/(1 - tax rate)
CM/unit
= 19143

Part 5)
Margin of safety ($) = Total sales - BE ($)

Margin of safety (%) = Margin of safety ($)

Total sales
Margin of safety ($) = $ 90,000
Margin of safety (%) = 20%

Part 6)
CM/unit 18
Selling price/unit 30
CM % = 60%

Incremental operating income $ 30,000 (which is also the increase in CM)

New total sales $ 500,000

New CM 300,000
Less: Current CM 270,000
Difference between new and old CM $ 30,000
unit