COST VOLUME ANALYSIS:

SAMPLE PROBLEM
1. Montyboy wishes to estimate the number of flower arrangements he must sell at $24.95 to
break even. He estimated fixed operating costs of $12,350 per year and variable operating costs
of $15.45 per arrangement. How many flower arrangements must Montyboy sell to break even
on operating costs?
2. Ippo Enterprises sells its single product for $129.00 per unit. The firm’s fixed operating costs are
$473,000 annually, and its variable operating costs are $86.00 per unit.
a. Find the firm’s operating break even in units.
b. Label the x as axis “Sales (units)” and y-axis axis as “Cost/Revenue ($),” and then graph
the firm’s sales revenue, total operating cost, and fixed operating costs functions on
these axes. In addition, label the operating break-even point and the areas of loss and
profit.
3. Bruno is considering opening a record store. He wants to estimate the number of CD’s he must
sell to break even. The CD’s will be sold for $13.98 each, variable operating costs are $10.48 per
CD, and annual fixed operating costs are $73,500.
a. Find the operating breakeven point in CD’s.
b. Calculate the total operating costs at the breakeven volume found n a
c. If Bruno estimates that at a minimum he can sell 2,000 CD’s per month, should he go
into the record business?
d. How much EBIT would Bruno realize if he sells the minimum 2,000 CD’s per month
noted in c?
KEY TO CORRECT: COST VOLUME ANALYSIS

1. Montyboy

2. Ippo

(a) Q  FC  (P  VC)
Q  $473,000  ($129  $86)
Q  11,000 units
(b)

Graphic Operating Breakeven

Analysis
3000 Breakeven
Profits Sales Revenue
2500
Point
Total Oper-
ating
2000 Cost

Cost/Revenue 1500 Losses

($000)
1000

500 Fixed Cost

0
0 4000 8000 12000 16000 20000 24000

Sales (Units)
3. Bruno

(a)
(b) Total operating costs  FC  (Q  VC)
Total operating costs  $73,500  (21,000  $10.48)
Total operating costs  $293,580
(c) 2,000  12  24,000 CDs per year. 2,000 records per month exceeds the operating breakeven
by 3,000 records per year. Bruno should go into the CD business.
(d) EBIT  (P  Q)  FC  (VC  Q)
EBIT  ($13.98  24,000)  $73,500  ($10.48  24,000)
EBIT  $335,520  $73,500  $251,520
EBIT  $10,500