Session 14 Solutions

# Session 14 Solutions - An Extended Example Impulse Purchase...

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An Extended Example P Break-even \$ sales = Break-even unit volume (for 2007) 2 1,200,000 = Impulse Purchase Co. produces an item which it sells for \$2.00 per unit. In 2007, Impulse earned \$100,000, before taxes; its break-even sales volume was \$1,200,000 and its fixed costs were \$300,000. Impulse expects that fixed costs, variable costs, and unit prices will be the same in 2008 , as they were in 2007. a. What was Impulse's breakeven volume, in units, for 2007? What will it be for 2008? 600,000 = The break-even will be the same for 2008.

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b. What was Impulse’s margin of safety in 2007? (Assume that Impulse sold what it produced.) The volume needed to achieve the profit earned in 2007, \$100,000, can be determined by solving the equation: P - V π T + F = Q T Now, substituting in the equation to determine the volume, above, we get 0.50 100,000 + 300,000 = Q T However, first we need to know the contribution margin per unit, which we can get from = Q B/E x P P P – V F = Breakeven Sales (\$) P – V 2 300,000 = x 2 1,200,000 300,000 = P - V 0.50 = 800,000 units =
So, the margin of safety for 2007 was 800,000 – 600,000 = 200,000 units

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c.
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