Katara Enterprises distributes a single product whose selling price is $36 and whose variable
cost is $24 per unit. The company's monthly fixed expense is $12,000.
Required:
1.
Prepare a cost-volume-profit graph for the company up to a sales level of 2,000 units.
Note: The CVP graph is plotted using the three steps in the text.
Step 1:
Draw a line parallel to the volume axis to represent the total fixed expense (See purple line).
For this company, the total fixed expense is $12,000.
Step 2:
Choose some volume of sales and plot the point representing total expenses (fixed and
variable) at the activity level you have selected. (Part (a) of this problem wants us to find the sales
level at 2,000 units) so:
Fixed expense
$12,000
Variable expense ($2,000 units * $2
48,000
Total expense
$60,000
2.
Estimate the company's break-even point in unit sales using your cost-volume profit
graph.
The break-even point where the total sales revenue and the total expense lines intersect. This occurs
at sales of 1,000 units. This can be verified by solving for the break-even point in unit sales, Q, using
the equation method as follows:
Sales
=
Variable expenses + Fixed expenses + Profits
$36Q
=
$24Q + $12,000 + $0
$12Q
= $12,000
Q
= $12,000/ $12 per unit
Q
= 1,000 units
0
$20,000
5
0
0
1,
00
00
1,
50
0
2,
00
0
$40,000
$60,000
$80,000
Fixed costs
$12,000
Total costs:
Variable ($24 *
2000) + $12,000
=
$60,000
Total sales
revenue:
2,000 units * $36
=
$72,000.
Break-even
point: 1,000
units