Chapter 19

# Fixed costs are estimated at 840000 the unit

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increase sales. Fixed costs are estimated at \$840,000. The unit contribution margin before the additional 2% commission is determined below. Unit selling price \$250 Unit variable cost 145 Unit contribution margin \$105 3

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11-30 19-30 Without additional 2% commission: \$250 – [\$145 + (\$250 × 2%)] = \$100 Break-Even in Sales (units) = \$840,000 \$105 = 8,000 units With additional 2% commission: Break-Even in Sales (units) = \$840,000 \$100 = 8,400 units Break-Even in Sales (units) = Fixed Costs Unit Contribution Margin 3
11-31 19-31 Target Profit The sales volume required to earn a target profit is determined by modifying the break-even equation. Sales (units) = Fixed Costs + Target Profit Unit Contribution Margin 3

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11-32 19-32 Units Required for Target Profit Fixed costs are estimated at \$200,000, and the desired profit is \$100,000. Unit contribution margin is \$30. Unit selling price \$75 Unit variable cost 45 Unit contribution margin \$30 Sales (units) = Fixed Costs + Target Profit Unit Contribution Margin \$30 Sales (units) = 10,000 units \$200,000 \$100,000 3
11-33 19-33 Contribution Margin Ratio = Unit Contribution Margin Unit Selling Price Contribution Margin Ratio = \$30 \$75 from Slide 32 Contribution Margin Ratio = 40% Sales (dollars) = Fixed Costs + Target Profit Contribution Margin Ratio Sales (dollars) = \$200,000 + \$100,000 40% = \$750,000 3 Target Profit Necessary sales to have a \$100,000 target profit

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11-34 19-34 4 Using a cost-volume-profit chart and a profit-volume chart, determine the break-even point and sales necessary to achieve a target profit.
11-35 19-35 Unit selling price \$ 50 Unit variable cost 30 Unit contribution margin \$ 20 Total fixed costs \$100,000 The cost-volume-profit chart in Slides 36 to 48 is based on Exhibit 5. Exhibit 5 was constructed using the following data: 4

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11-36 19-36 Sales and Costs (in thousands ) 0 Units of Sales (in thousands) \$500 \$450 \$400 \$350 \$300 \$250 \$200 \$150 \$100 \$ 50 Dollar amounts are indicated along the vertical axis. 1 2 3 4 5 6 7 8 9 10 (continued) Volume is shown on the horizontal axis. Cost-Volume-Profit Chart 4 Exhibit 5
11-37 19-37 Using maximum sales of \$500,000 and knowing that each unit sells for \$50, we can find the values of the two axis. Where the horizontal sales and costs line intersects the vertical 10,000 unit of sales line is Point A in Slide 38 . 4

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11-38 19-38 Point A Point A Cost-Volume-Profit Chart (continued) 4 Exhibit 5 1 2 3 4 5 6 7 8 9 10 Sales and Costs (in thousands ) 0 \$500 \$450 \$400 \$350 \$300 \$250 \$200 \$150 \$100 \$ 50 Units of Sales (in thousands) Point A could have been plotted at any sales level because linearity is assumed.
11-39 19-39 Point A Point A Cost-Volume-Profit Chart (continued) 4 Exhibit 5 Sales and Costs (in thousands ) 0 \$500 \$450 \$400 \$350 \$300 \$250 \$200 \$150 \$100 \$ 50 1 2 3 4 5 6 7 8 9 10 Units of Sales (in thousands) Beginning at zero on the left corner of the graph, connect a straight line to the dot (Point A).

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11-40 19-40 Fixed cost of \$100,000 is a horizontal line. 4 Cost-Volume-Profit Chart (continued) Exhibit 5 Sales and Costs (in thousands ) \$500 \$450 \$400 \$350 \$300 \$250 \$200 \$150 \$100 \$ 50 0 1 2 3 4 5 6 7 8 9 10 Units of Sales (in thousands)
11-41 19-41 A point on the chart is needed to establish the revenue line. An arbitrary sales amount is picked of 10,000 units. At this sales level, the cost should be \$400,000, calculated as follows: [(10,000 × \$30) + \$100,000] = \$400,000.

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