The equation method which shows break even in units 8The algebraic equation

The equation method which shows break even in units

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The equation method which shows break-even in units. 8. The algebraic equation method for determining break-even is stated as follows: Selling price per unit Variable cost per unit x = x +Fixed cost No. of units sold No. of units sold The results of this method do not differ from the per unit contribu- tion margin approach. Both determine break-even in units produced and sold. 9. The break-even point can be affected by the relative quantities (sales mix) of the products sold. 10. CVP analysis assumes a strictly linear relationship between the vari- ables, constant worker efficiency within the relevant range, and a constant level of inventory where production equals sales. To the extent these assumptions are invalid, CVP analysis will be inaccur- ate. Estimates are used frequently in business decision making. Actual data is not available until after the fact so managers most of- ten have to rely on projections that by their nature are estimates. 11. From Hartwell’s perspective, the $2,000 cost of the computer is a fixed cost. The computer costs $2,000 with or without Jamail’s con- tribution. Accordingly, whatever Jamail is willing to contribute to- ward the purchase will contribute to the coverage of the fixed cost. Jamail’s $750 offer should be accepted. 12. Break-even: 3-2
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Chapter 3 Analysis of Cost, Volume, and Pricing to Increase Profitability (Sales price x Units) = (Variable cost x Units) + Fixed cost Target profit considered: (Sales price x Units) = (Variable cost x Units) + Fixed cost + Desired profit 13. The cost-volume-profit formulas provide only quantitative data. For example, they do not account for factors such as competitive forces and consumer demand. Cost-volume-profit formulas provide only one source of data in a complicated price-setting decision. 14. Cost-volume-profit analysis is based on a set of assumptions that are normally invalid at extreme levels of production. For example, even the fixed cost for plant and equipment will not remain constant if production is raised above some level. However, most companies do not operate at the extremes. Instead, they have a narrow range of activity over which they usually operate. This range is called the relevant range. Fortunately, most of the assumptions used in cost- volume-profit analysis are valid over the relevant range of activity. Exercise 3-1A Break-even units = Fixed cost ÷ Contribution margin Break-even units = $240,000 ÷ ($12 – $9) Break-even units = 80,000 units Break-even dollars = $12.00 x 80,000 units = $960,000 Exercise 3-2A (Price x units) = Fixed cost + (Variable cost per unit x Units) $7X = $81,000 + $4X $3X = $81,000 X = 27,000 units Break-even dollars = $7 x 27,000 units = $189,000 Exercise 3-3A Contribution margin = Sales – Variable cost = $10 – $6=$4 3-3
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Chapter 3 Analysis of Cost, Volume, and Pricing to Increase Profitability Contribution margin ratio = Contribution margin ÷ Sales Contribution margin ratio = $4 ÷ $10.00 = 40% Sales in dollars = (Fixed cost + Desired profit) ÷ Contribution margin ratio Required sales = ($90,000 + $30,000) ÷ .40 Sales in dollars = $300,000 Sales in units = $300,000 ÷ $10.00 = 30,000 Units Exercise 3-4A (Price x Units) = Fixed cost + (Variable cost per unit x Units) + Profit $21Y = $230,000 + $15Y + $70,000;
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