Accounting: What the Numbers Mean 9th Edition by Wayne W McManus, Daniel F Viele, David H Marshall

Exercise 77

CVP analysis—what-if questions; breakeven Monterey Co. makes and sells a single product. The current selling price is $15 per unit. Variable expenses are $9 per unit, and fixed expenses total $27,000 per month.

Required:

(Unless otherwise stated, consider each requirement separately.)

a.Calculate the break-even point expressed in terms of total sales dollars and sales volume.

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b. Calculate the margin of safety and the margin of safety ratio. Assume current sales are $75,000.

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c. Calculate the monthly operating income (or loss) at a sales volume of 5,400 units per month.

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d. Calculate monthly operating income (or loss) if a $2 per unit reduction in selling price results in a volume increase to 8,400 units per month.

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e. What questions would have to be answered about the cost-volume-profit analysis simplifying assumptions before adopting the price cut strategy of part d?

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f. Calculate the monthly operating income (or loss) that would result from a $1 per unit price increase and a $6,000 per month increase in advertising expenses, both relative to the original data. Assume a sales volume of 5,400 units per month.

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g. Management is considering a change in the salesforce compensation plan. Currently each of the firm’s two salespeople is paid a salary of $2,500 per month. Calculate the monthly operating income (or loss) that would result from changing the compensation plan to a salary of $400 per month, plus a commission of $0.80 per unit, assuming a sales volume of

1. 5,400 units per month.

2. 6,000 units per month.

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h. Assuming that the sales volume of 6,000 units per month achieved in part g could also be achieved by increasing advertising by $1,000 per month instead of changing the salesforce compensation plan, which strategy would you recommend? Explain your answer.

Step 1 of 12

By extracting the information:

a)

Calculation of break-even point in terms of total sales dollars and sales volume:

Let us assume number of unit sold is equals to. Since at break-even point contribution margin equals to fixed expenses, therefore the break-even point in terms of sales volume can be calculated as follows: