Question 2: CVP relation version 2 Current sales revenue is $5,000, total variab

Question

Question 2: CVP relation version 2 Current sales revenue is $5,000, total variable costs are $3,000, and total fixed costs are $4,000 (no data on units). a) Compute the contribution margin ratio: CMR 0.8 b) Write down the CVP relation (version 2): profit as a function of sales revenue. Profit 0.6 (e.g., if profit 0.1*Revenue-500, enter 0.1 in the first box and 500 in the second box) * Revenue 4000 c) Predict profit at sales revenue of $10,000: 2000 d) Your boss gave you a profit target of $5,000. How much do you need to sell in dollars to meet this target? e) Compute the breakeven revenue: f) When sales revenue increases by $1,000 (from any initial level in the relevant range), profit increases by: (1-CMR)*$1,000 $600 CMR*$1,000 $400 not enough information

Explanation / Answer

Sales Revenue = $ 5,000 Less: Total Variable cost = $ 3,000 Contribution Margin = $ 2,000 Fixed Cost = $ 4,000 a) Contribution margin ratio (CMR) = Contribution Margin / Sales = $2,000 / $5,000 = 0.4 b) Profit = CMR X Revenue - Fixed cost Profit = 0.4 X Revenue - $4,000 c) Computation of profit when Sales revenue = $10,000 Profit = 0.4 X Revenue - $4,000 Profit = 0.4 X $10,000 - $4,000 Profit = 0 d) Computation of Sales revenue to meet the profits of $5,000 Profit = 0.4 X Revenue - $4,000 $                                                     5,000 = 0.4 X Revenue - $4,000 Sales Revenue = $                                              22,500 e) Breakeven revenue = Fixed cost / Contribution ratio = $4,000 / 0.4 = $                                                1,600 f) When sales revenue increase by $1,000 profit will increase by: CMR X Increase in sales revenue = Increaes in profit 0.40 X $1,000 = $400 or CMR X $1,000 = $400

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