Question 1: CVP relation a) Compute the following items: price= unit VC= unit CM

Question

Question 1: CVP relation

a) Compute the following items:
    price=    
    unit VC=    
    unit CM=  

b) Write down the CVP relation.
  Profit = ___________ * volume - __________
(e.g., if Profit=4*volume-1000, enter 4 in the first box and 1000 in the second box).

c) Predict profit at sales volume of 120 units:


d) Your boss gave you a profit target of $2,100. How many units do you need to sell to meet this target?


e) Compute the breakeven point:
    breakeven volume =  
    breakeven revenue =  

f) Compute the margin of safety at current sales volume of 100 units:

(e.g., if your answer is 20%, enter 20 without the % sign)
If sales decrease by 35%, will you lose money? YES / NO
If sales decrease by 45%, will you lose money? YES / NO


g) When sales volume increases by 10 units (from any initial level in the relevant range), profit increases by:

price*10 = $700

unit VC*10 = $400

not enough informationunit

CM*10 = $300

Sales volume in units 100 Revenue $7,000   Variable costs $4,000 Contribution margin $3,000   Fixed costs $1,800 Profit $1,200

Explanation / Answer

Answer:

a) How much is the price per unit, unit variable cost and unit contribution margin? price = revenue/volume = $7,000/100 = $70 per unit

unit VC = VC/volume = $4,000/100 = $40 per unit

unit CM = CM/volume =$3,000/100 = $30/unit (or use unit CM = price – unit VC)

___________________________

b) Write down the CVP relation:

profit as a function of sales volume in units.

Profit = unit CM * Volume - FC = $30*Volume - $1,800

_____________________________________________________

c)

If sales volume increases by 20% (from 100 to 120), how much is the $ change in profits?

at volume = 120, profit = $30*120 - $1,800 = $1,800 (vs original profit of $1,200 from the CM statement)

change in profit

= $1,800 - $1,200

= $600

– increase of $600 Alternatively, can compute as: change in profit

= unit CM * change in volume = $30*(120-100) = $600

_____________________________________________

d)

What is the sales volume required to achieve target profit of $2,100?

Profit = $30*Volume - $1,800 = $2,100 => volume = (2,100+1,800)/30 = 130 units

____________________________________________

e)

How much is the breakeven volume? Breakeven revenue?

Breakeven volume = FC/unit CM = $1,800/$30 = 60 units.

(or, solve for volume in:

Profit = $30*Volume - $1,800 = $0). Breakeven revenue = breakeven volume * price = 60*$50 = $3,000

___________________________________________

f)

How much is the margin of safety (at current sales volume of 100 units)?

Margin of safety = (current volume – breakeven volume) / current volume = (100-60)/100 = 40%

______________________________________________________

g)

When sales volume increases by 10 units (from any initial level in the relevant range), profit increases by:

Sales increase =70*10 = $700

unit VC increase 40*10 = $400

CM increase 3*10 = $300

Increase in FC =0

Increase in profit =300

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