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 $4,000, and total fixed costs are $3,000 (no data on units).

a) Compute the contribution margin ratio:
CMR=  

b) Write down the CVP relation (version 2): profit as a function of sales revenue.
  Profit = ___________* Revenue - __________

(e.g., if profit = 0.1*Revenue-500, enter 0.1 in the first box and 500 in the second box).

c) Predict profit at sales revenue of $10,000:


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:

CMR*$1,000 = $200

(1-CMR)*$1,000 = $800

    not enough information

Explanation / Answer

A) contribution margin ratio: Revenue-Variable cost/Revenue

=5000-4000/5000

=1000/5000

contribution margin ratio=0.20

B)Profit= Contribution Margin ratio*Revenue- Fixed Cost

=0.20*Revenue -$3,000

C) Revenue=$10,000

Profit= Contribution Margin ratio*Revenue- Fixed Cost

=0.20*10,000-3000

Loss=(1,000)

D)Profit Target= $10,000

=Profit target+Fixed cost/Contribution Margin ratio

=10,000+3000/0.20

=13,000/0.20

Revenue required= $65,000

E)Calculation of Breakeven Revenue.

Breakeven means No profit No loss which means contribution should be equal to fixed cost.

Breakeven Revenue.=Fixed cost/Contribution margin ratio

=3,000/0.20= $ 15,000

f) If the sales revenue increase by $ 1000, New sales will be $ 6000

Profit= Contribution Margin ratio*Revenue- Fixed Cost

=0.20*6000-3000

Loss= (1,800)

So Profit has increased by $2,000-$1,800=$200.

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