AE4-12 CVP Analysis, Profit Equation [LO 3] Clyde\'s Marina has estimated that f

Question

AE4-12

CVP Analysis, Profit Equation [LO 3]

Clyde's Marina has estimated that fixed costs per month are $305,880 and variable cost per dollar of sales is $0.40.


What is the break-even point per month in sales dollars?

$ _____________

What level of sales dollars is needed for a monthly profit of $59,700?

$ ________________


For the month of July, the marina anticipates sales of $1,091,000. What is the expected level of profit?

$ _________________






2. AE4-18

Constraints [LO 6]

Dvorak Music produces two durable music stands:

Stand A
Stand B

Selling Price $126 $85
Less variable costs 42
37

Contribution margin $84
$48


Stand A requires 7 labor hours and stand B requires 3 labor hours. The company has only 358 available labor hours per week. Further, the company can sell all it can produce of either product.


Which stand(s) should the company produce?

Stand B or Stand A


What would be the incremental benefit of obtaining 16 additional labor hours?

$ ______________

Explanation / Answer

1) According to the given information, Fixed costs per month = $305,880 Variable cost per dollar of sales = $0.40 For $1 of sales, the variable cost is $0.40 and the remaining $0.60 is the fixed cost per dollar of sales. Therefore, number of units can be calculated as We know that Contribution margin per unit = Selling price per unit - Variable cost per unit                                                                = $1 - $0.40                                                                = $0.60 Break-even point in dollars = Fixed costs / CM ratio But CM ratio = CM per unit / Selling price per unit                     = $0.60 / $1                     = 0.6 or 60% Break-even point in dollars = Fixed costs / CM ratio Break-even point in dollars = Fixed costs / CM ratio                                         = $305,880 / 0.6                                         = $509,800 Therefore, the break-even point in sales dollars is $509,800 2) Sales dollars = (Fixed costs + Target profit) / CM ratio                        = ($305,880 + $59,700) / 0.6                        = $609,300 Therefore, to earn a profit of $59,700 the required sales dollars is $609,300 3) If sales is expected to be $1,091,000 then Variable cost = 40% (Sales)                    = 40% ($1,091,000)                    = $436,400 Contribution margin = Sales - variable cost                               = $1,091,000 - $436,400                               = $654,600 Net operating profit = Contribution margin - Fixed costs                              = $654,600 - $305,880                              = $348,720 Therefore, the net operating profit is $348,720        

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