Grissom Company estimates that variable costs will be 60% of sales, and fixed co
ID: 2434444 • Letter: G
Question
Grissom Company estimates that variable costs will be 60% of sales, and fixed costs will total $800,000. The selling price of the product is $4.a) Prepare a CVP graph assuming maximum sales of $3,200,000 (Note: Use $400,000 increments for sales and costs and 100,000 increments for units)
Note: I do not understand how to set up the total-sales line and total-cost line. What numbers do I use to plot my points? I understand the calculation for finding the break-even points but Im not sure how to incorporate the information onto the graph. Thanks for your help
Explanation / Answer
From the given information, Actual sales = $3,200,000 Fixed costs = $800,000 Variable cost per unit = $2.4(60% on $4) Selling price per unit = $4 Calculating the Net operating income: Sales $3,200,000 (-) Variable cost $1,920,000 ---------------------------------------------- Contribution margin $1,280,000 (-) Fixed costs $800,000 ----------------------------------------------- Net income or Net profit $480,000 ----------------------------------------------- CVP analysis begins with basic equation, Profit = Total revenue - Total costs = $3,200,000 - $2,720,000 = $480,000 To determine the Number of units Number of units (Q) = (F + Profit) / (P-V) Where F is the fixed cost P is the selling price per unit V is the variable cost per unit Q = ($800,000 + $480,000) / ($4 - $2.4) = $800,000 Therefore the number of units produced = $800,000 Plot the graph as Quantity of bikes on X-axis and Dollars on Y-axis. Use $400,000 increments for sales amd costs and $100,000 increments for quantity of units produced. The CVP analysis is used to determine the break even point or level of operating activity at which revenues cover all fixed and variable costs.
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