create a scenario for a business or other organization and use CVP analysis to s
ID: 2527807 • Letter: C
Question
create a scenario for a business or other organization and use CVP analysis to show the following:
Breakeven in units
Breakeven in dollars
Target sales in units for achieving a $50,000 target NI
Target sales in dollars for achieving a $50,000 target NI
You realize that your scenario’s actual capacity is limited to its breakeven number of units (BEu, as calculated in #1 above). Calculate what the new sales price (SP) should be in order to achieve a $10,000 NI using the BEu (#1 above) for sales volume (Q).
Same as #5, except this time calculate what the new variable cost per unit (VC) would need to be in order to achieve a $10,000 NI using the BEu (#1 above) for sales volume (Q).
Requirements:
Define each CVP variable for your scenario:
SP =
VC =
FC =
Calculate:
CM per unit =
CM ratio =
Calculate #1 – 6 above, showing all calculations
Explanation / Answer
Let us assume in our scenario the following:
Company is selling plastic made toys to retail customers and is into the manufacturing of same.
SP = $10 per unit
VC = $6 per unit
FC = $100,000
CM per unit = SP - VC = 10 - 6 = $4 per unit
CM ratio = 4/10 x 100 = 40%
Break even units = Fixed Cost (FC) / CM per unit
= 100,000 / 4 per unit = 25,000 units
Break even sales in dollars = Break even units x SP
= 25,000 x 10 = $250,000
Target Sales for 50,000 NI in units = (FC + Profit required) / CM per unit
= (100,000 + 50,000) / 4 = 37,500 units
Target Sales for 50,000 NI in dollars = Target sales in units x SP
= 37,500 x $10 per unit = $375,000
New Sales Price For 10,000 NI:
Let New price be x per unit
Contribution Margin = $(x - 6) per unit
Sales in units at BEU = 25,000
Total COst + Profit to be recovered from sales = $100,000 + 10,000 = $110,000
Therefore equating both we get:
(X - 6) x 25,000 = 110,000
25,000x - 150,000 = 110,000
25,000x = 260,000
x = $10.4 per unit
NEW Variable Cost calculation:
Assuming variable cost to be y and SP be $10 per unit (ie same as part 1).
Therefore again equating the equation we get:
(10 - Y) x 25,000 = 110,000
250,000 - 25,000Y = 110,000
25,000Y = 140,000
Y = $5.6 per unit.
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