2.JWG company publishes creative crosswords. Last year the book of puzzles sold
ID: 2670661 • Letter: 2
Question
2.JWG company publishes creative crosswords. Last year the book of puzzles sold for $10 with variable operating costs per book of $8 fixed operating costs of $40,000. How many books must JWG sell this year to achieve the break even point for the stated operating cost, given the following different circumstances.A. All figures remain the same as last year?
B. Fixed operating costs increase to $44,000; all other figures remain the same?
C. The selling price increases to $10.50; all costs remain the same as for last year?
D. Variable operating costs per book increases to $8.50; all other figures remain the same.
E. What conclusion about the operating break even point can be drawn from you answers?
Explanation / Answer
According to the given information,
Selling price = $10
Variable cost = $8
Fixed operating costs = $40,000
a) Calculating the break-even point in sales units:
The formula for calculating the break-even point in sales units is
Break-even point in units = Fixed costs / Contribution margin per unit
But Contribution margin is calculated as
Contribution margin = Selling price per unit - Variable cost per unit
= $10 - $8
= $2
Therefore, the contribution margin per unit is $2
Break-even point in units = Fixed costs / CM per unit
= $40,000 / $2
= 20,000 units
Therefore, the Company should sell 20,000 units to break-even.
b) If fixed operating costs increase to $44,000 and keeping all the remaining variables constant, we get
Break-even point in units = Fixed costs / CM per unit
= $44,000 / $2
= 22,000 units
Therefore, the Company should sell 22,000 units to break-even.
c) If the selling price increases to $10.50, keeping all the remaining things constant, we get
Contribution margin = Selling price per unit - Variable cost per unit
= $10.50 - $8
= $2.50
Therefore, the contribution margin per unit is $2.50
Break-even point in units = Fixed costs / CM per unit
= $40,000 / $2.50
= 16,000 units
Therefore, the Company should sell 16,000 units to break-even.
d) If the variable operating costs increase to $8.50, and keeping all the remaining things constant, we get
Contribution margin = Selling price per unit - Variable cost per unit
= $10 - $8.50
= $1.50
Therefore, the contribution margin per unit is $1.50
Break-even point in units = Fixed costs / CM per unit
= $40,000 / $1.50
= 26,667 units
Therefore, the Company should sell 26,667 units to break-even.
e) From part-a, the break-even point in units is 20,000. When the fixed operating costs increases to $44,000, the break-even point has increased from 20,000 to 22,000 keeping all the remaining things constant. When the selling price has increased, the contribution margin per unit has increased which led to break-even at 16,000 units. When the variable cost per unit has increased in part-d, the contribution margin has decreased which has increased the number of units to break-even resulting in $26,667 units. This shows that with the increase in contribution margin per unit, the number of units to break-even will decrease.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.