Question

For the coming year, Loudermilk Inc. anticipates fixed costs of $600,000, a unit variable cost of $75, and a unit selling price of $125. The maximum sales within the relevant range are $2,500,000. a. Construct a cost-volume-profit chart on a sheet of paper. Indicate whether each of the following levels of sales (units or dollars) is in the operating profit area, operating loss area, or at the break-even point. 4,800 units 12,000 units $1,500,000 20,000 units $2,500,000 b. Estimate the break-even sales (dollars) by using the cost-volume-profit chart constructed in part (a). $ c. The graphic format permits the user to visually determine the and the for any given level of

Answer 1

Answer:

a) 4.800 units: Operational loss area (L)

12,000: Break even point (BEP)

$1,500,000: BEP

20,000 units: Operational profit area (P). Also, the maximum amount of units.

$2,500,000: Operational profit area (P). Also, the maximum amount of sales.

b) BEP: 12,000 units or $1,500,000 in sales.

Explanation:

The graph is divided in two sections:

1 - The operational loss area (L)

2 - The operational profit area (P)

The interface between both regions is the breakeven point.

a) 4.800 units: Operational loss area (L)

12,000: Break even point (BEP)

$1,500,000: BEP

20,000 units: Operational profit area (P). Also, the maximum amount of units.

$2,500,000: Operational profit area (P). Also, the maximum amount of sales.

b) The breakeven point is where sales equal total cost (or the level at which profits are zero). This breakeven point (BEP) is at 12,000 units:

$BEP=\frac{FC}{price-VC} =\frac{600,000}{125-75}=\frac{600,000}{50}=12,000$

This corresponds to $1,500,000 in sales.

$S_{BEP}=125*12,000=1,500,000$