Posted: April 7th, 2016

Break-Even and Target Profit

Nolan Estevez started his company, The Sign of Things to Come, three years ago after graduating from Eastend College. While earning his engineering degree, Nolan became intrigued by all of the neon signs he saw at bars and taverns around the university. Few of his friends were surprised to see him start a neon sign company after leaving school. Nolan is currently considering the introduction of a new custom neon sign that he believes will sell like hot cakes. In fact, he is estimating that the company will sell 600 of the signs. The new signs are expected to sell for $80 and require variable costs of $20. The new signs will require a $35,000 investment in new equipment.

A. How many new signs must be sold to break even?

B. How many new signs must be sold to earn a profit of $18,000? before taxes

C. If 600 new signs are sold, how much profit will they generate, before taxes?

D. What would be the break-even point if the sales price decreased by 21 percent? Round your answer to the next-highest number.

E. What would be the break-even point if variable costs per sign decreased by 33 percent?

F. What would be the break-even point if the additional fixed costs were $50,800 rather than $35,000?

CVP: What-If Analysis

Last year, Mayes Company had a contribution margin of 30 percent. This year, fixed expenses are expected to remain at $123,000 and sales are expected to be $590,000, which is 18 percent higher than last year.

What must the contribution margin ratio be if the company wants to increase net income by $15,000 this year?

Sales to Reach After-Tax Profit

Securit Enterprises currently sells its padlocks for $20 each. The locks have a variable cost of $10, and the company’s annual fixed costs are $150,000. The company’s tax rate is 38 percent.

Calculate the number of locks that must be sold to earn an after-tax profit of $22,000.

CVP: What-If Analysis

Red Rock, Inc. mines and distributes various types of rocks. Most of the company’s rock is sold to contractors who use the product in highway construction projects. Aracely Hudson, company president, believes that the company needs to advertise to increase sales. She has proposed plan to the other managers that Red Rock, Inc. spend $120,000 on a targeted advertising campaign. The company currently sells 27,000 tons of aggregate for total revenue of $5,010,000. Other data related to the company’s production and operational costs follow:

Direct labor $1,540,000

Variable production overhead 230,000

Fixed production overhead 380,000

Selling and administrative expenses:

Variable 53,000

Fixed 327,000

A. Compute the break-even point in units (i.e., tons) for Red Rock, Inc.

B. Compute the contribution margin ratio for Red Rock, Inc.

C. If Aracely decides to spend $100,000 on advertising and the company expects the advertising to increase sales by $200,000, should the company increase the advertising?

If the company increases the advertising, the contribution margin will — by $ — and net income will — by $—

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