Basic Cvp Analysis

Basic CVP Analysis
1. Using the equation method, we know:
Profit = Unit CM X Q – Fixed Expense
$ 0 = ($30-$18) X Q - $150,000
$ 0 = $12 X Q - $150,000
$12Q = $150,000
Q = $150,000 / 12 = 12,500
12,500 pairs X $30 per pair = $375,000
The break-even point is the level of sales at which profit is zero. It provides a company with valuable information regarding how much sales revenue is required to cover its operating costs, thus can give an understanding of how aggressively the company must market its products to meet its operating costs.
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2. CVP Graph
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3. Sales (12,000 pairs of shoes X $30.00 per pair)               $ 360,000
    Variable Expenses (12,000 pairs X $18.00 per pair)           216,000
    Contribution Margin (CM)                                                   144,000
    Fixed Expenses                                                                     150,000
    Loss                                                                                     ($6,000)
If 12,000 pairs of shoes are sold in a year, Shop 48’s loss would be $6,000.
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4. If the company is considering paying the store manager of Shop 48 an incentive commission of 75 cents per pair of shoes (in addition to the sales person’s commission), the total variable expenses per pair of shoes will be $18.75 ($18.00 + $0.75). As a result, CM will be ($30.00- $18.75) $11.25 per pair.
Profit = Unit CM X Q – Fixed expenses
$0 = ($30.00 - $18.75) X Q - $150,000
$0 = ($11.25) X Q -$150,000
$11.25Q = $150,000
Q = $150,000/ 11.25
Q = 13,333 pairs (rounded); 13,333 pairs X $30.00 per pair = $399,990
If the change is made, the new break-even point in dollar sales is approximately $400,000 and in unit sales 13,333 pairs of shoes.
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5. Sales (15,000 pairs X $30.00 per pair)                               $ 450,000
    Variable Expenses (12,500 pairs X $18.00 per pair;
                                  2,500 pairs X $18.50 per pair)               271,250...