Chapter 21, Problem 21.17EX

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

Chapter
Section

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Cost-volume-profit chartFor 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. b.  Estimate the break-even sales (dollars) by using the cost-volume profit chart constructed in part (a). c.  What is the main advantage of presenting the cost-volume-profit analysis in graphic form rather than equation form?

a.

To determine

Cost-Volume-Profit Analysis: It is a method followed to analyze the relationship between the sales, costs, and the related profit or loss at various levels of units sold. In other words, it shows the effect of the changes in the cost and the sales volume on the operating income of the company.

To construct: a cost-volume-profit chart.

Explanation

Construct a cost-volume-profit chart.

Figure (1)

The volume in units of sales is shown on the horizontal axis. The maximum relevant range is 20,000 units. The sales and the total costs (fixed cost and variable cost) in dollars is shown on the vertical axis. The maximum relevant range of sales and total costs is $2,500,000. The total sales line is drawn right upward by connecting the first point at$0 to the second point at $2,500,000[20,000units×$125perunit] for 20,000 units (maximum relevant range on the horizontal axis).

The total cost line is drawn right upward by connecting the first point at $600,000 (fixed cost) on the vertical axis to the second point at$2,100,000[$600,000+$1,500,000] to the end of the relevant range

b.

To determine

To estimate: the break-even sales (dollars) by using the cost-volume-profit chart constructed in part (a).

c.

To determine

To explain: the main advantage of presenting the cost-volume-profit analysis in graphic form rather than equation form.

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