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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

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

Break-even sales and cost-volume-profit chart

Last year Parr Co. had sales of $900,000, based on a unit selling price of $200. The variable cost per unit was $125, and fixed costs were $225,000. The maximum sales within Parr Co.’s relevant range are 7,500 units. Parr Co. is considering a proposal to spend an additional $112,500 on billboard advertising during the current year in an attempt to increase sales and utilize unused capacity.

Instructions

1. Construct a cost-volume-profit chart indicating the break-even sales for last year. Verify your answer, using the break-even equation.

2. Using the cost-volume-profit chart prepared in part (1), determine (a) the income from operations for last year and (b) the maximum income from operations that could have been realized during the year. Verify your answers.

3. Construct a cost-volume-profit chart indicating the break-even sales for the current year, assuming that a noncancellable contract is signed for the additional billboard advertising. No changes are expected in the selling price or other costs. Verify your answer, using the break-even equation.

4. Using the cost-volume-profit chart prepared in part (3), determine (a) the income from operations if sales total 6,000 units and (b) the maximum income from operations that could lie realized during the year. Verify your answers.

1.

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 indicating the break-even sales for last year.

Explanation

Construct a cost-volume-profit chart indicating the break-even sales for last year.

Figure (1)

The volume in units of sales is shown on the horizontal axis. The maximum relevant range is 7,500 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 $1,500,000.

The total sales line is drawn right upward by connecting the first point at $0 to the second point at $1,500,000 [7,500units×$200perunit] for 7,500 units sold (maximum relevant range on the horizontal axis)

2.

To determine
(a) the income from operations for last year and (b) the maximum income from operations that could have been realized during the year using the cost-volume-profit chart.

3.

To determine

To construct: a cost-volume-profit chart indicating the break-even sales for the current year.

4.

To determine
(a) the income from operations for sales 6,000 units and (b) the maximum income from operations that could have been realized during the year using the cost-volume-profit chart..

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