Question

The Doral Company manufactures and sells pens. Currently, 5,000,000 units are sold per year at $0.50 per unit. The fixed costs are $900,000 per year. Variable costs are $0.30 per unit.
Consider each case separately:

1a. What is the current annual operating income?

b. What is the present breakeven point in revenues?

Compute the new operating income for each of the following changes:

2. A $0.04 per unit increase in variable costs

3. A 10% increase in fixed costs and a 10% increase in units sold

4. A 20% decrease in fixed costs, a 20% decrease in selling price, a 10% decrease in variable cost per unit and a 40% increase inunits sold.

Compute the new breakeven point in units for each of the following changes:

5. A 10% increase in fixed costs

6. A 10% increase in selling price and a $20,000 increase in fixed costs

Answer 1

Answer:

Operating Income = $100,000

Explanation:

1 a. What is the current annual operating income?  

Revenue - 5,000,000* $0.5 = 2,500,000

Less: Variable Costs - 5,000,000*$0.3 = 1,500,000

Contribution = 1,000,000 (margin = 1m/2.5m = 40%)

Less: Fixed Costs ....$900.000

Operating Income = $100,000

b. What is the present break even point in revenues?  

BEP = FC/Contribution Margin = 900,000/0.4 = $2,250,000

2. A $0.04 per unit increase in variable costs  

Revenue - 5,000,000* $0.5 = 2,500,000

Less: Variable Costs - 5,000,000*$0.34 = 1,700,000

Contribution = 800,000

Less: Fixed Costs ....$900.000

Operating Income = ($100,000)

3. A 10% increase in fixed costs and a 10% increase in units sold  

Revenue - 5,500,000* $0.5 = 2,750,000

Less: Variable Costs - 5,500,000*$0.3 = 1,650,000

Contribution = 1,100,000

Less: Fixed Costs ....$990.000

Operating Income = $110,000

4. A 20% decrease in fixed costs, a 20% decrease in selling price, a 10% decrease in variable cost per unit and a 40% increase inunits sold.  

Revenue - 7,000,000* $0.4 = 2,800,000

Less: Variable Costs - 7,000,000*$0.27 = 1,890,000

Contribution = 910,000

Less: Fixed Costs ....$720.000

Operating Income = $190,000

5.Compute the new breakeven point in units for each of the following changes:   A 10% increase in fixed costs  

BEP = FC/Contribution Margin = 810,000/0.4 = $2,025,000

6. A 10% increase in selling price and a $20,000 increase in fixed costs

Revised Contribution Margin = 0.55 - 0.3 = 0.25; 0.25/0.55 = 0.4545

BEP = FC/Contribution Margin = 1080,000/0.4545 = $2,376,238

Answer 2

 Answer:

1 a) Operating Income $ 100,000

1 b) Breakeven point in revenues $ 2,250,000

2) Operating Loss : $ 100,000

3) Operating Income $ 60,000

4) Operating Income $ 190,000

5) Breakeven point in revenues $ 2,475,000

Explanation:

Explanation for Answer 1a

Revenues (5,000,000*.5)                     = $ 2,500,000

Fixed costs                                               $(   900,000)

Variable Cost ( 5,000,000 *.30)              $( 1,500,000)

Operating Income                                    $     100,000

Explanation for Answer 1b

Revenues (4,500,000*.5)                     = $ 2,250,000

Fixed costs                                               $(   900,000)

Variable Cost ( 4,500,000 *.30)              $( 1,350,000)

Operating Income                                    $                  0

Explanation for Answer 2

Revenues (5,000,000*.5)                     = $ 2,500,000

Fixed costs                                               $(   900,000)

Variable Cost ( 5,000,000 *.34)              $( 1,700,000)

Operating Loss                                         $(   100,000)

Explanation for Answer 3

Revenues (5,500,000*.5)                     = $ 2,750,000

Fixed costs (900,000*110%)                    $(   990,000)

Variable Cost ( 5,000,000 *.34)              $( 1,700,000)

Operating Income                                    $      60.000

Explanation for Answer 4

Revenues (5,000,000*140% * 80 %)                  = $   2,800.000

Fixed costs (900,000*80%)                                  $ (    720,000)

Variable Cost ( 7,000,000 *.27)                            $ ( 1,890,000)

Operating Income                                                  $    190,000      

Explanation for Answer 5

Revenues (4,950,000*.5)                     = $ 2,475,000

Fixed costs                                               $(   990,000)

Variable Cost ( 4,950,000 *.30)              $( 1,585,000)

Operating Income                                    $                  0

Explanation for Answer 6

Revenues (3,680,000*.55)                     = $ 2,024,000

Fixed costs                                               $(   920,000)

Variable Cost ( 3,680,000 *.30)              $( 1,104,000)

Operating Income                                    $                  0