Question

Praveen Co. manufactures and markets a number of rope products. Management is considering the future of Product XT, a special rope for hang gliding, that has not been as profitable as planned. Since Product XT is manufactured and marketed independently of the other products, its total costs can be precisely measured. Next year’s plans call for a $350 selling price per 100 yards of XT rope. Its fixed costs for the year are expected to be $315,000, up to a maximum capacity of 550,000 yards of rope. Forecasted variable costs are $245 per 100 yards of XT rope.
Required:
1. Estimate Product XT's break-even point in terms of (a) sales units and (b) sales dollars.
2. Prepare a CVP chart for Product XT. Use 7,000 units (700,000 yards/100 maximum number of sales units on the horizontal axis of the graph, and $1,400,000 as the maximum dollar amount on the vertical axis.
3. Prepare a contribution margin income statement showing sales, variable costs, and fixed costs for Product XT at the break-even point.

Answer 1

Answer:

1a. 3,000 units

1b. $1,050,000

2. See attachment.

3. contribution margin income statement

Sales  ($350 × 7,000 units)                            $2,450,000

Less Variable Cost  ($245 × 7,000 units))     ($1,715,000)

Contribution                                                       $735,000

Less Fixed Costs                                              ( $315,000)

Operating Profit                                                 $420,000

Explanation:

Break-even point (sales units ) = Fixed Cost ÷ Contribution per unit

                                                   = $315,000 ÷ ($350 - $245)

                                                   = 3,000

Break-even point (sales dollars) = Fixed Cost ÷ Contribution Margin Ratio

                                                     = $315,000 ÷ ($105/$350)

                                                     = $1,050,000