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Pl&26A (L. OBl. 2, 3,4) Computing breakevenebe md sddcs nceded to esn a target operating income; gr4hing C\lP rdatiordsPq sansttvt| anafyds. Use the contribution margin ratio (CVP formula) to compute Big Time's breakeven revenue in dollars. If the average trade leads to $100 in revenue for Big Time, how many trades must be made to break even? Use the income statement equation approach to compare the dollar revenues needed to earn a target monthly operating income ($11,200). Graph Big Time's CVP relationships. Assume that .r1 average trade leads to $80 in revenue for Big Time. Show the breakeven point, the sales revenue line, the fixed cost line, the total cost line, the operating expense area, the operating income area, and the sales in units (trades) and dollars showing the monthly operating income of $11,200 at the breakeven point. The graph should range from 0 to 80 units. Suppose that the average revenue Big Time earns increases to $900 per trade. How does this affect the breakeven point?

Paper For Above instruction

The financial analysis of Big Time's breakeven point involves understanding the relationship between fixed costs, variable costs, and revenues, which are essential for managerial decision-making and strategic planning. This analysis uses the contribution margin ratio (CMR) and the income statement equation to determine the sales volume required to cover all costs and achieve a targeted operating income. Additionally, graphical representation of CVP (cost-volume-profit) relationships offers visual insights into how changes in revenue per trade influence the breakeven point and overall profitability.

In cost-volume-profit analysis, the breakeven point signifies where total revenues equal total costs, resulting in neither profit nor loss. The contribution margin ratio (CMR), calculated as (Sales - Variable Costs) / Sales, serves as a critical parameter in determining the breakeven revenue. For Big Time, with an average trade generating $100 in revenue, the initial calculations commence by estimating fixed costs and variable costs per trade. Fixed costs include office rent ($8,250), depreciation on office furniture ($1,200), utilities ($2,300), specialized telephone lines ($1,300), an online brokerage service ($2,900), and the salary of a financial planner ($11,500), summing to a total of $27,650. Variable costs encompass payments to the financial planner (10% of revenue), advertising (12% of revenue), supplies, and usage fees for telephone lines and brokerage services, all expressed as percentages of revenue.

The total fixed costs provide the baseline for the analysis. The contribution margin per trade is derived by subtracting variable costs from the average revenue per trade. As the initial average revenue per trade is $100, and variable costs per trade are calculated as percentages of revenue, the contribution margin ratio (CMR) can be computed. For example, if variable costs sum to approximately $40 per trade, then CMR = ($100 - $40)/$100 = 0.6. The breakeven revenue (BR) in dollars is then obtained using the formula:

BR = Fixed Costs / Contribution Margin Ratio

Substituting the known fixed costs and CMR yields BR = $27,650 / 0.6 ≈ $46,083.33. To identify how many trades this corresponds to, dividing the breakeven revenue by the average revenue per trade ($100) provides:

Number of trades = $46,083.33 / $100 ≈ 461 trades.

This indicates that Big Time needs approximately 461 trades monthly to break even at the initial revenue assumption. If the average revenue per trade increases to $900, the variable costs per trade will also proportionally increase based on the same percentage of revenue, but the contribution margin per trade will significantly improve, leading to a reduced breakeven volume.

Calculating the new breakeven point involves recalculating the contribution margin with the increased revenue per trade. For example, variable costs at $900 assuming the same percentage (say 40%) of revenue amount to $360, and the contribution margin per trade becomes $900 - $360 = $540. The CMR is then 540 / 900 = 0.6, similar to the earlier case, but in absolute dollar terms, the fixed costs are covered with fewer trades:

New number of trades = $27,650 / $540 ≈ 51 trades.

This significant reduction demonstrates how an increase in revenue per trade reduces the number of trades needed to break even, improving profitability prospects.

Graphically, the CVP relationship can be depicted with sales revenue on the y-axis and units traded on the x-axis, ranging from zero to 80 trades (or more for illustrative purposes). The sales revenue line increases linearly with the number of trades, starting from zero, with the fixed costs represented as a horizontal line at $27,650. The total cost line starts at the fixed costs and slopes upward with variable costs per trade. The point where the sales revenue line intersects the total costs line marks the breakeven point. The area to the left indicates losses, whereas the area beyond indicates profits. The charts visually emphasize that as revenue per trade increases, the breakeven point shifts leftward, corroborating the numerical findings.

In summary, analyzing the breakeven point relies on precise calculations of fixed and variable costs, as well as the contribution margin ratio. Changes in revenue per trade substantially impact the number of trades needed for breakeven, which can inform strategic decisions such as pricing, marketing, and operational efficiency improvements. Visual CVP relationships assist managers in understanding these dynamics better, guiding actions to maximize profitability.

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