Prepare Breakeven And CVP Analysis Planning Future

Prepare Breakeven Analysis And A C V P Analysis Planning Future Sales

Prepare breakeven analysis and a C-V-P analysis planning future sales using the information below. Breakeven Analysis and Planning Future Sales Write Company has a maximum capacity of 200,000 units per year. Variable manufacturing costs are $12 per unit. Fixed overhead is $600,000 per year. Variable selling and administrative costs are $5 per unit, and fixed selling and administrative costs are $300,000 per year. The current sales price is $23 per unit.

Required What is the breakeven point in (a) sales units and (b) sales dollars? How many units must Write Company sell to earn a profit of $240,000 per year? A strike at one of the company's major suppliers has caused a shortage of materials, so the current year's production and sales are limited to 160,000 units. To partially offset the effect of the reduced sales on profit, management is planning to reduce fixed costs to $841,000. Variable cost per unit is the same as last year. The company has already sold 30,000 units at the regular selling price of $23 per unit. a. What amount of fixed costs was covered by the total contribution margin of the first 30,000 units sold? b. What contribution margin per unit will be needed on the remaining 130,000 units to cover the remaining fixed costs and to earn a profit of $210,000 this year?

Paper For Above instruction

The breakeven analysis and contribution margin-profit planning are essential tools for managerial decision-making, especially when facing constraints such as limited production capacity or unexpected supply disruptions. This paper provides a comprehensive analysis of the breakeven point, target profit sales, and strategic adjustments needed under altered operational circumstances for Write Company.

Breakeven Point Analysis

The first step in financial planning involves calculating the breakeven point—that is, the sales volume at which total revenues equal total costs, resulting in neither profit nor loss. Write Company's cost structure includes variable manufacturing costs of $12 per unit, variable selling and administrative costs of $5 per unit, and fixed costs totaling $900,000 ($600,000 manufacturing overhead + $300,000 selling and administrative). The sales price per unit is $23.

The contribution margin (CM) per unit is derived by subtracting variable costs from the sale price:

• CM per unit = $23 - ($12 + $5) = $6

(a) Sales units to breakeven:

Breakeven point in units = Fixed Costs / CM per unit = $900,000 / $6 = 150,000 units.

This means Write Company must sell 150,000 units to cover all fixed costs.

(b) Sales dollars to breakeven:

Sales dollars = Breakeven units Price per unit = 150,000 $23 = $3,450,000.

Thus, $3,450,000 in revenue is needed to break even.

Target Profit Sales Volume

To determine the units required to achieve a target profit of $240,000, the company uses the formula:

• Required units = (Fixed costs + Target profit) / CM per unit = ($900,000 + $240,000) / $6 = 1,140,000 / 6 = 190,000 units

The company must sell 190,000 units to realize a profit of $240,000, which is within its maximum capacity of 200,000 units, indicating operational feasibility.

Impact of Supply Shortage and Cost Reduction

The supply chain disruption limits output to 160,000 units, fewer than the required 190,000 units for the desired profit. To accommodate this, management plans to reduce fixed costs to $841,000.

Given existing sales of 30,000 units at the usual price, the contribution margin contributed by these units is:

(a) Fixed costs covered by first 30,000 units:

Contribution margin for 30,000 units = 30,000 * $6 = $180,000.

This amount partially covers the fixed costs, leaving a remainder of $841,000 - $180,000 = $661,000 to be covered by the remaining units.

(b) Marginal contribution margin needed on remaining 130,000 units:

To cover fixed costs and reach the target profit of $210,000, the total contribution margin needed is:

Total fixed costs + desired profit = $841,000 + $210,000 = $1,051,000.

Contribution margin from first 30,000 units = $180,000, so the contribution margin needed from remaining 130,000 units is:

$1,051,000 - $180,000 = $871,000.

Contribution margin per unit for remaining units:

CM per unit = Total required contribution margin / remaining units = $871,000 / 130,000 ≈ $6.70.

To achieve this, the contribution margin per unit must be $6.70, which implies:

Selling price per unit = Variable costs + Contribution margin per unit = $17 (variable costs of $12 + $5) + $6.70 ≈ $23.70

However, since the sale price is fixed at $23, and variable costs are fixed, to attain this contribution margin per unit, the company must review pricing strategies or cost controls, or accept the lower contribution margin and adjust profit expectations accordingly.

Conclusion

The analysis highlights the importance of flexible cost and revenue strategies in response to operational constraints and supply disruptions. While breakeven and target profit calculations are straightforward under normal circumstances, real-world disruptions necessitate adjustments such as cost reductions and strategic pricing to attain financial goals within capacity limits.

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