Question

Colin is the managerial accountant in charge of Company A, which

sells water bottles. He previously determined that the fixed costs of

Company A consist of property taxes, a lease, and executive salaries,

which add up to $100,000 per year. The variable cost associated with

producing one water bottle is $2 per unit. The water bottle is sold at a

premium price of $12.

a) Prepare B.E. chart. b) What volume per month is required in order to break even?

c) What profit would be realized on a monthly volume of 60,000

units?

d) What volume would be needed to obtain a profit of $ 20,000

per month?

e) What volume is required to provide revenue of $ 40,000 per

month?

Answer 1

a) A break even chart is a chart that shows the sales volume level at which total costs equal sales.

b) The volume per month that is required in order to break even is:

$Q = \frac{FC} {P - AVC} = \frac{100,000}{12-2} = 10,000$ units.

c) If Q = 60,000 units, then total profit is: $TP = P×Q - (FC + VC) = 12×60,000 - (100,000 + 2×60,000) = 500,000.$

d) To obtain a profit of $ 20,000 per month the quantity is:

$Q = \frac{TP + FC} {P - AVC} = \frac{20,000 + 100,000} {12 - 2} = 12,000$units12,000units.

e) The volume required to provide revenue of $ 40,000 per month is:

$Q = TR/P = 40,000/12 = 3,333 units.$