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Case Study 1

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6 views

Case Study 1

Uploaded by

ahmadr.sanfor
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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ase Study: Cost-Volume-Profit (CVP) Analysis

Background

XYZ Manufacturing Inc. produces and sells custom furniture. The company
is analyzing its cost structure and pricing to determine the number of
units needed to break even and achieve a target profit.

Given Information

 Selling Price per Unit: $200

 Variable Cost per Unit: $120

 Fixed Costs: $50,000 per month

 Desired Profit: $30,000

Task

1. Calculate the break-even point in units and sales dollars.

2. Determine the required sales volume in units to achieve the


target profit of $30,000.

3. How would an increase in the selling price to $220 affect the break-
even point?

Solution

1. Break-even Point in Units


The break-even point is where total revenue equals total costs,
meaning no profit or loss. The formula is:
Break-even point (units)=Fixed CostsSelling Price per Unit−Variable
Cost per Unit\text{Break-even point (units)} = \frac{\text{Fixed
Costs}}{\text{Selling Price per Unit} - \text{Variable Cost per
Unit}}Break-even point (units)=Selling Price per Unit−Variable Cost
per UnitFixed Costs

Break-even point (units)=50,000200−120=50,00080=625 units\


text{Break-even point (units)} = \frac{50,000}{200 - 120} = \
frac{50,000}{80} = 625 \text{ units}Break-
even point (units)=200−12050,000=8050,000=625 units

 Break-even point in sales dollars:


Break-even point (sales dollars)=625×200=125,000 dollars\text{Break-
even point (sales dollars)} = 625 \times 200 = 125,000 \
text{ dollars}Break-even point (sales dollars)=625×200=125,000 dollars

2. Required Sales Volume for Target Profit


To achieve a target profit, the required sales volume formula is:

Required sales volume (units)=Fixed Costs+Target ProfitSelling Price per U


nit−Variable Cost per Unit\text{Required sales volume (units)} = \frac{\
text{Fixed Costs} + \text{Target Profit}}{\text{Selling Price per Unit} - \
text{Variable Cost per
Unit}}Required sales volume (units)=Selling Price per Unit−Variable Cost
per UnitFixed Costs+Target Profit
Required sales volume (units)=50,000+30,000200−120=80,00080=1,000
units\text{Required sales volume (units)} = \frac{50,000 + 30,000}{200
- 120} = \frac{80,000}{80} = 1,000 \
text{ units}Required sales volume (units)=200−12050,000+30,000
=8080,000=1,000 units

 Required sales dollars:

Required sales dollars=1,000×200=200,000 dollars\text{Required sales


dollars} = 1,000 \times 200 = 200,000 \
text{ dollars}Required sales dollars=1,000×200=200,000 dollars

3. Effect of Increasing Selling Price to $220


With the increased selling price, the new break-even point will be:

New break-even point (units)=50,000220−120=50,000100=500 units\


text{New break-even point (units)} = \frac{50,000}{220 - 120} = \
frac{50,000}{100} = 500 \text{ units}New break-
even point (units)=220−12050,000=10050,000=500 units

 The break-even point decreases from 625 to 500 units, as the


contribution margin per unit has increased.

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