Personal Investors is opening an office in Ville Marie. Fixed monthly costs are office rent ($2,800), depreciation on office furniture ($310), utilities ($260), special telephone lines ($670), a connection with an online brokerage service ($700), and the salary of a financial planner ($2,760). Variable expenses include payments to the financial planner (10% of revenue), advertising (5% of revenue), supplies and postage (2% of revenue), and usage fees for the telephone lines and computerized brokerage service (23% of revenue).
1. Use the contribution margin ratio CVP formula to compute the investment firm’s break-even revenue in dollars. If the average trade leads to $500 in revenue for Personal Investors, how many trades must be made to break even?
2. Use the income statement equation approach to compute dollar revenues needed to earn monthly operating income of $3,900.
3. Graph Personal Investors’ CVP relationships. Assume that an average trade leads to $500 in revenue for Personal Investors. Show the break-even point, sales revenue line, fixed expense line, total expense line, operating loss area, operating income area, and sales in units (trades) and dollars when monthly operating income of $3,900 is earned. The graph should range from 0 to 40 units (trades).
4. Assume that the average revenue Personal Investors earns decreases to $400 per trade. How does this affect the break-even point in number of trades?