Cost-volume-earnings analysis (breakeven analysis) is used to determine and express the interrelationships of different volumes of activity (sales), costs, sales prices, and sales mix to earnings. More specifically, the analysis is concerned with what will be the effect on earnings of changes in sales volume, sales prices, sales mix, and costs.

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a. Certain terms are fundamental to cost-volume-earnings analysis. Explain the meaning of each of the following terms:

1. Fixed costs.
2. Variable costs.
3. Relevant range.
4. Breakeven point.
5. Margin of safety.
6. Sales mix

b. Several assumptions are implicit in cost-volume-earnings analysis. What are these assumptions?

c. In a recent period Zero Company had the following experience:

Each item below is independent.
1. Calculate the breakeven point for Zero in terms of units and sales dollars. Show your calculations.
2. What sales volume would be required to generate a net income of \(\$ 96,000\) ? Show your calculations.
3. What is the breakeven point if management makes a decision, which increases fixed costs by \(\$ 18,000\) ? Show your calculations.

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Sales (10,000 units @ $200) Fixed Variable $2,000,000 Costs: Direct material.................. $ 200,000 Direct labor......... 100,000 Factory overhead................ 160,000 600,000 Administrative expenses 180,000 80,000 Other expenses.............. 200,000 120,000 Total costs.......... $540,000 $1,100,000 1,940,000 Net income....................... $ 60,000