exercise 5.2:

the contribution margin and the pv ratio

In $

Revenue 420,000

Variable costs

• Purchases (205,000)
• Freight-in (4,000)
• Commissions (3,000)

Total variables costs (212,000)

Contribution margin 208,000

Fixed costs

• Salaries (distribution) (60,000)
• Travel (3,000)
• Advertising (5,000)
• Salaries (administration) (38,000)
• Depreciation/amortization (40,000)
• Leasing (7,000)
• Finance costs (14,000)

Total fixed costs (167,000)

Profit before taxes 41,000

(1) Profit before taxes (excluding other income) is $41,000

(2) Contribution margin is $208,000

(3) PV ratio is .495 ($208,000 $420,000)

exercise 5.3:

the break-even point

The Millers are thinking of introducing a new product line in their store. For this exercise, assume the following:

• Total fixed costs for the line are estimated at $15,000.
• Total number of units they expect to sell are 10,000, based on a market study.
• Total variable costs are $20,000.
• Unit selling price is $4.50.

Based on the information, answer the following questions:

Unit selling price $4.50

Unit variable costs (2.00) ($20,000 10,000 units)

Unit contribution margin $2.50

1. What is the break-even point in units?

Fixed costs $15,000

---------- = 6,000 units

Contribution margin $2.50

1. What is the break-even point in revenue?

Number of 6,000 units $4.50 = $27,000

1. Should they go ahead with their plan?

Yes, they should go ahead with the decision. They expect to sell 10,000 units and the break-even point is 6,000 (60% of the objective). In terms of revenue, the expected revenue based on the study is $45,000 and the revenue break-even is $27,000 (also 60% of the revenue objective).

In Learning Activity (Week-6), Solve all questions