Problem $1$

Company XYZ has $$2,500,000$ in fixed costs. It sells products at an average selling price of $$50.$

Average variable costs amount to $60\%$ of selling price. The marketing department proposes

spending $$500,000$ on an advertising campaign which will result in increased volume of

between $10,000$ and $30,000$ units.

Determine:

Breakeven volume before the proposed ad campaign

Breakeven volume if ad campaign undertaken

Minimum and maximum incremental profit if ad campaign undertaken

Would you support the proposal? Why or why not?

Unit volume to achieve an operating profit of $$800,000$ assuming the ad campaign is

undertaken

Operating income at unit volume of $200,000$ units assuming ad campaign is undertaken

Margin of safety assuming volume of $200,000$ units is achieved and ad campaign

undertaken

Incremental operating income if an additional $1,000$ units are sold

Problem $2$

Company ABC has fixed costs of $$320,000$ and variable costs equal to $60\%$ of sales. If its margin

of safety is $20\%,$ what is the company's operating profit?

Questions:

Breakeven analysis is an extremely useful tool. It looks at the incremental profit impact

from changes in costs and volumes. What critical assumption is made to enable us to

use this tool?

What is the primary concept underlying breakeven analysis and the key to incremental

profitability analysis?Company XYZ has $$2,500,000$ in fixed costs. It sells products at an average selling price of $$50.$ Average variable costs amount to $60\%$ of selling price. The marketing department proposes spending $$500,000$ on an advertising campaign which will result in increased volume of between $10,000$ and $30,000$ units.

Determine:

Breakeven volume before the proposed ad campaign

Breakeven volume if ad campaign undertaken

Minimum and maximum incremental profit if ad campaign undertaken

Would you support the proposal? Why or why not?

Unit volume to achieve an operating profit of $$800,000$ assuming the ad campaign is undertaken

Operating income at unit volume of $200,000$ units assuming ad campaign is undertaken

Margin of safety assuming volume of $200,000$ units is achieved and ad campaign undertaken

Incremental operating income if an additional $1,000$ units are sold

Problem $2$

Company ABC has fixed costs of $$320,000$ and variable costs equal to $60\%$ of sales. If its margin of safety is $20\%,$ what is the company$$s operating profit?

Questions:

Breakeven analysis is an extremely useful tool. It looks at the incremental profit impact from changes in costs and volumes. What critical assumption is made to enable us to use this tool?

What is the primary concept underlying breakeven analysis and the key to incremental profitability analysis?