Question

Cost Behavior and Breakeven Analysis  

XYZ Company sells clothing for young adults. The firm has normal monthly fixed costs of $140,000 ($68,000 of this amount is fixed salaries). The firm’s variable cost ratio averages 65%. The firm operates 3 stores in the mid-Atlantic region.

1. What is the monthly level of sales dollars needed to breakeven? ____________
2. What is the monthly level of sales dollars needed to earn an operating profit of $40,000 monthly?____________
3. What is the monthly level of sales dollars needed to earn an operating profit of 9% of sales monthly?___________
4. The firm is considering reducing monthly fixed salaries (currently $68,000) and using a combination salary and commission employee compensation plan. The reduction in fixed salaries would equal $10,000 monthly and be replaced with 2% of the gross sales commission payment. The 2% would be shared by all fixed salary employees.

   a. Calculate the new breakeven point in monthly sales dollars.

   b. Calculate the new level of monthly sales dollars needed to earn an operating profit of $40,000 monthly.

Answer 1

1.

Let the Sales be $1

Variable cost is 65% = 0.65

Contribution = Sales – Variable cost

= $1-0.65

=0.35

BEP sales (in units) = Fixed cost/contribution margin per unit

BEP Sales = $140000/0.35

=$400,000

2.

Calculate the monthly level sales dollars need to earn an operating profit of $10,000 monthly

Sales = FC+ Desired profit/Contribution margin ratio

= ( $140,000+$40,000)/0.35

= $514286

3.

Operating profit equal to 9% of monthly sales

Let the sales be x, and opting profit be $40,000

Then sales are as follows:

$40,000= 9/100 × x

X= $444,444