Question

*** ALL QUESTIONS MUST BE ANSWERED IN FULL DETAIL AS SPECIFICALLY REQUESTED -- IF YOU CANNOT ANSWER ALL PARTS OF ALL 3 QUESTIONS, PLEASE DO NOT ANSWER ***

The Downstream Company rents kayaks and transports kayaks and customers to and from their kayak trip on a local river. The trip is priced at $20 per person and has a contribution margin ratio of 30%. The company’s fixed expenses are $84,000. Last year, sales were $400,000 and profit was $36,000.

a) Provide a definition for break-even analysis, and ALSO explain how a manager would use break-even analysis to enable more effective decision making when you compare your answers from “item b” to “item c”, in the next section of this particular problem.

b) Based on the information provided in this problem, how many units need to be sold to break-even? Show all detailed supporting calculations that were used to determine the final number of units that need to be sold for this company to break-even.

c) Based on the information provided in this problem, how many units need to be sold to earn a target profit of $42,000? ALSO you are required to show all detailed supporting calculations that were used to determine the final number of units that need to be sold for this company to earn a profit of $42,000.

Answer 1

Answer to B

Answer to A

Break even point is defined as the point where the company recovers all its costs and is in a no profit/no loss situation. Break even analysis helps a manager to determine the minimum quantum of sales it would require to recover all its costs. Further, this analysis also helps determine the quantum of sales required to earn a particular quantum of profit. This can be seen in the solution to B and C. Further, the break even point can be quoted in terms of quantity (units) or sale value

Please comment for any further clarifications