Reference no: EM132708153
Problem - Break-even sales and cost-volume-profit graph
Last year, Ridgecrest Inc. had sales of $3,200,000, based on a unit selling price of $400. The variable cost per unit was $240, and fixed costs were $1,088,000. The maximum sales within Ridgecrest Inc.'s relevant range are 10,000 units. Ridgecrest Inc. is considering a proposal to spend an additional $160,000 on billboard advertising during the current year in an attempt to increase sales and utilize unused capacity.
Instructions -
1. Construct a cost-volume-profit graph indicating the break-even sales for last year. Verify your answer using the break-even equation.
2. Using the cost-volume-profit graph prepared in part (1), determine (a) the operating income for last year and (b) the maximum operating income that could have been realized during the year. Verify your answers arithmetically.
3. Construct a cost-volume-profit graph indicating the break-even sales for the current year, assuming that a noncancelable contract is signed for the additional billboard advertising. No changes are expected in the unit selling price or other costs. Verify your answer using the break-even equation.
4. Using the cost-volume-profit graph prepared in part (3), determine (a) the operating income if sales total 8,000 units and (b) the maximum operating income that could be realized during the year. Verify your answers arithmetically.
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