Exercise-1 (Target profit analysis, break-even point)

PNG electric company manufactures a number of electric products. Rechargeable light is one of the PNG’s products that sells for $180/unit. Total fixed expenses related to rechargeable electric light are $270,000 per month and variable expenses involved in manufacturing this product are $126 per unit. Monthly sales are 8,000 rechargeable lights.

Required:

  1. Compute break-even point of the company in dollars and units.
  2. According to a research conducted by sales department, a 10% reduction in sales price will result in 25% increase in unit sale. Prepare two income statements in contribution margin format, one using the current price and one using proposed price (10% below the old sales price).
  3. Compute the number of rechargeable lights to be sold to earn a net operating income of $189,000 per month (use original data).

Solution:

(1) Computation of break-even point:

a. Break even point in units:

Break even point in units can be computed by using either equation method or contribution margin method. Both the methods are given below:

Equation method:

Sales = Variable expenses + Fixed expenses

$180Q = $126Q + 270,000

$180Q – $126Q = $270,000

$54Q = $270,000

Q = $270,000/$54

Q = 5,000 Units

Contribution margin method:

Break even point = Fixed expenses/Contribution margin per unit

270,000 / 54*

= 5,000 units

*$180 – $126

b. Break-even point in dollars:

Break-even point in dollars can be computed by multiplying break-even point in units by sales price per unit as shown below:

5,000 units × $180

=$900,000

(2) Income statements:

a. Income statement under current operations:

exercise-1-cvapr-img1

b. Income statement under proposed operations:

exercise-1-cvapr-img2

The proposal should not be accepted because it will reduce the contribution margin from $54 per unit to $36 per unit and net operating income from $162,000 to $90,000.

(3) Target profit analysis:

a. Equation method:

Sales = Variable expenses + Fixed expenses + Profit

$180Q = $126Q + 270,000 + $189,000

$180Q – $126Q = $459,000

$54Q = $459,000

Q = $459,000 / $54

Q = 8,500 Units

b. Contribution margin method:

(Fixed expenses + Target income)/Contribution margin per unit

= ($270,000+$189,000)/54

= 8,500 units

On the basis of original data, company needs to sell 8,500 rechargeable lights to earn a profit of $189,000.

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12 Comments on Exercise-1 (Target profit analysis, break-even point)

  1. Kassahun

    Yes,I am very much helped in your detail explanation.

  2. Alexa

    Third question: “Compute the number of rechargeable lights to be sold to earn a net operating income of $144,000 per month.” Answer given for 72.000, should be 11500 units.

  3. zaid

    3ed quastion i think the answ0er shuld be like this 144000+270000/cm(54)=7666 units

    1. Accounting For Management

      $270000+$189000/cm(54)=8500 units

  4. Razaz Eliass

    can i have more explaine about the target profit analysis

  5. Chris

    she doen’t like me to control her life as well as i can’t control of the sale arise or goes down. so learning this formula make realize that how to make balance between love and sale.

  6. Lucky

    Sale of 8,000 units @ 8
    Prime cost 3 Rs.
    Variable Overheads @ 1 Rs
    Fixed cost 1,00,000 Rs.
    Calculate BEP and MOP..??

    1. Dilshad ansari

      100000/8-8=20000ans

  7. ale

    Income statement under proposed operations:

    Can anyone explain how did we get 10,000 unit price and 162 per unit?

    1. Accounting For Management

      Under proposed operations, we assume that the sale price will reduce by 10% and the number of units sold will increase by 25%.

      Number of units sold under proposed operations:
      8,000 + (8,000 x 25%) = 10,000 units

      Sale price under proposed operations:
      180 – (180 x 10%) = $162

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