Computing breakeven sales and sales needed to earn a target operating income; graphing CVP relationships; sensitivity analysis
Diversified Investor Group is opening an office in Boise. Fixed monthly costs are office rent ($8,100), depreciation on office furniture ($1,600), utilities ($2,500), special telephone lines ($1,200), a connection with an online brokerage service ($2,700), and the salary of a financial planner ($4,900). Variable costs include payments to the financial planner (8% of revenue), advertising (14% of revenue), supplies and postage (1% of revenue), and usage fees for the telephone lines and computerized brokerage service (7% of revenue).
1. Use the contribution margin ratio CVP formula to compute Diversified’s breakeven revenue in dollars. If the average trade leads to $750 in revenue for Diversified, how many trades must be made to break even?
2. Use the income statement equation approach to compute the dollar revenues needed to earn a target monthly operating income of $10,500.
3. Graph Diversified’s CVP relationships. Assume that an average trade leads to $750 in revenue for Diversified. Show the breakeven point, the sales revenue line, the fixed cost line, the total cost line, the operating loss area, the operating income area, and the sales in units (trades) and dollars when monthly operating income of $10,500 is earned.
4. Suppose that the average revenue Diversified earns increases to $1,000 per trade. Compute the new breakeven point in trades. How does this affect the breakeven point?