Question

(LO 1, 2, 3) Breakeven; target income; CVP analysis Adam Granger operates a kiosk in downtown Chicago, at which he sells one style of baseball hat. He buys the hats from a supplier for $14 and sells them for $20. Adam’s current breakeven point is 15,000 hats per year.

Required

1. What is Adam’s current level of fixed costs?
2. Assume that Adam’s fixed costs, variable costs, and sales price were the same last year, when he made $21,000 in net income. How many hats did Adam sell last year, assuming a 30% income tax rate?
3. What was Adam’s margin of safety last year?
4. If Adam wants to earn $37,800 in net income, how many hats must he sell?
5. How many hats must Adam sell to break even if his supplier raises the price of the hats to $15 per hat?
6. What actions should Adam consider in response to his supplier’s price increase?
7. Adam has decided to increase his sales price to $21 to offset the supplier’s price increase. He believes that the increase will result in a 5% reduction from last year’s sales volume. What is Adam’s expected net income?

Answer 1

Breakdown pont = 15000 rc fris- V.C. on = Break-everponis line în lunch . 15000 Ya $20-$14) n = 99000 here, na fined until $90940 on has here, $21000 is ts to be 21000 showing on net basis, it means aften de duition of all expenser, tuloso alion ete. here $ 21000 is shown @ To PAT2 $ 21000 a Oolon $30000 Profit Before Tax $30,000

$ 39000 fined cast: Coulibiler $90000. 120000 cont/munt = $6. .. 20000 hat has been produired. No. of unit $20- 814 = $6 and no los no profit a Breatmen point alo profet 2 it means @ 15000 unit no con 31 de doo 1 lli Mangin of safety . It is the and above the breakeuen profit Dont over uen pont lie. Cunew sale lend cunent sale Breakevenpontploo - denel = 20000 - 15800 20000 x 100 $37,800 as net miome CDAT) 54000 & PBT) 0.70

I PBT $54000 (t) fixed as = $90000 744000 $ / $0 2 24000 unit. 5. Мало tо dіли що во ka5- s.p. = $20 V. CE $15 : O - .. as fore Brealenen S UFC - $90000 he sale/-vehunt ($2015 wit mun t e 2 18000 mil they have to prodine 18000 uut Iue down has two option either Cherease the price of sale and copacity deene are in no. of sale an demain the mire as it is a and prish hard to uncrease the sale by adding some unmateriale to the selle of the hat and I şu lite I Bulk discount to dis count regular parly Cuirlone

Imreme in sl = $21 «ауғура и олилд= 20 000 il — & in volume by 5l. = 20000 x 5%. - 1 600 или je 19000 units. Contubulin = 21$- $15 = $6* 19000 = $114ooo () F.C. 2 890,000 Profit $24000 Tax (0ol G200) Met duino $ 16, 8000
Break even point : It is position where the company donot invite any loss nor earn any profits.