Matoaka Monograms sells stadium blankets that have been monogrammed with high school and...
Question:
Matoaka Monograms sells stadium blankets that have been monogrammed with high school and university emblems. The blankets retail for $40 throughout the country to loyal alumni of over 1,000 schools. Matoka's variable costs are 40% of sales; fixed costs are $120, 000 per month.
Required:
a. What is Matoka's annual breakeven point in sales dollars?
b. Matoaka currently sells 100,000 blankets per year. Its sales volumes were to increase by 15%, by how much would operate income increase?
c. Assume that variable costs increase to 45% of the current sales price and fixed costs increase by $10,000 per month. If Matoaka were to raise its sales price by .10%, to cover these new costs, what would be the new annual breakeven point in sales dollars?
d. Assume that variable costs increase to 45% of the current sales price and fixed increase by $10, 000 per month. If Matoaka were to raise its sales price 10% to cover these new costs, but the number of blankets sold was to drop by 5%, What would be the new annual operating income?
e. If variable costs and fixed costs were to change as in part (d), would Matoaka be better off raising its selling price and losing volume or keeping the selling price at $40 and selling 100,000 blankets? Why?
Break-even analysis
Break-even analysis is a set of formulas used in cost accounting to illustrate the effect that a change in sales volumes and/or in fixed and variable cost will have on the net operating income.
Answer and Explanation: 1
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a.) Annual break-even sales dollars = fixed costs for the year / contribution margin ratio
= $120,000 x 12 / 60% (If variable cost is 40% of sales,...
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Break-Even Analysis: Definition & Example
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Chapter 4 / Lesson 3
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A break-even analysis utilizes a price calculation formula to determine how much product a business must sell and at what price in order to make a profit. Learn how to apply this analysis through examples with fixed and variable costs, and discover the importance of a margin of safety.
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