Accounting 26th Edition by Carl Warren ,Jim Reeve ,Jonathan Duchac

Exercise 41

Break-even sales and cost-volume-profit chart
Last year, Hever Inc. had sales of $500,000, based on a unit selling price of $250. The variable cost per unit was $175, and fixed costs were $75,000. The maximum sales within Hever Inc.'s relevant range are 2,500 units. Hever Inc. is considering a proposal to spend an additional $33,750 on billboard advertising during the current year in an attempt to increase sales and utilize unused capacity.
Instructions
1. Construct a cost-volume-profit chart indicating the break-even sales for last year. Verify your answer, using the break-even equation.
2. Using the cost-volume-profit chart prepared in part (1), determine (a) the income from operations for last year and (b) the maximum income from operations that could have been realized during the year. Verify your answers using the mathematical approach to cost-volume-profit analysis.
3. Construct a cost-volume-profit chart indicating the break-even sales for the current year, assuming that a noncancellable 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 chart prepared in part (3), determine (a) the income from operations if sales total 2,000 units and (b) the maximum income from operations that could be realized during the year. Verify your answers using the mathematical approach to cost-volume-profit analysis.