Reference no: EM132716544

Problem - 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 operating income for last year. Verify your answers using the mathematical approach to cost-volume-profit analysis.

(b) the maximum operating income 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 operating income if sales total 2,000 units. Verify your answers using the mathematical approach to cost-volume-profit analysis.

(b) the maximum operating income that could be realized during the year. Verify your answers using the mathematical approach to cost-volume-profit analysis.