## Answer for a Question on Drewery Pty Ltd

Drewery Pty Ltd has fixed costs of \$50000 and operating profit of \$17000. If sales increase by 18%, by how much will operating profit increase? What would happen to operating profit if sales decreased by 20%?

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## Objective Type Questions

a) A company sells a product which has a unit sales price of \$5, unit variable cost of \$3 and total fixed costs of \$120,000. The number of units the company must sell to break even is

1. 60,000 units.
2. 24,000 units.
3. 240,000 units.
4. 40,000 units.

b) A company has total fixed costs of \$120,000 and a contribution margin ratio of 20%. The total sales necessary to break even are

1. \$480,000.
2. \$600,000.
3. \$150,000.
4. \$144,000.

c) At the break-even point of 2,500 units, variable costs are \$55,000, and fixed costs are \$32,000. How much is the selling price per unit?

1. \$34.80
2. \$9.20
3. \$12.80
4. \$22.00

## STRATEGIC INVESTMENT DECISIONS: Schweser Satellites Inc.

STRATEGIC INVESTMENT DECISIONS: Schweser Satellites Inc.

Schweser Satellites Inc. Produces satellite earth stations that sell for \$100,000 each. The firm’s fixed cost, F, are \$2 million; 50 earth stations are produced and sold each year; profits total \$500,000; and the firms assets (all equity financed) are \$5million. The firm estimates that it can change its production process, adding \$4million to investment and \$500,000 to fixed operating costs. This change will (1) reduce variable costs per unit by \$10,000 and (2) increase output by 20 units, but (3) sales price on all units will have to be lowered to \$95,000 to permit sales of the additional output. The firm has tax loss carry forwards that cause its tax rate to be zero, its cost equity is 15 percent, and it uses no debt.

1. Should the firm make the change?
2. Would the firms operating leverage increase or decrease if it made the change? What about its breakeven point?
3. Would the new situation expose the firm to more or less business risk than the old one?

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## Write up on Cost, Volume and Profit Analysis Write up on Cost, Volume and Profit Analysis in \$3 Only (Instant Download)

Write a 350 to 700-word paper, using APA guidelines, that addresses the following:
o Explain the components of cost-volume-profit analysis.
o What does each of the components mean?
o Based on the formulas you have reviewed, what happens to contribution margin per unit when unit selling prices increase? Illustrate your explanation with an example from a fictitious company of how an increase in unit selling prices might affect contribution margin.
o When fixed costs decrease, what does this do for sales? Illustrate your explanation with an example from a fictitious company.
o Define contribution ratios.
o What happens to contribution ratios as one of the components changes?

The Components of CVP analysis are:

I) Fixed cost: Fixed costs remain the same even if the volume (i.e., quantity of product manufactured and sold) changes. A cost like factory rent would be an example of a fixed cost. The nature of fixed cost presented in the following figure (a).

II) Variable cost: Variable costs are those costs which have a perfect positive correlation with volume of production/ sales. It means these costs vary in proportion to changes in activity. An example of a variable cost is raw material. If volume of production increases by say 10%, then we can expect raw material costs also to increase by 10%.

III) Contribution:

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## Springfield Express: Various Break-Even Point Calculation Springfield Express is a luxury passenger carrier in Texas. All seats are first class, and the following data are available:

Number of seats per passenger train car 90
Average load factor (percentage of seats filled)        70%
Average full passenger fare     \$160
Average variable cost per passenger     \$70
Fixed operating cost per month  \$3,150,000
What is the break-even point in passengers and revenues per month?
What is the break-even point in number of passenger train cars per month?
If Springfield Express raises its average passenger fare to \$ 190, it is estimated that the average load factor will decrease to 60 percent. What will be the monthly break-even point in number of passenger cars?
(Refer to original data.) Fuel cost is a significant variable cost to any railway. If crude oil increases by \$ 20 per barrel, it is estimated that variable cost per passenger will rise to \$ 90. What will be the new break-even point in passengers and in number of passenger train cars?
Springfield Express has experienced an increase in variable cost per passenger to \$ 85 and an increase in total fixed cost to \$ 3,600,000. The company has decided to raise the average fare to \$ 205. If the tax rate is 30 percent, how many passengers per month are needed to generate an after-tax profit of \$ 750,000?