Profit-Volume Chart

For the coming year, Loudermilk Inc. anticipates fixed costs of $600,000, a unit variable cost of $75, and a unit selling price of $125. The maximum sales within the relevant range are $2,500,000.

a. Determine the maximum possible operating loss.
$

b. Compute the maximum possible operating profit.
$

c. Construct a profit-volume chart on paper. Indicate whether each of the following levels of sales is in the operating profit area, operating loss area, or at the break-even point

4,800 units
8,000 units
12,000 units
16,000 units
20,000 units
d. Estimate the break-even sales (units) by using the profit-volume chart constructed in part (c).

Explanation:

Answer a.

Maximum Operating Loss will occur when sale is $0.

If Sale is $0, then Variable Cost will also be $0 and Fixed Cost will be $600,000

Operating Profit = Sales – Variable Expenses – Fixed Cost

Operating Profit = - 600,000

Operating Profit = $ - 600,000

Answer b.

Maximum Operating Loss will occur when sale is $2,500,000.

Units Sold = 20,000 ($2,500,000 / 125)

If Sale is $2,500,000, then Variable Cost will also be $1,500,000 ($75×20,000) and Fixed Cost will be $600,000

Operating Profit = Sales – Variable Expenses – Fixed Cost

Operating Profit = 2,500,000 – 1,500,000 - 600,000

Operating Profit = $ 400,000

Answer c.

4,800 Units :

Operating profit = $125×4,800 - $75×4,800 – 600,000

Operating profit = $ - 360,000

8,000 units :

Operating profit = $125×8,000 - $75×8,000 – 600,000

Operating profit = $ - 200,000

12,000 Units :

Operating profit = $125×12,000 - $75×12,000 – 600,000

Operating profit = $ 0

16,000 Units :

Operating profit = $125×16,000 - $75×16,000 – 600,000

Operating profit = $ 200,000

20,000 Units :

Operating profit = $125×20,000 - $75×20,000 – 600,000

Operating profit = $ 400,000

4,800 Units                   Operating Loss Area

8,000 Units                   Operating Loss Area

12,000 Units                   Break-even Point

16,000 Units                   Operating Profit Area

20,000 Units                   Operating Profit Area

Answer d.

Break-even Sales = 12,000 Units as there is neither operating profit nor loss.

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