Chapter 21 Cost-Volume-Profit Analysis

Demonstration Problem

Trimble Company sells an electronic toy for $40. The variable cost is $24 per unit and the fixed cost is $32,000 per year. Management is considering the following changes:

Alternative #1

Lease a new packaging machine for $4,000 per year, which will reduce variable cost by $1 per unit.

Alternative #2

Increase selling price 10 percent to counteract an expected 25 percent increase in fixed cost.

Alternative #3

Reduce fixed cost by 25 percent by moving to a lower rent location. This would have the effect of increasing variable costs by 10 percent.

Required:

Consider and answer each of the following questions independently:
Round calculations to the nearest unit

(a)Determine the current break-even point in units and dollars.

(b)Determine the expected profit assuming alternative #1 and sales of 3,200 units.

(c) Determine the break-even point in units and dollars assuming alternative #2.

(d)Determine the break-even point required in units and dollars assuming alternative #3.

(e) Determine the volume of sales required to earn $23,600 assuming alternative #3.