Financial Management

Assignments week 3
Raymond den Bakker
Liset van den Broek
Toby Fryars
Rozemarijn van Laar
Babette Vesters
3-21 CVP analysis, income taxes
1. How many cars must Brooke Motors sell each month to break even?

Q = Fixed costs/(Price-Variable costs)

F = 48,200+68,000+13,000 = $129,200
P = $27,000
V = 23,000 + 600 = $23,600
Q = 129,200/(27,000-23,600) = 38
Brooke Motors has to sell 38 cars a
month to break even.
1I. Brooke Motors has a target monthly net income of $51,000.
What is its target monthly operating income?
Net profit = Operating profit Taxes
Tax rate is 40%
$51,000 net income (60%) = $85,000 (100%)
operating profit.
Target monthly operating profit is $85,000
How many cars must be sold each month to reach the target monthly net
income of $51,000?

Q = Revenue/(Price-Variable costs)
Q = (85,000+129,200)/(27,000-23,600) = 63
63 cars must be sold each month to reach
the target monthly net income of $51,000
3-28 Sales mix, three products
Bobbies Bagel Shop sells only coffee and bagels. Bobbie estimates that every time she
sells one bagel, she sells four cups of coffee. The budgeted cost information for Bobbies
products for 2011 follows:

I. How many cups of coffee and how many bagels must Bobbie sell in order to break
even assuming the sales mix of four cups of coffee to one bagel, given previously?
Q = Fixed costs/Contribution Margin (= P-V)
F = 5,000+2,000 = $7,000
P = 4 cups of coffee+1 bagel = (4*2.50)+3.75 = $13.75
Vcoffee = 0.50+0.50+0.25 = $1.25
Vbagel = 0.50+1.00+0.25 = $1.75
V4 cups of coffee+1 bagel = (4*1.25)+1.75 = $6.75
Q = 7,000/(13.75-6.75) = 1.000 combinations of 4 cups of coffee and 1 bagel.
Meaning Bobbie has to sell 4.000 cups of coffee and 1.000 bagels to break even.
II. If the sales mix is four cups of coffee to one bagel, how many units of each
product does Bobbie need to sell to earn operating income before tax of
$28,000?

The contribution margin (P-V) of coffee is: 2.50-1.25 = $1.25

The contribution margin (P-V) of a bagel is: 3.75-1.75 = $2.00
For the combination the margin is: (4*1.25)+2.00 = $7.00

Break even point = Fixed costs + Target operating costs /

Contribution margin per combination
F = $7,000
Target operating costs = $ 28,000
Contribution margin/combination = $7.00

Break-even Point = $7,000+$28,000/$7,00 = 5,000

combinations
Meaning that Bobbie has to sell 5,000 bagels as 20,000 cups of
coffee to break even.
III. Assume that Bobbie decides to add the sale of muffins to her product mix. The selling
price for muffins is $3.00 and the related variable costs are $0.75. Assuming a sales mix
of three cups of coffee to two bagels to one muffin, how many units of each product
does Bobbie need to sell in order to break even? Comment on the results.

Contribution margin (P-V) for a muffin is: $3.00 -

$0.75 = $2.25
Break even point = fixed costs/contribution
margin per combination
F = $7,000
Total contribution margin per combination (3 coffee,
2 bagels, 1 muffin) = 3*1.25 + 2*2.00 + 2.25 = $10.00

Break even point = $7.000/$10.00 = 700

combinations
Meaning Bobbie has to sell 2,100 cups of coffee,
1,400 bagels and 700 muffins.