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. Required: 1. Construct a cost-volume-profit chart on your own paper, indicating the break-even sales for last year. Break-even sales (dollars) Break-even sales (units) 2. Using the cost-volume-profit chart prepared in part (1), determine (a) the income from operations for last year and (b) the maximum income from operations that could have been realized during the year. Income from operations Maximum income from operations 3. Construct a cost-volume-profit chart (on your own paper) indicating the break-even sales for the current year, assuming that a noncancelable contract is signed for the additional billboard advertising. No changes are expected in the unit selling price or other costs. Dollars Units

1. Break-even sales (dollars)$ 250,000

Break-even sales (units)1000

2. Income from operations$ 75,000

Maximum income from operations$ 112,500

3. Break-even sales (dollars) $ 362,500

Break-even sales (units)1450

4. Income from operations at 2,000 units $41,250

Maximum income from operations$ 78,750

Explanation:

1. Calculation to Construct a cost-volume-profit chart , indicating the break-even sales for last year.

First step is to calculate the Contribution margin using this formula

Contribution margin = unit selling price - variable costper unit

Let plug in the formula

Contribution margin =250-175

Contribution margin = 75

Second step is to calculate the Contribution margin Ratio using this formula

Contribution margin Ratio = Contribution margin /unit selling price

Let plug in the formula

Contribution margin Ratio = 75/250

Contribution margin Ratio = 30%

Now let calculate the Break-even sales (dollars) using this formula

Break-even sales (dollars) = fixed costs /Contribution margin Ratio

Let plug in the formula

Break-even sales (dollars) = 75,000/30%

Break-even sales (dollars) = $250,000

Therefore Break-even sales (dollars) is $250,000

Calculation for Break-even sales (units) using this formula

Break-even sales (units) = fixed costs /Contribution margin

Let plug in the formula

Break-even sales (units) = 75,000/75

Break-even sales (units) = 1000

Therefore Break-even sales (units) is 1000

2a. Calculation to determine the income from operations for last year Using the cost-volume-profit chart prepared in part (1)

First step is to calculate the No of Unit sold using this formula

No of Unit sold = Sale /Sale Price

Let plug in the formula

No of Unit sold = 500000/250

No of Unit sold= 2000

Now let calculate the Income from operations for last year Using this formula

Income from operations for last year = Contribution margin*No of Unit sold - Fixed cost

Let plug in the formula

Income from operations for last year = 75*2000 - 75000

Income from operations for last year = $ 75,000

Therefore Income from operations for last year is $75,000

2b. Calculation to determine the maximum income from operations that could have been realized during the year Using the cost-volume-profit chart prepared in part (1)

Using this formula

Maximum income from operations = Contribution margin*No of Maximum Unit can be sold - Fixed cost

Let plug in the formula

Maximum income from operations = 75*2500 - 75000

Maximum income from operations = $ 112,500

Therefore Maximum income from operations is $ 112,500

3. Calculation to Construct a cost-volume-profit chart indicating the break-even sales for the current year

First step is to calculate the Contribution margin using this formula

Contribution margin = unit selling price - variable costper unit

Let plug in the formula

Contribution margin =250-175

Contribution margin = 75

Second step is to calculate the Contribution margin Ratio using this formula

Contribution margin Ratio = Contribution margin /unit selling price

Let plug in the formula

Contribution margin Ratio = 75/250

Contribution margin Ratio = 30%

Third step is to calculate the Total fixed costs

Total fixed costs = 75,000+33,750

Total fixed costs = $108,750

Now let calculate the Break-even sales (dollars) using this formula

Break-even sales (dollars) = Fixed costs /Contribution margin Ratio

Let plug in the formula

Break-even sales (dollars) = 108,750/30%

Break-even sales (dollars) =$362,500

Therefore the Break-even sales (dollars) is $362,500

Calculation for the Break-even sales (units) using this formula

Let plug in the formula

Break-even sales (units) = Fixed costs /Contribution margin

Break-even sales (units) = 108,750/75

Break-even sales (units) = 1450

Therefore the Break-even sales (units) is 1450

4a. Calculation to determine (a) the income from operations if sales total 2,000 units Using the cost-volume-profit chart prepared in part (3)

First step is to calculate the No of Unit sold Using this formula

No of Unit sold = Sale /Sale Price

Let plug in the formula

No of Unit sold = 500,000/250

No of Unit sold 2000

Now let calculate the Income from operations for last year using this formula

Income from operations for last year = Contribution margin*No of Unit sold - Fixed cost

Let plug in the formula

Income from operations for last year = 75*2000 - 108,750

Income from operations for last year = $ 41,250

Therefore Income from operations for last year is $41,250

4b. Calculation to determine (b) the maximum income from operations that could be realized during the year Using the cost-volume-profit chart prepared in part (3)

Using this formula

Maximum income from operations = Contribution margin*No of Maximum Unit can be sold - Fixed cost

Let plug in the formula

Maximum income from operations = 75*2500 -108,750

Maximum income from operations = $ 78,750

Therefore Maximum income from operations is $ 78,750

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