Problem: Break-Even Sales and Cost-Volume-Profit Chart

Last year, Gelbin Inc. had sales of $225,000, based on a unit selling price of $100. The variable cost per unit was $80, and fixed costs were $31,200. The maximum sales within Gelbin's relevant range are 2,800 units. Gelbin is considering a proposal to spend an additional $8,000 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. In your computations, do not round the contribution margin percentage.

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. In your computations, do not round the contribution margin percentage.

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. In your computations, do not round the contribution margin percentage.

Dollars

Units

4. Using the cost-volume-profit chart prepared in part (3), determine

(a) the income from operations if sales total 2,250 units and

(b) the maximum income from operations that could be realized during the year. In your computations, do not round the contribution margin percentage.

Income from operations at 2,250 units

Maximum income from operations