Question :

Evaluating break-even sales and sales needed to earn a target operating income; graphing CVP relationships; sensitivity analysis National Investor Group is opening an office in Portland. Fixed monthly costs are office rent $8,500, depreciation on office furniture $2,000, utilities $2,100, special telephone lines $1,100, a connection with online brokerage service $2,800, and the salary of a financial planner ($4,500). Variable costs add payments to the financial planner 8% of revenue; advertising 13% of revenue, sup- plies and postage 3% of revenue, and usage fees for the telephone lines and computerized brokerage service 6% of revenue.

Requirements

1. Apply the contribution margin ratio CVP formula to evaluate National's breakeven revenue in dollars. If the average trade leads to $1,000 in revenue for National, how many trades has to be made to break even?

2. Use the income statement equation approach to evaluate the dollar revenues needed to earn a target monthly operating income of $12,600.

3. Graph National's CVP relationships. Consider that an average trade leads to $1,000 in revenue for National. Show the breakeven point, the sales revenue line, the total cost line, the fixed cost line, the operating loss area, the sales in units (trades) and the operating income area and dollars when monthly operating income of $12,600 is earned.

4. Consider that the average revenue National earns increases to $1,200 per trade. Evaluate the new breakeven point in trades. How does this affect the breakeven point?