Current sales revenue is $5,000, total variable costs are $2,000, and total fixed costs are $1,000 (no data on units). a) Compute the contribution margin ratio: CMR = b) Write down the CVP relation (version 2) : profit as a function of sales revenue. Profit = * Revenue - (e. g., if profit = 0.1*Revenue-500, enter 0.1 in the first box and 500 in the second box). c) Predict profit at sales revenue of $10,000: d) Your boss gave you a profit target of $5,000. How much do you need to sell in dollars to meet this target? e) Compute the breakeven revenue: f) When sales revenue increases by $1,000 (from any initial level in the relevant range), profit increases by:

a) CMR = 0.6

b) CVP=0.6-$1,000

c) Profit = $5000

d) Sales $10,000

e) Break-even=$3000

f) Profit increases = $600

Explanation:

a) contribution margin ratio formula is

(Total revenue - variable cost) / Total revenue

= ($5,000-$2,000) / $5,000 = 0.6

b) CVP relation: profit as a function of sales revenue

Version 2:

Profit = CMR * Revenue - FC

where

CMR = contribution margin ratio (contribution per $ of sales)

Revenue = sales revenue in $

FC = fixed costs

That means

Profit = 0.6*Revenue-$1,000

c) profit = 0.6*$10,000-$1,000

profit = $6000-$1,000

profit = $5000

d)

profit = 0.6*Revenue-$1,000

Revenue = (profit + $1,000) / 0.6

Revenue = ($5,000 + $1,000) / 0.6 = 10000

e) Break even is when sales are equal to the cost.

sales revenue=variable costs+fixed costs

sales revenue=$2,000+$1,000

Break-even=$3000

f) profit increases

profit increases = 0.6*Revenue-$1,000

profit increases = 0.6*$1,000=$600