
Practical Management Science
6th Edition
ISBN: 9781337406659
Author: WINSTON, Wayne L.
Publisher: Cengage,
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Transcribed Image Text:### Educational Content: Break-Even Analysis and Cost-Volume-Profit Chart
**De Anza Co. Upcoming Year Expectations:**
- **Expected unit selling price:** $125
- **Expected unit variable cost:** $70
- **Expected total fixed costs:** $1,512,500
**Requirements:**
1. **Calculate Break-Even Point:**
- Calculate in both units and dollars.
- Round units to the nearest unit.
- Round dollars to the nearest dollar.
2. **Compute Sales Units for Target Income:**
- Determine the number of sales units required to achieve an operational income of $630,000.
3. **Construct a Cost-Volume-Profit Chart:**
- Assume maximum sales in the range of 40,000 units.
- Use the provided graph template.
- Label the chart with the following components:
- Sales Revenue
- Fixed Costs
- Variable Costs
- Total Costs
- Profit Area
- Loss Area
- Break-Even Point
**Graph Explanation:**
The graph template provided has a grid layout that can be used to plot the cost-volume-profit analysis. Here's how to interpret the graph:
- **X-axis (Horizontal):** Represents the number of units, ranging from 0 to 40,000 units, in increments of 5,000.
- **Y-axis (Vertical):** Needs labeling based on appropriate cost amounts (e.g., dollars).
- **Plotting Instructions:**
- **Sales Revenue Line:** Plot a line representing total sales revenue at different sales volumes.
- **Fixed Costs Line:** Draw a horizontal line displaying fixed costs, which remain constant regardless of units sold.
- **Total Costs Line:** This line should start at the point where fixed costs intersect the Y-axis and increase with variable costs.
- **Break-Even Point:** The point where the Sales Revenue Line intersects the Total Costs Line indicates the break-even point.
- **Profit Area:** The region above the Total Costs Line after the break-even point.
- **Loss Area:** The region below the Total Costs Line before reaching the break-even point.
Use the graph to visually analyze the profit and loss areas relative to sales volume, and to identify the break-even point. This exercise helps in understanding the financial dynamics related to selling products.
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