1. Cost-Volume-Profit Analysis
Johnson, Inc. projects sales for next year will be 60,000 units if the sales price is $28. At this level, unit fixed costs will be $8 while total variable costs will be $720,000. The vice president of marketing advises management to reduce sales price to $26 and to undertake a national advertising campaign costing $10,000.
a. What is the break-even point for the company in terms of dollars and units before giving effect to the vice president's plan?
b. What is the break-even point in units after giving effect to the plan?
c. The vice president believes that his plan will result in a before tax earnings of $56,000. How many units must be sold to reach this earnings level?
d. Using the graph on the next page, create a Cost-Volume-Profit graph for the answer to part (b). Label all parts of the graph and show your work.