accounting-what-is-the-breakeven-point-in-both-sales-dollars-and-units

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Orange Crush Sports
Forecast Information
Based in Corvallis, Oregon, Orange Crush Sports specializes in the best baseball bats on the planet. The
bat design has been developed over decades of research and application. The bats are made from the
wood of either ash or maples trees. The wood for each bat costs $65, the labor for each bat runs about
$24/hour and each bat requires 2.5 labor hours, and the overhead is allocated at the rate of $6 per directlabor hour. Each bat is sold at a 50% markup on cost, and 5,000 bats are sold each month.
Orange Crush has invested significantly in their facilities and equipment. They pay $24,000 for rent each
month, $30,000 in marketing/advertising, and other fixed overhead items of $135,000 per month. They
also have $19,500 of equipment depreciation each month.
Create a contribution-margin format income statement (for a month or a year) on a per unit, percentage, and
total basis.
Answer the following questions(treat each question independently from each other):

1) What is the breakeven point in both sales dollars and units for Orange Crush Sports? What is the
margin of safety?
2) What is the degree of operating leverage at 5,000 bats per month? What would happen to Net
Operating Income if sales were to increase by 8%?
3) What would happen to Net Operating Income if sales volume increased by 50 units per month?
What would happen to Net Operating Income if sales volume decreased by 500 units per month?
4) What level of sales in dollars and units would be required if Orange Crush needs to generate
$2,000,000 of net operating income for the year? What level of sales in dollars and units would be
required if Orange Crush needs to generate $175,000 per month? Compared to the original
scenario, how would the margin of safety and degree of operating leverage change?
5) If Orange Crush met the sales dollar and unit volume to generate $2,000,000 in net operating
income, what would be their margin of safety and their degree of operating leverage?
6) What would the impact on breakeven and profitability be if Orange Crush replaced some of their
equipment and the monthly depreciation increased $3,000?
7) What would be the effect on breakeven and profitability be if Orange Crush increased the fixed
overhead by the $3,000 in #6 AND added $5 in sales commission per bat AND sales increased by
750 bats? The sales price for each bat does not change.

Complete a CVP Graph for one of the scenarios above.

Orange Crush Sports

Page 1

Contribution Margin Income Statement

1)

2)

3)

4)

5)

6)

7)

CVP Graph

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