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Cost Volume Analysis: Formulae

The owner of Old Fashion Berry Pies is planning a new pie line requiring $6,000 monthly for new equipment. Pies cost $2 each to make and sell for $7 each. To break even, 1200 pies must be sold monthly to cover the $6,000 fixed costs. Selling 1000 pies in a month would result in a $1000 loss. To make a $4000 profit, 2000 pies must be sold. If the goal is a $5000 profit selling 2000 pies, the pie price should be $7.50 each.

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78 views1 page

Cost Volume Analysis: Formulae

The owner of Old Fashion Berry Pies is planning a new pie line requiring $6,000 monthly for new equipment. Pies cost $2 each to make and sell for $7 each. To break even, 1200 pies must be sold monthly to cover the $6,000 fixed costs. Selling 1000 pies in a month would result in a $1000 loss. To make a $4000 profit, 2000 pies must be sold. If the goal is a $5000 profit selling 2000 pies, the pie price should be $7.50 each.

Uploaded by

Mahdi Khan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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COST VOLUME ANALYSIS

Q. The owner of old fashion berry pies, Mr. Simon, is planning a new line of pies, which will
require leasing new equipments for a monthly payment of $6,000. Variable costs would be
$2.00 per pie, and pies retail for $7.00 each.

a) How many pies must be sold in order to break even?

b) What would be profit or loss if 1,000 pies sold in a month?

c) How many pies must be sold to realize a profit of $4,000?

d) If 2,000 can be sold. And profit target is $5,000, what price should be charged per
pie?

Formulae:

- Total Cost (TC) = Fixed Cost (FC) + Variable Cost (VC) = FC + Q x v


- Profit, (P) = TR – TC = R x Q – (FC + Q x v) = R x Q – FC – Q x v
- Profit, (P) = Q (R – v) – FC
- Quantity to generate specific profit, Q = (P + FC) / (R – v)
- QBEP = FC / (R – v)

Where, v = Variable cost per unit, R = Price per unit (Also called revenue), Q = Given quantity
of output

Soln: FC = $6000, VC = $2 per pie, Revenue (R) = $7 per pie

a) QBEP = FC / (R – v) = $6000 / ($7 - $2) = 1200 pies/month

b) For Q = 1,000, Profit (P) = Q (R – v) – FC = 1000 ($7-$2) - $6000 = - $1000 (Loss)

c) P = $ 4000, Q = (P + FC) / (R – v) = ($4000 + $6000) / ($7 - $2) = 2000 pies

d) Q = 2000, P = $5000
Profit (P) = Q (R – v) – FC
$ 5000 = 2000 (R - $2) - $6000
R = $7.5

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