I apparently keep doing these problems wrong and I don't know where or how to fix them. Can someone please explain the steps ?


For the coming year, Viking Products Inc. anticipates a unit selling price of $125, a unit variable cost of $50, and fixed costs of $1,200,000.

1. Compute the anticipated break-even sales (units)
2. Compute the sales (units) required to realize income from operations of $300,000
3. Construct a cost-volume-chart, assuming maximum sales of $40,000 units within the relevant range. From your chart, indicate whether each of the following sales levels would produce a profit, a loss, or a break-even:

40,000 units
$5,000,000
16,000 units
4,000 units
$1,000,000

4. Determine the probable income (loss) from operations if sales total 28,000 units. If required, use the minus sign to indicate a loss.

This is one of those cases in which the mathematical approach becomes obvious when you first approach it intuitively.

Assuming their predictions hold true, every time Viking sells a product it receives 125 from the customer, but incurs a variable cost of 50. So if you consider only the selling price and the unit variable cost (disregard the fixed costs for a moment) the company makes a profit of 125 - 50 = 75 on each unit. This little "profit per unit without considering fixed costs" we'll call UCM (unit contribution margin).

For Q1, in order to exactly break even Viking needs to sell enough units so that the total UCM (75 per unit, times number of units sold) exactly covers the fixed costs of 1.2M.

Q2 is just an extension of the same idea: To hit a profit of 300K Viking must sell enough units so that the total UCM not only covers the fixed costs, but also provides an extra 300K to boot. In other words, now you need enough units sold so that total UCM equals 1.5M.

For the chart requested in Q3 I'd have used a slightly different chart, but since it's asking for a Cost-Volume chart, that's what we'll do.

Set up a basic XY type chart, with the horizontal (bottom) axis representing the number of units sold, and the vertical (left) axis representing the total costs.

Now note that total cost will always equal the fixed costs (which stay at 1.2M regardless of how many units are produced), plus the unit variable cost of 50. If they sell 0 units, their total costs will be 1.2M. If they sell 100 units (for example), total costs will be 1.2M + (100 x 50) = 1,205,000.

Start tackling the above concepts, and some of the ideas will begin becoming apparent to you. I haven't fully discussed the chart yet, but after you've worked with Qs 1 and 2 you'll be in a better position to start seeing some logic in building that chart.

If you reach a sticking point, wrestle with it a bit (learn to be best friends with a calculator, a pencil, and plenty of blank scratch paper), and then post back here if you're not getting anywhere.

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