Retirement Investors is opening an office in Denver Fixed mo

Retirement Investors is opening an office in Denver. Fixed monthly costs are office rent ($2,500), depreciation on office furniture ($260), utilities (5380 special telephone lines (S500), a connection with an online brokerage service ($640), and the salacy of a financial planner (3,400). Variable costs include payments to the financial planner (10% of revenue, advertising (5% of rev- enue), supplies and postage (2% of revenue, and usage fees for the tele- phone lines and computerized brokerage service (3% of revenue). Requirements 1. Use the contribution margin ratio CVP formula to compute the investment firm\'s breakeven revenue in dollars. If the average trade yields $400 in revenue for Retirement Investors, how many trades must be made to break even? (p. 1060) 2. Use the income statement equation approach to compute dollar reve- nues needed to earn monthly operating income of $3,840. (p. 1058) 3. Graph Retirement Investors\' CVP relationships. Assume that an average trade yields S400 in revenue for the firm. Show the breakeven point, the sales revenue line, the fixed cost line, the total cost line, the operating loss area, the operating income area, and the sales in units (trades) and dollars when monthly operating income of $3,840 is earned. The graph should range from 0 to 40 units. (pp. 1061-1063) 4. Suppose that the average revenue Retirement Investors earns es to $320 per trade. How does this affect the breakeven ecreas point in number of trades? (p. 1060)

Solution

1) Contribution Margin Ratio = Revenues (Assumed to be 100%) - Total Variable Cost (% of revenue)

Total Variable Cost (% of revenue)

= Payments to the Financial Planner+Advertising+Supplies and Postage+Usage fees and brokerage

= 10%+5%+2%+3% = 20%

Contribution Margin Ratio = 100% - 20% = 80%

Breakeven Revenue (in dollars) = Total Fixed Costs/Contribution margin ratio

= ($2,500+$260+$380+$500+$640+$3,400)/80% = $7,680/80% = $9,600

Breakeven trades = Breakeven revenue/Average trade yield = $9,600/$400 = 24 trades

2) Revenue = $100

Total Variable Cost = 20% of revenue = 20%*$400 = $80

Let No. of trades = T

Income Statement Equation

Revenue - Variable Cost - Fixed Cost = Required Operating Income

(Trades*$400) - (Trades*$80) - $7,680 = $3,840

400T - 80T - 7,680 = 3,840

320T = 3,840+7,680

320T = 11,520

T = 11,520/320 = 36 Trades

Required revenue = 36*$400 = $14,400

4) If the average revenue decreases to $320 per trade then the break even point in number of trades will be as follows:-

Breakeven trades = Breakeven revenue/Average trade yield = $9,600/$320 = 30 trades