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Applying CVP to the Aviation Industry

| | |
|Sales (5 aircraft): | |
|Total |$950,000 |
|Per Unit |$190,000 |
|Variable Expenses: | |
|Total |285,000 |
|Per Unit |57,000 |
|Contribution Margin: | |
|Total |665,000 |
|Per Unit |133,000 |
|Fixed Expenses |300,000 |
|Net Operating Income |$365,000 |

Calculate the break-even point for Wolverine Aircraft.

Profit = Total revenue - Total costs = Total revenue - Total variable costs - Total fixed costs

= Selling Price*Quantity – Variable Expenses*Quantity – Fixed Expenses

= Quantity (Selling Price- Variable Expense) – Fixed Expenses

Therefore,

Quantity = [Profit + Fixed Expenses] / [Selling Price – Variable Expenses]

Breakeven Quantity = [Profit + Fixed Expenses] / [Selling Price – Variable Expenses]

Breakeven Quantity = [Profit + Fixed Expenses] / [Contribution Margin]

Profit = 0 at breakeven, therefore

Breakeven Quantity = Fixed Expenses / Contribution Margin

= 300,000/ (133,000)

= 2.26 Units

Breakeven Revenue = Fixed Expenses / Contribution Margin Ratio

CMR = (Selling Price – Variable Expenses) / Selling Price

Therefore,

Breakeven Revenue = Selling Price [Fixed Expenses / Contribution Margin]

= $ 428,571

Assuming Wolverine Aircraft continues to sell five aircraft a month, what is the lowest price at which Wolverine Aircraft can offer its aircraft and still make a profit?

Profit = Quantity (Selling Price-