Sheridan Shacks makes portable garden sheds that sell for ...

Sheridan Shacks makes portable garden sheds that sell for $$\$ 1,800$$ each. Costs are as follows: $$ \begin{array}{lcc} & \text { Per Unit } & \text { Total } \\ \hline \text { Direct material } & \$ 800 & \\ \text { Direct labor } & 90 & \\ \text { Variable production overhead } & 60 & \\ \text { Variable selling and administrative cost } & 50 & \\ \text { Fixed production overhead } & & \$ 200,000 \\ \text { Fixed selling and administrative } & & 60,000 \end{array} $$ a. How many garden sheds must the company sell to break even? b. If Sheridan Shacks' management wants to earn a pre-tax profit of $$\$ 200,000$$, how many garden sheds must it sell? c. If Sheridan Shacks' management wants to earn a pre-tax profit of $$\$ 280,000$$, how many garden sheds must it sell?

Sheridan Shacks makes portable garden sheds that sell for $$\$ 1,800$$ each. Costs are as follows:
$$
\begin{array}{lcc}
& \text { Per Unit } & \text { Total } \\
\hline \text { Direct material } & \$ 800 & \\
\text { Direct labor } & 90 & \\
\text { Variable production overhead } & 60 & \\
\text { Variable selling and administrative cost } & 50 & \\
\text { Fixed production overhead } & & \$ 200,000 \\
\text { Fixed selling and administrative } & & 60,000
\end{array}
$$
a. How many garden sheds must the company sell to break even?
b. If Sheridan Shacks' management wants to earn a pre-tax profit of $$\$ 200,000$$, how many garden sheds must it sell?
c. If Sheridan Shacks' management wants to earn a pre-tax profit of $$\$ 280,000$$, how many garden sheds must it sell?

Key Concepts

Cost-Volume-Profit (CVP) Analysis

Cost-Volume-Profit analysis examines the interrelationships among cost, volume, and profit. It helps management understand how changes in costs and sales volume affect profit and assists in making decisions regarding pricing, product mix, and cost control, making it a vital tool in managerial accounting.

Break-even Analysis

Break-even analysis determines the point where total revenues equal total costs, meaning there is no profit or loss. This concept helps businesses understand the minimum level of sales required to cover all fixed and variable costs, and it is fundamental in decision-making and financial planning.

Fixed Costs

Fixed costs are expenses that remain constant regardless of the level of production or sales volume, such as rent, salaries, or depreciation. They must be covered by the contribution margin and play a critical role in determining the break-even point and overall profitability.

Variable Costs

Variable costs change in direct proportion to the level of production or sales. Examples include costs like direct materials and direct labor. Knowing the variable cost per unit helps in calculating the total variable costs and is essential for determining the contribution margin per unit.

Contribution Margin

The contribution margin is the difference between the sales price per unit and the variable cost per unit. It represents the portion of sales revenue available to cover fixed costs and, after covering fixed costs, to generate profit. It is a key figure in break-even and target profit analyses.

Target Profit Analysis

Target profit analysis involves computing the number of units that must be sold to achieve a specific profit target in addition to covering fixed costs. By adding the desired profit to fixed costs and dividing by the contribution margin per unit, managers can plan sales strategies to meet profit goals.

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