c.
Linear analysis likely overstates total costs at high activity levels.
d.
Linear analysis of high activity levels fails to capture the fact that total fixed costs
decrease as more units are produced.
49. Information about two products is as follows:
Product C
Product D
Selling price per unit
£20
£25
Variable costs per unit
_11
_18
Contribution margin per unit
£ 9
£ 7
The firm expects 60 per cent of its sales (in units) to be Product C (a sales mix of 6:4). Fixed costs are
expected to be £82,000. Break-even in units would be
Product C Product D
a.
1,200 units 800 units
b.
2,460 units 1,312 units
c.
18,000 units 14,000 units
d.
6,000 units 4,000 units
Mix
£9
£7
Product C: 1,000 packages 6 units per package =
Product D: 1,000 packages 4 units per package =
Total
50. The following information is provided:
Sales price per unit
£70
Variable cost per unit
£45
Fixed costs
£50,000
Expected sales
5,000 units
The margin of safety is
a.
2,000 units.
b.
3,000 units.
c.
5,000 units.
d.
7,000 units.
SHORT ANSWER
1. Describe the cost-volume-profit analysis. Discuss how this analysis can be useful.
2. Explain the limitation of basic cost-volume-profit analysis as it relates to an organization’s sales mix.
PROBLEM
1. The Valdez Mug Company manufactures plastic mugs that sell to wholesalers for £4.00 each. Variable
and fixed costs are as follows:
Variable Costs per Unit
Fixed Costs per Month
Manufacturing:
Direct materials
£0.60
Factory overhead
£ 8,000
Direct labour
0.70
Selling and adm.
__6,000
Factory overhead
_0.50
£1.80
Total
£14,000
Selling and adm.
_0.40
Total
£2.20
Valdez Mug produced and sold 10,000 cups during April 2011. There were no beginning or ending
inventories.
Required:
a.
Determine Valdez Mug’s monthly break-even point in units.
b.
If monthly sales increase by 500 cups, what will be the change in monthly profits?
c.
If Valdez Mug is now subject to an income tax of 40 per cent, what pound sales volume is
required to earn a monthly after-tax net income of £12,000?
2. At a price of £32, the estimated monthly sales of a product are 12,000 units. Variable costs include
manufacturing costs of £18 and distribution costs of £6. Fixed costs are £40,000 per month.
Required:
Determine each of the following values:
a.
Unit contribution margin
b.
Monthly break-even unit sales volume
c.
Before-tax monthly profit
d.
Monthly margin of safety in units
3. Xi Company is the exclusive Iowa distributor of lawn mowers for a small manufacturing company. It
sells only one model at £600 per unit and for which Xi pays £250. Xi’s other variable costs amount to
£50 per unit. Fixed costs are £2,000. In October, Xi sold 15 lawn mowers and it sold 20 in November.
Required:
Calculate the following values:
a.
Monthly break-even point in monetary sales
b.
Monthly break-even point in units
c.
Monthly income for October
d.
Monthly income for November
e.
Margin of safety for October
a.
£2,000/[(600 – 250 – 50)/600] = £4,000
b.
£2,000/(600 – 250 – 50) = 6.67 or 7 mowers
(15 £300) – £2,000 = £2,500
(20 £300) – £2,000 = £4,000
e.
£9,000 – £4,000 = £5,000, or 9 mowers
4. The Young Manufacturing Company produces the following three products:
Hammers
Screwdrivers
Saws
Selling price per unit
£40
£16
£50
Variable costs per unit
_28
_12
_30
Contribution per unit
£12
£ 4
£20
Fixed costs are £76,000 per year.
Fifty per cent of all sales in units are hammers, 30 per cent are screwdrivers, and 20 per cent are saws.
Required:
Calculate the following values:
a.
Break-even point in total units
b.
Number of hammers that will be sold at break-even
c.
Total sales in units to obtain a before-tax profit of £19,000
Ave. CM/unit = (£12 0.5) + (£4 0.3) + (£20 0.2) = £11.20
£76,000/£11.20 = 6,786 units of hammers, screwdrivers, and saws
Monthly break-even sales volume
_5,000 units
Monthly margin of safety
7,000 units
5. Zachary Plumbing Company has the following information for 20011:
Selling price per unit
£10
Variable costs per unit
£7
Fixed costs
£1,500
Required:
Prepare a profit-volume graph identifying the following items:
a.
Profit line
b.
Intersection of profit line and vertical axis
c.
Break-even point
d.
Profit area
e.
Loss area
6. For each of the following situations, draw a graph that best describes the cost behaviour pattern. The
vertical axis represents costs, and the horizontal axis represents volume.
a.
Direct materials per unit
b.
Depreciation expense on a building per unit
c.
An employee paid £50 per hour with a guaranteed salary of £1,000 per week
d.
A consultant paid £100 per hour with a maximum fee of £2,000
e.
Salaries of teachers where each teacher can handle a maximum of 15 students
c.
(£76,000 + £19,000)/£11.20 = 8,482 units
7. Enola, SA., manufactures a product that sells for £400. The variable costs per unit are as follows:
Direct materials
£100
Direct labour
80
Variable manufacturing overhead
50
During the year, the budgeted fixed manufacturing overhead is estimated to be £500,000, and budgeted
fixed selling and administrative costs are expected to be £250,000. Variable selling costs are £20 per
unit.
Required:
a.
Determine the break-even point in units.
b.
Determine the number of units that must be sold to earn £300,000 in profit before taxes.
c.
Determine the number of units that must be sold to generate an after-tax profit of £90,000
if there is a 40 per cent tax rate.
5,000 units
(£500,000 + £250,000)/[£400 – (£100 + £80 + £50 + £20)]
b.
7,000 units
(£750,000 + £300,000)/(£400 – £250)
6,000 units
[£750,000 + (£90,000/.6)]/(£400 – £250)
8. Chopra Company developed the following income statement using a contribution margin approach:
CHOPRA COMPANY
PROJECTED INCOME STATEMENT
FOR THE CURRENT YEAR ENDING DECEMBER 31
Sales
£240,000
Less variable costs:
Variable manufacturing costs
£60,000
Variable selling costs
_36,000
Total variable costs
__96,000
Contribution margin
£144,000
Less fixed costs:
Fixed manufacturing costs
£85,000
Fixed selling and administrative costs
_35,000
Total fixed costs
_120,000
Operating income
£ 24,000
The projected income statement was based on sales of 12,000 units. Chopra has the capacity to
produce 15,000 units during the year.
Required:
a.
Determine the break-even point in units.
b.
The sales manager believes the company could increase sales by 1,000 units if advertising
expenditures were increased by £15,000. Determine the effect on income if the company
increases advertising expenditures.
c.
What is the maximum amount the company could pay for advertising if the advertising would
increase sales by 1,000 units?
9. The Millennium Company produces two types of products: Quality and Superior. The company
expects to sell 1,200 units of Quality and 800 units of Superior.
A projected income statement for the firm as a whole follows:
Sales
£400,000
Less: Variable costs
_100,000
Contribution margin
£300,000
Less: Fixed costs
__75,000
Operating income
£225,000
Required:
a.
Determine the break-even point in terms of sales revenue.
b.
Determine the sales revenue necessary to generate a before-tax profit of £300,000.
c.
Determine the sales revenue necessary to generate an after-tax profit of £270,000 if the
tax rate is 40 per cent.
a.
£100,000
£75,000/(£300,000/£400,000)
b.
£500,000
(£75,000 + £300,000)/75%
c.
£700,000
[£75,000 + (£270,000/.6)]/75%
a.
10,000 units
£120,000/(£20 – £8)
(1,000 £12) – £15,000
1,000 £12
10. Anthony Industries developed the following income statement using a contribution margin approach:
ANTHONY INDUSTRIES
PROJECTED INCOME STATEMENT
FOR THE CURRENT YEAR ENDING DECEMBER 31
Sales
£750,000
Less variable costs:
Variable manufacturing costs
£280,000
Variable selling costs
_120,000
Total variable costs
_400,000
Contribution margin
£350,000
Less fixed costs:
Fixed manufacturing costs
£130,000
Fixed selling and administrative costs
__80,000
Total fixed costs
_210,000
Operating income
£140,000
The projected income statement was based on sales of 100,000 units. Anthony has the capacity to
produce 120,000 units during the year.
Required:
a.
Determine the break-even point in units.
b.
The sales manager believes the company could increase sales by 8,000 units if
advertising expenditures were increased by £22,000. Determine the effect on income if
the company increases advertising expenditures.
c.
What is the maximum amount the company could pay for advertising if the advertising
would increase sales by 8,000 units?
a.
60,000 units
£210,000/(£7.50 – £4.00)
8,000 £3.50
11. The Barnes Company manufactures two products. Information about the two product lines is as
follows:
Product K
Product Y
Selling price per unit
£80
£30
Variable costs per unit
_45
_15
Contribution margin per unit
£35
£15
The company expects fixed costs to be £189,000. The firm expects 60 per cent of its sales (in units) to
be Product K (a sales mix of 3:2).
Required:
a.
Calculate the contribution margin per package.
b.
Determine the break-even point in units for Product K and Product Y.
c.
Determine the level of sales (in pounds) necessary to generate a before-tax profit of
£135,000.
12. Supply the missing data in each independent case.
Case 1
Case 2
Case 3
Case 4
Case 5
Unit sales
700
300
?
?
?
Sales revenue
£42,000
?
?
£58,000
£40,000
Variable cost per unit
£ 45
£ 1
£ 15
?
?
Contribution Margin
?
£1,200
?
?
£10,000
Fixed costs
£ 7,500
?
£60,000
?
?
Operating income
?
£ 100
?
?
?
Unit contribution margin
?
?
?
£ 1
£ 2
Break-even point (units)
?
?
5,000
30,000
?
Margin of Safety
?
?
1,000
-1,000
600
Case 1
Case 2
Case 3
Case 4
Case 5
Unit sales
700
Sales revenue
£42,000
£58,000
£40,000
Variable cost per unit
£ 45
£ 1
£ 15
Contribution Margin
£1,200
£10,000
£135
Contribution