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Cost-Volume-Profit
18 - 41
Ex. 172
The Bradshaw Law Office has the following monthly telephone records and costs:
Calls Costs
2,000 $2,400
1,500 2,000
2,200 2,600
2,500 2,800
2,300 2,700
1,700 2,200
Instructions
Identify the fixed and variable cost elements using the high-low method.
Ex. 173
Determine the missing amounts.
Contribution Contribution
Unit Selling Price Unit Variable Costs Margin Per Unit Margin Ratio
1. $300 $180 A B
2. $600 C $210 D
3. E F $300 30%
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
FOR INSTRUCTOR USE ONLY
18 - 42
Ex. 174
Henderson Farms reports the following results for the month of November:
Sales (10,000 units) $600,000
Variable costs 420,000
Contribution margin 180,000
Fixed costs 110,000
Net income $ 70,000
Management is considering the following independent courses of action to increase net income.
1. Increase selling price by 5% with no change in total variable costs.
2. Reduce variable costs to 66
23
% of sales.
3. Reduce fixed costs by $10,000.
Instructions
If maximizing net income is the objective, which is the best course of action?
Cost-Volume-Profit
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Ex. 175
Marvin Co. had a net loss of $150,000 in 2012 when the selling price per unit was $20, the
variable costs per unit were $14, and the fixed costs were $600,000. Management expects per
unit data and total fixed costs to be the same in 2013. Management has set a goal of earning net
income of $150,000 in 2013.
Instructions
(a) Compute the units sold in 2012.
(b) Compute the number of units that would have to be sold in 2013 to reach management's
desired net income level.
(c) Assume that Marvin Co. sells the same number of units in 2013 as it did in 2012. What would
the selling price have to be in order to reach the target net income? Use the mathematical
equation.
Ex. 176
In the month of September, Matlock Industries sold 800 units of product. The average sales price
was $30. During the month, fixed costs were $6,300 and variable costs were 70% of sales.
Instructions
(a) Determine the contribution margin in dollars, per unit, and as a ratio.
(b) Using the contribution margin technique, compute the break-even point in dollars and in
units.
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
FOR INSTRUCTOR USE ONLY
18 - 44
Ex. 177
In 2012, Stallman Co. had a break-even point of $800,000 based on a selling price of $10 per unit
and fixed costs of $240,000. In 2013, the selling price and variable costs per unit did not change,
but the break-even point increased to $850,000.
Instructions
(a) Compute the variable cost per unit and the contribution margin ratio for 2012.
(b) Using the contribution margin ratio, compute the increase in fixed costs for 2013.
Cost-Volume-Profit
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Ex. 178
The income statement for Bradford Machine Company for 2012 appears below.
BRADFORD MACHINE COMPANY
Income Statement
For the Year Ended December 31, 2012
——————————————————————————————————————————
Sales (40,000 units) ..................................................................................... $1,000,000
Variable expenses ....................................................................................... 700,000
Contribution margin ...................................................................................... 300,000
Fixed expenses ............................................................................................ 360,000
Net income (loss) ......................................................................................... $ (60,000)
Instructions
Answer the following independent questions and show computations using the contribution
margin technique to support your answers:
1. What was the company's break-even point in sales dollars in 2012?
2. How many additional units would the company have had to sell in 2013 in order to earn net
income of $45,000?
3. If the company is able to reduce variable costs by $2.50 per unit in 2013 and other costs and
unit revenues remain unchanged, how many units will the company have to sell in order to
earn a net income of $45,000?
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
FOR INSTRUCTOR USE ONLY
18 - 46
Ex. 179
Webber, Inc. developed the following information for its product:
Per Unit
Sales price $90
Variable cost 63
Contribution margin $27
Total fixed costs $1,080,000
Instructions
Answer the following independent questions and show computations using the contribution
margin technique to support your answers.
1. How many units must be sold to break even?
2. What is the total sales that must be generated for the company to earn a profit of $60,000?
3. If the company is presently selling 45,000 units, but plans to spend an additional $108,000 on
an advertising program, how many additional units must the company sell to earn the same
net income it is now making?
4. Using the original data in the problem, compute a new break-even point in units if the unit
sales price is increased 20%, unit variable cost is increased by 10%, and total fixed costs are
increased by $210,000.
Cost-Volume-Profit
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Ex. 180
Werth & Garza Manufacturing's sales slumped badly in 2013 due to so many people purchasing
gifts online. The company's income statement showed the following results from selling 500,000
units of product: net sales $2,125,000; total costs and expenses $2,500,000; and net loss
$375,000. Costs and expenses consisted of the following:
Total Variable Fixed
Cost of goods sold $2,000,000 $1,300,000 $700,000
Selling expenses 200,000 50,000 150,000
Administrative expenses 300,000 150,000 150,000
$2,500,000 $1,500,000 $1,000,000
Management is considering the following alternative for 2013:
Purchase new automated equipment that will change the proportion between variable and
fixed expenses sold to 45% variable and 55% fixed.
Instructions
(a) Compute the break-even point in dollars for 2013.
(b) Compute the break-even point in dollars under the alternative course of action.
Ex. 181
Henning Co. estimates that variable costs will be 60% of sales and fixed costs will total
$2,160,000. The selling price of the product is $10, and 600,000 units will be sold.
Instructions
Using the mathematical equation,
(a) Compute the break-even point in units and dollars.
(b) Compute the margin of safety in dollars and as a ratio.
(c) Compute net income.
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
FOR INSTRUCTOR USE ONLY
18 - 48
Solution 181 (15–20 min.)
Ex. 182
Norton, Inc. has the following information available for September 2013.
Unit selling price of video game consoles $ 400
Unit variable costs $ 280
Total fixed costs $48,000
Units sold 500
Instructions
(a) Prepare a CVP income statement that shows both total and per unit amounts.
(b) Compute Norton's breakeven in units.
Cost-Volume-Profit
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Solution 182 (Cont.)
Ex. 183
In the month of April, Avante Salon gave 2,500 haircuts, shampoos, and permanents at an
average price of $40. During the month, fixed costs were $21,000 and variable costs were 70% of
sales.
Instructions
(a) Determine the contribution margin in dollars, per unit, and as a ratio.
(b) Using the contribution margin technique, compute the break-even point in dollars and in
units.
(c) Compute the margin of safety dollars and as a ratio.
Ex. 184
Taveras Industries developed the following information for the product it sells:
Sales price $50 per unit
Variable cost of goods sold $28 per unit
Fixed cost of goods sold $650,000
Variable selling expense 10% of sales price
Variable administrative expense $2.00 per unit
Fixed selling expense $400,000
Fixed administrative expense $300,000
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
FOR INSTRUCTOR USE ONLY
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Ex. 184 (cont.)
For the year ended December 31, 2013, Taveras produced and sold 100,000 units of product.
Instructions
(a) Prepare a CVP income statement using the contribution margin format for Taveras
Industries for 2013.
(b) What was the company's break-even point in units in 2013? Use the contribution margin
technique.
(c) What was the company's margin of safety in dollars in 2013?
Cost-Volume-Profit
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Ex. 185
Gordon Manufacturing earned net income of $100,000 during 2012. The company wants to earn
net income of $40,000 more during 2013. The company's fixed costs are expected to be
$126,000, and variable costs are expected to be 30% of sales.
Instructions
(a) Determine the required sales to meet the target net income during 2013.
(b) Fill in the dollar amounts for the summary income statement for 2013 below, based on your
answer to part (a).
Sales revenue
$
Variable costs
Contribution margin
Fixed costs
Net income
$
Ex. 186
Ferris, Inc. has a unit selling price of $500, variable cost per unit of $300, and fixed costs of
$260,000.
Instructions
Compute the break-even point in units and in sales dollars.
