d.
20,317 units
80. Poole Products Inc. has the following product information available:
Sales price
$25 per unit
Variable costs
$10 per unit
Fixed costs
$36,000
If Poole is in the 40% tax bracket, how many units need to be sold in order to earn an after-tax target
profit of $249,000?
a.
30,067 units
b.
12,360 units
c.
27,667 units
d.
31,667 units
81. LeBlanc Manufacturing has the following product information available:
Sales price
$60 per unit
Variable costs
$20 per unit
Fixed costs
$50,000
If LeBlanc is in the 30% tax bracket, how many units need to be sold in order to earn an after-tax
target profit of $490,000?
a.
17,500 units
b.
18,750 units
c.
19,286 units
d.
9,450 units
82. Blinson Manufacturing has the following product information available:
Sales price
$75 per unit
Variable costs
$25 per unit
Before-tax profit
$180,000
If Blinson has calculated that it needs to sell 20,000 units in order to earn an after-tax target profit of
$126,000, what were Blinson’s fixed costs?
a.
$54,000
b.
$1,180,000
c.
$820,000
d.
$874,000
83. Howard Enterprises has a contribution margin ratio of 65% and fixed costs of $15,000. What would
sales have to be in order for Howard to earn an after-tax profit of $50,000? The company is in the 40%
tax bracket.
a.
$23,077
b.
$100,000
c.
$151,282
d.
$75,000
84. Which of the following is an assumption of CVP analysis?
a.
Inventory levels increase at a constant rate.
b.
Costs are linear throughout the relevant range.
c.
The number of units sold is constant.
d.
Fixed costs increase as production increases.
85. Which of the following is not an assumption of CVP analysis?
a.
Selling prices change only at the end of the month.
b.
Costs can be thought of as fitting a linear function within the relevant range.
c.
Sales mix is constant.
d.
Inventory levels do not change.
86. One of the major assumptions used in CVP analysis is:
a.
that number of units sold each year remains the same.
b.
that in a multi-product environment, all products are assumed to be sold in identical
proportion to total sales.
c.
that the tax rate is not known.
d.
that the sales price of a product will not change as volume changes.
87. Cost structure refers to the relative proportion of:
a.
variable costs to contribution margin.
b.
total costs to sales.
c.
fixed costs to variable costs.
d.
sales price per unit to variable costs per unit.
88. Operating leverage measures:
a.
how sensitive profit is to a change in fixed costs.
b.
how sensitive profit is to a change in sales volume.
c.
how sensitive profit is to a change in sales price per unit.
d.
how sensitive profit is to a change in tax rates.
89. Carson Cabana’s Inc. has the following information available regarding last year’s operations:
Sales
$1,500,000
Variable costs
600,000
Contribution margin
900,000
Fixed costs
300,000
Net operating income
$
600,000
The company’s operating leverage was:
a.
1.50.
b.
0.67.
c.
2.50.
d.
0.60.
90. Hillary’s Restaurant has the following information available regarding last year’s operations:
Sales
$900,000
Variable costs
300,000
Contribution margin
600,000
Fixed costs
175,000
Net operating income
$425,000
The company’s operating leverage was:
a.
0.71.
b.
1.50.
c.
2.12.
d.
1.41.
91. Which of the following statements is most likely true if Red Inc. has an operating leverage of 2.0 while
Blue Corp. has an operating leverage of 1.4?
a.
Red Inc. is selling its products for a higher sales price than Blue Corp.
b.
Red Inc.’s net operating income will be less sensitive to a change in sale volume than Blue
Corp.
c.
Blue Corp.’s fixed costs in relation to variable costs are lower than Red Inc.’s.
d.
Blue Corp. has a lower contribution margin per unit than Red Inc.
92. A company with a high level of operating leverage will:
a.
experience fewer fluctuations in income as sales fluctuate than a company with a low level
of operating leverage.
b.
experience wider fluctuations in income as sales fluctuate than a company with a low level
of operating leverage.
c.
earn higher profits than a company with a low level of operating leverage.
d.
earn lower profits than a company with a low level of operating leverage.
SHORT ANSWER
1. Your boss read a recent magazine article about income statements, but he was unclear about the
differences between a traditional income statement and a contribution margin income statement.
Explain the difference by: a) presenting a sample format for each statement, b) describing the focus of
each statement, and c) discussing how and by whom each statement is used.
Sales
Less: Variable costs
Contribution margin
Less: Fixed costs
Net operating income
fixed costs).
decision-making, and used by internal parties (ex. management).
2. For each of the following statements, fill in the blank with either the word increase, decrease, or stay
the same.
a.
All else being equal, as the sales price per unit increases, the contribution margin per unit
will _________________.
b.
All else being equal, as variable costs per unit increase, the contribution margin per unit
will _________________.
c.
All else being equal, as total fixed costs increase, the contribution margin per unit will
________________.
d.
All else being equal, as sales volume increases, total fixed costs will _______________.
e.
All else being equal, as sales volume increases, total variable costs will _____________.
3. How is contribution margin ratio computed?
4. When using CVP analysis, why is it important to consider qualitative factors? Provide one example of
a qualitative factor and explain how it might affect a decision.
5. What is meant by the term “break-even point” and how is it computed in a single versus a
multi-product environment?
a.
increase
b.
decrease
c.
stay the same
d.
stay the same
e.
increase
6. All else being equal, explain how each of the following independent changes will affect a company’s
break-even point in terms of the number of units that need to be sold.
a.
Fixed costs increase
b.
Sales price per unit increases
c.
Variable costs per unit increase
d.
Fixed costs decrease
e.
Variable costs per unit decrease
a.
Increase
b.
Decrease
c.
Increase
d.
Decrease
e.
Decrease
7. In 2011 Dillon Inc. had a total contribution margin of $100,000 and net operating income of $60,000.
For the upcoming year, the company would like to earn a target profit of $80,000. Assuming sales
volume is expected to be the same in the upcoming year as it was in the past year, give three separate
options the company could implement in order to achieve their target profit in the upcoming year.
a.
increase the sales price per unit.
b.
decrease the variable costs per unit.
c.
decrease fixed costs.
8. When and why should income taxes be considered in profit planning? What is the impact on target
profit when income taxes are taken into account?
9. In a multi-product environment, what are the four assumptions used in CVP analysis?
a.
b.
c.
d.
a.
The selling price is constant throughout the entire relevant range.
b.
Costs are linear throughout the relevant range.
c.
In a multi-product environment, the sales mix is constant.
d.
Inventory levels are held constant (ex. number of units produced and sold are the same)
10. What does operating leverage reveal about a company?
PROBLEM
1. Lowman Inc. sells a product with a sales price of $25 per unit, variable costs of $10 per unit, and total
fixed costs of $100,000. Lowman is looking into implementing an aggressive advertising campaign
that will cost $45,000.
By what amount do sales dollars need to at least increase by in order for the company’s overall profits
to not decrease by having the advertising campaign?
2. Sweet Baby Inc. produces two types of children’s specialty bed products − Baby Cribs and Toddler
Beds. The following information is available related to each product:
Baby Crib
Toddler Bed
Sales price per unit
$600
$500
Variable costs per unit
150
200
Baby cribs account for 60% of total product sales and toddler beds account for the rest. Sweet Baby’s
total fixed costs are $1,170,000.
Required:
A.
How many total children’s bed products does the company need to produce and sell in
order to break even?
B.
How many baby cribs need to be sold in order to break even?
A.
The total number of bed products that need to be produced and sold in order to break even
is 3,000 calculated as follows:
Break-even units in a multiproduct environment = FC Weighted-average CM per unit
Break-even units in a multiproduct environment = $1,170,000 390 = 3,000 total units
Baby crib weighted contribution margin = $450 60% = $270, and
Toddler bed weighted contribution margin = $300 40% = $120
Therefore, total weighted average contribution margin = $390 ($270 + 120)
3. Hugo Inc. sells three sizes of umbrellas: small, medium, and large. The company has annual fixed
costs of $390,400. For the past several years, 20% of Hugo’s sales have been the small and large
umbrellas each and with the remaining 60% being the medium size. Hugo does not expect this to
change in the upcoming year.
The following information is also available for each of the umbrellas:
Small
Medium
Large
Sales price per unit
$8
$14
$35
Variable costs per unit
3
4
9
Required:
A.
How many total umbrellas does the company need to produce and sell in order to break
even?
B.
How many medium umbrellas need to be sold in order to break even?
C.
If Hugo experiences a higher demand of large umbrellas than it anticipated, will the
break-even point increase, decrease, or stay the same? Why?
4. Greenwood Manufacturing has the following product information:
A.
The total number of umbrellas that need to be produced and sold in order to break even is
Break-even units in a multiproduct environment = FC Weighted-average CM per unit
Break-even units in a multiproduct environment = $390,400 12.20 = 32,000 total units
Small umbrella weighted contribution margin = $5 20% = $1, and
Medium umbrella weighted contribution margin = $10 60% = $6, and
Large umbrella weighted contribution margin = $26 20% = $5.20
Therefore, total weighted average contribution margin = $12.20 ($1 + 6 + 5.20)
break even.
Sales price
$60.00 per unit
Variable costs
$28.00 per unit
Fixed costs
$60,800
Required: Calculate the following based on the above information:
A.
What is the break-even point in units?
B.
What is the break-even point in sales dollars?
C.
How many units need to be sold in order for the company to earn a target-profit of
$500,000? (ignore taxes)
5. Sienna Manufacturing has the following product information:
Sales price
$20.00 per unit
Variable costs
$8.00 per unit
Fixed costs
$45,000
Required: Calculate the following based on the above information:
A.
What is the break-even point in units?
B.
What is the break-even point in sales dollars?
C.
How many units need to be sold in order for the company to earn a target-profit of
$499,800? (ignore taxes)
Break-even units = $45,000 12.00 = 3,750 units
Contribution margin ratio = $12.00 20.00 = 60%
Break-even sales dollars = $45,000 60% = $75,000
Sales volume to reach a target profit = ($45,000 + $499,800) $12.00 = 45,400 units
Break-even units = $60,800 32.00 = 1,900 units
Contribution margin ratio = $32.00 60.00 = 53.33%
Break-even sales dollars = $60,800 53.33% = $114,000
Sales volume to reach a target profit = ($60,800 + 500,000) 32.00 = 17,525 units
6. Eason Products has the following product information available:
Sales price
$35 per unit
Variable costs
$10 per unit
Fixed costs
$90,000
Required: If Eason is in the 40% tax bracket, how many units need to be sold in order to earn an
after-tax target profit of $450,000?
7. Carson Products has the following product information available:
Sales price
$20 per unit
Variable costs
$4 per unit
Fixed costs
$50,000
Required: If Carson is in the 40% tax bracket, how many units need to be sold in order to earn an
after-tax target profit of $300,000?
8. The following information is available for the Blue and Red Companies for 2011
Blue
Red
Sales (200,000 units)
$1,800,000
$1,800,000
Variable costs
800,000
1,200,000
Contribution margin
1,000,000
600,000
Fixed costs
500,000
100,000
Net operating income
$
500,000
$
500,000
Required:
A.
Compute the operating leverage for each company and explain what operating leverage
measures.
B.
If both companies experience a 20% increase in sales volume, will they continue to have
the same net operating income? Why or why not? Explain your answer with respect to
each company’s operating leverage.
9. Chapman Products produces a unique item with the following information:
Sales price
$125 per unit
Variable costs
$50 per unit
Fixed costs
$70,000
Units produced and sold
6,000
Required: Calculate the following based on the above information:
A.
Net operating income
B.
Contribution margin per unit
C.
Contribution margin ratio
D.
If Chapman sells 500 more additional units, by what amount will net operating income
increase?
E.
If Chapman has an additional $25,000 in sales, by what amount will net operating income
increase?
change in sales.
Blue Company’s operating leverage = $1,000,000 $500,000 = 2
Red Company’s operating leverage = $600,000 $500,000 = 1.2
10. Vincent Products manufactures a particular item with the following information:
Sales price
$60 per unit
Variable costs
$18 per unit
Fixed costs
$7 per unit
Units produced and sold
12,000
Required: Calculate the following based on the above information:
A.
Contribution margin per unit
B.
Contribution margin ratio
C.
Break-even point in units
D.
Break-even point in sales dollars
Contribution margin per unit = $60 − 18 = $42
Contribution margin ratio = $42 60 = 70%
Break-even point in units = Fixed costs CM per unit = $84,000 42 = 2,000 units
(note: Fixed costs = 12,000 units $7 = $84,000)
Break-even point in sales dollars = Fixed costs CM ratio = $84,000 70% = $120,000
Sales (6,000 units $125)
Less: Variable costs (6,000 units $50)
Contribution margin
Less: Fixed costs
Net operating income
Contribution margin per unit: $125 − 50 = $75
C.
Contribution margin ratio = $75 / 125 = 60%
Net operating income will increase by $15,000 = ($25,000 60%)
11. Trenton Inc. manufactures a single product. The following information is available for 2011
Number of units produced and sold
21,000 units
Sales price per unit
$18 per unit
Variable manufacturing costs
$7 per unit
Variable selling and administrative costs
$1.5 per unit
Total fixed manufacturing costs
$15,000
Total fixed selling and administrative costs
$10,000
Required:
A.
Prepare a traditional format income statement (ignore taxes).
B.
Prepare a contribution margin format income statement (ignore taxes).
12. Amanda’s Silver Company produces a unique item with the following information:
Sales price
$40 per unit
Variable costs
$10 per unit
Fixed costs
$15,000
Units produced and sold
2,000
Required: Calculate the following based on the above information:
A.
Net operating income
B.
Contribution margin per unit
C.
Contribution margin ratio
A.
Traditional format:
Sales (21,000 units $18)
Less: Cost of goods sold [$15,000 + ($7 21,000 units)]
Gross profit
Less: Selling and administrative costs [$10,000 + ($1.5 21,000 units)]
Net operating income
B.
Contribution margin format:
Sales (21,000 units $18)
Less: Variable costs [21,000 units ($7 + 1.5)]
Contribution margin
Less: Fixed costs ($15,000 + 10,000)
Net operating income
D.
If Amanda’s sells 100 more additional units, by what amount will net operating income
increase?
E.
If Amanda’s has an additional $2,000 in sales, by what amount will net operating income
increase?
13. Carolina Products has the following product information:
Sales price
$25.00 per unit
Variable costs
$15.00 per unit
Fixed costs
$50,000
Required: Calculate the following based on the above information:
A.
How many units need to be sold in order to break even?
B.
Calculate the increase in net operating income if an additional 1,000 units over the
break-even point are sold.
C.
How many units need to be sold in order to earn a target profit of $600,000? (Ignore taxes)
Break-even units = $50,000 10.00 contribution margin per unit = 5,000 units
1,000 units $10 contribution margin per unit = $10,000 increase in net operating income
Sales volume to reach a target profit = ($50,000 + 600,000) $10.00 = 65,000 units
Sales (2,000 units $40)
Less: Variable costs (2,000 units $10)
Contribution margin
Less: Fixed costs
Net operating income
Contribution margin per unit: $40 − 10 = $30
C.
Contribution margin ratio = $30 / 40 = 75%
units)
Net operating income will increase by $1,500 = ($2,000 75%)
14. Bradford Products has the following product information available:
Sales price
$25.00 per unit
Variable costs
$15.00 per unit
Fixed costs
$50,000
Required: Answer each of the following independent questions.
A.
What is the contribution margin per unit?
B.
What is the contribution margin ratio?
C.
How many units must be sold in order to break even?
D.
How many units must be sold in order to earn a target profit of $400,000? (ignore taxes)
E.
Bradford is considering an advertising campaign that has a cost of $70,000. The marketing
department estimates that the campaign will increase sales by $250,000. Should the
company have the advertising campaign? Why or why not? Show your calculations.
15. Harrison Inc. has a contribution margin ratio of 60% and fixed costs of $91,000.
Required:
A.
If Harrison ignores income taxes, what do sales dollars need to be in order to have net
operating income of $500,000?
Contribution margin per unit = $10 = ($25 − 15)
Contribution margin ratio = $10 25 = 40%
Break-even units = $50,000 10 = 5,000 units
Yes, net profit will increase if they have the advertising campaign.
Calculations:
The effect on contribution margin if sales increase $250,000:
$250,000 40% = $100,000 increase in contribution margin
B.
If Harrison takes into account income taxes, and the company is in the 40% tax bracket,
what do sales dollars need to be in order to have an after-tax net operating income of
$500,000?
(rounded).