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Chapter 18
Cost Behavior and Cost-Volume-Profit
Analysis
QUESTIONS
1. A variable cost is one that varies proportionately with the volume of activity. For
units) are treated as variable costs with respect to the number of units produced.
2. Variable costs per unit stay the same (remain constant) when output volume
3. Fixed costs per unit decrease when output volume increases. This is because the
4. Cost-volume-profit analysis is especially useful in the planning phase for a
(sensitivity) analysis.
5. A step-wise cost remains constant over a limited range of output activity, outside of
which it changes by a lump-sum amount, then remains constant over another limited
6. Contribution margin ratio means that for each sales dollar a specified percent is
available to cover fixed costs and contribute to profits. To illustrate, if a company
7. Definition: Contribution margin ratio = Contribution margin / Sales price per unit.
8. Definition: Unit contribution margin = Sales price per unit - Variable costs per unit.
9. A CVP analysis for a manufacturing company is simplified by assuming that the
10. The first is that although individual costs classified as fixed or variable might not
behave precisely in those patterns, some variations of individual components in the
11. By assuming a relevant range for operating activity, management can more
justifiably assume either fixed or variable relations between costs and volume, and
12. Three common methods for measuring cost behavior are: the scatter diagram, the
high-low method, and least-squares regression.
13. A scatter diagram is used to display the relation between past costs and sales
14. At break-even, profits are zero. Break-even is the point where sales equals fixed
plus variable costs.
15. This line represents total cost, which equals the sum of the fixed and variable costs
16. Fixed costs are depicted as a horizontal line on a CVP chart because they remain the
same (constant) at all volume levels within the relevant range.
17. Company A has a contribution margin of 50% [($20,000 – $10,000) / ($20,000)] and
Company B has a contribution margin of 80% [($20,000 – $4,000) / ($20,000)]. This
18. Margin of safety reflects the expected sales in excess of the level of break-even
sales.
19. Google’s primary variable costs in making tablet computers are: labor, energy,
manufacturing and inventory-related costs. The costs of operating the plant and
20. Apple designs, manufactures, and markets mobile communication and media
devices, personal computers, and portable digital music players, and sells a variety
of related software, services, peripherals, networking solutions, and third-party
21. A 65% increase in sales of a popular smartphone model of Samsung is likely viewed
as a substantial increase. When this occurs, the sales and cost structures are likely
to change. Specifically, the selling price per unit, fixed costs, and variable costs are
QUICK STUDIES
Quick Study 18-1 (10 minutes)
Quick Study 18-2 (10 minutes)
1. Variable 4. Variable 7. Fixed
Quick Study 18-3 (10 minutes)
Variable costs = = $250 per maintenance hour
Quick Study 18-4 (15 minutes)
1. Estimated line of cost behavior
$8,100 - $3,600
24 - 6
Quick Study 18-4 (Concluded)
2. Estimated cost components
Fixed costs = $3,000
Quick Study 18-5 (10 minutes)
Contribution margin $5,000 – $3,000 = $2,000
Quick Study 18-6 (10 minutes)
1. Contribution margin per unit = $90 - $36 = $54
Quick Study 18-7 (10 minutes)
Quick Study 18-8 (10 minutes)
1. Contribution margin ratio = = 60%
$162,000
$54
$162,000
$54
$90
Quick Study 18-9 (5 minutes)
Quick Study 18-10 (5 minutes)
Quick Study 18-11 (10 minutes)
Sales at expected level (10,000 x $175).............................................$1,750,000
Margin of safety (%) = $700,000 / $1,750,000 = 40%.
Quick Study 18-12 (10 minutes)
ZHAO CO.
Contribution Margin Income Statement (at Expected Sales Level)
For Year Ended December 31, 2015
Sales (10,000 x $175)..........................................................................$1,750,000
Variable costs (10,000 x $116)........................................................... 1,160,000
Contribution margin (10,000 x $59)...................................................590,000
Fixed costs......................................................................................... 354,000
Net income..........................................................................................$ 236,000
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Financial and Managerial Accounting, 6th Edition
1034
$162,000 + $200,000
$54
Quick Study 18-13 (5 minutes)
Unit sales at target income = $354,000 + $118,000 = 8,000 units
$59
Quick Study 18-14 (10 minutes)
Break-even point in composite units = $105,000 / $125 = 840 composite units
Quick Study 18-15 (10 minutes)
CVP Chart
Notes: Expected sales are 400,000 units ($34 million), thus selling price is $85 per unit.
Fixed costs are $17.5 million, and variable costs are $35 per unit.
Quick Study 18-16 (10 minutes)
1.
Contribution margin..........................................................................$960,000
Degree of operating leverage = $960,000/$240,000 = 4.0
2. If sales increase by 15%, income will increase by 4.0 x 15% = 60%, or,
Quick Study 18-17 (10 minutes)
VOLKSWAGEN
Contribution Margin Statement (in € millions)
Sales ...................................................................................................€126,875.00
Variable costs:
EXERCISES
Exercise 18-1 (15 minutes)
1. Graph #1. Variable cost
Graph #2. Fixed cost
2. a. Graph #5
b. Graph #2
Exercise 18-2 (10 minutes)
1. A
Exercise 18-3 (15 minutes)
Series A Variable cost
Exercise 18-4 (20 minutes)
The scatter diagram and its estimated line of cost behavior appear below.
The cost line appears to reflect a variable cost because it increases at a
$ 0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
$18,000
$0 $5,000 $10,000 $15,000 $20,000 $25,000
Sales
Cost of sales
