Chapter 09 – Short-Term Profit Planning: Cost-Volume-Profit (CVP) Analysis
9-50 (Continued-1)
$4.000 $27,435 $27,389
$4.250 $28,087 $27,944
$4.500 $28,739 $28,500
$4.750 $29,391 $29,056
$5.000 $30,043 $29,611
Based on the above analysis and graph, we see that for these two
4. Pseudo degree of operating leverage (DOL) measure
Alternative Lifetime Mileage Assumption = 62,000
Original Assumption–Lifetime Mileage = 60,000
Assumed price-per-gallon of gas = $4.00
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Chapter 09 – Short-Term Profit Planning: Cost-Volume-Profit (CVP) Analysis
9-50 (Continued-2)
Lifetime Cost Lifetime Cost %
Option
@ 62,000
miles
@ 60,000
miles
Change
Cost
% Change
Mileage
Pseudo
DOL
Gas Powered
Car $27,783 $27,435 1.2678% 3.333% 0.380
Hybrid Model $27,685 $27,389 1.0818% 3.333% 0.325
The above pseudo DOL measure for the gas-powered car indicate that from
driven.
5. Decision Table–Break-even gas price as a function of different
combinations of initial cost differential (Hybrid cost [net of rebate] −
Cost of gasoline-powered model) and lifetime miles driven
Initial Cost
Difference
Lifetime Miles
Driven
$2,500 70,000
$2,000 60,000
$1,500 50,000
$1,000
$500
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Chapter 09 – Short-Term Profit Planning: Cost-Volume-Profit (CVP) Analysis
9-
50 (continued-3)
Breakeven
Initial Cost Lifetime Miles Gas Price
Differential Driven (per gallon)
$1,500 70,000 $3.327
$1,500 60,000 $3.881
$1,500 50,000 $4.658
$1,000 70,000 $2.218
$1,000 60,000 $2.588
$1,000 50,000 $3.105
$500 70,000 $1.109
$500 60,000 $1.294
$500 50,000 $1.553
hybrid versus the gasoline-powered model, the greater the breakeven point
in terms of cost per gallon of fuel. You also notice that the breakeven gas
price is inversely related to lifetime miles driven. While both conclusions
seem intuitively appealing, the advantage of the decision table is the
structured way in which it allows you to deal quantitatively with uncertainty
surrounding the financial consequence of your decision choice.
6. Expected value calculations:
10
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Initial Cost
Differential
Lifetime Miles
Driven
Breakeven Gas Price
(per gallon)
$2,500 70,000 $5.545
Chapter 09 – Short-Term Profit Planning: Cost-Volume-Profit (CVP) Analysis
9-50 (continued-4)
Action (Decision)
i Event p Hybrid Gas Model
1 $2.75 0.01 $246 $242
2 $3.00 0.05 $1,258 $1,241
3 $3.25 0.05 $1,286 $1,274
4 $3.50 0.05 $1,314 $1,307
5 $3.75 0.15 $4,025 $4,017
6 $3.88 0.15 $4,069 $4,069
7 $4.00 0.15 $4,108 $4,115
8 $4.25 0.20 $5,589 $5,617
Lifetime cost = initial cost outlay (F) + variable (gas) cost over four-year
period
Example: for the hybrid model, if the probability of gas selling at
$2.75/gallon is 0.01, then the appropriate amount is cost
component for calculating expected lifetime cost is:
To minimize the expected lifetime cost, we should choose the hybrid
model. However, these expected values are so close that they are
effectively equal, particularly given uncertainty in the price of gas. Thus, if
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Chapter 09 – Short-Term Profit Planning: Cost-Volume-Profit (CVP) Analysis
facilitate this discussion.
9-50 (continued-5)
7. Student answers will likely differ. Below are representative considerations.
Qualitative Considerations
a. safety record–does this differ between the two models?
b. reliability–does this differ between the two models? (in some cases, the
d. “carbon footprint” issue–it is true that from an operating standpoint, the
carbon footprint of the hybrid would be less than it is for the related
gasoline-powered model. However, what this comparison ignores is the
be larger than it is for a related gasoline-powered model.
e. relationship between mpg and lifetime miles driven: ignored thus far in
the analysis is the fact that the latter might be a function of the former.
Our analysis has, in fact, assumed that these two variables are
unrelated (i.e., we assumed in the base case that for both decision
Additional Quantitative Considerations
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Chapter 09 – Short-Term Profit Planning: Cost-Volume-Profit (CVP) Analysis
a. what is the estimated useful life for each vehicle? (this would be
important if the buyer intended to use the vehicle beyond the four-year
consideration)
9-50 (continued-6)
d. other operating expenses associated with use of each vehicle (e.g.,
insurance, repairs/maintenance)–how do these compare? In addition,
alternative (similar to the approach taken in capital budgeting
decisions).
f. the given mpg figures are based on some type of average driving (or
mix between city and highway miles driven). Is the anticipated driving
behavior of the purchaser different from this assumed mix so that the
use of average mpg data would not be appropriate? If most of the
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Chapter 09 – Short-Term Profit Planning: Cost-Volume-Profit (CVP) Analysis
Check Figures: Chapter 9
9-21 1. $509,500; 2. 14,561 units (rounded up); 3. $474,500; 4. 20,622 units (rounded
up); 5. 36,061 units
9-22 1. Machine A: 100,000; Machine B: 120,000; 2. 197,143 units; 3. Cost for A =
9-31 No check figure.
9-32 No check figure.
9-33 No check figure.
9-39 1.14,096 units (rounded up); CMR = 25%; BE ($) = $1,184,064; 2.15,523.8 units,
not rounded (or, $1,304,000); 3. 16,477 units (rounded up); $1,384,068; 4.
$30,010 (difference of $10 is due to rounding up on sales volume); 5. Profits will
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Chapter 09 – Short-Term Profit Planning: Cost-Volume-Profit (CVP) Analysis
above-listed breakeven quantities were rounded up to the next whole number)
9-48 1.contribution margin = $10.10 per weekly subscription; contribution margin =
up); 7. Required sales volume = 121,936 units (rounded up)
9-49 1. Unit contribution margins: $270.00 (current) and $237.50 (proposed); B/E =
9-50 1. Lifetime cost (Y) function, regular model: Y = $17,000 + (2,608.7 gals. × v),
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