Chapter 21 – Cost-Volume-Profit Analysis
Chapter 21
Cost-Volume-Profit Analysis
QUESTIONS
1. A variable cost is one that varies proportionately with the volume of activity. For
2. Variable costs per unit stay the same (remain constant) when output volume
changes. This is because each unit consumes the same amount of variable costs
within the relevant range of activity.
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
5. A step-wise cost remains constant over a limited range of output activity, outside of
6. Contribution margin ratio means that for each sales dollar a specified percent is
7. Definition: Contribution margin ratio = Contribution margin / Sales price per unit.
8. Definition: Unit contribution margin = Sales price per unit – Variable costs per unit.
Unit contribution margin is the per unit dollars available to cover fixed costs, with
the remainder being profit.
9. A CVP analysis for a manufacturing company is simplified by assuming that the
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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
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
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Chapter 21 – Cost-Volume-Profit Analysis
QUICK STUDIES
Quick Study 21-1 (10 minutes)
Quick Study 21-2 (10 minutes)
Quick Study 21-3 (10 minutes)
Variable costs = = $250 per maintenance hour
Quick Study 21-4 (15 minutes)
1. Estimated line of cost behavior
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$8,100 – $3,600
24 – 6
Chapter 21 – Cost-Volume-Profit Analysis
Quick Study 21-4 (Concluded)
2. Estimated cost components
Instructor note: Answers to part 2 can vary slightly depending on where students draw the cost
line.
*(rounded)
Quick Study 21-5 (10 minutes)
Contribution margin $5,000 – $3,000 = $2,000
Quick Study 21-6 (10 minutes)
Quick Study 21-7 (10 minutes)
Quick Study 21-8 (10 minutes)
1. Contribution margin ratio = = 60%
3,500 – 0
$54
$54
$90
Chapter 21 – Cost-Volume-Profit Analysis
Quick Study 21-9 (5 minutes)
Units to be sold = = 6,704 units (rounded)
Quick Study 21-10 (5 minutes)
Quick Study 21-11 (10 minutes)
Sales at expected level (10,000 x $175)..…………………………………….$1,750,000
Quick Study 21-12 (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
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$162,000 + $200,000
$54
Chapter 21 – Cost-Volume-Profit Analysis
Quick Study 21-13 (5 minutes)
Unit sales at target income = $354,000 + $118,000 = 8,000 units
$59
Quick Study 21-14 (10 minutes)
Break-even point in composite units = $105,000 / $125 = 840 composite units
Quick Study 21-15 (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.
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Chapter 21 – Cost-Volume-Profit Analysis
Quick Study 21-16 (10 minutes)
1.
Degree of operating leverage = $960,000/$240,000 = 4.0
2. If sales increase by 15%, income will increase by 4.0 x 15% = 60%, or,
Quick Study 21-17 (10 minutes)
VOLKSWAGEN
Contribution Margin Statement (in € millions)
Sales ………………………………………………………………………………….…..€126,875.00
Variable costs:
EXERCISES
Exercise 21-1 (15 minutes)
1. Graph #1. Variable cost
2. a. Graph #5
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Chapter 21 – Cost-Volume-Profit Analysis
Exercise 21-2 (10 minutes)
Exercise 21-3 (15 minutes)
Series A Variable cost
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$
0
$2,00
0
0
$6,00
0
$8,00
0
$10,00
0
$12,00
0
$14,00
0
$16,00
0
$18,00
$
0
$5,00
0
$10,00
0
$15,00
0
$20,00
0
$25,00
0
Sale
s
Cost of
sales
Chapter 21 – Cost-Volume-Profit Analysis
Exercise 21-4 (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
Exercise 21-5 (20 minutes)
The scatter diagram and its estimated line of cost behavior appear below.
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