Chapter 21 – Cost-Volume-Profit Analysis
Problem 21-6B (45 minutes)
Part 1 Instructor note: Use the equation in Exhibit 21.12
Break-even in dollar sales = Fixed costs / Contribution margin ratio
*To compute contribution margin ratio
Sales price per unit
Existing strategy……………………………………………………………..……………….…………
New strategy [$20.00 x (1 – 20%)]….…….…….…….…….…….……....…........…............
Existing
Strategy
$20.00
New
Strategy
$16.00
Total variable costs per unit
Part 2
BEST COMPANY
Forecasted Contribution Margin Income Statement
Existing Strategy New Strategy
Income before taxes……………………………………….…... 150,000 634,000
Income taxes (25%)…………………………..….……….……. 37,500 158,500
Net income……………………………………..….…….…….…..$ 112,500 $ 475,500
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Chapter 21 – Cost-Volume-Profit Analysis
Problem 21-7B (50 minutes)
Part 1 BREAK–EVEN ANALYSIS ASSUMING USE OF SAME MATERIALS
Step 1: Compute break-even in composite units—Use equation in Exhibit 21.29
* To compute the contribution margin per composite unit
Unit Sales Price Unit Variable Costs
6 units of Product 1
@ $40 per unit……………………………..…………….
@ $30 per unit……………………………..…………….
$240
$180
4 units of Product 2
Thus:
Contribution margin per composite unit = $400 – $256 = $144
Contribution margin ratio = $144 / $400 = 36%
Step 2: Compute break-even in individual product unit sales
Step 3: Compute break-even in individual product dollar sales
Dollar sales of Product 1 at break-even: 11,250 units x $40 = $450,000
Dollar sales of Product 2 at break-even: 7,500 units x $30 = $225,000
Dollar sales of Product 3 at break-even: 3,750 units x $20 = $ 75,000
Crossfoot Step 3 total with that from formula:
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Chapter 21 – Cost-Volume-Profit Analysis
Problem 21-7B (Continued)
Part 2 BREAK–EVEN ANALYSIS ASSUMING USE OF NEW MATERIALS
Step 1: Compute break-even in composite units—Use equation in Exhibit 21.29
*To compute the contribution margin per composite unit
Unit Sales Price Unit Variable Costs
6 units of Product 1
@ $40 per unit……………………………………..…….…
@ ($30 – $10) per unit…………………………………….
$240
$120
Variable cost of a composite unit………….…..….....
$176
Thus:
Step 2: Compute break-even in individual product unit sales
Unit sales of Product 1 at break-even: 1,429 x 6 = 8,574 units
Unit sales of Product 2 at break-even: 1,429 x 4 = 5,716 units
Unit sales of Product 3 at break-even: 1,429 x 2 = 2,858 units
Step 3: Compute break-even in individual product dollar sales
Crossfoot Step 3 total with that from formula ($171 of rounding differences):
Part 3
When a business invests in fixed assets, as in this case, there is an increase
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Chapter 21 – Cost-Volume-Profit Analysis
SERIAL PROBLEM — SP 21
Serial Problem, Business Solutions (50 minutes)
1. Selling price per composite unit
3 desk units @ $1,250 per unit………………………………………………….$3,750
2 chairs @ $500 per unit………………………………………………….….…… 1,000
Selling price per composite unit………………..…….……….…….…….…$4,750
3. Break-even point in composite units
Fixed costs
= Contribution margin per composite unit
4. Unit sales of desk units and chairs at break-even point
Chairs: 2 x 60 units (from 3)………………………….….…….……….120 units
Reporting in Action — BTN 21-1
1. Some of the costs of Apple’s repair services department are:
Variable: Parts used to repair electronic devices, direct labor used to
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2. As revenues grow, the variable costs will increase in total, as will the
mixed costs. Total fixed costs should not change in total. Since the
3. Since variable costs are not likely to increase with volume increases by
a constant amount, Apple cannot use a simple contribution margin ratio
Comparative Analysis — BTN 21-2
1. Apple Google
Average selling price per unit………….………. $ 550 $ 470
2. As unit sales decline, Apple’s operating profits will fall by $300 per unit
versus Google’s decline in operating profits of $200 per unit. Thus,
operating profit will decline more for Apple than for Google as unit sales
decline.
Ethics Challenge — BTN 21-3
Instructor note: This question can serve to generate class discussion on
cost analysis and estimation. Discussion can focus on accounting,
business, and other ethical concerns.
MEMORANDUM
To: “Mechanics” and “Owners”
From: Your name
RE: Analysis of labor costs for survey
Date: Current date
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Education.
Chapter 21 – Cost-Volume-Profit Analysis
The memorandum should include many of the following points:
Objectivity: A statement about the need to be objective in the analysis. Both
ethical and professional concerns should motivate the preparer’s desire for
objectivity.
Cost Accounting Estimation: The memorandum should outline how cost
should be changed.
Mechanic-Related Issues: The memorandum should also be concerned about
the quality of mechanical work. Is the work being done correctly and is
customer safety in jeopardy by paying the mechanic on a job-by-job basis?
Who is responsible for establishing a fair compensation system? These
issues are likely topics for the memorandum.
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Chapter 21 – Cost-Volume-Profit Analysis
Communicating in Practice — BTN 21-4
Instructor note: Reports will vary, but a typical report would likely include
assumptions similar to the following.
1. Revenue (salary) assumptions
Find job that pays a specified amount.
Expectations regarding overtime pay.
2. Cost assumptions
Find living accommodations at a specified amount.
Taking It to the Net — BTN 21-5
The site offers many tools for an entrepreneur in assessing costs, sales,
and profits. Specifically, a spreadsheet file is provided that allows an
entrepreneur to identify the start-up costs of the business. A new business
Also, many of the tools (such as the worksheet) are in the form of a
spreadsheet. This means an entrepreneur can modify the spreadsheet and
use it to conduct various types of “what-if” analyses by considering
different possible scenarios of business.
Teamwork in Action — BTN 21-6
(a) Questions for school administrators (others are possible)
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Education.
Chapter 21 – Cost-Volume-Profit Analysis
Costs of providing movies to students at school.
(b) Questions for owners (others are possible)
List of other potential markets for theater showings during school
days.
Entrepreneurial Decision — BTN 21-7
1. Costs that won’t change regardless of how many t-shirts Fast Yeti
makes (i.e., fixed costs) likely include rent, depreciation on equipment,
and salaries.
2. Overly optimistic sales estimates could lead the company to expand
into markets or products that are unable to break-even or make profits.
3. Reid, Jordan, and Ryan can use CVP techniques to manage their
company. Focusing on contribution margin per unit enables the
Hitting the Road — BTN 21-8
1. There is no set solution for this problem. Answers will vary because each
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Education.
Chapter 21 – Cost-Volume-Profit Analysis
show the student that several estimates are required in this type of CVP
analysis.
One simple example with crucial facts
Product
Estimated
Selling
Price per
unit
Estimated
CM ratio
Estimated
CM
per unit
Estimated
Sales
Mix
Estimated CM
for each
component in
composite unit
Total contribution margin (CM) per composite unit.…….…….…..…........... $12.38
Estimated fixed costs per year: $500,000
Break-even point in composite unit sales: $500,000/$12.38 = 40,388
Unit sales of individual products per year required to break-even:
In general, when evaluating a student’s solutions, look for:
Estimated selling price of products
Estimated contribution margin per item
Detailed computations are described in the chapter under the section Computing
Multiproduct Break-Even Point.
2. The report should properly interpret the analysis from part 1. This
question is also designed to show students that a fast food restaurant
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1. Managers at Samsung likely use multiproduct CVP analysis when
planning. Samsung designs, manufactures, and markets many different
2. If Samsung adds a new product line to their offerings, they will have to
consider its selling price and any variable costs, such as the cost of the
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