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Chapter 3
Cost-Volume-Profit Relationships
Solutions to Questions
3-1 The contribution margin (CM) ratio is
estimate the effect on profits of a change in
sales revenue.
3-3 All other things equal, Company B, with
its higher fixed costs and lower variable costs,
profits when sales increase.
3-4 Operating leverage measures the impact
dividing the contribution margin at that level of
sales by the net operating income at that level
sales at which profits are zero.
3-6 (a) If the selling price decreased, then
increased, then both the fixed cost line and the
cost line would rise more steeply and the break-
even point would occur at a higher unit volume.
can drop before losses begin to be incurred.
3-8 The sales mix is the relative proportions
3-9 A higher break-even point and a lower
net operating income could result if the sales
contribution margin ratio in the company to
decline, resulting in less total contribution
would be higher because more sales would be
required to cover the same amount of fixed
costs.
Exercise 3-1 (continued)
3. The new income statement would be:
Total
Per Unit
Sales (7,000 units) .......
$182,000
$26.00
Variable expenses ........
126,000
18.00
Contribution margin ......
56,000
$ 8.00
Fixed expenses ............
56,000
Net operating income ...
$ 0
Note: This is the company's break-even point.
Exercise 3-2 (continued)
$0
$20,000
$40,000
$60,000
$80,000
0500 1,000 1,500 2,000
Dollars
Volume in Units
CVP Graph
Fixed Expense Total Expense
Total Sales Revenue
Exercise 3-3 (continued)
2. Looking at the graph, the break-even point appears to be 3,000 units.
Exercise 3-5 (20 minutes)
1. The following table shows the effect of the proposed change in monthly
advertising budget:
Sales With
Additional
Current
Advertising
Sales
Budget
Difference
Sales ...........................
$225,000
$240,000
$15,000
Variable expenses ........
135,000
144,000
9,000
Contribution margin ......
90,000
96,000
6,000
Fixed expenses ............
75,000
83,000
8,000
Net operating income ...
$ 15,000
$ 13,000
$(2,000)
Assuming that there are no other important factors to be considered,
the increase in the advertising budget should not be approved because
it would lead to a decrease in net operating income of $2,000.
Alternative Solution 1
Expected total contribution margin:
$240,000 × 40% CM ratio ..................
$96,000
Present total contribution margin:
$225,000 × 40% CM ratio ..................
90,000
Incremental contribution margin ...........
6,000
Change in fixed expenses:
Less incremental advertising expense .
8,000
Change in net operating income ............
$(2,000)
