Fundamental Accounting Principles, 21st Edition
1254
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 21.27
* 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
@ $30 per unit…………………………………………..
@ $15 per unit…………………………………………..
120
60
2 units of Product 3
@ $20 per unit…………………………………………..
@ $ 8 per unit…………………………………………..
40
____
16
Selling price of a composite unit ………………….
Variable cost of a composite unit …………………
$400
$256
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
Crossfoot Step 3 total with that from formula:
Break-even in dollar sales = Fixed costs / Contribution margin ratio
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 21.27
*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
4 units of Product 2
@ $30 per unit ……………………………………………..
@ ($15 – $5) per unit …………………………………….
120
40
2 units of Product 3
@ $20 per unit ……………………………………………..
@ ($8 – $0) per unit ……………………………………..
40
____
16
Selling price of a composite unit ……………………..
Variable cost of a composite unit …………………….
$400
$176
Thus:
Contribution margin per composite unit = $400 – $176 = $224
Contribution margin ratio = $224 / $400 = 56%
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
Step 3: Compute break-even in individual product dollar sales
Crossfoot Step 3 total with that from formula ($171 of rounding differences):
Break-even in $ sales = Fixed costs / Contribution margin ratio
= ($270,000 + $50,000) / 56% = $571,429 (rounded)
Part 3
When a business invests in fixed assets, as in this case, there is an increase
Fundamental Accounting Principles, 21st Edition
1256
SERIAL PROBLEM — SP 21
Serial Problem, Success Systems (50 minutes)
1. Selling price per composite unit
$3,750
1,000
$4,750
2. Variable costs per composite unit
$2,250
500
$2,750
3. Break-even point in composite units
4. Unit sales of desk units and chairs at break-even point
Desk units: 3 x 60 units (from 3) ……………………………………….……
180 units
Chairs: 2 x 60 units (from 3) ……………………………………….……
120 units
Reporting in Action — BTN 21-1
1. Some of the costs of Polaris’s services department are:
• Variable: Parts used to repair vehicles, direct labor used to perform
the repairs, indirect supplies used
2. As revenues grow, the variable costs will increase in total, as will the
mixed costs. Total fixed costs should not change. Since the “product”
3. Since variable costs are not likely to increase with volume increases by
a constant amount, Polaris cannot use a simple contribution margin
useful.
Comparative Analysis — BTN 21-2
1.
Polaris
Arctic Cat
Average selling price per unit …………………..
$ 10,500
$ 11,200
Average variable cost per unit ………………....
4,200
5,100
Average contribution margin per unit …………....
$ 6,300
$ 6,100
Total fixed costs ($ thousands) ………………..
$146,570
$133,570
Break-even point in units (rounded) ………...
23,266
21,897
2. As unit sales decline, Polaris’s operating profits will fall by $6,300 per
Fundamental Accounting Principles, 21st Edition
1258
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
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
estimation is conducted. For example, you might describe how regression
Business Concerns: The memorandum should point out that the repair
business should follow established business practices for setting cost
estimates. There should also be an expressed concern of fairness for the
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
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.
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
Also, many of the tools (such as the worksheet) are in the form of a
Fundamental Accounting Principles, 21st Edition
1260
Teamwork in Action — BTN 21-6
(a) Questions for school administrators (others are possible)
• Number of students that would attend the theater.
(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 footballs Paul
sewing equipment, and salaries.
2. Overly optimistic sales estimates could lead the company to expand into
3. Paul Cunningham can use CVP techniques to manage his company.
Focusing on contribution margin per unit enables the company to set
Hitting the Road — BTN 21-8
1. There is no set solution for this problem. Answers will vary because each
student will make different estimates for groups, costs, and volume. The
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
Burgers …………..………………
$2.00
0.75
$1.50
3.5
$ 5.25
Fries ……………….………….
$1.00
0.70
$0.70
5.0
3.50
Drinks …………….…………….
$1.00
0.90
$0.90
3.5
3.15
Desserts………….………………
$0.50
0.40
$0.20
1.2
0.24
Other …………………………..
$0.80
0.30
$0.24
1.0
0.24
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:
Burgers …………..………………
40,388 x 3.5 =
141,358 units
Fries ……………….………….
40,388 x 5.0 =
201,940 units
Drinks …………….…………….
40,388 x 3.5 =
141,358 units
Desserts………….………………
40,388 x 1.2 =
48,466 units
Other …………………………..
40,388 x 1.0 =
40,388 units
In general, when evaluating a student’s solutions, look for:
• Estimated selling price of products
• Estimated contribution margin per item
• Estimated sales mix
2. The report should properly interpret the analysis from part 1. This
question is also designed to show students that a fast food restaurant
Fundamental Accounting Principles, 21st Edition
1262
Global Decision — BTN 21-9
1. Managers at Piaggio likely use multiproduct CVP analysis when
2. If Piaggio adds a new product line to their offerings, they will have to
consider its selling price and any variable costs, such as cost of the