Title: Problem 21-7B
QA_Ori:
Part 1 BREAK–EVEN ANALYSIS ASSUMING USE OF SAME MATERIALS
Step 1: Compute break-even in composite units—Use equation in Exhibit 21.27
Break-even in composite units = Fixed costs/Contribution margin per composite unit
* 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
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
Crossfoot Step 3 total with that from formula:
Break-even in dollar sales = Fixed costs / Contribution margin ratio
Part 2 BREAK–EVEN ANALYSIS ASSUMING USE OF NEW MATERIALS
Step 1: Compute break-even in composite units—Use equation in Exhibit 21.27
Break-even in composite units = Fixed costs/Contribution margin per composite unit
= 1,429 composite units (rounded to the next unit)
*To compute the contribution margin per composite unit
Unit Sales Price Unit Variable Costs
6 units of Product 1
@ $40 per unit
$240
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
Step 3: Compute break-even in individual product dollar sales
Dollar sales of Product 1 at break-even: 8,574 units x $40 = $342,960
Crossfoot Step 3 total with that from formula ($171 of rounding differences):
Break-even in $ sales = Fixed costs / Contribution margin ratio
Part 3
When a business invests in fixed assets, as in this case, there is an increase in its risk
level (more fixed costs must be recovered). However, investments in fixed assets can
QA_Ori:
1. Selling price per composite unit
2. Variable costs per composite unit
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
Title: Reporting In Action 1
QA_Ori:
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
Mixed: Utilities
Fixed: Management salaries, rent on facilities used
(Other answers are possible)
Title: Reporting In Action 2
QA_Ori:
As revenues grow, the variable costs will increase in total, as will the mixed costs. Total
Title: Reporting In Action 3
QA_Ori:
Since variable costs are not likely to increase with volume increases by a constant
Title: Comparative Analysis
QA_Ori:
1. Polaris Arctic Cat
Average selling price per unit $ 10,500 $ 11,200
2. As unit sales decline, Polaris’s operating profits will fall by $6,300 per unit versus
QA_Ori:
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”
The memorandum should include many of the following points:
Cost Accounting Estimation: The memorandum should outline how cost estimation is
conducted. For example, you might describe how regression analysis was used to
Business Concerns: The memorandum should point out that the repair business should
follow established business practices for setting cost estimates. There should also be
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
Title: Communicating in Practice 1
QA_Ori:
Revenue (salary) assumptions
Find job that pays a specified amount.
QA_Ori:
Cost assumptions
Title: Taking It to the Net
QA_Ori:
The site offers many tools for an entrepreneur in assessing costs, sales, and profits.
Also, many of the tools (such as the worksheet) are in the form of a spreadsheet. This
Title: Teamwork in Action
QA_Ori:
(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.
Any additional heat and lighting costs.
Title: Entrepreneurial Decision 1
QA_Ori:
Costs that won’t change regardless of how many footballs Paul Cunningham
makes (i.e. fixed costs) likely include rent, depreciation on sewing equipment, and
salaries.
Title: Entrepreneurial Decision 2
QA_Ori:
Overly optimistic sales estimates could lead the company to expand into markets or
products that are unable to break-even or make profits.
Title: Entrepreneurial Decision 3
QA_Ori:
Paul Cunningham can use CVP techniques to manage his company. Focusing
on contribution margin per unit enables the company to set selling prices that cover
Title: Hitting the Road 1
QA_Ori:
Answers will vary.
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
Unit sales of individual products per year required to break-even:
Burgers 40,388 x 3.5 = 141,358 units
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.
Title: Hitting the Road 2
QA_Ori:
The report should properly interpret the analysis from part 1. This question is also
Title: Global Decision 1
QA_Ori:
Managers at Piaggio likely use multiproduct CVP analysis when planning. Piaggio
Title: Global Decision 2
QA_Ori:
If Piaggio adds a new product line to their offerings, they will have to consider its