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Chapter 18
Cost Behavior and 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
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.
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
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
13. A scatter diagram is used to display the relation between past costs and sales
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
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
19. Arctic Cat’s primary variable costs in making snowmobiles are: costs of the
component parts (metals, engine parts, seat components, wiring, gauges, etc.), and
20. Polaris offers a variety of two-, three- and four- wheel vehicles. To adequately
21. A 65% increase in sales of a popular scooter model of Piaggio is likely viewed as a
substantial increase. When this occurs, the sales and cost structures are likely to
QUICK STUDIES
Quick Study 18-1 (10 minutes)
Quick Study 18-2 (10 minutes)
Quick Study 18-3 (10 minutes)
Quick Study 18-4 (15 minutes)
1. Estimated line of cost behavior
Quick Study 18-4 (Concluded)
2. Estimated cost components
Fixed costs = $3,000
Instructor note: Answers to part 2 can vary slightly depending on where students draw the cost
line.
*(rounded)
Quick Study 18-5 (10 minutes)
Contribution margin $5,000 – $3,000 = $2,000
Quick Study 18-6 (10 minutes)
1. Contribution margin per unit = $90 - $36 = $54
Quick Study 18-7 (10 minutes)
Quick Study 18-8 (10 minutes)
1. Contribution margin ratio = = 60%
3,500 - 0
$54
$90
Quick Study 18-9 (10 minutes)
Pretax income = $140,000 / (1 - 0.30) = $200,000
Quick Study 18-10 (5 minutes)
Quick Study 18-11 (15 minutes)
Explanation: Company B has a relatively low proportion of variable costs to
total costs. This means that the contribution margin (sales - variable costs)
for Company B is relatively high. Also, given that the fixed costs for
Quick Study 18-12 (10 minutes)
Number of smart phones sold at break-even: 840 x 3 = 2,520 phones
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Quick Study 18-13 (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.
Quick Study 18-14 (10 minutes)
VOLKSWAGEN
Contribution Margin Statement (in € millions)
Sales ................................................................................................
€126,875.00
Variable costs:
Variable cost of goods sold (€105,431 x 75%) ..............................
79,073.25
Variable selling and administrative (€15,500 x 75%) ....................
11,625.00
Contribution margin ................................................................
€ 36,176.75
EXERCISES
Exercise 18-1 (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
reasonably constant rate with changes in sales and it appears to intersect
the cost axis at zero (the origin).
Exercise 18-2 (15 minutes)
1. Graph #1. Variable cost
2. a. Graph #5
b. Graph #2
$ 0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
$18,000
$0
$5,000
$10,000
$15,000
$20,000
$25,000
Sales
Cost of sales
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Exercise 18-3 (10 minutes)
Exercise 18-4 (15 minutes)
Exercise 18-5 (20 minutes)
1. Fixed costs + Target pretax income
Dollar sales = Contribution margin ratio
2.
Sales ....................................................
$1,296,000
Fixed costs ..........................................
(160,000)
Pretax income ................................
(164,000)
Variable costs ................................
$ 972,000
(Alternatively: $1,296,000 in sales x [1 - 0.25 CM ratio] = $972,000)
Exercise 18-6 (20 minutes)
The scatter diagram and its estimated line of cost behavior appear below.
The cost pattern appears to exhibit a step-wise pattern.
$0
$100
$200
$300
$400
$500
$600
$700
$0 $500 $1,000
Costs
Sales
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Exercise 18-7 (20 minutes)
The scatter diagram and line of estimated cost behavior appear below.
Selecting 0 and 2,400 units sold as the activity levels yields $2,500 as the
estimate of fixed costs and the following estimate of variable costs per
unit:
Exercise 18-8A (20 minutes)
Exercise 18-9 (10 minutes)
(1) Contribution margin = Selling price – Variable costs
= $205 - $164 = $41 per unit
Exercise 18-10 (30 minutes)
(a) Contribution margin per unit = $180 – $135 = $45 per unit
(b) Contribution margin ratio = $45 / $180 = 25%
Exercise 18-11 (15 minutes)
$0
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
$3,000,000
$3,500,000
$4,000,000
0
5,000
10,000
15,000
20,000
25,000
Units
Sales
Total costs
Break-even point
Exercise 18-12 (20 minutes)
1.
BLANCHARD COMPANY
Contribution Margin Income Statement (at Break-Even)
Sales (12,500 x $180) ..........................................................................
$2,250,000
Variable costs (12,500 x $135) ...........................................................
1,687,500
Contribution margin (12,500 x $45) ...................................................
562,500
Fixed costs .........................................................................................
562,500
Net income ..........................................................................................
$ 0
2. Sales (in dollars) to break even with increased fixed costs
Break-even = (Original fixed costs + Additional fixed costs)
Exercise 18-13 (25 minutes)
Preliminary computations
Pretax income = After-tax income / (1 – Tax rate)
= $810,000 / (1 - 0.20)
1. Unit sales at target income =
Fixed + Pretax
2. Dollar sales at target income = costs income
Contribution margin ratio
Fixed Pretax
costs income
Contribution margin/unit
+
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Exercise 18-14 (20 minutes)
BLANCHARD COMPANY
Forecasted Contribution Margin Income Statement
Sales (40,000 x $200) ..........................................................................
$8,000,000
Variable costs (40,000 x $140) ...........................................................
5,600,000
Contribution margin (40,000 x $60) ...................................................
2,400,000
Fixed costs .........................................................................................
562,500
Income before taxes ..........................................................................
1,837,500
Income taxes (20% x $1,837,500) .......................................................
367,500
Net income ..........................................................................................
$1,470,000
Exercise 18-15 (20 minutes)
1. Pretax income = Sales – Variable costs – Fixed costs
$155,000 = $___?___ - $390,000 - $430,000
2. Instructor note: Use the equation in Exhibit 18.23 with no tax effects
Unit sales = Fixed costs + Target pretax income
Contribution margin per unit
Exercise 18-16 (30 minutes)
(a) Total expected variable costs
= Variable costs per unit x units produced and sold
