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Chapter 18
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
10. The first is that although individual costs classified as fixed or variable might not
behave precisely in those patterns, some variations of individual components in the
11. By assuming a relevant range for operating activity, management can more
range.
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
14. At break-even, profits are zero. Break-even is the point where sales equals fixed
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
18. Margin of safety reflects the expected sales in excess of the level of break-even
sales.
19. Google’s primary variable costs in making tablet computers are: labor, energy,
manufacturing and inventory-related costs. The costs of operating the plant and
20. Apple designs, manufactures, and markets mobile communication and media
devices, personal computers, and portable digital music players, and sells a variety
21. A 65% increase in sales of a popular smartphone model of Samsung is likely viewed
as a substantial increase. When this occurs, the sales and cost structures are likely
to change. Specifically, the selling price per unit, fixed costs, and variable costs are
Quick Study 18-1 (10 minutes)
Quick Study 18-2 (10 minutes)
1. Variable 4. Variable 7. Fixed
2. Probably Mixed 5. Fixed
3. Probably Mixed 6. Fixed
Quick Study 18-3 (10 minutes)
Quick Study 18-4 (15 minutes)
1. Estimated line of cost behavior
$8,100 - $3,600
Quick Study 18-4 (Concluded)
2. Estimated cost components
Fixed costs = $3,000
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
2. Break-even point in units = = 3,000 units
Quick Study 18-7 (10 minutes)
1. I 4. I
2. D 5. D
3. I 6. D
Quick Study 18-8 (10 minutes)
1. Contribution margin ratio = = 60%
2. Break-even point in dollars = = $270,000
$162,000
$54
$162,000
60%
$54
$90
Quick Study 18-9 (5 minutes)
Quick Study 18-10 (5 minutes)
Quick Study 18-11 (10 minutes)
Sales at expected level (10,000 x $175) .............................................
$1,750,000
Sales at break-even level (6,000 x $175) ...........................................
1,050,000
Margin of safety (in dollars) ..............................................................
$ 700,000
Margin of safety (%) = $700,000 / $1,750,000 = 40%.
Quick Study 18-12 (10 minutes)
ZHAO CO.
Contribution Margin Income Statement (at Expected Sales Level)
For Year Ended December 31, 2015
Sales (10,000 x $175) ..........................................................................
$1,750,000
Variable costs (10,000 x $116) ...........................................................
1,160,000
Contribution margin (10,000 x $59) ...................................................
590,000
Fixed costs .........................................................................................
354,000
Net income ..........................................................................................
$ 236,000
$162,000 + $200,000
$54
Quick Study 18-13 (5 minutes)
Quick Study 18-14 (10 minutes)
Break-even point in composite units = $105,000 / $125 = 840 composite units
Quick Study 18-15 (10 minutes)
CVP Chart
Quick Study 18-16 (10 minutes)
1.
Contribution margin ..........................................................................
$960,000
Fixed costs .........................................................................................
720,000
Income (pretax) ..................................................................................
$240,000
Degree of operating leverage = $960,000/$240,000 = 4.0
2. If sales increase by 15%, income will increase by 4.0 x 15% = 60%, or,
Quick Study 18-17 (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 (15 minutes)
1. Graph #1. Variable cost
Graph #2. Fixed cost
2. a. Graph #5
b. Graph #2
Exercise 18-2 (10 minutes)
1. A
2. E
3. B
4. D
5. F
6. C
Exercise 18-3 (15 minutes)
Series A Variable cost
Exercise 18-4 (20 minutes)
The scatter diagram and its estimated line of cost behavior appear below.
$ 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
Exercise 18-5 (20 minutes)
