Problem 18-6B (45 minutes)
Part 1 Instructor note: Use the equation in Exhibit 18.12
Break-even in dollar sales = Fixed costs / Contribution margin ratio
Existing Strategy: = $950,000 / 55%*
Problem 18-7B (50 minutes)
Part 1 BREAK–EVEN ANALYSIS ASSUMING USE OF SAME MATERIALS
Step 1: Compute break-even in composite units—Use equation in Exhibit 18.29
Break-even in composite units = Fixed costs/Contribution margin per composite unit
= $270,000 / $144*
Problem 18–7B (Continued)
Part 2 BREAK–EVEN ANALYSIS ASSUMING USE OF NEW MATERIALS
Step 1: Compute break-even in composite units—Use equation in Exhibit 18.29
Break-even in composite units = Fixed costs/Contribution margin per composite unit
= ($270,000 + $50,000) / $224*
1. Selling price per composite unit
3 desk units @ $1,250 per unit ………………………………………………...
$3,750
2 chairs @ $500 per unit ………………………………………………………....
1,000
Selling price per composite unit ……………………………………………...
$4,750
2. Variable costs per composite unit
3 desk units @ $750 per unit …………………………………………………...
$2,250
2 chairs @ $250 per unit ………………………………………………………....
500
Variable costs per composite unit …………………………………………...
$2,750
3. Break-even point in composite units
Fixed costs
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
1. Some of the costs of Apple’s repair services department are:
Variable: Parts used to repair electronic devices, direct labor used to
2. As revenues grow, the variable costs will increase in total, as will the
mixed costs. Total fixed costs should not change in total. Since the
3. Since variable costs are not likely to increase with volume increases by
a constant amount, Apple cannot use a simple contribution margin ratio
1.
Apple
Google
Average selling price per unit …………………..
$ 550
$ 470
Average variable cost per unit ………………....
250
270
Average contribution margin per unit…………....
$ 300
$ 200
Total fixed costs ($ millions) …………………....
$36,000
$10,000
Break-even point in units (000’s) ……………...
120,000
50,000
2. As unit sales decline, Apple’s operating profits will fall by $300 per unit
versus Google’s decline in operating profits of $200 per unit. Thus,
operating profit will decline more for Apple than for Google as unit sales
decline.
Ethics Challenge — BTN 18-3
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
analysis was used to estimate the average time to complete the most common
jobs completed basis. Perhaps the compensation structure of the mechanic
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
customer safety in jeopardy by paying the mechanic on a job–by-job basis?
1. Revenue (salary) assumptions
Find job that pays a specified amount.
2. Cost assumptions
Find living accommodations at a specified amount.
Avoid costly entertainment events.
Stay healthy and do not incur excess medical expenses.
Cost estimates for food, clothing, and other necessities.
1. Costs that won’t change regardless of how many t-shirts Fast Yeti
2. Overly optimistic sales estimates could lead the company to expand
3. Reid, Jordan, and Ryan can use CVP techniques to manage their
company. Focusing on contribution margin per unit enables the
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
instructor should make certain the student follows the correct steps in
preparing a multiproduct break-even analysis. This activity is designed to
show the student that several estimates are required in this type of CVP
analysis.
1. Managers at Samsung likely use multiproduct CVP analysis when
planning. Samsung designs, manufactures, and markets many different
2. If Samsung adds a new product line to their offerings, they will have to
consider its selling price and any variable costs, such as the cost of the