3-31
Sales revenue 5,000
1.20
$60 $360,000
Variable costs 5,000
1.20
$25 × (1 – 0.20) 120,000
1. CMU (SP – VCU = $30 – $21) $ 9.00
a. Breakeven units (FC
CMU = $360,000
$9 per unit) 40,000
2. Pairs sold 35,000
Revenues, 35,000
$30 $1,050,000
Total cost of shoes, 35,000
$19.50 682,500
3. Unit variable data (per pair of shoes)
Selling price $ 30.00
Cost of shoes 19.50
Sales commissions 0
3-32
4. Unit variable data (per pair of shoes)
Selling price $ 30.00
Cost of shoes 19.50
5. Pairs sold 50,000
Revenues (50,000 pairs
$30 per pair) $1,500,000
Total cost of shoes (50,000 pairs
$19.50 per pair) $ 975,000
Sales commissions on first 40,000 pairs (40,000 pairs
$1.50 per pair) 60,000
3-33
3-39 (30 min.) CVP analysis, shoe stores (continuation of 3-38).
Salaries + Commission Plan
Higher Fixed Salaries Only
No. of
units sold
CM
per Unit
CM
Fixed
Costs
Operating
Income
CM
per Unit
CM
Fixed Costs
Operating
Income
Difference in favor
of higher-fixed-
salary-only
(1)
(2)
(3)=(1)
(2)
(4)
(5)=(3)–(4)
(6)
(7)=(1)
(6)
(8)
(9)=(7)–(8)
(10)=(9)–(5)
40,000
$9.00
$360,000
$360,000
0
$10.50
$420,000
$441,000
$ (21,000)
$(21,000)
42,000
9.00
378,000
360,000
18,000
10.50
441,000
441,000
0
(18,000)
44,000
9.00
396,000
360,000
36,000
10.50
462,000
441,000
21,000
(15,000)
46,000
9.00
414,000
360,000
54,000
10.50
483,000
441,000
42,000
(12,000)
48,000
9.00
432,000
360,000
72,000
10.50
504,000
441,000
63,000
(9,000)
50,000
9.00
450,000
360,000
90,000
10.50
525,000
441,000
84,000
(6,000)
52,000
9.00
468,000
360,000
108,000
10.50
546,000
441,000
105,000
(3,000)
54,000
9.00
486,000
360,000
126,000
10.50
567,000
441,000
126,000
0
56,000
9.00
504,000
360,000
144,000
10.50
588,000
441,000
147,000
3,000
58,000
9.00
522,000
360,000
162,000
10.50
609,000
441,000
168,000
6,000
60,000
9.00
540,000
360,000
180,000
10.50
630,000
441,000
189,000
9,000
62,000
9.00
558,000
360,000
198,000
10.50
651,000
441,000
210,000
12,000
64,000
9.00
576,000
360,000
216,000
10.50
672,000
441,000
231,000
15,000
66,000
9.00
594,000
360,000
234,000
10.50
693,000
441,000
252,000
18,000
3-34
1. See preceding table. The new store will have the same operating income under either
compensation plan when the volume of sales is 54,000 pairs of shoes. This can also be calculated
2. When sales volume is above 54,000 pairs, the higher-fixed-salaries plan results in lower
costs and higher operating incomes than the salary-plus-commission plan. So, for an expected
3. Let TQ = Target number of units
For the salary-only plan,
$30.00TQ – $19.50TQ – $441,000 = $168,000
$10.50TQ = $609,000
4. WalkRite Shoe Company
Operating Income Statement, 2011
3-35
1. Contribution margin per
page assuming current
fixed leasing agreement
= $0.15 – $0.03 – $0.04 = $0.08 per page
Fixed costs = $1,000
Fixed costs $1,000 12,500 pages
2. Let
x
denote the number of pages Stylewise must sell for it to be indifferent between the
x
$0.15
x
– $0.03
x
– $0.04
x
– $1,000 = $0.15
x
– $0.02
x
– $0.03
x
– $.04
x
x
x
$0.02
x
= $1,000
x
= $1,000 ÷ $0.02 = 50,000 pages
x
x
x
3. Fixed leasing agreement
Pages
Sold
(1)
Revenue
(2)
Variable
Costs
(3)
Fixed
Costs
(4)
Operating
Income
(Loss)
(5)=(2)–(3)–(4)
Probability
(6)
Expected
Operating
Income
(7)=(5)
(6)
20,000
20,000
$.15=$ 3,000
20,000
$.07=$1,400
$1,000
$ 600
0.20
$ 120
40,000
40,000
$.15=$ 6,000
40,000
$.07=$2,800
$1,000
$2,200
0.20
440
60,000
60,000
$.15=$ 9,000
60,000
$.07=$4,200
$1,000
$3,800
0.20
760
80,000
80,000
$.15=$12,000
80,000
$.07=$5,600
$1,000
$5,400
0.20
1,080
100,000
100,000
$.15=$15,000
100,000
$.07=$7,000
$1,000
$7,000
0.20
1,400
Expected value of fixed leasing agreement
$3,800
3-37
1. Variable cost per computer = $100 + ($15
10) + $50 = $300
Contribution margin per computer = Selling price –Variable cost per computer
2. Target number of computers =
Fixed costs + Target operating income
Contribution margin per computer
$200 =
3. Contribution margin per computer = Selling price – Variable cost per computer
= $500 – $200 – $50 = $250
Contribution margin per computer $250
4. Let
x
be the number of computers for which PC Planet is indifferent between paying
a monthly rental fee for the retail space and paying a 20% commission on sales. PC
Planet will be indifferent when the profits under the two alternatives are equal.
$500
x
x
x
x
x
3-38
3-42 (30 min.) CVP analysis, income taxes, sensitivity.
1a.To breakeven, Agro Engine Company must sell 1,200 units. This amount represents the point
where revenues equal total costs.
Let Q denote the quantity of engines sold.
Revenue = Variable costs + Fixed costs
2. To achieve its net income objective, Agro Engine Company should select alternative c,
where fixed costs are reduced by 20% and selling price is reduced by 10% resulting in 1,700
additional units being sold through the end of the year. This alternative results in the highest net
3-39
Alternative b
Revenues = ($3,000 300) + ($2,750c 1,800) = $5,850,000
Variable costs = ($500 300) + ($450d 1,800) = $960,000
Operating income = $5,850,000 − $960,000 − $3,000,000 = $1,890,000
1. We can recast Marston’s income statement to emphasize contribution margin, and then use it
to compute the required CVP parameters.
Marston Corporation
Income Statement
For the Year Ended December 31, 2011
Using Sales Agents
Using Own Sales Force
Revenues
$26,000,000
$26,000,000
Variable Costs
Cost of goods sold—variable
$11,700,000
$11,700,000
Marketing commissions
4,680,000
16,380,000
2,600,000
14,300,000
Contribution margin
9,620,000
11,700,000
Fixed Costs
Cost of goods sold—fixed
2,870,000
2,870,000
Marketing—fixed
3,420,000
6,290,000
5,500,000
8,370,000
Operating income
$ 3,330,000
$ 3,330,000
Contribution margin percentage
($9,620,000
26,000,000;
$11,700,000
$26,000,000)
37%
45%
Breakeven revenues
($6,290,000
0.37;
$8,370,000
0.45)
$17,000,000
$18,600,000
Degree of operating leverage
($9,620,000
$3,330,000;
$11,700,000
$3,330,000)
2.89
3.51
2. The calculations indicate that at sales of $26,000,000, a percentage change in sales and
contribution margin will result in 2.89 times that percentage change in operating income if
Marston continues to use sales agents and 3.51 times that percentage change in operating income
3. Variable costs of marketing = 15% of Revenues
Fixed marketing costs = $5,500,000
Variable
Fixed
Variable
Fixed