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Copyright © 2015 Pearson Education, Inc.
7-56
(30-45 min.) P7-64B
Req. 1
Cost-Volume-Profit Analysis
Companies Q, R, S, T
COMPANY
Q
R
S
T
Target sales
$757,500
$445,000
$162,500
$1,000,000
Less: Variable expenses
242,400
178,000
32,500
360,000
Less: Fixed expenses
340,000
159,000
81,000
488,000
Operating income
$ 175,100
$ 108,000
$ 49,000
$152,000
Units sold
85,000
106,800
15,625
20,000
Contribution margin per unit
$ 6.06
$ 2.50
$ 8.32
$ 32.00
Contribution margin ratio
0.68
0.60
0.80
0.64
Computations (top to bottom for each company)
Q: Sales − Variable expenses − Operating income = Fixed expenses
$757,500 − $242,400 − $175,100 = $340,000
Contribution margin / Units sold = Contribution margin per unit
$267,000 / 106,800 = $2.50
S: Units sold × Unit contribution margin = Contribution margin;
Sales − Contribution margin = Variable expenses
15,625 × $8.32 = $130,000; $162,500 − $130,000 = $32,500
Chapter 7 Cost-Volume-Profit Analysis
(continued) P7-64B
T: Units sold × Unit contribution margin = Contribution margin;
Contribution margin + Variable expenses = Sales
20,000 × $32.00 = $640,000; $640,000 + $360,000 = $1,000,000
(30-45 min.) P7-65B
Req. 1
Revenue per show:
1,400 tickets × $65 / ticket........................…………
$91,000
Variable expenses per show:
Programs: 1,400 guests × $6 / guest....................…
$ 8,400
Cast: 65 cast members × $320 / cast member.........
20,800
Total variable expenses per show.......................…..
$29,200
Managerial Accounting 4e Solutions Manual
(continued) P7-65B
Req. 2
Sales revenue
−
Variable expenses
−
Fixed expenses
=
Operating income
Revenue
Number
Variable
Number
per
×
of
−
exp. per
×
of
−
Fixed expenses
=
Operating income
show
shows
show
shows
Number
Number
$91,000
×
of
−
$29,200
×
of
−
$2,163,000
=
$0
shows
shows
($91,000 – $29,200) × Number of shows
=
$2,163,000
$61,800 × Number of shows
=
$2,163,500
Number of shows
=
$2,163,500
$61,800
Breakeven number of shows
=
35 shows
Req. 3
Contribution margin
=
$91,000 − $29,200
=
$61,800
Target number of shows
=
Fixed expenses + Target operating income
Contribution margin per unit
Target number of shows
=
$2,163,000 + $3,708,000
$61,800
Target number of shows
=
$5,871,000
$61,800
Target number of shows
=
95 shows
Chapter 7 Cost-Volume-Profit Analysis
(30-45 min.) P7-66B
Managerial Accounting 4e Solutions Manual
(continued) P7-66B
Req. 4
Margin of safety
=
Sales − Sales at breakeven
Margin of safety
=
$9,262,500− (75,000 cartons × $19.50 per carton)
Margin of safety
=
$9,262,500− $1,462,500
Margin of safety
=
$7,800,000
Managerial Accounting 4e Solutions Manual
(continued) P7-67B
Req. 3
Chapter 7 Cost-Volume-Profit Analysis
(25-35 min.) P7-68B
Req. 1
Margot Coffee
Weighted-Average Contribution Margin per Unit
Small
Large
Total
Sale price per unit
$3.00
$5.00
Less: Variable expense per unit
1.50
2.50
Contribution margin per unit
$1.00
$2.50
Multiply by: Sales mix in units
× 3
× 1
4
Contribution margin per unit
$4.50
$2.50
$7.00
Weighted-average contribution margin per unit ($5.00 / 4 units)
$1.75
Breakeven sales in total units:
Fixed expenses + Operating income
=
$42,000 + $0
=
24,000 units
Weighted-average contribution
$1.75
margin per unit
Breakeven sales of small coffees (24,000 × ¾)........
18,000 units
Breakeven sales of large coffees (24,000 × ¼)........
6,000 units
Proof:
Margot Coffee
Contribution Margin Income Statement
Month Ended February 29
Sales revenue [(18,000 × $3) + (6,000 × $5)]
$84,000
Less: Variable expenses [(18,000 × $1.50) + (6,000 × $2.50)]
42,000
Contribution margin
42,000
Less: Fixed expenses
42,000
Operating income
$ 0
Req. 2
Margin of safety
=
Actual sales − Breakeven sales
Margin of safety
=
$154,000 − $84,000*
=
$70,000
*Breakeven sales from proof in Req. 1.
Req. 3
Operating leverage factor:
= Contribution margin
Operating income
= $77,000
Managerial Accounting 4e Solutions Manual
(continued) P7-68B
Proof:
Margot Coffee
Effect on Operating Income of 15% Increase in Sales Volume
Increase in sales revenue ($154,000 × 0.15)
$23,100
Increase in variable expenses ($77,000 × 0.15)
11,550
Increase in contribution margin
11,550
Change in fixed expenses
0
Operating income before sales increase
35,000
Operating income after sales increase
$46,550
Copyright © 2015 Pearson Education, Inc.
7-65
A7-69
1. Define breakeven point. Why is the breakeven point important to managers?
1. the breakeven point
3. how changes in costs, sales price, and volume affect the company’s profit and
3. The purchasing manager for Rockwell Fashion Bags has been able to purchase the material for its signature
handbags for $2 less per bag. Keeping everything else the same, what effect would this reduction in material
cost have on the breakeven point for Rockwell Fashion Bags? Now assume that the sales manager decides to
4. Describe three ways that cost-volume-profit concepts could be used by a service organization.
C-V-P can be used by a service organization to help them determine:
2. the volume needed to reach target profit and
5. “Breakeven analysis isn’t very useful to a company because companies need to do more than break even to
survive in the long run.” Explain why you agree or disagree with this statement.
6. What conditions must be met for cost-volume-profit analysis to be accurate?
The following conditions must be met for C-V-P analysis to be accurate:
• A change in volume is the only factor that affects costs.
Managerial Accounting 4e Solutions Manual
7. Why is it necessary to calculate a weighted-average contribution margin ratio for a multiproduct company when
calculating the breakeven point for that company? Why can’t all of the products’ contribution margin ratios just
8. Is the contribution margin ratio of a grocery store likely to be higher or lower than that of a plastics
manufacturer? Explain the difference in cost structure between a grocery store and a plastics manufacturer.
9. Alston Jewelry had sales revenues last year of $2.4 million, while its breakeven point (in dollars) was $2.2
million. What was Alston Jewelry’s margin of safety in dollars? What does the term margin of safety mean?
10. Rondell Pharmacy is considering switching to the use of robots to fill prescriptions that consist of oral solids or
medications in pill form. The robots will assist the human pharmacists and will reduce the number of human
pharmacy workers needed. This change is expected to reduce the number of prescription filling errors, to reduce
11. Suppose a company can replace the packing material it currently uses with a biodegradable packing material.
The company believes this move to biodegradable packing materials will be well received by the general public.
12. How can CVP techniques be used in supporting a company’s sustainability efforts? Conversely, how might CVP
be a barrier to sustainability efforts?
savings.
A7-70
Select one product that you could make yourself. Examples of possible products could be cookies, birdhouses, jewelry,
1. Describe your product. What market are you targeting this product for? What price will you sell your product
for? Make projections of your sales in units over each of the upcoming five years.
Managerial Accounting 4e Solutions Manual
Copyright © 2015 Pearson Education, Inc.
7-68
5. Now classify all of the expenses you have listed as being either fixed or variable. For mixed expenses, separate
the expense into the fixed component and the variable component.
Rent
Fixed
Utilities
Fixed
Insurance
Fixed
6. Calculate how many units of your product you will need to sell to breakeven in each of the five years you have
7. Calculate the margin of safety in units for each of the five years in your projection.
Margin of Safety = Projected Sales – Breakeven Sales
2012
2013
2014
2015
2016
150-26=124
175-26=149
200-26=174
225-26=199
250-26=224
$15,000-$2,600
$17,500 - $2,600
$20,000 - $2,600
$22,500 - $2,600
$25,000 -
$2,600
$12,400
$14,900
$17,400
$19,900
$22,400
8. Now decide how much you would like to make in before-tax operating income (target profit) in each of the
upcoming five years. Calculate how many units you would need to sell in each of the upcoming years to meet
9. How realistic is your potential venture? Do you think you would be able to break even in each of the projected
five years? How risky is your venture (use the margin of safety to help answer this question). Do you think your
Chapter 7 Cost-Volume-Profit Analysis
(30 min.) A7-71
Ethics Mini-Case
1.
a. The ethical issues in this situation are:
Competence: “Provide decision support information and recommendations that are accurate, clear, concise,
2. By omitting the fixed monthly sales staff salaries from the report, breakeven sales are reported as lower than they
3. First, Greg should report the mistake with his immediate supervisor. If he has concerns about his employment with
1. Is the cost of down a fixed cost or a variable cost for a jacket manufacturer such as Lands’ End?
Down is a variable cost to jacket manufacturers because more down is required for each additional unit (jacket)
produced.
2. If the cost of down increases, what happens to the breakeven point for a down-filled jacket product line at
3. What is the percentage increase in the cost of down per pound from 2010 to 2012 at Land’s End? Would you
Managerial Accounting 4e Solutions Manual
Copyright © 2015 Pearson Education, Inc.
7-70
costs are assumed to have stayed the same, the actual total cost of making the jacket will increase by a smaller
total percentage. Therefore, the breakeven in units will increase by a smaller amount than 77%.
4. If down increases by a certain percentage, will the selling price of a down-filled jacket need to change by that
same percentage to maintain the same profit margin? Explain.
5. Assume that a Land’s End down jacket selling for $100 uses 12 ounces of down. Further assume that Lands’ End
has $250,000 of fixed costs related to the down jacket line and its other variable manufacturing costs total $60
6. Assume now the same set of facts as in Question 5 but that Lands’ End raises the selling price of each jacket by
$10 in October 2013. Does the contribution margin percentage remain the same?
No, the contribution margin would increase, this is because Lands’ End only uses 12 ounces of down in each jacket
