DO IT! 5-4 (Continued)
(b)
Margin of safety
=
Actual sales – Break-even sales
Actual sales
=
$800,000 – $550,000
$800,000
=
31.25%
(c) Sales – Variable costs – Fixed costs = Net income
$30Q – $18Q = $220,000 + $140,000
SOLUTIONS TO EXERCISES
EXERCISE 5-1
(a) The determination as to whether a cost is variable, fixed, or mixed can
be made by comparing the cost in total and on a per-unit basis at two
different levels of production.
Variable Costs
Fixed Costs
Mixed Costs
Vary in total but remain constant on a per-unit basis.
Remain constant in total but vary on a per-unit basis.
Contain both a fixed element and a variable element.
Vary both in total and on a per-unit basis.
(b) Using these criteria as a guideline, the classification is as follows:
Direct materials
Direct labor
Utilities
Variable
Variable
Mixed
Rent
Maintenance
Supervisory salaries
Fixed
Mixed
Fixed
EXERCISE 5-2
(a)
EXERCISE 5-2 (Continued)
(b) The relevant range is 3,000 – 8,000 units of output since a straight-line
(c)
Variable cost per unit
Within the relevant range
=
Cost
Units
(3,000 – 8,000 units)
=
$15,000*
5,000*
=
$3 per
unit
*Any costs and units within the relevant range could have been used
to calculate the same unit cost of $3.
(d) Fixed cost within the
EXERCISE 5-3
(a) Maintenance Costs:
$4,900 –$2,500
700 –300
=
$2,400
400
= $6 variable cost per machine hour
700
Machine Hours
300
Machine Hours
Total costs
Less: Variable costs
700 X $6
300 X $6
Total fixed costs
$4,900
4,200
$ 700
$2,500
1,800
$ 700
EXERCISE 5-3 (Continued)
(b)
$5,000
COSTS
Total Cost Line
$4,900
$4,000
$3,000
Variable Cost Element
$2,000
$1,000
Fixed Cost Element
0
100
200
300
400
500
600
700
Machine Hours
EXERCISE 5-4
1.
Wood used in the production of furniture.
Variable.
2.
Fuel used in delivery trucks.
Variable.
3.
Straight-line depreciation on factory building.
Fixed.
4.
Screws used in the production of furniture.
Variable.
5.
Sales staff salaries.
Fixed.
6.
Sales commissions.
Variable.
7.
Property taxes.
Fixed.
8.
Insurance on buildings.
Fixed.
9.
Hourly wages of furniture craftsmen.
Variable.
10.
Salaries of factory supervisors.
Fixed.
11.
Utilities expense.
Mixed.
12.
Telephone bill.
Mixed.
$ 700
EXERCISE 5-5
(a) Maintenance Costs:
$5,000 – $2,750
8,000 – 3,500 =$2,250
4,500
= $.50 variable cost per machine hour
Activity Level
High
Low
Total cost
Less: Variable costs
8,000 X $.50
3,500 X $.50
Total fixed costs
$5,000
4,000
00,000
$1,000
$2,750
1,750
$1,000
Thus, maintenance costs are $1,000 per month plus $.50 per
machine hour.
(b)
$5,000
COSTS
Total Cost Line
$4,000
$3,000
Variable Cost Element
$2,000
Fixed Cost Element
0
2,000
4,000
6,000
8,000
Machine Hours
$1,000
EXERCISE 5-6
(a)
Cost
Fixed
Variable
Mixed
Direct materials
X
Direct labor
X
Utilities
X
Property taxes
X
Indirect labor
X
Supervisory salaries
X
Maintenance
X
Depreciation
X
(b) Fixed costs = $1,000 + $1,900 + $2,400 +
$300 + $200
Maintenance:
Variable cost to produce 3,000 units = $1,100 – $200
= $900
Variable cost per unit = $900/3,000 units
= $.30 per unit
unit X 5,000 units)
EXERCISE 5-7
MEMO
To: Jim Taylor
From: Student
Re: Assumptions underlying CVP analysis
The five assumptions are:
the relevant range of the activity index.
2. All costs can be classified accurately as either fixed or variable.
3. Changes in activity are the only factors that affect costs.
4. All units produced are sold.
EXERCISE 5-8
(a)
Contribution margin per lawn
Contribution margin per lawn
Contribution margin ratio
=
=
=
$60 – ($12 + $10 + $2)
$36
$36 ÷ $60 = 60%
Fixed costs = $1,400 + $200 + $2,000 = $3,600
Break-even point in lawns = $3,600 ÷ $36 = 100
(b) Break-even point in dollars = 100 lawns X $60 per lawn
= $6,000 per month
OR
EXERCISE 5-9
1.
Contribution margin per room
Contribution margin per room
Contribution margin ratio
=
=
=
$60 – ($11 + $28)
$21
$21 ÷ $60 = 35%
Fixed costs = $6,200 + $1,100 + $1,000 + $100 = $8,400
Break-even point in rooms = $8,400 ÷ $21 = 400
= $24,000 per month
OR
EXERCISE 5-10
(a) Contribution margin in dollars: Sales = 560 X $120 = $67,200
Contribution margin per unit: $120 – $72 ($120 X 60%) = $48.
(b) Break-even sales in dollars:
$21,024
40%
= $52,560.
Break-even sales in units:
$21,024
$48
= 438.
EXERCISE 5-11
(a)
1. Contribution margin ratio is:
$27,000
= 75%
$36,000
Break-even point in dollars =
$15,000
= $20,000
75%
2. Round-trip fare =
$36,000
= $25
1,440 fares
Break-even point in fares =
$20,000
= 800 fares
$25
$15,000.
EXERCISE 5-12
(a) Unit contribution margin =
Fixed costs
Break-even sales in units
=
$112,000
($350,000 ÷ $5)
= $1.60
= $5.00 – $1.60
= $3.40
OR
= 70,000 X $5.00 = 70,000X + $112,000
Contribution margin ratio = $1.60 ÷ $5.00 = 32%
EXERCISE 5-12 (Continued)
(b) Fixed costs ÷ Contribution margin ratio = Break-even sales in dollars
Fixed costs ÷ .32 = $420,000
= $134,400 ($420,000 X.32)
($134,400 – $112,000).
EXERCISE 5-13
(a) CANNES COMPANY
CVP Income Statement
For the Month Ended September 30, 2014
Total
Per Unit
Sales (600 video game consoles) ……………… $240,000 $400
Variable costs …………………………………………. 165,000 275
(b) Sales = Variable costs + Fixed costs
(c) CANNES COMPANY
CVP Income Statement
For the Month Ended September 30, 2014
Total
Per Unit
Sales (416 video game consoles)………………. $166,400 $400