CHAPTER 19 Cost Behavior and Cost-Volume-Profit Analysis
Prob. 19–3B (FIN MAN); Prob. 4–3B (MAN)
*$150 unit selling price – $110 unit variable cost
3.
4. Sales (32,000 × $150)…………………………
…
$4,800,000
1. Break-Even Sales (units) = Total Fixed Costs
Unit Contribution Margin
2. Sales (units) = Total Fixed Costs + Target Profit
Unit Contribution Margin
$0
$3,000,000
$6,000,000
$7,000,000
Sales and Costs
Units of Sales
Total C ost s
Operating
Loss Area
Operating Profit Area
19-35
CHAPTER 19 Cost Behavior and Cost-Volume-Profit Analysis
Prob. 19–4B (FIN MAN); Prob. 4–4B (MAN)
Break-Even Units:
Break-Even Dollars:
Unit Selling Price
Contribution Margin Ratio = Unit Contribution Margin
Break-Even (dollars) = Total Fixed Costs
Contribution Margin Ratio
1.
Unit Contribution Margin
Break-Even Sales (units) = Total Fixed Costs
$0
$200,000
$400,000
$800,000
$1,000,000
0 1,500 3,000 4,500 6,000 7,500
Units of Sales
Break-Even
Point
Operating
$225,000
19-36
CHAPTER 19 Cost Behavior and Cost-Volume-Profit Analysis
Prob. 19–4B (FIN MAN); Prob. 4–4B (MAN) (Continued)
2.
a. b.
4,500 units 7,500 units
$0
$600,000
$1,400,000
$1,600,000
0 1,500 3,000 4,500 6,000 7,500
Sales and Costs
Units of Sales
Break-Even
Point
$1,500,000
19-37
CHAPTER 19 Cost Behavior and Cost-Volume-Profit Analysis
Prob. 19–4B (FIN MAN); Prob. 4–4B (MAN) (Continued)
3.
Unit Contribution Margin
Unit Contribution Margin
Unit Selling Price
=Total Fixed Costs
=
Break-Even (dollars)
=
Total Fixed Costs
Contribution Margin Ratio
Contribution Margin Ratio
Break-Even Dollars:
Break-Even Units:
Break-Even Sales (units)
$0
$200,000
$1,400,000
$1,600,000
0 1,500 3,000 4,500 6,000 7,500
Units of Sales
Operating
Operating
Loss Area
$337,500
19-38
CHAPTER 19 Cost Behavior and Cost-Volume-Profit Analysis
Prob. 19–4B (FIN MAN); Prob. 4–4B (MAN) (Concluded)
4.
a. b.
6,000 units 7,500 units
$0
$200,000
$400,000
$1,000,000
$1,400,000
$1,600,000
0 1,500 3,000 4,500 6,000 7,500
Units of Sales
Total Sales
b.
Operating
Break-Even
Point
Operating
Loss Area
$1,500,000
$337,500
19-39
CHAPTER 19 Cost Behavior and Cost-Volume-Profit Analysis
Prob. 19–5B (FIN MAN); Prob. 4–5B (MAN)
(Overall product is labeled E.)
1. Unit Selling Price of E [($12 × 30%) + ($15 × 70%)]…………………………………
…
$14.10
3. Unit selling price of E [($12 × 50%) + ($15 × 50%)]…………………………………
…
$13.50
…
Break-Even Sales (units)
=Fixed Costs
Unit Contribution Margin
19-40
CHAPTER 19 Cost Behavior and Cost-Volume-Profit Analysis
Prob. 19–6B (FIN MAN); Prob. 4–6B (MAN)
1.
Sales (12,000 × $240) $2,880,000
Cost of goods sold:
Expenses:
Selling expenses:
Sales salaries and commissions
[$340,000 + (12,000 × $4)] $388,000
Advertising 116,000
BELMAIN CO.
Estimated Income Statement
For the Year Ended December 31, 2014
19-41
CHAPTER 19 Cost Behavior and Cost-Volume-Profit Analysis
Prob. 19–6B (FIN MAN); Prob. 4–6B (MAN) (Continued)
3. Break-Even Sales (units) = Fixed Costs
Unit Contribution Margin
2. Contribution Margin Ratio = Sales – Variable Costs
Sales
19-42
CHAPTER 19 Cost Behavior and Cost-Volume-Profit Analysis
Prob. 19–6B (FIN MAN); Prob. 4–6B (MAN) (Concluded)
4.
5. Margin of safety:
In dollars:
Expected sales (12,000 units × $240)………………………
…
$2,880,000
As a percentage of sales:
=Margin of Safety Sales – Sales at Break-Even Point
Sales
$0
$500,000
$2,000,000
$2,500,000
$4,000,000
$4,500,000
0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000
Sales and Costs
Units
Sales
Total Co sts
Operating
Profit Area
Area
$1,920,000
19-43
CHAPTER 19 Cost Behavior and Cost-Volume-Profit Analysis
CP 19–1 (FIN MAN); CP 4–1 (MAN)
In an absolute sense, Edward’s actions are devious. He is clearly attempting
to use the first four-year scenario, which is favorable, as a way to market the
partnerships. They are really longer-term investments. After the first four
CASES & PROJECTS
19-44
CHAPTER 19 Cost Behavior and Cost-Volume-Profit Analysis
CP 19–2 (FIN MAN); CP 4–2 (MAN)
The airline industry has a high operating leverage. This means that fixed costs
are a large part of the cost structure. The break-even volume is apparently around
65% of capacity. When the volume falls below 65%, the industry loses money. As
the percentage increases above 65%, the industry becomes very profitable. There
change in passenger volume. However, this is unlikely. The revenue from price
increases would need to increase faster than the lost revenue from lower traffic
volume for a price increase to lower break-even. To raise ticket prices, the airline
would have to minimize the impact on lost volume. This might be possible for fare
increases targeted to business travelers that need to fly, regardless of ticket price.
scale. For example, an airline could consolidate three flights departing in the
morning from Tulsa to Dallas into just two flights departing in the morning. This
would reduce the airline’s costs but would increase the airline passengers’
inconvenience. This strategy works only if there is little loss in revenue by going
to two flights, meaning that the people bumped from the third flight go to the other
19-45
CHAPTER 19 Cost Behavior and Cost-Volume-Profit Analysis
CP 19–3 (FIN MAN); CP 4–3 (MAN)
Do-Nothing Strategy:
Revenue – Variable Costs – Fixed Costs = Profit
Thomas’s Strategy:
Revenue – Variable Costs – Fixed Costs = Profit
CP 19–4 (FIN MAN); CP 4–4 (MAN)
The direct labor costs are not variable to the increase in unit volume. The unit
volume is the wrong activity base for direct labor costs. The “number of
impressions” is a more accurate reflection of the direct labor cost. An impression
is a separate printing color application on the banners. Thus, the analysis should
be done as follows:
One Three
Color Color Total
Number of banners 212 616 1,800
Two
Color
274
Color
Four
698
19-46
CHAPTER 19 Cost Behavior and Cost-Volume-Profit Analysis
CP 19–5 (FIN MAN); CP 4–5 (MAN)
The Shipping Department manager should respond by pointing out that the
activities performed by his department are not related to sales volume but to
CP 19–6 (FIN MAN); CP 4–6 (MAN)
There are many possible applications of break-even analysis in a school
environment. Below are just a few possible ideas.
Revenue Fixed Costs Variable Costs
1 Break-even number Student tuition Faculty salary, space Supplies, copying
of students in a class for a class costs
2 Break-even sales Book sales Manager’s salary, Cashier salaries,
in the bookstore space costs cost of books
Break-Even Analysis
19-47