CHAPTER 22
Cost-Volume-Profit
ASSIGNMENT CLASSIFICATION TABLE
Learning Objectives
Questions
Brief
Exercises
Do It!
Exercises
A
Problems
1. Explain variable, fixed, and
mixed costs and the relevant
range.
1, 2, 3, 4, 5,
6
1, 2, 3
1
1, 2, 3
1A
2. Apply the high-low method to
determine the components of
mixed costs.
7, 8
4
2
2
1A
3. Prepare a CVP income
statement to determine
contribution margin.
9, 10, 11, 17
5
3
4, 5, 6, 7, 8, 9,
10
1A, 2A, 4A,
5A
4. Compute the break-even
point using three approaches.
12, 13, 14
6, 7
4
5, 6, 7, 8, 9,
10, 11, 13
1A, 2A, 3A,
4A, 5A
5. Determine the sales required
to earn target net income and
determine margin of safety.
15, 16
8, 9, 10
5
11, 12, 13
2A, 4A, 5A
6. Use CVP analysis to respond
to changes in the business
environment.
15, 16
11
6
14
*7. Explain the differences
between absorption costing
and variable costing.
18, 19
12
15, 16
6A
*Note: All asterisked Questions, Exercises, and Problems relate to material contained in the appendix to the
chapter.
ASSIGNMENT CHARACTERISTICS TABLE
Problem
Number
Description
Difficulty
Level
Time
Allotted (min.)
1A
Determine variable and fixed costs, compute break-even
point, prepare a CVP graph, and determine net income.
Simple
20–30
2A
Prepare a CVP income statement, compute break-even
point, contribution margin ratio, margin of safety ratio,
and sales for target net income.
Moderate
30–40
3A
Compute break-even point under alternative courses
of action.
Simple
20–30
4A
Compute break-even point and margin of safety ratio,
and prepare a CVP income statement before and after
changes in business environment.
Moderate
20–30
5A
Compute contribution margin, fixed costs, break-even
point, sales for target net income, and margin of safety
ratio.
Moderate
20–30
*6A
Prepare income statements under absorption costing and
variable costing for a company with beginning inventory,
and reconcile differences.
Moderate
20–30
Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End–of-Chapter Exercises and Problems
Learning Objective
Knowledge
Comprehension
Application
Analysis
Synthesis
Evaluation
**1. Explain variable, fixed, and mixed
costs and the relevant range.
E22-4
Q22-1
Q22-2
Q22-3
Q22-4
Q22-5
Q22-6
BE22-1
DI22-1
E22-1
E22-3
E22-2
E22-5
E22-6
BE22-2
BE22-3
E22-2
P22–1A
P22–6A
**2. Apply the high-low method to
determine the components of mixed
costs.
E22-4
Q22-7
Q22-8
BE22-4
DI22-2
E22-2
P22–1A
**3. Prepare a CVP income statement to
determine contribution margin.
Q22-9
Q22–10
Q22–11
Q22–17
BE22-5
DI22-3
E22-5
E22-6
E22-7
E22-8
E22-9
E22-10
BE22-6
P22–1A
P22–2A
P22-5A
P22–4A
**4. Compute the break-even point
using three approaches.
Q22–12
Q22–14
Q22–13
BE22-6
BE22-7
DI22-4
E22–11
E22-13
P22–1A
P22–2A
P22-5A
P22–3A
P22–4A
**5. Determine the sales required to
earn target net income and
determine margin of safety.
Q22–15
Q22–16
BE22-8
BE22-9
BE22–10
DI22-5
E22-11
E22-12
E22–13
P22–2A
P22–5A
P22–4A
**6. Use CVP analysis to respond to
changes in the business
environment.
BE22–11 E22-14
DI22-6
**7 Explain the differences between
absorption costing and variable
costing.
Q22-18
Q22-19
BE22–12
E22–17
E22-15
P22-6A
Broadening Your Perspective
BYP22-5
BYP22-3
BYP22-1
BYP22-4
BYP22-2
BYP22-6
BYP22-7
BLOOM’ S TAXONOMY TABLE
ANSWERS TO QUESTIONS
1. (a) Cost behavior analysis is the study of how specific costs respond to changes in the level of activity
within a company.
(b) Cost behavior analysis is important to management in planning business operations and in deciding
between alternative courses of action.
3. Fixed costs remain the same in total regardless of changes in the activity level. In contrast, fixed
costs per unit vary inversely with activity. As volume increases, fixed costs per unit decline and vice
versa.
4. (a) The relevant range is the range of activity over which a company expects to operate during
the year.
5. This is true. Most companies operate within the relevant range. Within this range, it is possible to
establish a linear (straight-line) relationship for both variable and fixed costs. If a relevant range
cannot be established, segregation of costs into fixed and variable becomes extremely difficult.
6. Apartment rent is fixed because the cost per month remains the same regardless of how much Adam
7. For CVP analysis, mixed costs must be classified into their fixed and variable elements. One approach
to the classification of mixed costs is the high-low method.
8. Variable cost per unit is $1.30, or [($165,000 – $100,000) ÷ (90,000 – 40,000)]. At any level of activity,
fixed costs are $48,000 per month [$165,000 – (90,000 X $1.30)].
Questions Chapter 22 (Continued)
12. Disagree. Knowledge of the break-even point is useful to management in deciding whether to introduce
new product lines, change sales prices on established products, and enter new market areas.
13. $26,000 ÷ 25% = $104,000
15. Margin of safety is the difference between actual or expected sales and sales at the break-even
point. 1,250 X $12 = $15,000; $15,000 – $13,200 = $1,800; $1,800 ÷ $15,000 = 12%.
16. At break-even sales, the contribution margin is equal to the fixed costs. The contribution margin
ratio is:
17. PACE COMPANY
CVP Income Statement
Sales ……………………………………………………………………………………. $900,000
Variable expenses
Cost of goods sold ($600,000 X .70) …………………………………… $420,000
Operating expenses ($200,000 X .70) …………………………………. 140,000
*18. Under absorption costing, both variable and fixed manufacturing costs are considered to be
product costs. Under variable costing, only variable manufacturing costs are product costs and
fixed manufacturing costs are expensed when incurred.
*19. (a) The rationale for variable costing centers on the purpose of fixed manufacturing costs, which
is to have productive facilities available for use. Since these costs are incurred whether a
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 22-1
Indirect labor is a variable cost because it increases in total directly and
proportionately with the change in the activity level.
Supervisory salaries is a fixed cost because it remains the same in total regard-
less of changes in the activity level.
Maintenance is a mixed cost because it increases in total but not proportionately
with changes in the activity level.
BRIEF EXERCISE 22-2
VARIABLE COST
Relevant Range
FIXED COST
Relevant Range
$10,000
$10,000
8,000
8,000
6,000
6,000
4,000
4,000
2,000
2,000
0
20
40
60
80
100
0
20
40
60
80
100
Activity Level
Activity Level
BRIEF EXERCISE 22-3
$60,000
COST
Total Cost Line
45,000
30,000
Variable Cost Element
15,000
Fixed Cost Element
0
500
1,000
1,500
2,000
2,500
Direct Labor Hours
BRIEF EXERCISE 22-4
High
Low
Difference
$15,000
$13,500
=
$1,500
$1,500 ÷ 1,000 = $1.50—Variable cost per mile.
High
Low
Total cost
$15,000
$13,500
BRIEF EXERCISE 22-5
1. (a) $288 = ($640 – $352)
(b) 45% ($288 ÷ $640)
BRIEF EXERCISE 22-6
(a) $520Q – $286Q – $163,800 = $0
$234Q = $163,800
Q = 700 units
BRIEF EXERCISE 22-7
Contribution margin ratio = [($300,000 – $180,000) ÷ $300,000] = 40%
Required sales in dollars = $110,000 ÷ 40% = $275,000
BRIEF EXERCISE 22-8
BRIEF EXERCISE 22-10
Contribution margin per unit $1.60 is ($6.00 – $4.40)
Required sales in units = ($480,000 + $1,500,000) ÷ $1.60 = 1,237,500.
BRIEF EXERCISE 22-11
HAMBY INC.
Income Statement
For the Quarter Ended March 31, 2017
Sales ……………………………………………………………… $2,000,000
Variable expenses
Cost of goods sold ………………………………….. $760,000
Selling expenses……………………………………… 95,000
*BRIEF EXERCISE 22-12
MEMO
To: Chief financial officer
From: Student
Re: Absorption and variable costing
SOLUTIONS FOR DO IT! REVIEW EXERCISES
DO IT! 22-1
Variable costs: Indirect labor, direct labor, and direct materials.
Fixed costs: Property taxes and depreciation.
Mixed costs: Utilities and maintenance.
DO IT! 22-2
DO IT! 22-3
Cedar Grove Industries
CVP Income Statement
For the Month Ended May 31, 2017
Total Per Unit
Sales $360,000 $45
DO IT! 22-4
(a) The formula is $250Q – $170Q – $160,000 = 0. Therefore, 80Q =
$160,000, and the breakeven point in units is 2,000 ($160,000 ÷ $80).
DO IT! 22-5
(a) CM per unit = Unit selling price – Unit variable costs
$12 = $30 – $18
CM ratio = CM per unit/Unit selling price
DO IT! 22-6
(a) Break-even point in units is 7,500 units ($150,000 ÷ $20).
Break-even point in sales dollars is $375,000 ($150,000 ÷ .40*).
The margin of safety in dollars is $75,000 ($450,000 – $375,000).
*$20 ÷ $50.
SOLUTIONS TO EXERCISES
EXERCISE 22-1
(a) The determination as to whether a cost is variable, fixed, or mixed can
be made by comparing the cost in total or on a per-unit basis at two
different levels of production.
EXERCISE 22-2
(a) Maintenance Costs:
$5,500 – $2,700
700 – 300
=
$2,800
400
= $7 variable cost per machine hour
EXERCISE 22-2 (Continued)
(b)
$6,000
$5,000
Total Cost Line
$2,000
700
$4,000
EXERCISE 22-3
1.
Wood used in the production of furniture.
Variable.
2.
Fuel used in delivery trucks.
Variable.
3.
Straight-line depreciation on factory building.
Fixed.
$5,500
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.
Salaries of factory supervisors.
Fixed.
Utilities expense.
Mixed.
EXERCISE 22-4
MEMO
To: Marty Moser
From: Student
Re: Assumptions underlying CVP analysis
CVP analysis is a useful tool in analyzing the effects of changes in costs
and volume on a company’s profits. However, there are some assumptions
which underlie CVP analysis. When these assumptions are not valid,
the results of CVP analysis may be inaccurate.
The five assumptions are:
1. The behavior of both costs and revenues is linear throughout
the relevant range of the activity index.
EXERCISE 22-5
(a)
Contribution margin per lawn
Contribution margin per lawn
=
=
$60 – ($12 + $10 + $2)
$36
EXERCISE 22-6
1.
Contribution margin per room
Contribution margin per room
Contribution margin ratio
=
=
=
$60 – ($14 + $28)
$18
$18 ÷ $60 = 30%
EXERCISE 22-7
(a) Contribution margin in dollars: Sales = 560 X $120 = $67,200
Variable costs = $67,200 X .60 = 40,320
Contribution margin $26,880
EXERCISE 22-8
(a)
1. Contribution margin ratio is:
$27,000
= 75%
$36,000
Break-even point in dollars =
2. Round-trip fare =
EXERCISE 22-9
(a) Unit contribution margin =
Fixed costs
Break-even sales in units
Variable cost per unit = Unit selling price – Unit contribution margin
= $5.00 – $1.60
= $3.40
EXERCISE 22-9 (Continued)
(b) Fixed costs ÷ Contribution margin ratio = Break-even sales in dollars
Fixed costs ÷ .32 = $420,000
= $134,400 ($420,000 X.32)
EXERCISE 22-10
(a) and (b) BILLINGS COMPANY
CVP Income Statement
For the Month Ended September 30, 2017
Total
Per Unit
Sales (600 video game consoles) ……………… $240,000 $400
(c) Sales = Variable costs + Fixed costs
(d) BILLINGS COMPANY
CVP Income Statement
For the Month Ended September 30, 2017
Total
Per Unit
Sales (450 video game consoles) ……………… $180,000 $400
EXERCISE 22-11
(a) Units sold in 2016 =
$570,000 + $210,000
$150 – $90
= 13,000 units
(c)
$570,000 + $262,000
X – $90
= 13,000 units, where X = new selling price
EXERCISE 22-12
1. Unit sales price = $400,000 ÷ 5,000 units = $80