-
Module 15
Cost-Volume-Profit Analysis and Planning
DISCUSSION QUESTIONS
Q3-1. Cost-volume-profit analysis is a technique used to examine
the relationships among the total volume of some independent
variable, total costs, total revenues, and profits during a time
period. It is particularly useful in the early stages of planning
when it provides a framework for discussing planning issues.
Q3-2. The important assumptions that underlie cost-volume-profit
analysis are:
1. All costs are classified as fixed or variable with unit-level
activity cost drivers.
2. The total cost function is linear within the relevant
range.3. The total revenue function is linear within the relevant
range.4. The analysis is for a single product, or the sales mix of
multiple
products is constant.5. There is only one activity cost driver:
unit or dollar sales
volume.
Q3-3. The use of a single variable in cost-volume-profit
analysis is most reasonable when analyzing the profitability of a
specific event or the profitability of an organization that
produces a single product or service on a continuous basis.
Cambridge Business Publishers, 2013
Solutions Manual, Module 15 15-1
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Q3-4. In a contribution income statement, costs are classified
according to behavior as variable or fixed, and the contribution
margin (the difference between total revenues and total variable
costs) that goes toward covering fixed costs and providing a profit
is emphasized. In a functional income statement, costs are
classified according to function (rather than behavior), such as
manufacturing and selling and administrative. This is the type of
income statement typically included in corporate annual
reports.
Q3-5. The unit contribution margin is equal to the difference
between the unit selling price and the unit variable costs. In
computing the unit break-even point, the fixed costs are divided by
the unit contribution margin.
Q3-6. The contribution margin ratio is the portion of each
dollar of sales revenue contributed toward covering fixed costs and
earning a profit. It is especially useful in situations involving
several products or when unit sales information is not
available.
Q3-7. The desired profit is added to the fixed costs, increasing
the sales volume required to cover both.
Q3-8. A profit-volume graph contains only one line showing the
relationship between volume and profits, while a cost-volume-profit
graph contains two lines one for total revenues and one for total
costs. A profit-volume graph is most likely to be used when
management is primarily interested in the impact on profits of
changes in sales volume and less interested in the related revenues
and costs.
Q3-9. Income taxes increase the sales volume required to earn a
desired after-tax profit.
Q3-10. Other things being equal, the higher the degree of
operating leverage, the greater the opportunity for profit with
increases in sales. Conversely, a higher degree of operating
leverage magnifies the risk of large losses with a decrease in
sales.
Cambridge Business Publishers, 2013
15-2 Financial & Managerial Accounting for MBAs, 3rd
Edition
-
MINI EXERCISES
M15-11
a. Break-even point = $120,000/(1 0.40) = $200,000
b. Margin of safety = $240,000 $200,000 = $40,000
c. Sales volume for desired profit = ($120,000 + $70,000) =
$316,667(1 0.40)
M15-12
a. 1. Total variable costs2. Total revenue3. Total costs4.
Variable costs5. Fixed costs6. Total costs7. Contribution margin8.
Break-even unit sales volume9. Loss area10. Profit area
b. Line CC Line OR Break-Even Point1. Shift downward No change
Shift left (decrease)2. No change Increase slope Shift left
(decrease)3. Increase slope No change Shift right
(increase)4. Shift upward Decrease slope Shift right
(increase)5. Shift downward and No change Shift left
(decrease)
decrease slope
Cambridge Business Publishers, 2013
Solutions Manual, Module 15 15-3
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M15-13
a. 1. Loss area2. Profit area3. Break-even point4. Axis on which
profit and loss are measured5. Fixed costs6. Profit at volume E
b. Line CF Break-Even Point1. Increase slope Shift left
(decrease)2. Decrease slope Shift right (increase)3. Shift upward
Shift left (decrease)4. Shift downward and Shift right (increase)
decrease slope5. Shift upward and Can't tell; the two changes
decrease slope have opposite effects.
M15-14
a.
$0
$12,000
$24,000
$36,000
$48,000
$60,000
$72,000
0 2,000 4,000 6,000
Unit sales
Total
revenues
and
Total
costs
Cambridge Business Publishers, 2013
15-4 Financial & Managerial Accounting for MBAs, 3rd
Edition
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M15-14 (concluded)
b.
($18,000)
($12,000)
($6,000)
$0
$6,000
$12,000
$18,000
$24,000
0 2,000 4,000 6,000
Total units
Total
Profit
or
(Loss)
c. It is most appropriate to use a profit-volume graph when
management is primarily interested in the impact on profits of
changes in sales volume and less interested in the related revenues
and costs.
Cambridge Business Publishers, 2013
Solutions Manual, Module 15 15-5
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M15-15
a. Selling price $5.00 per hot dogVariable costs 3.50 per hot
dogContribution margin $1.50
Break-even point = $750,000/$1.50 = 500,000 hot dogs
b.
$0
$1,000
$2,000
$3,000
$4,000
$5,000
0 250 500 750 1,000
Unit sales (000)
Total
revenues
and
Total
costs
(000)
c.
($750)($600)($450)($300)($150)
$0$150$300$450$600$750
0 250 500 750 1,000
Total units (000)
Total
Profit
or
(Loss)
(000)
d. It is easier to determine profit or loss at any volume with a
profit-volume graph than with a cost-volume-profit graph. This is
especially true in situations, such as this, where the unit
contribution margin is small and the scale of activity is large.
Although a profit-volume graph provides a clear illustration of
profits, it does not illustrate revenues and costs. Hence, a
manager using a profit-volume graph does not see the relationship
between revenues, costs, and profits.
Cambridge Business Publishers, 2013
15-6 Financial & Managerial Accounting for MBAs, 3rd
Edition
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M15-16
Product
Unit Contribution
MarginSales Mix (units)* Weight
A $1 6 $1 x 6/10 = $0.60B 2 3 2 x 3/10 = 0.60C 3 1 3 x 1/10 =
0.30
10 $1.50
*B = 3C and A = 2B, so A = 3 x 2 = 6
Average unit contribution margin = $1.50
Break-even unit sales volume = $112,500/$1.50 = 75,000 units
Units of A at break-even = 75,000 x 6/10 = 45,000
Cambridge Business Publishers, 2013
Solutions Manual, Module 15 15-7
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EXERCISES
E15-17
a.Alberta Company
Contribution Income StatementFor the Month of May 2012
Sales (6,000 x $40) $240,000Less variable costs:
Direct materials (6,000 x $10) $ 60,000Direct labor (6,000 x $2)
12,000Manufacturing overhead (6,000 x $5) 30,000Selling and
administrative (6,000 x $5) 30,000 (132,000)
Contribution margin 108,000Less fixed costs:
Manufacturing overhead 40,000Selling and administrative 20,000
(60,000)
Profit $ 48,000
b.
Note: The instructor might extend this assignment in class,
computing the break-even point, the margin of safety, and the
impact on profits of a change in sales.
Cambridge Business Publishers, 2013
15-8 Financial & Managerial Accounting for MBAs, 3rd
Edition
-
E15-18
a. Sales $750,000Variable costs (450,000 ) Contribution margin
$300,000
Contribution margin ratio = $300,000/$750,000 = 0.40Annual
break-even dollar sales volume = $210,000/0.40 = $525,000
b. Annual margin of safety in dollars:Sales $750,000Break-even
sales dollars (525,000)Margin of safety $225,000
c. To determine the variable and total cost lines, it is
necessary to compute the variable cost ratio:
Variable cost ratio = Variable costs = $450,000 = 0.60Sales
$750,000
At a volume of $1,000,000 sales dollars, variable costs are
$600,000.
$0
$250,000
$500,000
$750,000
$1,000,000
$0 $250,000 $500,000 $750,000 $1,000,000
Total Revenues
Tota
l Revenues a
nd
Tota
l Costs
d. Revised annual break-even dollar sales:
($210,000 + $35,000)/0.40 = $612,500
Cambridge Business Publishers, 2013
Solutions Manual, Module 15 15-9
Fixed costs =
$210,000
Profit =
$90,000
Variable costs =$450,000
-
E15-19
a. Contribution margin $ 380,000Sales 1,000,000 Contribution
margin ratio 0.38
Break-even point in sales dollars = $285,000/0.38= $750,000
b. Current sales $1,000,000Break-even sales (750,000 ) Margin of
safety $ 250,000
c. Current fixed costs $285,000Impact of increase 57,000New
fixed costs $342,000
Revised break-even point = $342,000/0.38= $900,000
d. Required before-tax income = $200,000/(1 0.36)= $312,500
Sales volume required to provide an after-tax income of
$200,000:($285,000 + $312,500)/0.38 = $1,572,368
e. Sales $1,572,368Variable costs (62% of sales) (974,868 )
Contribution margin (38% of sales) 597,500Fixed costs (285,000 )
Net income before taxes 312,500Income taxes (36%) (112,500 ) Net
income after taxes $ 200,000*
*Answer reflects rounding.
Cambridge Business Publishers, 2013
15-10 Financial & Managerial Accounting for MBAs, 3rd
Edition
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E15-20
a. Fixed costs $12,500,000Contribution [($8,000 $1,000) 1,500]
$10,500,000Endowments and grants 250,000 (10,750,000 ) Required
from other sources $ 1,750,000
b. Break-even price ($30,000/3,000) = $10.00
Revenues (2,700 $10) $27,000Fixed costs (30,000 ) Deficit $
3,000
c. Cost to city ($20 10,000) = $200,000
d. Contribution [($1.25 $0.75) 5,000] $2,500Fixed costs (500 )
Amount raised $2,000
e. Available funds $20,000Fixed costs (5,000 ) Available for
variable costs 15,000Variable costs per present $10 Number of
presents 1,500
Cambridge Business Publishers, 2013
Solutions Manual, Module 15 15-11
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E15-21
a.Capital-
IntensiveLabor-
IntensiveFixed costs:
Manufacturing overhead
$2,440,000 $ 700,000
Selling 500,000 500,000 Total $2,940,000 $1,200,000
Selling price $ 30.00 $30.00
Variable costs:
Direct materials $5.00 $ 6.00Direct labor 5.00 12.00Manuf.
overhead 4.00 2.00Selling 2.00 (16 .00) 2.00 (22 .00) Unit cont.
margin $14 .00 $ 8 .00
Fixed costs $2,940,000 $1,200,000Unit cont. margin $14.00 $ 8.00
Unit break-even point 210,000 150,000
Cambridge Business Publishers, 2013
15-12 Financial & Managerial Accounting for MBAs, 3rd
Edition
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E15-21 (concluded)
b. Paper Mate would be indifferent between the two methods at
the unit volume, X, where total costs are equal.
$16X + $2,940,000 = $22X + $1,200,000$6X = $1,740,000
X = 290,000 units
Identical results are obtained if profit, rather than cost,
equations are used.
($30 $16)X $2,940,000 = ($30 $22)X $1,200,000$6X =
$1,740,000
X = 290,000 units
Paper Mate should use the labor-intensive method if sales are
less than 290,000 units and use the capital-extensive method if
sales are above 290,000 units.
c. 1. Operating leverage is a measure of the responsiveness of
income to changes in sales. The higher a firm's operating leverage,
the more sensitive are its profits to changes in sales volume. It
is also an indication of an organization's cost structure. The
higher the portion of an organization's fixed costs (in comparison
with variable costs), the higher its operating leverage.
2. Capital- Labor-
Intensive IntensiveUnit contribution margin $ 14.00 $ 8.00Unit
sales volume x 250,000 x 250,000Contribution margin 3,500,000
2,000,000Fixed costs (2,940,000) (1,200,000)Net income $ 560,000 $
800,000
Contribution margin $3,500,000 $2,000,000Net income 560,000
800,000 Operating leverage 6.25 2.50
3. The capital-intensive method has a higher operating leverage
because of the greater use of fixed assets.
Cambridge Business Publishers, 2013
Solutions Manual, Module 15 15-13
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E15-22
a.Florida Berry Basket
Contribution Income StatementFor the Year Ended December 31,
2012
Sales (45,000 $90) $4,050,000Variable costs (45,000 $80)
(3,600,000 ) Contribution margin 450,000Fixed costs 275,000 ) Net
income $ 175,000
b. Operating leverage = Contribution margin/Net income=
$450,000/$175,000= 2.57
c. Percentage change in profits = % decrease in sales x
Operating leverage= 10 x 2.57= 25.7 percent decrease
Profits should decrease by 25.7 percent to $130,025, computed
as: [$175,000 ($175,000 x 0.257)].
d. Contribution margin [45,000 ($90 $77.50)] $ 562,500Fixed
costs (375,000 ) Net income $ 187,500
Operating leverage ($562,500/$187,500) 3
The acquisition of the berry-picking machines will reduce
variable costs, thereby increasing the contribution margin. It will
also increase fixed costs, thereby increasing the difference
between the contribution margin and net income. The net effect
would be an increase in operating leverage.
Cambridge Business Publishers, 2013
15-14 Financial & Managerial Accounting for MBAs, 3rd
Edition
-
E15-23
a. Unit Sales Selling MixProduct Price (units) WeightStandard $
50 x 1,750/2,500 $35Multiform 125 x 500/2,500 25Complex 250 x
250/2,500 25Average unit selling price $85
Unit Sales Contribution Mix Product Margin (units)* Weight
Standard $ 20 x 1,750/2,500 $14Multiform 50 x 500/2,500 10Complex
100 x 250/2,500 10Average unit contribution margin $34
Contribution margin ratio = $34/$85 = 0.40
Break-even sales volume = $45,000/0.40 = $112,500
b. Actual sales volume = 2,500 $85 = $212,500Break-even sales
volume 112,500 Margin of safety $100,000
c.
($50)
($25)
$0
$25
$50
$0 $50 $100 $150 $200
Total sales (000)
Total
Profit
or
(Loss)
(000)
Cambridge Business Publishers, 2013
Solutions Manual, Module 15 15-15
-
E15-24
Once the following, or a similar, format is established, each
case is solved by filling in the given information and working
toward the unknowns.
Case 1 Case 2 Case 3 Case 4
Unit sales 1,000 800 4,300?* 3,000 ?*
Sales revenue $20,000 $ 1,600 ? $137,600 ? $60,000Variable
costs:
Unit $ 10 $ 1 $ 12 $ 5?Unit sales x 1,000 x 800 x 4,300 x 3,000
?Total (10,000 ) (800 ) (51,600 ) (15,000 ) ?
Contribution margin $10,000? $ 800 $ 86,000? $45,000?Fixed costs
(8,000 ) (400 )? (80,000) (30,000 )?
Net income $ 2,000? $ 400 $ 6,000?# $15,000 ?#
Unit cont. margin:Cont. margin $10,000? $ 800 $86,000?
$45,000?
Unit sales 1,000 800 4,300 ? 3,000 ?Unit contribution $ 10? $ 1?
$ 20 ? $ 15
Break-even point:Fixed costs $8,000 $ 400 $ 80,000 $30,000?
Unit cont. margin $10 ? $1 ? $20 ? $15 Unit break-even point 800
? 400 ? 4,000 2,000
Margin of safety (unit sales less unit break- even point) 200 ?
400 ? 300 1,000
*Solved as the unit break-even point plus the margin of
safety.#Solved as the unit contribution margin times margin of
safety.
Cambridge Business Publishers, 2013
15-16 Financial & Managerial Accounting for MBAs, 3rd
Edition
-
E15-25
Once the following or similar format is established, each case
can be solved by filling in the known amounts and working toward
the unknowns.
Case A Case B Case C Case DSales revenue $100,000 $80,000
$50,000 $45,000*
Cont. margin ratio 0.40 ? 0.50 0.40 0.80 ?Contribution margin $
40,000 $40,000? $20,000 $36,000?Fixed costs ( 30,000) (35,000)?
(10,000)? (20,000)?Net income $ 10,000? $ 5,000 $10,000
$16,000?
Variable cost ratio 0.60? 0.50 0.60? 0.20Contribution margin
ratio 0.40? 0.50? 0.40 0.80?Total 1.00 1.00 1.00 1.00
Break-even point:Fixed costs $ 30,000 $35,000 $10,000?
$20,000?Cont. marg. ratio 0.40 ? 0.50 ? 0.40 0.80 Dollar break-even
point $ 75,000? $70,000? $25,000? $25,000
Margin of safety (dollar sales less dollar break-even point) $
25,000? $10,000? $25,000? $20,000
*Computed as the break-even point plus the margin of safety.
Cambridge Business Publishers, 2013
Solutions Manual, Module 15 15-17
-
E15-26 A
Weekly contribution per average customer:
$15 sales per visit (1 - 0.80) contribution ratio 1.75 visits =
$5.25
Annual contribution per customer = $5.25 52 weeks = $273
Customers required for desired profit = ($80,000 + $40,000)/$273
= 440
Required population = 440 customers / 0.04 customers in
population = 11,000
E15-27 A
a. Minimum order size to break even on order = $200 =
$2,500(0.10 0.02)
b. Annual sales to break-even on average customer = ($200 x 4
orders) + $1,000 = $22,500
(0.10 0.02)
c. Average order size = $22,500/4 = $5,625
d. Order-level costs ($200 4 orders 100 customers) $
80,000Customer-level costs ($1,000 100 customers)
100,000Facility-level costs 60,000Total costs $ 240,000Contribution
margin ratio 0.08 Minimum annual sales to break even $3,000,000
e. Average order size = $3,000,000/(4 orders 100 customers) =
$7,500
f. Part (a) considers only order-level costs while part (c) also
considers customer-level costs, and part (e) adds facility-level
costs. In order for a company to break even on an order, it need
only cover order-level costs. To break even on a customer, the
company must cover order-level and customer-level costs. Finally,
to achieve true break-even, all costs must be covered.
Cambridge Business Publishers, 2013
15-18 Financial & Managerial Accounting for MBAs, 3rd
Edition
-
PROBLEMS
P15-28
a. Unit contribution margin: $35 $25 = $10
Total contribution (20,000 $10) $200,000Fixed costs 110,000 Net
income before taxes 90,000Net income after taxes 54,000 Income
taxes 36,000Net income before taxes $90,000 Tax rate 0.40
b. Required before-tax income = $90,000/(1 0.40)= $150,000
Volume required to provide an after-tax income of
$90,000:($110,000 + $150,000)/$10 = 26,000 units
c. Contribution marginCurrent $10.00Impact of reduction in
variable costs 2 .50 New $12 .50
Fixed costs:Current $110,000Impact of increase in fixed costs
20,000New $130,000
Volume required to provide an after-tax income of
$90,000:($130,000 + $150,000)/$12.50 = 22,400 units
The reduction in variable costs was more than enough to offset
the increase in fixed costs. Consequently, the volume required to
achieve an after-tax profit of $90,000 declined from 26,000 units
to 22,400 units.
d. Requirements (a) through (c) assume that taxable income and
accounting income are equal and that the tax rate is constant.
Cambridge Business Publishers, 2013
Solutions Manual, Module 15 15-19
-
P15-29
a.New York Tours
Contribution Income StatementFor the Month of June 2012
Sales (3,000 $90) $270,000Less variable costs:
Admission fees (3,000 $30) $ 90,000Lunch (3,000 $20)
60,000Overhead (3,000 $12) 36,000Selling and administrative (3,000
$8) 24,000 (210,000)
Contribution margin 60,000Less fixed costs:
Operations 25,000Selling and administrative 15,000 (40,000)
Before-tax profit 20,000Income taxes ($20,000 .40)
8,000After-tax profit $ 12,000
b. Monthly break-even point in units.: $40,000/($90 70) = 2,000
units
c. Margin of safety in units:Actual June sales 3,000 unitsBreak
even sales 2,000 unitsMargin of safety 1,000 units
d. Sales for an after-tax profit of $15,000:Required before-tax
profit = $15,000/(1 0.40) = $25,000Required sales = ($40,000 +
$25,000)/($90 70) = 3,250
Cambridge Business Publishers, 2013
15-20 Financial & Managerial Accounting for MBAs, 3rd
Edition
-
P15-29 (concluded)
e.
$0
$100,000
$200,000
$300,000
$400,000
0 1,000 2,000 3,000 4,000
Unit sales
P15-30
a. Prior to solving this problem it is necessary to determine
the variable costs per unit, the fixed costs per year, and the unit
selling price.
Using the high-low method:Variable costs per unit = ($85,000
$70,000)/(8,000 5,000) = $5
Fixed costs = $85,000 $5(8,000) = $45,000or, = $70,000 $5(5,000)
= $45,000
Unit selling price = $65,000/5,000 = $104,000/8,000 = $13
Unit contribution margin = $13 $5 = $8
Break-even point = $45,000/$8 = 5,625 units
b. Sales volume required to earn a profit of $10,000: ($45,000 +
$10,000)/$8 = 6,875 units
Cambridge Business Publishers, 2013
Solutions Manual, Module 15 15-21
Variable costs =
$210,000
Fixed costs =
$40,000
Profit =
$20,000
Total
revenues
&
Total
costs
-
P15-31
a. Contribution ratio = 1.0 0.60 = 0.40
Break-even point = $1,300,000/0.40 = $3,250,000
b. Before-tax profit = $500,000/(1 0.34) = $757,576
(rounded)
Required sales volume = ($1,300,000 + $757,576)/0.40 =
$5,143,940
c. Profits of automation = Profits of outsourcing(1 0.54)X
($1,300,000 + $300,000) = (1 0.65)X ($1,300,000 $300,000)0.46X
$1,600,000 = 0.35X $1,000,0000.11X = $600,000 X = $5,454,545
(rounded)
d.Automation Outsourcing
Strength: It will provide higher profits if
sales increase. It may provide new
opportunities. It may enhance quality.
Strength: This alternative has less risk
and a lower break-even point. It is preferred at the current
sales volume. It allows focusing on core
competencies.
Weakness: This alternative has higher risk
and a higher break-even point.
Weakness: This alternative will not have
as great a potential for high profits.
It provides less control of operations.
Cambridge Business Publishers, 2013
15-22 Financial & Managerial Accounting for MBAs, 3rd
Edition
-
P15-32
a. The break-even point in patient-days equals total fixed costs
divided by the contribution margin per patient-day.
Fixed costs: Melford Hospital charges $2,900,000 Salaries
480,000 Total $3,380,000Unit contribution margin:
Revenues per patient-day $300Variable costs per patient-day
(100)*Contribution margin per patient-day $200
*$6,000,000 total 2011 revenues/$300 revenue per patient-day
equals 20,000 patient-days for 2011.
$2,000,000 total 2011 variable costs / 20,000 patient-days =
$100 variable costs per patient-day
Break-even point in patient-days = $3,380,000/$200= 16,900
patient-days
b.Pediatrics
Schedule of Change in Earnings from Rental of 20 Additional
BedsFor the Year Ending June 30, 2012
Increase in revenues (20 beds 90 days $300/ day) $
540,000Increase in expenses:
Fixed charges by Melford Hospital:Annual charge per bed
($2,900,000/60) $ 48,333Number of additional beds 20 Total increase
in fixed charges 966,660
Variable charges by Melford Hospital($100/patient-day 90 days 20
beds) 180,000 (1,146,660)
Net decrease in earnings $ (606,660)
(Note that the break-even on the additional 20 beds is 4,834 bed
days ($966,660/$200), or 242 days for each of the 20 additional
beds. This is an increase of 3,034 bed days (or 152 days for each
bed) above the estimated demand of 90 days for each of the 20
beds.)
Cambridge Business Publishers, 2013
Solutions Manual, Module 15 15-23
-
P15-33
a. Required before-tax profit = $30,000/( 1 0.40) = $50,000
Required sales for a $30,000 after-tax profit:
Sure Foot = ($280,000* + $50,000)/($80 50) = 11,000 pairs
Trail Runner = ($200,000* + $50,000)/($75 50) = 10,000 pairs
*Because only one product will be produced the product-level
costs and the facility-level costs are combined: $130,000 +
$150,000 for Sure Foot and $50,000 + $150,000 for Trail Runner.
b. Required sales for identical before-tax profit:
Sure Foot Profit = Trail Runner Profit($80 $50)X $280,000 = ($75
$50)X $200,000 $30X $25X = $80,000 $5X = $80,000 X = 1 6,000
pairs
c. The after-tax profit or loss is the same with either product.
Hence, it is only necessary to solve for one product.
Sure Foot: [($80 $50)16,000 $280,000] (1 0.40) = $120,000
Trail Runner: [($75 $50)16,000 $200,000] (1 0.40) = $120,000
d. Without further analysis it is apparent that at a volume of
13,000 pairs the Trail Runner is preferred. Trail Runner requires
fewer sales to achieve a $30,000 after-tax profit and the profits
of both products are not identical until a total of 16,000 pairs of
either product are sold. This answer can also be demonstrated
analytically:
Sure Foot: [($80 $50)13,000 $280,000] (1 0.40) = $66,000
Trail Runner: [($75 $50)13,000 $200,000] (1 0.40) = $75,000
Cambridge Business Publishers, 2013
15-24 Financial & Managerial Accounting for MBAs, 3rd
Edition
-
P15-33 (concluded)
e. Required Sure Foot variable costs for identical profit at
13,000 pairs:
Because before-tax and after-tax profits will be the same for
either product, it is simpler to develop a solution based on
identical before-tax profits with X representing the required Sure
Foot variable costs per pair.
Sure Foot Profit = Trail Runner Profit ($80 X)13,000 $280,000 =
($75 $50)13,000 $200,000 $1,040,000 13,000X $280,000 = $325,000
$200,000 13,000X = $635,000 X = $48.85 (rounding)
The variable costs of Sure Foot must decline $1.15 ($50.00
$48.85) to $48.85.
Sure Foot Profit with reduced variable costs = [($80
$48.85)13,000 $280,000] (1 0.40) = $74,970 (with rounding
error)
Cambridge Business Publishers, 2013
Solutions Manual, Module 15 15-25
-
P15-34
a. Cost-estimating equation:Variable cost ratio = $1,243,155
$1,113,567 = 0.8134
$1,364,661 $1,205,340Annual fixed costs = $1,243,155 ($1,364,661
x 0.8134) = $133,139.7 (thousand)Total cost (in thousands) =
$133,139.7 + 0.8134XWhere X is revenue in thousands of dollars.
Note the high variable cost ratio, as discussed in the chapter
opening.
b. Annual break-even point:Contribution margin ratio = 1 0.8134
= 0.1866Break-even point = ($133,139.7/0.1866) = $713,503.2
(thousand)
c. Predicted 2009 operating profit:Revenues
$1,670,269.0Less:Variable costs (1,670,269 0.8134) 1,358,596.8Fixed
costs 133,139 .7 Operating profit $ 178,532 .5
d. The equations assume linear cost behavior, stable prices, and
a stable cost structure.
Netflix reported a 2009 operating profit of $191,939,000,
$13,406,500 more than the amount predicted using equations based on
2007 and 2008 data, an error of approximately 7 percent. This
under-prediction likely occurred because of changes in Netflixs
cost structure, higher fixed costs and lower variable costs, as the
number of Netflix customers increase with greater use of streaming
video. See the opening vignette for Chapter 3.
Cambridge Business Publishers, 2013
15-26 Financial & Managerial Accounting for MBAs, 3rd
Edition
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P15-35 A
a. Annual break-even point in sales dollars:Break-even point =
$360,000/(1 0.75 0.05) = $1,800,000
b. Annual break-even point in units:Break-even point =
$360,000/{$120 [$120(0.75 + 0.05)]} = 15,000 units(or
$1,800,000/$120 = 15,000)
c. On new books the contribution to other costs is 25 percent
(1.00 less 0.75 to the publisher) of the suggested retail price. On
used books the contribution to other costs is 50 percent of the
suggested retail price (0.75 less 0.25 cost of the book). Shifting
towards more used books and fewer new books will increase bookstore
profitability with the same unit sales.
d. Publisher project break-even point:Note: Solution is in terms
of wholesale price to bookstore, not retail price to final
buyer.
Project break-even point = $325,000/(1 0.20 0.15) = $500,000
e. Profitability analysis of sales of 8,000 new books:1.
Bookstores unit-level contribution
Final retail sales $120 8,000 $960,000Less unit-level costs
(0.75 + 0.05) (768,000 ) Bookstores unit-level contribution
$192,000
2. Publishers project-level contribution:Sales to bookstores
$120 0.75 8,000 $720,000Unit-level costs (0.20 + 0.15)
(252,000)Project-level costs (325,000 ) Publishers project
contribution $143,000
3. Authors royalties: $720,000 net to publisher 0.15
$108,000
Cambridge Business Publishers, 2013
Solutions Manual, Module 15 15-27
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P15-36
a. Current break-even point in sales dollars:
Contribution margin ratio = $400,000/$1,050,000 = 0.38095
Break-even point = $240,000/0.38095 = $630,004
b. Unit contribution margin and break-even point:
Average unit contribution margin = $400,000/2,500 = $160
Unit break-even point = $240,000/$160 = 1,500 units
c. The current average unit contribution margin is $160.
Current unit contribution margin of individual products:Cozy
Kitchen $100,000/1,000 units $100All-House $300,000/1,500 units
$200
Shifting the mix to 80:20 will change the average unit
contribution margin:
($100 0.80) + ($200 0.20) = $120
Contribution with proposed plan = 3,000 units $120 =
$360,000
The current contribution margin is $400,000. The contribution
margin with a shift in the mix, even with a 500-unit sales
increase, is only $360,000. Hence, profits will decrease if the
projected shift occurs. In the absence of capacity constraints,
sales reps should emphasize increased sales of the product with the
higher unit contribution margin.
Cambridge Business Publishers, 2013
15-28 Financial & Managerial Accounting for MBAs, 3rd
Edition
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P15-37
a. 1. Current contribution:Fixed costs $21,000Profit +
9,000Contribution $30,000
Contribution margin ratio = $30,000/$50,000 = 0.60Current
break-even point = $21,000/0.60 = $35,000
2. Super SuperBurgers Chickens
Selling price $2.50 $3.00Variable costs -1.00* -1.80Unit
contribution $1.50 $1.20
*$2.50 (1.0 0.60)
Short-run Volume Mix
Super Burgers 10,000 0.50Super Chickens 10,000 0.50
UnitContribution Mix Weight
Super Burgers $1.50 0.50 $0.75Super Chickens 1.20 0.50
0.60Average unit contribution $1.35
Short-run monthly profit:Contribution (20,000 units $1.35)
$27,000Less fixed costs ($21,000 + 7,760) (28,760 ) Profit (loss) $
(1,760 )
Short-run contribution ratio:Contribution margin 27,000Revenue
[(10,000 $2.50) + (10,000 $3.00)] 55,000Contribution ratio
0.4909
Short-run break-even point = $28,760/0.4909 = $58,586
Cambridge Business Publishers, 2013
Solutions Manual, Module 15 15-29
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P15-37 (concluded)
3. Long-run Volume Mix
Super Burgers 30,000 2/3Super Chickens 15,000 1/3
UnitContribution Mix Weight
Super Burgers $1.50 2/3 $1.00Super Chickens 1.20 1/3 0.40Average
unit contribution $1.40
Long-run monthly profit:Contribution (45,000 units $1.40)
$63,000Less fixed costs ($21,000 + 7,760) (28,760 ) Profit
$34,240
Long-run contribution ratio:Contribution margin $ 63,000Revenue
[(30,000 $2.50) + (15,000 $3.00)] 120,000Contribution ratio
0.525
Long-run break-even point = $28,760/0.525 = $54,781
b. Answers to requirement (b) will vary. Two possible
recommendations are as follows:
Do not introduce the sandwich. There is too much risk.
Introducing the sandwich causes a short-run loss, a permanent
decline in the contribution ratio, and an increase in the
break-even point. If the predicted increase in sales does not
occur, the company will be in serious difficulty. Also, it is
unclear what the time period is for the short run.
Introduce the sandwich. While there is a short-run loss, a
permanent decline in the contribution ratio, and an increase in the
break-even point, these negatives are more than offset by the
long-run increase in volume. Introducing the sandwich is taking the
business to the next level of size and profitability.
Cambridge Business Publishers, 2013
15-30 Financial & Managerial Accounting for MBAs, 3rd
Edition
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P15-38 A
a. AccuMeterContribution Income Statement
For the Year 2012Sales $2,000,000Less variable costs:
Direct materials $500,000Processing 750,000Setup 200,000Batch
movement 40,000Order filling 20,000 (1,510,000)
Contribution margin 490,000Less fixed costs:
Manufacturing overhead 800,000Selling and administrative 300,000
(1,100,000)
Net income (loss) $ (610,000)
b. AccuMeterMulti-Level Contribution Income Statement
For the Year 2012Sales $2,000,000Less unit-level costs:
Direct materials $500,000Processing 750,000 (1,250,000)
Unit-level contribution 750,000Less lot-level costs:
Setup 200,000Batch movement 40,000Order filling 20,000
(260,000)
Lot-level contribution 490,000Less facility-level costs:
Manufacturing overhead 800,000Selling and administrative 300,000
(1,100,000)
Net income (loss) $ (610,000)
Cambridge Business Publishers, 2013
Solutions Manual, Module 15 15-31
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P15-38 A (concluded)
c. Sales (500 at $40) $20,000Less unit and lot-level costs:
Direct materials (500 at $10) $5,000Processing (500 at $15)
7,500Setup 2,000Batch movement 400Order filling 200
(15,100)Contribution per lot $ 4,900
d. Unit contribution margin:Selling price $60Less unit-level
costs:
Direct materials $12Processing 15 (27)
Unit contribution $33
Lot-level costs:Setup $2,000Movement 400Order filling 200Total
$2,600
Lot-level costs $2,600Desired contribution 700 $3,300Unit
contribution $33 Required lot size 100 units
Cambridge Business Publishers, 2013
15-32 Financial & Managerial Accounting for MBAs, 3rd
Edition
-
MANAGEMENT APPLICATIONS
MA15-39
It is important for senior management to set the ethical climate
for the organization. In this case, perhaps out of a true concern
for employees, or perhaps out of a desire for a big bonus, the
plant manager is proposing an unethical (illegal?) speedup of the
assembly line.
We do not know if New City Automotive has a code of ethics. If
it does, Art Conroy should refer to it for guidance. Because Art is
a management accountant, he should also refer to the Standards of
Ethical Conduct for Management Accountants, published by the
Institute of Management Accountants.
Art has followed these standards so far. Faced with an issue
that concerned him, he went to the appropriate company official. At
this point, he should follow the procedures for resolution of
ethical conflict. In particular, he needs to further discuss the
situation with Paula, expressing his concern about what may happen
if the speedup is detected (strikes, legal action, mistrust, plant
closure) and what he believes are the advantages of facing the
situation directly.
He might recommend a general meeting with all employees and
suggest that in this meeting financial information be shared.
Employees should be made aware of the likelihood of closing the
plant if financial performance is not improved. They should also be
shown how a small increase in productivity will make a big
difference in financial performance. They might even be invited to
offer their own suggestions for increasing productivity. They
should be treated as team members, rather than as adversaries.
Finally Art might conclude his comments by noting how the careers
of all plant employees, including management, will be adversely
affected if the speedup is detected or if productivity is not
improved. In this case, including employees in the decision is less
risky than the alternative.
Cambridge Business Publishers, 2013
Solutions Manual, Module 15 15-33
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MA15-40
a. Using a unit-level analysis, develop a graph with two lines,
(1) representing Homestead Telephones cost structure in the 1940s
and (2) representing Homestead Telephones cost structure in the
late 1990s. Be sure to label the axes and lines.
b. With sales revenue as the independent variable, the likely
impact of the changed cost structure on Homestead Telephones:
Contribution margin percent: Because variable costs decrease,
the contribution margin percent will INCREASE
Break-even point With an increase in fixed costs and a decrease
in variable costs, the impact on the break-even point CANNOT BE
DETERMINED. If there is a change, the BEP will likely increase
because of downward pressure on prices.
c. The shift from human operators to mechanical devices
increased Homesteads operating leverage, which means that if sales
increase, the percentage increase in before-tax profits will exceed
the percentage increase in sales. Conversely, if sales decrease,
the percentage decrease in profits will exceed the percentage
decrease in sales.
Cambridge Business Publishers, 2013
15-34 Financial & Managerial Accounting for MBAs, 3rd
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MA15-41
a. To determine the break-even point, you must first find the
contribution margin as a percent of sales and the fixed costs per
period. Because there are no taxes at the break-even point, our
analysis is based on before-tax information:
Variable costs as a percent of sales =
Change in total costs = $4,857,900 $4,430,000 = 0.823Change in
Sales $5,520,000 $5,000,000
Fixed costs = $4,430,000 ($5,000,000 0.823) = $315,000
Break-even point = $315,000 / (1 0.823) = $1,779,661
b. Sales volume required to earn an after-tax profit of
$480,000:
Required before-tax profit = $480,000/(1 0.40) = $800,000
Required sales = ($315,000 + $800,000)/(1 0.823) =
$6,299,435
c. Regional Distribution, Inc.Contribution Income Statement
For the Year 2012
Sales $6,000,000Variable costs ($6,000,000 0.823) (4,938,000 )
Contribution margin 1,062,000Fixed costs (315,000 ) Before-tax
profits 747,000Income taxes at 40 percent (298,800 ) After-tax
profit $ 448,200
Cambridge Business Publishers, 2013
Solutions Manual, Module 15 15-35
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MA15-41 (concluded)
d. The method used for determining the cost equation for
Regional Distribution with the available data was the high-low
method, which used only two data points. There was not sufficient
information to determine whether those two data points were
representative of the larger population of data points. Also, it
was not possible to determine the possible effects of inflation on
the data from 2010 to 2011. Also, if Regional Distribution has
multiple products and or departments that have varying cost
structures, using aggregate data for the company as a whole to
estimate its costs and break-even point may not produce accurate
results. The cost-volume-profit model works best when there is a
single cost driver and all costs are either variable or fixed with
respect to that cost driver. For that reason, the model is
generally more effective for analyzing smaller segments of a
business, such as a particular product line.
Cambridge Business Publishers, 2013
15-36 Financial & Managerial Accounting for MBAs, 3rd
Edition