Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 40

CVP Analysis—Sensitivity Analysis (spreadsheet recommended)

Alameda Tile sells products to many people remodeling their homes and thinks that they could profitably offer courses on tile installation, which might also increase the demand for their products. The basic installation course has the following (tentative) price and cost characteristics:

Tuition	$ 400 per student
Variable costs
(tiles, supplies, and so on)	240 per student
Fixed costs (advertising, salaries, and so on)	80,000 per year

Required

a. What enrollment will enable Alameda Tile to break even?

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b. How many students will enable Alameda Tile to make an operating profit of $40,000 for the year?

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c. Assume that the projected enrollment for the year is 800 students for each of the following (considered independently):

1. What will be the operating profit (for 800 students)?

2. What would be the operating profit if the tuition per student (that is, sales price) decreased by 10 percent? Increased by 20 percent?

3. What would be the operating profit if variable costs per student decreased by 10 percent? Increased by 20 percent?

4. Suppose that fixed costs for the year are 10 percent lower than projected, whereas variable costs per student are 10 percent higher than projected. What would be the operating profit for the year?

Step 1 of 18

Sales revenue

Sales revenue is the revenue earned by the company by selling its goods or providing its services. The sales revenue is calculated as number of units sold multiplied by the sale price per unit.

Variable costs

Variable costs are the costs which varies with the output of quantity produced that is if the number of units produced increases then the variable cost would also increase.

Fixed costs

Fixed costs are cost which does not varies with the number of units produced and would remain fixed to the extent of producing capacity of the company and any goods produced in excess of capacity would lead to increase in fixed costs. If units are produced below the production capacity of the company still the costs incurred would remain fix and would not change.