# Cornerstones of Cost Management Study Set 4

## Quiz 16 :Cost-Volume-Profit Analysis

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Explain why contribution margin per unit becomes profit per unit above the break-even point.
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At break-even point the total fixed costs are equal to the total contribution margin. So the total fixed costs are already covered by the break-even units. In a relevant range the fixed cost does not change as per the changes in the volume of production. So if a company produces more than the break-even units, its fixed cost will remain same.
So if a company produces units above the break-even point, automatically the contribution margin per unit becomes the profit per unit above the break-even point.

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A restaurant owner who had yet to earn a monthly profit said, "The busier we are, the more we lose." What do you think is happening in terms of contribution margin?
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The statement is "The busier we are, the more we lose", means if the restaurant generates huge sale in the day will get huge loss.
If we compile this statement to "contribution margin (Sales- variable cost)", I understood that "the selling price should have been lower than the variable cost" otherwise the more contribution margin should more profit.

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Break-Even in Units Gelbart Company manufactures gas grills. Fixed costs amount to $16,335,000 per year. Variable costs per gas grill are$225, and the average price per gas grill is $600. Required: 1. How many gas grills must Gelbart Company sell to break even? 2. If Gelbart Company sells 46,775 gas grills in a year, what is the operating income? 3. If Gelbart Company's variable costs increase to$240 per grill while the price and fixed costs remain unchanged, what is the new break-even point?
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1. The Break even is appoint where there is no profit or loss, hence it shall be calculated by using following formula:
Hence applying the above formula we get:
2. The operating income if 46,775 grills shall be sold in following manner:
In the above solution, in case of variable costing the profit shall be 17,540,625 as the fixed costs are ignored in variable costing while in absorption costing the profit shall be 1,205,625.3. The new break-even point if variable costs are increased to 240 per grill shall be calculated in following manner:
Hence applying the above formula we get:
All the values are in $. Tags Choose question tag Break-Even Units and Sales Revenue: Margin of Safety Dupli-Pro Copy Shop provides photocopying service. Next year, Dupli-Pro estimates it will copy 2,800,000 pages at a price of$0.08 each in the coming year. Product costs include: There is no variable selling expense; fixed selling and administrative expenses total $46,000. Required: 1. Calculate the break-even point in units. 2. Calculate the break-even point in sales revenue. 3. Calculate the margin of safety in units for the coming year. 4. Calculate the margin of safety in sales revenue for the coming year. 5. What if the total selling and administrative expenses are reduced to$38,800? Recalculate: a. Break-even point in units b. Break-even point in sales revenue c. Margin of safety in units for the coming year d. Margin of safety in sales revenue for the coming year
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Break-Even Units: Units for Target Profit Jay-Zee Company makes an in-car navigation system. Next year, Jay-Zee plans to sell 16,000 units at a price of $320 each. Product costs include: Variable selling expense is a commission of 5 percent of price; fixed selling and administrative expenses total$116,400. Required: 1. Calculate the sales commission per unit sold. Calculate the contribution margin per unit. 2. How many units must Jay-Zee Company sell to break even? Prepare an income statement for the calculated number of units. 3. Calculate the number of units Jay-Zee Company must sell to achieve target operating income (profit) of $333,408. 4. What if the Jay-Zee Company wanted to achieve a target operating income of$322,000? Would the number of units needed increase or decrease compared to your answer in Requirement 3? Compute the number of units needed for the new target operating income.
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If the contribution margin increases from 30 to 35 percent of sales, what will happen to the break-even point, and why will this occur?
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Define the term break-even point.
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Multiple-Product Break-Even and Target Profit Vandenberg, Inc., produces and sells two products: a ceiling fan and a table fan. Vandenberg plans to sell 30,000 ceiling fans and 70,000 table fans in the coming year. Product price and cost information includes: Common fixed selling and administrative expenses total $85,000. Required: 1. What is the sales mix estimated for next year (calculated to the lowest whole number for each product)? 2. Using the sales mix from Requirement 1, form a package of ceiling fans and table fans. How many ceiling fans and table fans are sold at break-even? 3. Prepare a contribution-margin-based income statement for Vandenberg, Inc., based on the unit sales calculated in Requirement 2. 4. What if Vandenberg, Inc., wanted to earn operating income equal to$14,400? Calculate the number of ceiling fans and table fans that must be sold to earn this level of operating income. (Hint: Remember to form a package of ceiling fans and table fans based on the sales mix and to first calculate the number of packages to earn an operating income of $14,400.) Essay Answer: Tags Choose question tag Describe the difference between the units-sold approach to CVP analysis and the sales- revenue approach. Essay Answer: Tags Choose question tag Explain how CVP analysis can be used for managerial planning. Essay Answer: Tags Choose question tag Contribution Margin Ratio, Break-Even Sales Revenue, Sales Revenue for Target Profit Schylar Pharmaceuticals, Inc., plans to sell 130,000 units of antibiotic at an average price of$22 each in the coming year. Total variable costs equal $1,086,800. Total fixed costs equal$8,000,000. (Round all ratios to four significant digits, and round all dollar amounts to the nearest dollar.) Required: 1. What is the contribution margin per unit? What is the contribution margin ratio? 2. Calculate the sales revenue needed to break even. 3. Calculate the sales revenue needed to achieve a target profit of $245,000. 4. What if the average price per unit increased to$23.50? Recalculate: a. Contribution margin per unit b. Contribution margin ratio (rounded to four decimal places) c. Sales revenue needed to break even d. Sales revenue needed to achieve a target profit of $245,000 Essay Answer: Tags Choose question tag Variable Costs, Contribution Margin, Contribution Margin Ratio Super-Tees Company plans to sell 12,000 T-shirts at$16 each in the coming year. Product costs include: Variable selling expense is the redemption of a coupon, which averages $0.80 per T-shirt; fixed selling and administrative expenses total$19,000. Required: 1. Calculate the: a. Variable product cost per unit b. Total variable cost per unit c. Contribution margin per unit d. Contribution margin ratio (rounded to four significant digits) e. Total fixed expense for the year 2. Prepare a contribution-margin-based income statement for Super-Tees Company for the coming year. 3. What if the per unit selling expense increased from $0.80 to$1.75? Calculate the new values for the following: a. Variable product cost per unit b. Total variable cost per unit c. Contribution margin per unit d. Contribution margin ratio (rounded to four significant digits) e. Total fixed expense for the year
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Suppose a firm with a contribution margin ratio of 0.3 increased its advertising expenses by $10,000 and found that sales increased by$30,000. Was it a good decision to increase advertising expenses? Why is this simple problem an important one for businesspeople to understand?
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Degree of Operating Leverage, Percent Change in Profit Ringsmith Company is considering two different processes to make its product-process 1 and process 2. Process 1 requires Ringsmith to manufacture subcomponents of the product in-house. As a result, materials are less expensive, but fixed overhead is higher. Process 2 involves purchasing all subcomponents from outside suppliers. The direct materials costs are higher, but fixed factory overhead is considerably lower. Relevant data for a sales level of 30,000 units follow: Required: 1. Compute the degree of operating leverage for each process. 2. Suppose that sales are 20 percent higher than budgeted. By what percentage will operating income increase for each process? What will be the increase in operating income for each system? What will be the total operating income for each process? 3. What if unit sales are 10 percent lower than budgeted? By what percentage will operating income decrease for each process? What will be the total operating income for each process?
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What is the variable cost ratio? The contribution margin ratio? How are the two ratios related?
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Contribution Margin, Break-Even Units, Contribution Margin Income Statement, Margin of Safety Zebra Company manufactures custom-designed skins (covers) for iPods® and other portable MP3 devices. Variable costs are $10.80 per custom skin, the price is$16, and fixed costs are $66,560. Required: 1. What is the contribution margin for one custom skin? 2. How many custom skins must Zebra Company sell to break even? 3. If Zebra Company sells 13,000 custom skins, what is the operating income? 4. Calculate the margin of safety in units and in sales revenue if 13,000 custom skins are sold. Essay Answer: Tags Choose question tag Define the term sales mix, and give an example to support your definition. Essay Answer: Tags Choose question tag After-Tax Profit Targets Olivian Company wants to earn$420,000 in net (after-tax) income next year. Its product is priced at $275 per unit. Product costs include: Variable selling expense is$14 per unit; fixed selling and administrative expense totals $290,000. Olivian has a tax rate of 40 percent. Required: 1. Calculate the before-tax profit needed to achieve an after-tax target of$420,000. 2. Calculate the number of units that will yield operating income calculated in Requirement 1 above. (Round to the nearest unit.) 3. Prepare an income statement for Olivian Company for the coming year based on the number of units computed in Requirement 2. 4. What if Olivian had a 35 percent tax rate? Would the units sold to reach a $420,000 target net income be higher or lower than the units calculated in Requirement 3? Calculate the number of units needed at the new tax rate. (Round dollar amounts to the nearest dollar and unit amounts to the nearest unit.) Essay Answer: Tags Choose question tag Break-Even Sales: Sales for Target Profit Health-Temp Company is a placement agency for temporary nurses. It serves hospitals and clinics throughout the metropolitan area. Health-Temp Company believes it will place temporary nurses for a total of 23,500 hours next year. Health-Temp charges the hospitals and clinics$90 per hour and has variable costs of $75.60 per hour (this includes the payment to the nurse). Total fixed costs equal$321,000. Required: 1. Calculate the contribution margin per unit and the contribution margin ratio. 2. Calculate the sales revenue needed to break even. 3. Calculate the sales revenue needed to achieve a target profit of $100,000. 4. What if Health-Temp had target operating income (profit) of$110,000? Would sales revenue be larger or smaller than the one calculated in Requirement 3? Why? By how much?