1

Management Accounting Tauseef A.Qureshi

Assignment No 3 (CVP Analysis)

Problem No 1: (Schrimper Knife Company)

Schrimper Knife Company sells a knife for $36 that has a contribution margin rate of
40%, and fixed costs of $288,000 per year. Annual sales were 50,000units during the
previous year.

Required:

A. Calculate the increase in net income for the next year if sales increase by 15,000
units. ($216,000)
B. Calculate the increase in net income if sales increase by $120,000 next year due
to additional units. ($48,000 increase)
C. The vice president of sales proposes that $60,000 increase advertising would
increase sales by $100,000. Should his proposal be accepted? (Loss $20,000)
D. The sales manager proposes reducing the selling price by 20% and increasing the
advertising budget by $50,000.He predicts that if both of these changes are
implemented, unit sales will increase by 50 %.Should his proposal be accepted.
(Not Accepted)

Problem No 2: (Raub Company)

Raub Company has prepared its projected 1991 income statement, which is presented
below. The company is evaluating four independent situations and has asked for your
assistance.

Sales (10,000units) $153,600

Value expenses 88,320
Contribution margin 65,280
Less fixed costs 53,760
Net Income $11,520

Required:

A. If a new marketing method would increase variable expenses (by an unknown

amount that you are to determine),increase sales units 10%, decrease fixed costs
5%,and increase net income by 25%, what would be the company’s break-even
point in terms of dollar sales if it adopts this new method? Assume that the sales
price per unit would not be changed. (8583 units or $131,482)
 2

B. If sales units increase 30% in the next year and net income increases 150%, did
the manager perform better or worse than expected in terms of net income?
Assume that there was adequate capacity to meet the increased volume without
increasing fixed costs. (Worse diff $2,304)
C. Assume variable costs would decrease 10% per unit due to a change in the
quality of direct materials, and sales would decrease 5% in spite of increasing
advertising costs of $5,000. Should the company make the change in the
materials used in production? (increase in income $126)
D. If the company hires an additional sales person at a salary of $10,200 ,how much
must sales increase in terms of dollars to maintain the company’s current net
income? ($11,520)

Problem No 3: (Terry Company)

The sales and cost data for Terry Company are as follows:

Product Selling Price Variable Cost Sales Volume

A $10 $6 10,000 units
B 20 10 6,000 units
C 40 16 4,000 units

Total fixed costs are $156,800

Required:

A. Compute the net income for the year. ($39,200)

B. Compute the break-even point in total units and units of each product. (16,000
units)
C. What is the firm’s margin of safety. (20% or $76,000)

Problem No 4: (Foster Company)

Foster Company manufactures three toys that sell for $8 eachand have the following
sales and cost data.

Toy R Toy S Toy T

Sales $240,000 $40,000 $120,000
Variable costs 180,000 20,000 96,000

Total fixed costs are $74,880

Required:
A. Calculate the BEP in total units and sales dollars. (36,000units)
 3

B. Calculate the BEP in units and sales dollars for each individual toy.
C. Assume that the sales level remains the same as above, but the sales mix
changes to 30%, 40%, 30%, for Toy R, Toy S, and Toy T, respectively. In addition,
fixed costs increase to $80,400. Calculate the new BEP in total sales dollars and
in units for each individual toy. (30,000 units)

Problem No 5: (Ticonderoga Sporting goods Company)

Ticonderoga Sporting Goods Company, a wholesale supply company engages
independent sales agent to market the company’s products throughout New York and
Ontario. These agents currently receive a commission of 20 percent of sales, but they
are demanding an increase to 25 percent of sales made during the year ending
December 31,19x9. The controller already prepared the 19x9 budget before learning of
the agents’ demand for an increase in commissions. The budgeted 19x9 budget before
learning of the agents demand for an increase in commissions. The budgeted 19x9
income statements is shown below. Assume that cost of goods sold is 100 percent
variable cost.

Sales ………………………………………………………………………….. $10,000,000

Cost of goods sold ……………………………………………………… 6,000,000
Gross Margin ………………………………………………………….... $4,000,000
Selling and administrative expenses:
Commissions ……………………………………………… $2,000,000
All other expenses (fixed) ……………………………. 100,000 2,100,000

Income before taxes …………………………………. $1,900,000

Income tax (30%) …………………………………………………… 570,000
Net Income ………………………………………………………….. $1,330,000

Ticonderoga’s management is considering the possibility of employing full-time sales

personnel. Three individuals would be required, at an estimated annual salary of
$30,000 each plus commissions of 5 percent of sales. In addition, a sales manager would
be employed at a fixed annual salary of $160,000. All other fixed costs, as well as the
variable cost percentages, would remain the same as the estimates in the 19x9
budgeted income statements.

Required:

1. Compute Ticonderoga’s estimated break-even point in sales dollars for the year
ending December 31,19x9, based on the budgeted income statement prepared by
the controller.($500,000)
2. Compute Ticonderoga’s estimated break-even point in sales dollars for the year
ending December 31,19x9, if the company employ’s its own sales personnel.
($1,000,000)
 4

3. Compute the estimated volume in sales dollars that would be required for the
year ending 31,19xp, to yield the same net income as projected in the budgeted
income statement, if Ticonderogo continues to use the independent sales agents
and agrees to their demand for a 25 percent sales commission. Assume 25% sales
commission. ( $13,333,333)

Problem No 6: (Great Northern Ski Company)

Great Northern Ski Company expanded its manufacturing capacity. The firm will now be
able to produce up to 15,000 pairs of cross-country skis of either the mountaineering
model or the touring model. The sales department assures management that it can sell
between 9,000 and 13,000 units of either product this year. Because the models are
very similar, the company will produce only one of the models.
The following information was compiled by the accounting department.

Mountaineering Model Touring model

Selling price per unit $88.00 $80.00
Variable cost per unit 52.80 52.80

Fixed costs will total $369,600 if the mountaineering model is produced but will be only
$316,800 if the touring model is produced. Great Northern Ski Company is subject to a
40 percent income tax rate.

Required:

1. Compute the contribution-margin ratio for the touring model. (0.34)

2. If Great Northern Ski Company desires an after-tax net income of $22,080, how
many pairs of touring skis will the company have to sell? (13,000 units)

3. How much would be the variable cost per unit of the touring model have to
change before it had the same break-even point in units as the mountaineering
model? (VC per unit $49.82)

4. Suppose the variable cost per unit of the touring skis decrease by 10 percent,
and the total fixed cost of touring skis increase by 10 percent. Compute the new
break even point. (BEP 10,729 units)

5. Suppose management decided to produce both products. If the two models are
sold in equal proportions, and total fixed costs amounts to $343,200 what is the
firm’s break-even point in units? (5,500 units each)
 5

Problem No 7: (Monnex Corp)

Monnex Corp sells three designs of all-weather vehicle tires: Radial, All terrain and
Super Pro. The following represents the sales and cost information budgeted for 1997.

Radial All Terrain Super Pro

Sales price per unit $50 $100 $200
Costs per unit:
Direct materials 25 50 70
Direct labor 15 15 15
Variable overhead 10 10 10
Fixed overhead 5 5 5
55 80 100
Gross margin per unit $(5) $20 $100

 Fixed overhead per unit is based on the sales on the 1996 sales of 5,000 Radial
tires, 20,000 All Terrain and 10,000 Super Pro tires?

Required:

Fixed administration costs total $150,000 in 1997 budget. Assuming the 1996 sales mix
continues, what is the break- even volume for Radial tires? (1049 units)

Problem 8: (New Concept Store)

The new Concepts Store sells designer jeans. For 1989, the store had the following
income statement:

Sales (7,300 pairs@ $25) $182,500

Cost of goods sold 94,900
Gross Profit 87,600
Operating expenses:
Selling $21,700
Administrative 25,900 47,600
Net Income $40,000

The store manager currently is planning for 1990 and wants to make certain evaluation
and projections for the store’s performance. She has determined that the only variable
costs other than cost of goods sold are selling expenses of $2 per pair of jeans. The
selling price for jeans is expected to increase by $3 per pair from 1989 to 1990, and the
unit sales volume should increase by 20%. The following cost changes are also
projected:
 6

Variable costs:
Cost of goods sold Increase of $1.00 per pair
Selling expenses Increase of $0.24 per pair
Fixed Costs:
Selling Increase of $6,160
Administrative Increase of $2,000

Required:

1. Restate the firm’s 1989 income statement using a contribution margin format.
(NI $40,000)
2. What was the firm’s breakeven point in 1989? (BEP $82,500 or 3,300 pairs)
3. Based on the expected financial performance for the store in 1990, prepare an
income statement with a contribution margin format. (NI 61,858)
4. Calculate the store’s break - even point for 1990. (BEP $98,000 or 3,500 units)
5. What is the firm’s margin of safety for 1990? ($147,000 or 60%)
6. Determine how many pairs of jeans the store will have to sell in 1990 to earn net
income of $67,032? ($257,600 or 9,200 units)

Problem No 9 (Walk Rite Shoe Company)

The Walk Rite Shoe Company operates a chain of shoe stores. The stores sell ten
different styles of inexpensive men’s shoes with identical unit costs and selling prices. A
unit is defined as a pair of shoes.
Each store has a store manager who is paid a fixed salary. Individual salespeople receive
a fixed salary and a sales commission. Walk Rice is trying to determine the desirability of
opening an-other store, which is expected to have the following revenue and cost
relationship.

Unit variable costs per pair:

Selling price $30.00

Cost of shoes $19.50
Sales commissions 1.50
Total variable costs $21.00
Annual fixed costs:
Rent $ 60,000
Salaries 200,000
Advertising 80,000
Other fixed costs 20,000
Total fixed costs $360,000
 7

Required: (Consider each question independently)

1. What is the annual breakeven point in (a) units sold and (b) revenues ? (40,000
pairs , $1,200,000)
2. If 35,000 units were sold, what will be the store’s operating income (loss) ?
($4,500 loss)
3. If sales commission were discontinued for individual salespeople in favor of an
$81,000 increase in fixed salaries, what would be the annual breakeven point in
(a) units sold and (b) revenues? (42,000 pairs)
4. Refer to the original data. If the store manager were paid $0.30 per unit sold in
addition to his current fixed salary, what would be the annual break even point
in (a) units sold and (revenues)? (BEP 41,380 pairs, $1,241,400)
5. Refer to the original data. If the store manager were paid $ 0.30 per unit
commission on each unit sold in excess of the break even point, what would be
the store’s operating income if 50,000 units were sold? (this $0.30 is in addition
to both the commission paid to the sales staff and the store manager’s fixed
salary. (OI $87,000)

Problem No 10 (Goldman Company)

The Goldman C retails two products, a std and a deluxe version of luggage carrier.

The budgeted income statement is as follows:

Standard Deluxe Carrier Total

Carrier
Units sold 150,000 50,000 200,000
Revenue@$20 and $30 per unit $3,000,000 $ 1,500,000 $ 4,500,000
Variable costs @ $14 and $18 per unit 2,100,000 900,000 3,000,000
Contribution margin @ $6 and $12 per $ 900,000 $600,000 1,500,000
unit
Fixed costs 1,200,000
Operating income $ 300,000

Required:
1. Compute the break even point in units, assuming that the planned revenue mix
is maintained.(40,000 units od Deluxe and 120,000 units of Standard)
2. Compute the breakeven point in units (a) if only standard carriers are sold and
(b) if only deluxe carriers are sold. (200,000 units, 100,000 units)
3. Suppose 200,000 units are sold, but only 20,000 are deluxe. Compute the
operating income. ($120,000)
4. Compute the breakeven point if these relationships persist in the next period.
Compare your answer with the original plans and the answer in requirement
1.What is the major lesson of this problem. (BEP 181,820 units)
Problem 11 (Evenkeel Corporation)
 8

Evenkeel Corporation manufactures and sells one product – an infant car seat called
Evenflo at a price of $50 per seat cover. Variable costs equal $20 per seat cover. Fixed
costs are $495,000.Evenkeel manufactures Evenflo only after it gets firm orders from its
customers. In 2000, it sold 30,000 units of Evenflo. One of the Evenkeel’s customer,
Plaston Corporation, has asked if in 2001 Evenkeel will manufacture a different style of
car seat called Ridex. Plaston will pay $25 for each unit of Ridex. The variable cost of
Ridex are estimated to be $15 per seat. Fortunately, Evenkeel has enough capacity to
manufacture all the units of Evenflo it can sell and the units of Ridex that Plaston wants,
and thus will incur no additional fixed costs. Evenkeel estimates it will sell 30,000 units
of Evenflo and 20,000 units of Ridex in 2001.
As Andy Minton, the president of Evenkeel, checked the impact of accepting Plaston’s
offer on the breakeven sales revenues for 2001, he was surprised to find that the dollar
sales revenues required to break even using the sales mix for 2001 appeared to
increase. He was not sure that his numbers were correct, but if they were, Andy felt
inclined to reject Plaston’s offer. In any event, he thought it best to seek your advice.

Required:

1. Calculate the breakeven point in units and sales dollars in 2000. (16,500 units)

2. Calculate the breakeven point in units and sales dollars at the expected sales
mix. (Evenflo 13,500 units and Ridex 9,000Units)

3. Explain why the break even points in sales dollars calculated in requirement 1
and 2 are different. (CM in 2000 60%, CM in 2001 55%)
 9

Problem 13: (Unknown Numbers)

 10

For each of the following independent cases, find the unknown designated by the
capital letters.

Case 1 Case 2
Direct material used H $40,000
Direct manufacturing labor $30,000 15,000
Variable marketing, distribution and Admin costs K T
Fixed manufacturing overhead I 20,000
Fixed marketing, distribution and Admin costs J 10,000
Gross Margin 25,000 20,000
Finished goods inventory, January 1,2000 0 5,000
Finished goods inventory, December31,2000 0 5,000
Contribution margin (dollars) 30,000 V
Revenues 100,000 100,000
Direct material inventory, January 1,2000 12,000 20,000
Direct material inventory, December31,2000 5,000 W
Variable manufacturing overhead 5,000 X
Work in process, January 1,2000 0 9,000
Work in process, December 31,2000 0 9,000
Purchases of Direct materials 15,000 50,000
Breakeven points in dollars 66,667 Y
Cost of goods manufactured G U
Operating income L (5,000)

Case 1 (G to L) 75,000 (G) , 22,000 (H), 13,000 (I), 7,000 (J), 13,000 (K)

CM Income Statement

Revenue $100,000
V.Cost of goods sold:
DM ( beg) 12,000
Purchased 15,000
DM(End) (5,000)
DM Used 22,000 (H)
DL 30,000
V. Manufacturing overhead 5,000
V. Marketing and Admin costs 13,000 (K)
Total Variable costs 70,000
Contribution Margin 30,000
 11

Fixed Costs:
Fixed manufacturing overhead 13,000(I)
Fixed. Marketing & Admin 7,000(J)
Total Fixed costs 20,000
Operating Income (loss) $10,000

BEP = FC ÷ CM % 66,667 = FC ÷ 0.30 FC= $ 20,000

Conventional Income Statement

Revenue $100,000
Cost of goods sold:
DM used 22,000
DL 30,000
V. Manufacturing overhead 5,000
F. Manufacturing overhead 18,000(I)
Cost of goods manufactured 75,000(G)

Gross Margin 25,000

Operating expenses:
V. Marketing and Admin costs 13,000
F. Marketing & Admin 7,000(J)
Total Operating expenses 20,000
Operating income $5,000
Case 2

CM Income Statement

Revenue
V.Cost of goods sold:
DM ( beg)
Purchased
DM(End)
DM Used
DL
V. Manufacturing overhead
V. Marketing and Admin costs
Total Variable costs
Contribution Margin
Fixed Costs:
Fixed manufacturing overhead
Fixed. Marketing & Admin
 12

Total Fixed costs

Operating Income (loss)

BEP = FC ÷ CM % 66,667 = FC ÷ 0.30 FC= $ 20,000

Conventional Income Statement

Revenue
Cost of goods sold:
DM used
DL
V. Manufacturing overhead
F. Manufacturing overhead
Cost of goods manufactured

Gross Margin
Operating expenses:
V. Marketing and Admin costs
F. Marketing & Admin
Total Operating expenses
Operating income
 13

Problem No 8 (Revise) page 322 Hilton – P 8-33

Designer Pak Company produced and sold 60,000 backpacks during the year just ended
at an average price of $20 per unit. Variable manufacturing cost were $8 per unit and
variable marketing cost were $4 per unit sold. Fixed costs amounted to $180,000 for
manufacturing and $72,000 for marketing. There was no year- end WIP inventory.
Ignore income taxes.

Required:

1. Compute Designer Packs break-even point in sales dollars for the year.

2. Compute the number of sales units required to earn a Net Income of $180,000 during
the year.

3. The Designer Packs variable manufacturing costs are expected to increase 10% in the
coming year. Compute the firm’s break-even point in sales dollar for the coming year.

4. If Designer Packs variable manufacturing costs do increase 10%, compute the selling
price that would yield the same contribution margin ratio in the coming year.

1. BE = FC ÷ CM %

= (180,000 + 72,000) ÷ 0.4 = $630,000

2. Q = (252,000+180,000) ÷ (20-8-4) = 54,000 units

3. New unit variable manufacturing cost = 8×1.10 = $8.80

CM = $20 – 12.80 = 7.2

CM ratio = 7.2÷20 = 0.36

BEP = $252,000 ÷ 0.36 = $700,000

4. P is the SP that will yield same CM ratio.

(P- 8.80- 4) ÷ P = O.40

 14

0.4 P = P – 12.80

P = $21.33

Problem No 12: (ABC Company)

The ABC company produces two products. The marketing department expects that
the company can sell 1,000 units of product A and 1,100 units of product B per
month. The company provides the following information:

Product A Product B
Unit sales price $210 $270
Unit variable cost 110 120

Total fixed cost for FIVE machines used to manufacture both products is $120,000. It
takes 1 machine hour (on any of these machines) to produce product A and 2 hours to
produce product B. Each machine has a capacity of 680 hours/month.

a) Assuming that sales mix is constant, (i.e., the company will sell 1.1 unit of
product B for each unit of product A sold), how many units of product A and B
should the company produce each month at the break-even point?

b) One machine was broken unexpectedly and it will take a long time to get a new
machine, so only FOUR machines are in operation now. To maximize profit, how
many units of product A and B should the company produce? What is the total
profit ( assume fixed costs remains unchanged)

c) Before ABC gets a new machine to replace the one broken, the company can
temporarily outsource product A (only A can be outsourced) at total costs of
$160/unit. Does the company need to change the production plan you suggested
 15

in b)? If so, how many units of product A and B now should be produced or
outsourced? What’s the total profit?

Problem No 6 (Tic Toc Ltd)

Tic Toc Ltd produces two types of clocks: a digital model and an Analog model
Budgeted sales for next
year are as follows:

Digital Analog Total

Sales Volume 8,000 units 12,000 units 20,000 units
Sales revenue $180,000 $140,000 $320,000

Total variable manufacturing costs, which are joint costs, are estimated to amount to
$160,000 next year and
variable selling costs are estimated to amount to 5% of sales. Budgeted fixed cost for
next year are $80,000 for
manufacturing overhead and $24,000 for selling and administration. All manufacturing
costs are allocated to
the two models on the basis of sales revenue. The company’s effective tax rate is 30%.

1. The budgeted contribution margin percentage for sales is

a) 45% for both models
b) 59.4 for the digital model and 26.4 for the analog model
c) 25% for both models
d) 505 for both models
e) 12.5% for both models

2 . Assuming the budgeted contribution margin percentage is 40% of sales for both
models, the desired total sales
required to be raised by Tic Toc Ltd. To earn an after-tax income of $70,000 is

a) $354,286
b) $453,333
c) $487,500
d) $510,000
e) $582,857

3. Assuming the budgeted dollar mix is maintained during the year and the Contribution
margin percentage of sales is
30% for the digital model and 50% for the Analog model, how many units of each
model must Tic Toc Ltd. sell
during the year to make a contribution margin of $164,000?

a) Digital model – 15,449 units; analog model – 10,332 units

 16

b) Digital model – 13,667 units; analog model – 12,300 units

c) Digital model – 10,581 units; analog model – 15,871 units
d) Digital model – 9,762 units; analog model – 14,643 units
e) Digital model – 9,719 units; analog model – 16,869 units

4. Assume the budgeted dollar sales mix and the budgeted sales volume for each model
are maintained for next year.
Also assume the budgeted contribution margin is 40% of sales for both models and
total fixed costs amount to
$105,000 for next year. What is the minimum unit price for each model that should be
set to earn a 7% after-
tax return on sales next year?

a) Digital model - $17.50/unit; analog model - $17.50/unit

b) Digital model - $18.46/unit; analog model - $9.57/unit
c) Digital model - $20.51/unit; analog model - $10.64/unit
d) Digital model - $22.37/unit; analog model - $11.60/unit
e) Digital model - $24.61/unit; analog model - $12.76/unit