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Exercise C2

The document analyzes the cost-volume-profit (CVP) relationship for a company with $150,000 in fixed costs and a contribution margin of $12 per unit. It calculates the break-even point in units and sales dollars, and shows how to determine the units needed to be sold each month to earn a target profit of $18,000. It also defines margin of safety and contribution margin ratio, and provides an example of how net income would increase if monthly sales rose by $80,000 with no change in fixed expenses.

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Nhựt Anh
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77 views13 pages

Exercise C2

The document analyzes the cost-volume-profit (CVP) relationship for a company with $150,000 in fixed costs and a contribution margin of $12 per unit. It calculates the break-even point in units and sales dollars, and shows how to determine the units needed to be sold each month to earn a target profit of $18,000. It also defines margin of safety and contribution margin ratio, and provides an example of how net income would increase if monthly sales rose by $80,000 with no change in fixed expenses.

Uploaded by

Nhựt Anh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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CHAPTER 2:

PHAN TICH MOI QUAN HE CVP


Solution

1. Break Even Point in Units and Sales Dollars?

𝑭𝒊𝒙𝒆𝒅 𝑪𝒐𝒔𝒕𝒔 (𝑬𝒙𝒑𝒆𝒏𝒔𝒆𝒔) $𝟏𝟓𝟎,𝟎𝟎𝟎


BEP (U) = = = 12,500 units
𝑼𝒏𝒊𝒕 𝑪𝒐𝒏𝒕𝒓𝒊𝒃𝒖𝒕𝒊𝒐𝒏 𝑴𝒂𝒓𝒈𝒊𝒏 $𝟏𝟐 𝒑𝒆𝒓 𝒖𝒏𝒊𝒕

𝑭𝒊𝒙𝒆𝒅 𝑪𝒐𝒔𝒕𝒔 (𝑬𝒙𝒑𝒆𝒏𝒔𝒆𝒔) $𝟏𝟓𝟎,𝟎𝟎𝟎


BEP ($) = = = $500,000
𝑪𝒐𝒏𝒕𝒓𝒊𝒃𝒖𝒕𝒊𝒐𝒏 𝑴𝒂𝒓𝒈𝒊𝒏 𝑹𝒂𝒕𝒊𝒐 𝟑𝟎%

𝑪𝒐𝒏𝒕𝒓𝒊𝒃𝒖𝒕𝒊𝒐𝒏 𝑴𝒂𝒓𝒈𝒊𝒏 𝒑𝒆𝒓 𝒖𝒏𝒊𝒕


Contribution Margin Ratio = × 100
𝑺𝒆𝒍𝒍𝒊𝒏𝒈 𝑷𝒓𝒊𝒄𝒆 𝒑𝒆𝒓 𝑼𝒏𝒊𝒕

$𝟏𝟐
Contribution Margin Ratio = × 100 = 30%
$𝟒𝟎

2. Without resorting to computations, what is the total contribution margin at the


break-even point?
The contribution margin at the break-even point is $150,000 because at
that point it must equal the fixed expenses.
3. How many units would have to be sold each month to earn a target profit of $18,000?
Use the formula method. Verify your answer by preparing a contribution format
income statement at the target level of sales.

𝑭𝒊𝒙𝒆𝒅 𝑪𝒐𝒔𝒕𝒔 + 𝑻𝒂𝒓𝒈𝒆𝒕 𝑷𝒓𝒐𝒇𝒊𝒕


Units Sold to attain target profit =
𝑼𝒏𝒊𝒕 𝑪𝒐𝒏𝒕𝒓𝒊𝒃𝒖𝒕𝒊𝒐𝒏 𝑴𝒂𝒓𝒈𝒊𝒏

$𝟏𝟓𝟎,𝟎𝟎𝟎 +$𝟏𝟖,𝟎𝟎𝟎
Units Sold to attain target profit = = 14,000 units
$𝟏𝟐 𝑷𝒆𝒓 𝑼𝒏𝒊𝒕

Verifying our answer:

Total Unit
Sales (14,000 units × $40 per unit) .............. $560,000 $40
(-) Variable expenses (14,000 units × $28) 392,000 28
(=) Contribution margin 168,000 $12
(-) Fixed expenses ...................................... 150,000
(=) Net operating income ............................ $ 18,000

4. Refer to the original data. Compute the company’s margin of safety in both dollar
and percentage terms.

Margin of Safety in Dollars = Sales revenue – BEP($)


= $600,000 - $500,000 = $100,000

Margin of Safety in units = Sales units – BEP(U)


= [$600,000÷$40] – 12,500 = 2,500 units

5. What is the company’s CM ratio? If monthly sales increase by $80,000 and there is
no change in fixed expenses, by how much would you expect monthly net operating
income to increase?

𝑪𝒐𝒏𝒕𝒓𝒊𝒃𝒖𝒕𝒊𝒐𝒏 𝑴𝒂𝒓𝒈𝒊𝒏 𝒑𝒆𝒓 𝒖𝒏𝒊𝒕


a) Contribution Margin Ratio = × 100
𝑺𝒆𝒍𝒍𝒊𝒏𝒈 𝑷𝒓𝒊𝒄𝒆 𝒑𝒆𝒓 𝑼𝒏𝒊𝒕

$𝟏𝟐
Contribution Margin Ratio = × 100 = 30%
$𝟒𝟎

b) Change in Net Income (Increase) = Change in Sales × Contribution margin ration


Change in Net Income (Increase) = $80,000 × 30% = $24,000
(2).

If variable expenses increase as a percentage of sales, a higher break-even


point will be needed. The higher variable expenses as a percentage of sales,
the lower contribution margin is as a percentage of sales. The company would
have to sell more units to increase contribution margin to the point it covers
fixed costs.
Question 10:

Surreal Sound Ltd manufactures and sells compact disks. Price and cost data are as
follows:

Selling price per unit (package of 2 CDs) $25

Variable costs per unit:

+ Direct material: $8.2

+ Direct Labor: $4

+ Manufacturing overhead: $6

+ Selling expense: $1.6

Total variable cost per unit $19.8

Annual fixed costs:

+ Manufacturing overhead $288,000

+ Selling and Administrative $414,000

Total fixed costs: $702,000

Forecasted annual sales volume (140,000 units) $3,500,000

Required:

a. What is Surreal Sound’s break-even point (in units and sales)


b. How many units would Surreal Sound have to sell in order to earn $390,000?
c. What is the firm’s margin of safety?
d. Management estimates that direct-labor costs will increase by 10% next year.
How many units will the company have to sell next year to reach its break-
even point?
e. If the company’s direct labor cost do increase 10%, what selling price per unit
of product must it charge to maintain the same contribution – margin ratio?

1) Break even unit = Fixed cost/CM per unit = 468000/(25-19.80) = 90000 Units

2) Break even sales = 90000*25 = 2250000

3) Required unit = (468000+260000)/5.200 = 140000 Units

4) Margin of safety = 3000000-2250000 = 750000

Margin of safety (%) = 750000/3000000 = 25%

5) Break even unit = 468000/(25-20.20) = 97500 Units

6) CM ratio = (Sales-Variable cost)/Sales

0.208 = (X-20.20)/X

0.208X = X-20.20

-.792X = -20.20

X(Selling price) = 25.51

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