Q 1/ Adams Company sells a product for $14.

Unit costs are as follows:

Direct materials $3.9

Direct labor 1.40
Variable overhead 2.10
Variable selling expenses 1.00

Total fixed overhead is $44,000 per year, and total fixed selling and
administrative expenses are $47,280.
Required
Calculate each of the following:
1. Variable cost per unit
2. Contribution margin
3. Contribution margin ratio
4. Variable cost ratio
5. Total fixed cost
6. Break-even units

A 1/

1. VC = D material + D labor + V overhead + V selling expenses

$8.4 = 3.9 + 1.4 + 2.1 + 1.00
2. Contribution Margin = Price – VC
$5.6 = 14 – 8.4

CM 5.6
3. Contribution Margin Ratio = -------------- = ----------- = 0.4 or %40
Price 14

VC 8.4
4. Variable Cost Ratio = -------------- = ------------- = 0.6 or %60
Price 14

5. Total Fixed Cost = Total fixed overhead + total fixed selling and
administrative expenses
Total Fixed Cost = $44,000 + $47,280 = $91280
 Total Fixed Cost 91280
6. Break-even units = ------------------------- = ------------ = 16300 units
Contribution Margin 5.6

Q 2/ Sokolov Company sells a product for $12. Unit costs are as follows:

Direct materials $1.90

Direct labor 2.85
Variable overhead 1.25
Variable selling expenses 2.00
Total fixed overhead is $44,000 per year, and total fixed selling and
administrative expenses are $37,900.
Required
1. Calculate the contribution margin per unit
2. Calculate the break-even units.
3. How many units must Sokolov produce and sell to earn operating
income of $9,000?
4. Prepare an income statement for your answer in requirement 3.

A 2/

1. VC = 1.9 + 2.85 + 1.25 + 2.00 = $ 8

Contribution Margin = Price – VC = 12 – 8 = $ 4

2. Total Fixed Expenses = 44000 + 37900 = $81900

Total Fixed Cost 81900

Break-even units = ------------------------- = ------------ = 20475 units
Contribution Margin 4

Total Fixed Cost + Targeted Profit

3. BE for targeted Profit = ---------------------------------------------
Contribution Margin
 81900 + 9000
BE for targeted Profit = --------------------- = 22725 units
4

4. Sales (22725 * $12) 272700

Variable Cost (22725 * $8) (181800)
-------------
Contribution Margin 90900
Fixed Cost (81900)
-------------
Profit 9000
======

Q 3/ The controller of Lohrey Company prepared the following projected

income statement:

Sales (15,000 units @ $8) $120,000

Less: Variable costs 75,000
Contribution margin $ 45,000
Less: Fixed costs 37,500
Operating income $ 7,500
Required

1. Calculate the break-even number of units.

2. Prepare an income statement for Lohrey at breakeven.
3. How many units must Lohrey sell to earn operating income equal to
$9,900?
A 3/

1. Unit Variable Cost = 75000 / 15000 = $5

Contribution Margin = $8 - $5 =$3
$37500
Break-even units = ----------------- = 12500 units
$3
2. Sales (12,500 × $8) $100000

Variable costs (12,500 × $5) ( 62500)

---------------

Contribution margin 37500

Fixed Cost (37500)

------------------

Operating Income $ 0

==========

$37500 + 9900
3. Break-even units = ------------------------ = 15800 units

$3

Q 4/ Refer to Exercise Q3 for data.

Required
1. What is the contribution margin per unit for Lohrey Company? What is
the contribution margin ratio?
2. What is the variable cost ratio for Lohrey Company?
3. Calculate the break-even revenue.
4. How much revenue must Lohrey make to earn operating income equal
to $9,900?

A 4/

1. Contribution Margin = $8 - $5 =$3

 Contribution Margin Ratio = $3 / $8 = 0.375 or %3.75
2. Variable Cost Ratio = $5 / $8 = 0.625 or %6.25
$37500
3. Break-Even Revenue = ------------------- = $100000
0.375

$37500 + $9900
4. Break-Even Revenue = ------------------------------ = $126400
0.375

Q 5/ Ingo Company produces and sells disposable foil baking pans to

retailers for $3.20 per pan. The variable costs per pan are as follows:

Direct materials $0.77

Direct labor 0.71
Variable overhead 0.60
Selling 0.32
Fixed manufacturing costs total $151,650 per year. Administrative costs
(all fixed) total $28,350.
Required
1. Compute the number of pans that must be sold for Ingo to break even.
2. How many pans must be sold for Ingo to earn a before-tax profit of
$12,600?
3. What is the unit variable cost? What is the unit variable manufacturing
cost?
Which is used in cost-volume-profit analysis, and why?

A 5/

1. Variable Cost = 0.77 + 0.71 + 0.60 + 0.32 = $2.4

Contribution Margin = $3.2 – 2.4 = $0.8
151650 + 28350
Break-even unit = ------------------------- = 225000 units
0.8
151650 + 28350 + 12600
2. Break-even unit = ----------------------------------- = 240750 units
0.8
 3. Unit Variable Cost = $2.4
unit variable manufacturing cost = $2.4 – 0.32 = $2.08

Q 6/ Refer to Exercise Q5.

Required
1. Assuming a tax rate of 40 percent, how many pans must be sold to earn
an after-tax profit of $25,200?
2. Now, assuming a tax rate of 30 percent, how many pans must be sold
to earn after-tax income of $25,200?
3. Now, assuming a tax rate of 50 percent, how many pans must be sold
to earn after-tax income of $25,200?

A 6/

1. Before-tax income = $25,200/(1 – 0.40) = $42,000

Units = ($180,000 + $42,000)/$0.80
= $222,000/$0.80
= 277,500
2. Before-tax income = $25,200/(1 – 0.30) = $36,000
Units = ($180,000 + $36,000)/$0.80
= $216,000/$0.80
= 270,000
3. Before-tax income = $25,200/(1 – 0.50) = $50,400
Units = ($180,000 + $50,400)/$0.80
= $230,400/$0.80
= 288,000

Q 7/ Pacheco Company sells a product for $15. Units costs are as follows:

Direct materials $3.90

Direct labor 1.40
Variable overhead 2.10
Total fixed overhead is $52,000 per year. Variable selling expenses are
$1.60 per unit sold; fixed selling and administrative expenses are
$37,950.
Required
1. Calculate the contribution margin ratio
2. Calculate the break-even revenue.
3. Calculate the revenue needed to earn $18,000.
4. Calculate the break-even units, rounded to the nearest unit.
5. Calculate the units needed to earn $18,000, rounded to the nearest unit.

A 7/

1. Contribution margin per unit = $15 – ($3.90 + $1.40 + $2.10 + $1.60) = $6

Contribution margin ratio = $6/$15 = 0.40 or 40%
2. Breakeven Revenue = Fixed cost/Contribution margin ratio
= ($52,000 + $37,950)/0.40
= $224,875
3. Revenue = (Target income + Fixed cost)/Contribution margin ratio
= ($52,000 + $37,950 + $18,000)/0.40
= $269,875
4. Breakeven units = $224,875/$15 = 14,992 (rounded)
Or
Breakeven units = $89,950/$6 = 14,992 (rounded)
5. Units for target income = $269,875/$15 = 17,992 (rounded)
Or
Units for target income = $107,950/$6 = 17,992 (rounded)

Q 8/ Lotts Company produces and sells one product. The selling price is
$10, and the unit variable cost is $6. Total fixed costs are $10,000.
Required
1. Prepare a CVP graph with “Units Sold” as the horizontal axis and
“Dollars” as the vertical axis. Label the break-even point on the
horizontal axis.
2. Prepare CVP graphs for each of the following independent scenarios:
a. Fixed costs increase by $5,000.
b. Unit variable cost increases to $7.
c. Unit selling price increases to $12.
d. Assume that fixed costs increase by $5,000 and unit variable cost is $7.
3. Prepare a profit-volume graph using the original data. Repeat,
following the scenarios in Requirement 2.
4. Which of the two graphs do you think provides more information?
Why?
A 8/

1. Step 1

Step 2
Step 3
Total Revenue = Price * Units
Total Revenue = 10 * Units
If units = 0 then revenue = 0 (0 , 0)
If units = 1500 then revenue = 15000 (1500 , 15000)
 Step 4
Total Costs = (Variable Cost * Units) + Fixed Cost
Total Costs = ( 6 * Units ) + 10000
If units = 0 then total cost = 10000 (0 , 10000 )
If units = 2500 then total cost = 25000 ( 2500 , 25000)

2. Homework
3. Operating Income = Revenue – Total Cost
Operating Income = (Price * units) – (V.C. * Units) – Fixed Cost
Operating Income = (10 * units ) – (6 * units ) – 10000
If units = 0 then O. Income= - 10000 (0 , -10000)
If units = 2500 then O. Income = 0 (2500 , 0)
Q 9/ The controller of Hannibal Company prepared the following
projected income statement:

Sales (5,000 units @ $15) $75,000

Less: Variable costs 60,000
Contribution margin $15,000
Less: Fixed costs 10,350
Operating income $ 4,650
Required
1. Calculate the break-even number of units.
2. Calculate the break-even sales revenue.
3. Calculate the margin of safety in units.
4. Calculate the margin of safety in sales dollars.

A 9/

1. V.C per Unit = 60000 ÷ 5000 = $ 12

C.M. per Unit = 15-12 = $ 3
BEUnits = 10350 / 3 = 3450 units
2. % C.M. = 3 ÷ 15 = 0.2
BESales = 10350 / 0.2 = $ 51750

Q 10/ Aeveen Company had revenues of $930,000 last year with total
variable costs of $399,900 and fixed costs of $307,800.
Required
1. What is the variable cost ratio for Aeveen? What is the contribution
margin ratio?
2. What is the break-even point in sales revenue?
3. What was the margin of safety for Aeveen last year?
4. Aeveen is considering starting a multimedia advertising campaign that
is supposed to increase sales by $7,500 per year. The campaign will cost
$5,000. Is the advertising campaign a good idea? Explain.

A 10/

1. % V.C = 399,900 / 930,000 = 0.43

Total C.M. = 930,000 - 399,900 = $530100
% C.M. = 530100 / 930,000 = 0.57
2. BESales = 307,800 / 0.57 = $ 540000
3. C. M. from increased sales = ($7,500)(0.57) = $4,275
Cost of advertising = $5,000
No, the advertising campaign is not a good idea, because the
company’s operating income will decrease by $725 ($4,275 –
$5,000).

Q 11/ Solve the following independent problems.

Required
1. Sarah Company’s break-even point is 1,500 units. Variable cost per
unit is $300; total fixed costs are $120,000 per year. What price does
Sarah charge?
Income = Revenue – Variable cost – Fixed cost
0 = 1,500P – $300(1,500) – $120,000
0 = 1,500P – $450,000 – $120,000
$570,000 = 1,500P
P = $380
2. Jesper Company charges a price of $3.50; total fixed costs are
$160,000 per year; and the break-even point is 128,000 units. What is the
variable cost per unit?

$160,000/($3.50 – Unit variable cost) = 128,000 units

Unit variable cost = $2.25

3. Aisha Company sold 35,000 units last year at a price of $40. Variable
cost per unit was $30. The margin of safety was 300 units. What was the
total fixed cost?

Margin of safety = Actual units – Breakeven units

300 = 35,000 – breakeven units
Breakeven units = 34,700
Breakeven units = Total Fixed Cost/(Price – Variable cost per unit)
34,700 = Total Fixed Cost/($40 – $30)
Total Fixed Cost = $347,000

Q 12/ Candyland, Inc., produces a particularly rich praline fudge. Each

10-ounce box sells for $5.60. Variable unit costs are as follows:

Pecans $0.70
Sugar 0.35
Butter 1.85
Other ingredients 0.34
Box, packing material 0.76
Selling commission 0.20
Fixed overhead cost is $32,300 per year. Fixed selling and administrative
costs are $12,500 per year. Candyland sold 35,000 boxes last year.
Required
1. What is the contribution margin per unit for a box of praline fudge?
What is the contribution margin ratio?
Contribution margin per unit = $5.60 – $4.20*
= $1.40
*Variable costs per unit:
$0.70 + $0.35 + $1.85 + $0.34 + $0.76 + $0.20 = $4.20
Contribution margin ratio = $1.40/$5.60 = 0.25 = 25%

2. How many boxes must be sold to break even? What is the break-even
sales revenue?
Break-even in units = ($32,300 + $12,500)/$1.40 = 32,000 boxes
Break-even in sales = 32,000 × $5.60 = $179,200
or
= ($32,300 + $12,500)/0.25 = $179,200
3. What was Candyland’s operating income last year?
Sales ($5.60 × 35,000) $ 196,000
Variable costs ($4.20 × 35,000) 147,000
Contribution margin $ 49,000
Fixed costs 44,800
Operating income 4,200

4. What was the margin of safety?

5. Suppose that Candyland, Inc., raises the price to $6.20 per box but
anticipates a sales drop to 31,500 boxes. What will the new break-even
point in units be? Should Candyland raise the price? Explain.
Break-even in units = 44,800/($6.20 – $4.20) = 22,400 boxes
New operating income = $6.20(31,500) – $4.20(31,500) – $44,800
= $195,300 – $132,300 – $44,800 = $18,200
Yes, operating income will increase by $14,000 ($18,200 – $4,200).

Q 13/ Skelly Company’s controller prepared the following budgeted

income statement for the coming year:

Sales $315,000
Less: Variable expenses 126,000
Contribution margin $189,000
Less: Fixed expenses 63,000
Profit before taxes $126,000
Less: Taxes 37,800
Profit after taxes $ 88,200
Required
1. What is Skelly’s variable cost ratio? What is its contribution margin
ratio?
Variable cost ratio = $126,000/$315,000 = 0.40
Contribution margin ratio = $189,000/$315,000 = 0.60

2. Suppose Skelly’s actual revenues are $46,000 more than budgeted. By

how much will before-tax profits increase? Give the answer without
preparing a new income statement.
$46,000 × 0.60 = $27,600
3. How much sales revenue must Skelly earn to break even? What is the
expected margin of safety?
4. How much sales revenue must Skelly generate to earn a before-tax
profit of $90,000?
Revenue = ($63,000 + $90,000)/0.60
= $255,000

5. How much sales revenue must Skelly generate to earn an after-tax

profit of $56,000? Prepare a contribution income statement to verify the
accuracy of your answer.
Before-tax income = $56,000/(1 – 0.30) = $80,000
Note: Tax rate = $37,800/$126,000 = 0.30
Revenue = ($63,000 + $80,000)/0.60 = $238,333
Sales ................................................................................ $ 238,333
Less: Variable expenses ($238,333 × 0.40) .................. 95,333
Contribution margin....................................................... $ 143,000
Less: Fixed expenses .................................................... 63,000
Income before income taxes ......................................... $ 80,000
Income taxes ($80,000 × 0.30) ....................................... 24,000
Net income ................................................................ $ 56,000

Q 14/ The income statement for Fellows, Inc., is as follows:

Sales $650,000
Less: Variable expenses 240,000
Contribution margin $ 410,000
Less: Fixed expenses 295,200
Operating income $ 114,800
Fellows produces and sells a single product. The income statement is
based on sales of 100,000 units.
Required
1. Compute the break-even point in units and in revenues.
Contribution margin/unit = $410,000/100,000 = $4.10
Contribution margin ratio = $410,000/$650,000 = 0.6308
Break-even units = $295,200/$4.10 = 72,000 units
Break-even revenue = 72,000 × $6.50 = $468,000
or
= $295,200/0.6308 = $467,977*
*Difference due to rounding error in calculating the contribution margin ratio.
2. Suppose that the selling price increases by 10 percent. Will the break-
even point increase or decrease? Recompute it.
The break-even point decreases:
X = $295,200/(P – V)
X = $295,200/($7.15 – $2.40)
X = $295,200/$4.75
X = 62,147 units
Revenue = 62,147 × $7.15 = $444,351

3. Ignoring the price increase in Requirement 2, suppose that the variable

cost per unit increases by $0.35. Will the break-even point increase or
decrease? Recompute it.
The break-even point increases:
X = $295,200/($6.50 – $2.75)
X = $295,200/$3.75
X = 78,720 units
Revenue = 78,720 × $6.50 = $511,680

4. Can you predict whether the break-even point increases or decreases if

both the selling price and the unit variable cost increase? Recompute the
break-even point incorporating both of the changes in Requirements 2
and 3.
Predictions of increases or decreases in the break-even point can be made
without computation for price changes or for variable cost changes. If both
change, then the unit contribution margin must be known before and after to
predict the effect on the break-even point. Simply giving the direction of the
change for each individual component is not sufficient. For our example, the
unit contribution changes from $4.10 to $4.40, so the break-even point in
units will decrease.
Break-even units = $295,200/($7.15 – $2.75) = 67,091
Now, let’s look at the break-even point in revenues. We might expect that it,
too, will decrease. However, that is not the case in this particular example.
Here, the contribution margin ratio decreased from about 63 percent to just
over 61.5 percent. As a result, the break-even point in revenues has gone up.
Break-even revenue = 67,091 × $7.15 = $479,701
5. Assume that total fixed costs increase by $50,000. (Assume no other
changes from the original data.) Will the break-even point increase or
decrease? Recompute it.
The break-even point will increase because more units will need to be sold to
cover the additional fixed expenses.
Break-even units = $345,200/$4.10 = 84,195 units
Revenue = $547,268