Chapter 20

Cost-Volume-Profit Analysis

Demonstration Problems

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Demonstration of E20-23

For its top managers, Jackson Company formats its income statement as follows:

JACKSON COMPANYIncome Statement

For the Month Ended April 30, 2016

Sales Revenue $ 300,000Variable Costs 135,000Contribution Margin 165,000Fixed Costs 130,000

Operating Income $ 35,000

Jackson’s relevant range is between sales of $200,000 and $450,000.

Requirements

1. Calculate the contribution margin ratio.

2. Prepare two contribution margin income statements: one at the $200,000 sales level and one at the $450,000 sales level. (Hint: The proportion of each sales dollar that goes toward variable costs is constant within the relevant range.)

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Contribution margin ratio =

Requirement 1: Calculate the contribution margin ratio.

Demonstration of E20-23

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Contribution margin ratio =Contribution marginNet sales revenue

Requirement 1: Calculate the contribution margin ratio.

Demonstration of E20-23

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Contribution margin ratio =Contribution marginNet sales revenue

=$165,000$300,000

Requirement 1: Calculate the contribution margin ratio.

Demonstration of E20-23

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Contribution margin ratio =Contribution marginNet sales revenue

=$165,000$300,000

= 55%

Requirement 1: Calculate the contribution margin ratio.

Demonstration of E20-23

© 2016 Pearson Education, Ltd. 20-6

Requirement 2: Prepare two contribution margin income statements: one at the $200,000 sales level and one at the $450,000 sales level. (Hint: The proportion of each sales dollar that goes toward variable costs is constant within the relevant range.)

JACKSON COMPANYIncome Statement

Demonstration of E20-23

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Requirement 2: Prepare two contribution margin income statements: one at the $200,000 sales level and one at the $450,000 sales level. (Hint: The proportion of each sales dollar that goes toward variable costs is constant within the relevant range.)

JACKSON COMPANYIncome Statement

Sales Revenue $ 200,000

Demonstration of E20-23

© 2016 Pearson Education, Ltd. 20-8

If the contribution margin ratio is 55% (that is, contribution margin is 55% of sales), then variable costs must be 45% of sales.

Requirement 2: Prepare two contribution margin income statements: one at the $200,000 sales level and one at the $450,000 sales level. (Hint: The proportion of each sales dollar that goes toward variable costs is constant within the relevant range.)

JACKSON COMPANYIncome Statement

Sales Revenue $ 200,000

Variable Costs (45% of sales) 90,000

Demonstration of E20-23

© 2016 Pearson Education, Ltd. 20-9

If the contribution margin ratio is 55% (that is, contribution margin is 55% of sales), then variable costs must be 45% of sales.

Requirement 2: Prepare two contribution margin income statements: one at the $200,000 sales level and one at the $450,000 sales level. (Hint: The proportion of each sales dollar that goes toward variable costs is constant within the relevant range.)

JACKSON COMPANYIncome Statement

Sales Revenue $ 200,000

Variable Costs (45% of sales) 90,000

Contribution Margin 110,000

Demonstration of E20-23

© 2016 Pearson Education, Ltd. 20-10

If the contribution margin ratio is 55% (that is, contribution margin is 55% of sales), then variable costs must be 45% of sales.

Requirement 2: Prepare two contribution margin income statements: one at the $200,000 sales level and one at the $450,000 sales level. (Hint: The proportion of each sales dollar that goes toward variable costs is constant within the relevant range.)

JACKSON COMPANYIncome Statement

Sales Revenue $ 200,000

Variable Costs (45% of sales) 90,000

Contribution Margin 110,000

Fixed Costs 130,000

Demonstration of E20-23

© 2016 Pearson Education, Ltd. 20-11

If the contribution margin ratio is 55% (that is, contribution margin is 55% of sales), then variable costs must be 45% of sales.

Requirement 2: Prepare two contribution margin income statements: one at the $200,000 sales level and one at the $450,000 sales level. (Hint: The proportion of each sales dollar that goes toward variable costs is constant within the relevant range.)

JACKSON COMPANYIncome Statement

Sales Revenue $ 200,000

Variable Costs (45% of sales) 90,000

Contribution Margin 110,000

Fixed Costs 130,000

Operating Income (Loss) $ (20,000)

Demonstration of E20-23

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Requirement 2: Prepare two contribution margin income statements: one at the $200,000 sales level and one at the $450,000 sales level. (Hint: The proportion of each sales dollar that goes toward variable costs is constant within the relevant range.)

JACKSON COMPANYIncome Statement

Sales Revenue $ 450,000

If the contribution margin ratio is 55% (that is, contribution margin is 55% of sales), then variable costs must be 45% of sales.

Demonstration of E20-23

© 2016 Pearson Education, Ltd. 20-13

Requirement 2: Prepare two contribution margin income statements: one at the $200,000 sales level and one at the $450,000 sales level. (Hint: The proportion of each sales dollar that goes toward variable costs is constant within the relevant range.)

JACKSON COMPANYIncome Statement

Sales Revenue $ 450,000

Variable Costs (45% of sales) 202,500

If the contribution margin ratio is 55% (that is, contribution margin is 55% of sales), then variable costs must be 45% of sales.

Demonstration of E20-23

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Requirement 2: Prepare two contribution margin income statements: one at the $200,000 sales level and one at the $450,000 sales level. (Hint: The proportion of each sales dollar that goes toward variable costs is constant within the relevant range.)

JACKSON COMPANYIncome Statement

Sales Revenue $ 450,000

Variable Costs (45% of sales) 202,500

Contribution Margin 247,500

If the contribution margin ratio is 55% (that is, contribution margin is 55% of sales), then variable costs must be 45% of sales.

Demonstration of E20-23

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Requirement 2: Prepare two contribution margin income statements: one at the $200,000 sales level and one at the $450,000 sales level. (Hint: The proportion of each sales dollar that goes toward variable costs is constant within the relevant range.)

JACKSON COMPANYIncome Statement

Sales Revenue $ 450,000

Variable Costs (45% of sales) 202,500

Contribution Margin 247,500

Fixed Costs 130,000

If the contribution margin ratio is 55% (that is, contribution margin is 55% of sales), then variable costs must be 45% of sales.

Demonstration of E20-23

© 2016 Pearson Education, Ltd. 20-16

If the contribution margin ratio is 55% (that is, contribution margin is 55% of sales), then variable costs must be 45% of sales.

Requirement 2: Prepare two contribution margin income statements: one at the $200,000 sales level and one at the $450,000 sales level. (Hint: The proportion of each sales dollar that goes toward variable costs is constant within the relevant range.)

JACKSON COMPANYIncome Statement

Sales Revenue $ 450,000

Variable Costs (45% of sales) 202,500

Contribution Margin 247,500

Fixed Costs 130,000

Operating Income (Loss) $ 117,500

Demonstration of E20-23

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Demonstration of E20-38

Mack Company has a monthly target profit of $7,350. Variable costs are 65% of sales, and monthly fixed costs are $3,150.

Requirements

1. Compute the monthly margin of safety in dollars if the shop achieves its income goal.

2. Express Mack Company’s margin of safety as a percentage of target sales.

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Requirement 1: Compute the monthly margin of safety in dollars if the company achieves its income goal.

Required sales in dollars for break-even =

Demonstration of E20-38

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Requirement 1: Compute the monthly margin of safety in dollars if the company achieves its income goal.

Required sales in dollars for break-even =Fixed costs + Target profitContribution margin ratio

Demonstration of E20-38

© 2016 Pearson Education, Ltd. 20-20

Requirement 1: Compute the monthly margin of safety in dollars if the company achieves its income goal.

If variable costs are 65% of sales, then the contribution margin ratio must be 35% of sales.

Required sales in dollars for break-even =Fixed costs + Target profitContribution margin ratio

Demonstration of E20-38

© 2016 Pearson Education, Ltd. 20-21

Requirement 1: Compute the monthly margin of safety in dollars if the company achieves its income goal.

If variable costs are 65% of sales, then the contribution margin ratio must be 35% of sales.

Required sales in dollars for break-even =Fixed costs + Target profitContribution margin ratio

=$3,150 + $0 35%

Demonstration of E20-38

© 2016 Pearson Education, Ltd. 20-22

Requirement 1: Compute the monthly margin of safety in dollars if the company achieves its income goal.

If variable costs are 65% of sales, then the contribution margin ratio must be 35% of sales.

Required sales in dollars for break-even =Fixed costs + Target profitContribution margin ratio

=$3,150 + $0 35%

= $9,000

Demonstration of E20-38

© 2016 Pearson Education, Ltd. 20-23

Required sales in dollars for target profit =Fixed costs + Target profitContribution margin ratio

Requirement 1: Compute the monthly margin of safety in dollars if the company achieves its income goal.

If variable costs are 65% of sales, then the contribution margin ratio must be 35% of sales.

Demonstration of E20-38

© 2016 Pearson Education, Ltd. 20-24

Required sales in dollars for target profit =Fixed costs + Target profitContribution margin ratio

=$3,150 + $7,350 35%

Requirement 1: Compute the monthly margin of safety in dollars if the company achieves its income goal.

If variable costs are 65% of sales, then the contribution margin ratio must be 35% of sales.

Demonstration of E20-38

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Required sales in dollars for target profit =Fixed costs + Target profitContribution margin ratio

=$3,150 + $7,350 35%

= $30,000

Requirement 1: Compute the monthly margin of safety in dollars if the company achieves its income goal.

If variable costs are 65% of sales, then the contribution margin ratio must be 35% of sales.

Demonstration of E20-38

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Requirement 1: Compute the monthly margin of safety in dollars if the company achieves its income goal.

Margin of safety in dollars =

Demonstration of E20-38

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Requirement 1: Compute the monthly margin of safety in dollars if the company achieves its income goal.

Margin of safety in dollars = Expected sales – Break-even sales

Demonstration of E20-38

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Requirement 1: Compute the monthly margin of safety in dollars if the company achieves its income goal.

Margin of safety in dollars = Expected sales – Break-even sales

= $30,000 – $9,000

Demonstration of E20-38

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Requirement 1: Compute the monthly margin of safety in dollars if the company achieves its income goal.

Margin of safety in dollars = Expected sales – Break-even sales

= $30,000 – $9,000

= $21,000

Demonstration of E20-38

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Requirement 2: Express Mack Company's margin of safety as a percentage of target sales.

Margin of safety ratio =

Demonstration of E20-38

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Requirement 2: Express Mack Company's margin of safety as a percentage of target sales.

Margin of safety ratio =Margin of safety in dollars Expected sales in dollars

Demonstration of E20-38

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Requirement 2: Express Mack Company's margin of safety as a percentage of target sales.

Margin of safety ratio =Margin of safety in dollars Expected sales in dollars

=$21,000$30,000

Demonstration of E20-38

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Requirement 2: Express Mack Company’s margin of safety as a percentage of target sales.

Margin of safety ratio =Margin of safety in dollars Expected sales in dollars

=$21,000$30,000

= 70%

Demonstration of E20-38

© 2016 Pearson Education, Ltd. 20-34