Chapter 6

EXERGISE 6€ ComFrte the Level of Sales Required to Attain a Target Profit [LO6-Lin Corporation has a single pioduct rvhose selling price is $120 and whose valiable cost is $80 perunit. The company's monthl) fixed expense is $50.000.

Rquired:I. Using the equation nrethod. solve tbr the unii saies thar are required to earn a target prolir o1'

$lO,mo.2- Using the contribution margin approach. solve for the dollar sales that lre required to earn a tar-

get profit of $l5.SO.

EXERCISE 5-7 Compute the Margin of Safety .i-l,ljMotander Corporation is a distritutor of a sun umtrella used at resort hotels. Data .on".rning ,h. n"*,month's budget appear below:

Selling price $30 per unilVariable expense. $20 per unitFixed expense.Unit sales

Requbed:

l. Compute the company's margin of safety

.-?r-€ornBute tbe cornpany's margin of safety' us a percentage of its sales.-\i

't EXERCISE 6-8 Cith$rte and Use the Degree of Operating Leverage iLOSlt.Ft gb.fg Comp26y installs lawn sod in home yards. The company's nrost recent lnonthly contribution

tonngylggne statement tbl lows:

Amount

Sales . . $80,000

Percont of Sal€s

100%40v"

$ 6,000

Ia.

F

l

Requred:l. Compute the company's degree of operating levera*te.

2. Usin-e the degree of operating leverage. estimate the inrpact on net income of a -5rlr inclease insales.

3. Verify your estimate from part (2) above by constructing a new contribution format income state-

,.----m€ot^Ior th€ company a$suming a 57c increase in sales.

i\_iEXERC|SE5.9Q9nputethe8reak.EvenPointforaMu|tiproductcomp3nyiLo9]

Lucido Prod-gct! markets two computer garnes: Claimjumper and Makeover. A contribution l'ormatini-ome statdment for.a recent month forthe two games appears below:

Claimiumper Makeover

Variable expenses .. . ..Contribution margin . . ..Fixed expenses

Net operaling income. . .

Sales . .

l-ess variable expsnses

Conlribution margin .

Lass fixed expenses

N6t operating income .

.... 32,000

48,000 60'/o

38,OOO :

$10,000

$30,00020,000

$10,000

$70,00050,000

Total

$100,00070,000

$20,000 30,00024,000

Requked:-

l. Compute the overall contribution niargin (CM) ratio for rhe company,?. Compute the overall break-even point for the company in sales doliars.3- Verify tbc overall break-eve n point for the gompany by constructin-g a contribution format income

statement showing the appropriate levels of sales for the trvo products.

Cosfvolume-Profi t Relationshios

EXERCISE 6-tO Break-Even Anatysis; Target profi! Margin of iafety; CM Ratio tLOl, LO3, LOS, LO€, LOTIMenlo Company manufactures and sells a single product. The company-'s sales and .*p.n.s., tbilu.riquarter follorv:

26!.

€0 per

'ofrr of

I a lar-

€ next

rution

f*Y;r, is the quarterly break-even poinr iB unirs sold and in sales dollars?

? s/ithout r€sorting to computations, ri,hat is the total contribution margin at the break-even point?3. *:[ow many units would have to be sold each quarter to earn a targer profit of $90,000? Use thecontributioh margin method- Verify your answer by preparing a contribution tbrnrat income stare-Bnenl at the larget sarles level.

4. .Refer to the original data. Compute the company's margin of saf'etv in borh dollar and percentageterms.

The comnittee mernbers would like to'charge $.35 per person for the evening's activities.Required:| . Compute rhe break-even point for the dinner-dance ( in rerms of rhe number of persons who nrust

aflend).2. Assume that last yer only 30{) persons artended the dinner-dance. If the same number atrend rhis

year. what price per ticket must be charged in order to break even?3.

$qfer to the original data ($35 ticket prii" p., p..ron). Prepare a CVP graph for the dinner-dancefi-om a zero level of activity up to 60O tickets sold. Number of persons should be placed on rheirorizontal {X) axis, and dollars should be placed on the vertical (/J axis.

EXERCISE &12 Using a Contribution Format tncome Statement ILOI, LO4lMiller company's nrosr recent contribution formal income statement is shown below:

Sales .

Lessvariableexpenses .. : :...Contribution margin .

Less fixed expenses

Net operating income .

Sales (20,0OO Units). .

VariaHe expenses -. . . . . . i. -

Conlribtrtion ma.gin . . . . . .:. .

Fixedexpenses.....Nel operating income.

Total Fer Unit

$450,000 $30180,000 12

270,000 $18216,000 :

$ s4,000

Total . Per Unii

$300,000 $1s.oo180,000 9.00

120,000 $6.0070,000 :

$ so,ooo

5e tn

ilate-

fmal

Required:Prepare 'r new contribtttion format inconre statemcnr under each of the tbllowing conditions (consider.each case independently):f . The sales volume incriascs bv l5c/c.2. The selling price.decreases Uy Si:Stl per unit. and the sales volume increase sbv 25%.

C-hapter 6

3. The selling price increases by $l'50 per unit, fixed expenses increase by $20.000. and the iales\,: volumc decreases by SZc.ii"1 +- The selling price inireases by l2vc, variable expenses increase by 60 cents per unit, and rhe sales.,:t-=v, Yolumcdecleases bY 107r,.

i EX€RCISE S-13 fdisifng Data; Basic CVp Concepts ii_:,r.l.. ;,;,-:, Fill in th-e-missingiamounts- irl each of the eighicase situations below. Each case is independent of.the-' othea (g!g:one wav to find the missing im6untr *;i;;; ;;.pill'*n*riuurion income srare-ment for each c:rse, enter the known data, and then cornpute ,lr. ,iirii"g it.**.;a. Assume that onry one product is being sold in each oi the far; i"fi;;g case siruarion.r:

Unils '

Sotd: r 'Sales

rs,o00 $i80,000? $100,000

10,000 ?6,000 $300,000

ContributionVariable ' Margin

Expenses ., per Unit r

$120,000 ?? $to

$70,000 $13??

i'let OperatingFixed Income l

Expenses iLo;s)

$50,000 ?$s2,o0o $8,OOO

? $12,ooo$100,000 $(1o,0oo)

Case .

t .._ "...2 . -. -...3.......4.....-.

b' Assume that rnore than one product is being sold in each of the four following case situarions:

AverageContribution Net Operating

r.,'r', : r Variable , Ma€in : ,.:' Fixed ' Inconie lSales :, Expenses (percant) :' ExpensesCase

1 ....... $500,000 ?; 2. 9400,000 9260,0001 3....-.. ? ?- "- "-,1 $600,000 $420,000

-t -\EXERCISE 5-14 B-fee*€yen and Target profit

20% ? $7,000? $100,000 ?

60% $130,000 $20,000? ? $(5,000)

. -E:{utsj: o-r4 !_reet-Eyen and Target profit Analysis ll-cr:, -,..{.i. t05, i_*_11

{indon Compgn! is the exclusive distributor for an auromnr,ro nr .t,., ih,Elnaon uomqpny rs the exclusive distributor for an automotive product that sells for $40 per uhitandhls=a"CM-*r6o of 3O%. The company,s fixed expenses are $ 1g0,000 per year.Required:

l. What are the variable expenses per unit?2. Using the eguation m€thod:

a. What is the break-even point in units and sales dollars?b' What sates level in units and in sales dollars is required to eam an annual profit of$60,000?c' .Assum€ that by using a rnore efficient.shipper, ti,..o.np"ny is able to riduce it, var-iable

exPenses by $4 per unit' what is the compiny's ne* bieai-euen point in units and salesdollars?

3. Repeat (2) above using the contribution margin method.

ES.RCISE G15 Operating tbverage t104, LOS]Magic Realm, Inc-, hai developed a new fanrasy board game. The compady sold 15,000 games lastyear at a selling pricc of $20 per game. Fixcd costs assoclated with the game rotal $ | g2,00d per year.and variable cosls are $6 per game- Production of the game is entrusted to a printing contractor. vari-able cosls consist mostly.of payments to this contracto-r.Rewired:i'

-};;P"* a contribution fotmat inconre statement for rhe game last year and compure the degree ofoperating leverage-

2' Managementisconfidentthatthecompanycansell l8.000gamcsnextyeai(anincreaseof3.000games, or 209., over last year). Compure;.t- The expected percentage increase in net operating income for next ).ear.h' The expected total.dollar net operating incomelor next year. tDo not prepare an income

slatement; us€ the degree of operating leverage to cofirpute you, unr*.r.j

CostVolum+Proft Relationships

/'exenclsE e-16 lleak-Even and Ta!.get pro6t Analysis ;11--4 Lu; ;-t.:K: P$S.::l':,11::?:*1-Tlnrnelrpne of rhe company's produ*s, a small carnp srove,'seulfs{EgP/r unit. l'ariable .*p.-ti"r *. $32 per u*ur. uniiJ.i :;;;;.;.;

"*""i."a"iiiii",'J;stove total $lO8.0Sper rnonth.Required:

1' Compute the break-even point in numberof sto,-es and in rotal sares doilars.2' If the r"ariabls exPerises p€r stove incteare as a percenrage of the selling price, will it result in ahigher cr a lower.break-even poinr? why? (Assume that tie fixed .up"nr"-rL#n ffi;;il.;" "3' At preseJrt' rhe company is selling 8,Qoo sioves per monrh. The sales *u"ug"i i, convinced ahat a109'reduction in the selling price woutd resuir in a 25zc increase in mJrrhly,"r", oir,nr=*.Prepare two contrlbution incorne staternents. one under preseni oper.ating

"onai,ion., and one asoperations *'ould appear after the ppposed changes. show uottr iorai .;J;;; unit data on yourstatemenLs.

4- . Refer to the data in (3) above. Ho*' ma-ny stoves would have to be sold at the new selling price toyield a minimum net operaring income of S35,O00 pcr monrh? - I - '

EXERCISE 6- t7 $llultiproduct Break.Evei? Aflalysis i.-rlii..

9l:lg1po Sporrs Corporation is the distributor in the Ptrilippines of rwo premiurn golf balls-rheFlight Dyrramic and rhe sure shot. Monthty sales and the contiibution *urgin ,uri* for the two prod-uct.s follorv:

a6=?

lre saXes

fre sales

ar of the!9 Stat€-

r$ng

B

D

jsns:

nitand

o,oos?ariable3 sales

es las{r yea5.:. Vari-

Jree of,

3.0$0

lcome

GG

Flight Dynamiol: S|:|ro Shot ,' ',fotal ,

Pts0,o00 P250,000 P4Oo,Ooo80% strt" ?

UH

Problerns

effe*f

Product

Sa|es........-.CM ntio

Fixed expense.s total Pl83'750 per month. (The currency in the philippines is rhe peso, which isdenoted by P-)

Required:t ' Prepare a contribution format incorne statement frrr the company as a wholc. carry computations'to

one decimal place.7. Compute rhe break-even point for the company based on the cunent sales niir.3-- If sales in*ease by pioO.Ooo a month, uy how much wourd you ;;;;;;;p.raring income roincrease? What are your assumptions?

FROALfM 5-tE Baiic CVp Anatysis i!-Ci, LLaS. iO4, tg5. L,:.tlFeather Friends' Inc-, distributes a high-qu:rliiy wooden birdhouse rhat selis for $2o per unit, Variableffistn are $8 per unit, and fixed cssts total $ I gb,000 per year.&quired:.A.nswer the lbllowing independent questions:t " What is the product's CM ratio?

7" Usd the CM ratio to determine the break-even poinr in srles dollirs.3" Due to an increasc in demand, the company estimates that sales will increase by $75,000 duringthe next year' By how mlch should net opeiating income increase 1or net loss decrease) assumingthat fixed costs do not change?4- . Assume that the operating results for last year were:

Sales . .

Variabte expenses

Contribution margin .

Fixedexpenses . ..... .......

$400,000160,000

240,000180,00c

a.b.

Net operating income. $60,000

S:ry1".T._Oegree of operaring leverage ar rhe cunenr level of sales.r ne presrdent exp€cts sare-s to increase by 20vc next year. By what percenta8e should netoperati ng incorne increase?

' Cost-Volume-ProntReiationships

tt- lVhat is the store's degree of cperating teverage llt- Angie is confident that with a more inte*se sules et'turt and rvith a rnore creative advertising

prograrri she can increase s:rles by 5O'6 nexr year, What would be the expected pel'centilgeincrelse in net operating incorne? Use the de-tlee of opelating leveta-ee to con'rpr.rte vour

. atns..vtr.

PROHJFM S24 Break-Erec and Target Profit Anabrcis iLO5. LO6lThe Shirt lvvorks sells a large variety of tee shi*s and sweatshit'ts. Steve Hooper. the owner. is thinkineofexp;inding his sales by hiring local high school students. on a comn:ission basis, to sell sweatshiltsbearing the naine and rnascot of the local high school.

T-:nese sq,eatshirts rrould hale to be ordered frorn the manuf'acluler six weeks in advance. andrhey could noi be returned because of the unique printing required. The sweatshirts rvould cosrMr. l{ooper 58 each with a rninimum order of 75 sweatshirts. Any additional sweatshifts would haveto be *ndered in incrsr-rrents of 75.

Since Mr'. F{ooper's plan would not requirc any additicnal tacilities, the only costs associatedll'ith tlrc project rvouid be tlre costs of the sweatshlrts and the costs of lhe sales commissions. The sell-ing pr:lce of thc sweatshifis wculd be $ | 3.5O each. Mr. Hooper would pay the studen(s a conrmissionof $ I -5O for each shirt .sold.

Required:l. Ttr make the projsct lvorth$'hile. Mr. Hooper would requile a $1.200 profit fbr the lirst thfee

f ;orrronths of the ventrire. What level of sales in units and in dollars would be required to reach this--:J -\.r^'!./ targer net o perat i n,s i ncome? S how .al I com Puta tion s.

p.'J Assume that rhe venture is uodertaken and an order is placed for'75 srveatshirts. What would be

i ; Llr. Hooper's trreak-even point in units and in seles dollarsl Show computations and explain the

"-7l--finsoning behind your answet

{'\LPRO&€['i S25lgales Mix; Sreak{ven fuialysis; Margin of Safety [147, Lo9])slgncl Novelti*(i tn..- ol Palau makes two products. Hawaiian Fantasy ancl Tlhitirn Joy. Plesent rev-enu-d. co'sri-nd salei data for the two pil]dilcts follrlw:

267

;!ons entirely iale, urhat will beou racommend

qPilrnal sellin-seach $2 reducle expenses aiert the $7O sell_

the companympaay gener-

ice yer deter-is this break-

, LosEpecializes inply r&e prin-Ps. As a first.

present in

ndals sold

md effort.

le- Ir witl;:osition-r. Shouldemeal)dals and

[EH

' :r: ': .r:

Selling price per unit.Variable expenses per unit.Numbbr ot units sold monlhlv"

Ha'/.Ja:ial. ri, :Iahitian

Fanlasy,.,,,,, rfoy 1

$15 $100$9 S20

?0,000 5,000

;3ii!l

iitjlli:

Fixed expenses total $;i75.80O per year. The Repuirlic of Palau uses the U.S. dollar as its currency.

Reguried:

.l - A.ssuming the salss mix given above, do the tbllowing:!:- Prepare a contribution format income statemeni showing both dollar and percent columns

2.

tbr each ploduct and.for the company a-s a whole.tt Cornpule tlte trreak-even point iir doliars fol the company as a *hoie.and the malgin of

safety in troth dollam atrd per,cent.The cornpany has developeci a nelv product to tre called Sanrtian Delight. Assunle that lhe cotn-p;rny could sell IO.OOO units at $45 each. The valiable expenses would be $36 each. The coru-pany's fixed expenSes would not change.a- . Prepare anothe!'contribution folmat income staternent. inclutiing sales of the Sarnoan Delight

(sales of the other two producLs lvould not change;.&- Compute the conrpany's new bieak-even poirit in dollars and the new margin of sattty in

both dollars anci percent.The president ofthe company exanrines your tigtrres and says, "Theie's something strange here.Gur fixed costs haven't changed and yau show greater total contribution niargin if rve adrl ther:erv prodtict, but you also show our break-even poinl going up. With -ureaier contribution margin.t{re break-ever: peint should *so Co'*'n, not up- You've ntade a nristake scmewhele.'l Explain to thepresident rvhai has happened.

li