Cvp

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CVP Analysis Practice Problem 1

Chad's Chocolates produces premium chocolate candy. For Easter, Chad's produces and sells

20,000 boxes of a special collection of chocolates that sell for $50 a box. Costs for producing a

box of the chocolates are as follows:

Direct Material $18

Direct Labor $15

MOH, variable $ 7

Variable S,G, & A $ 4

MOH, fixed $ 75,000

Fixed S, G, & A $ 15,000

Unless otherwise instructed, return to this original data for each problem.

1.What is Chad's break-even point in units? in dollars?

2.Chad has just received notice from his chocolate supplier that prices have been reduced by

20%. What is the new break-even point in units? in dollars?

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3.Chad has just completed union negotiations that resulted in a 10% increase in the wage rates

for his direct laborers. What is the new break-even point in units? in dollars?

4. Chad has just been approached by his marketing vice-president who says that if we spend

$25,000 on extra advertising inThe Lariat, we can increase our sales by 15% (in terms of

units). Should Chad advertise inThe Lariat?

5.Chad has just received a brochure in the mail describing a new candy press that sells for

$35,000. Chad believes that the machine will last for 5 years and will have no salvage value.

The new press will decrease the required direct labor by 10%. Should Chad invest in the new

machine?

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6.The marketing department has developed a new pricing policy calling for a 15% increase in

current prices. Research indicates that this will result in a 5% decrease in our sales volume.

What is the effect of the new pricing policy on the firm's net income?

7.Clinton has gotten part of his economic recovery plan in place. Direct materials costs have

increased by 10%. Direct labor has increased by 15%. Manufacturing overhead has

decreased by 20%, and our fixed costs have increased by $20,000. We have increased our

price by 20% and sales volume has increased by 5%. What has been the effect of all these

changes on net income?

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The Grager Company currently sells its product for $10 and has variable costs of $6 perunit. Fixed costs are $0!000.

Required: "ns#er the follo#ing uestions! considering each independently.

a. %hat is the brea&'even point in (a) units and (b) dollars*b. +f fixed costs rise by ,0-! #hat is the brea&'even point in (a) units and (b) dollars*c. +f variable costs decline to $! #hat is the brea&'even point in (a) units and (b) dollars*d. +f the selling price per unit declines by 10-! #hat is the brea&'even point in (a) units and

(b) dollars*e. +f the events described in uestions b! c! and d all occur! #hat is the brea&'even point in

(a) units and (b) dollars*f. %hat sales dollars are reuired to earn $/0!000 in profit*g. +f fixed costs increase by ,0- and variable costs decline by $1 per unit! #hat sales

dollars are reuired to earn $/0!000 profit*h. %hich of the follo#ing actions #ould lo#er the brea&'even point in units the most

(a) +ncreasing selling price by 10-*(b) ecreasing variable costs by $0.20*(c) ecreasing fixed costs by $/!000*

i. +f it is expected that an advertising campaign #ould generate an increase of /!000 unitsof sales! ho# much could the firm spend on the campaign #ithout changing profits*(3int 4our ans#er does not depend on the existing level of sales.)

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The controller of the "nderson Company is preparing data for a conference concerningcertain independent aspects of its operations.

Required: 5repare ans#ers to the follo#ing uestions for the controller.

a. Total fixed costs are $/00!000 and a unit of product is sold for $ in excess of its unitvariable cost. %hat is brea&'even unit sales volume*

b. The company #ill sell 60!000 units of product''each having a unit variable cost of $''ata price that #ill enable the product to absorb $,0!000 of fixed costs. %hat minimumunit sales price must be charged to brea& even*

c. 7et income before taxes of $1,0!000 is desired after covering $600!000 of fixed costs.%hat minimum contribution margin ratio must be maintained if total sales revenue is tobe $1!200!000*

d. 7et income before taxes is 10- of sales revenue! the contribution margin is 0-! andthe brea&'even dollar sales volume is $00!000. %hat is the amount of total revenue*

e. Total fixed costs are $,0!000! variable cost per unit is $6! and unit sales price is $,0.%hat dollar sales volume #ill generate a profit of $,!000 after paying income taxes of0-*

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The 8arco Company provides the follo#ing cost information

9ale price per cup $.,/ 100-

:ariable expense per cupCommission to 9tate ;niversity $.069oft drin& in each cup .0/Cost of each paper cup .0, .1 /,-

Contribution margin per cup $.1, 2-

Fixed expenses (per game)<ease cost of booth $,00%ages of 1/ ha#&ers at $10 each 1/0<iability insurance 10 Total $60

9hould The 8arco Company enter into a lease agreement #ith 9tate ;niversity for a booth in thene# stadium* +n coming to a decision! the company #ill have to resolve uestions such as thefollo#ing

a. %hat #ould be the brea&'even point for the booth in number of cups sold! and in dollarsof sales*

b. +f The 8arco Company needs a minimum $600 in profits per game! ho# many cups #ill

have to be sold* %hat #ill the dollar sales be*

c. +f the booth is very successful and 9tate ;niversity decides to double the lease cost!#hat #ill be the effect on the brea&'even point* 3o# many cups #ill have to be sold toyield the minimum reuired $600 in profits*

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d. "ssuming the original data! if the cost of each paper cup doubles #hat #ill be the effecton the brea&'even point in number of cups sold* 3o# many cups #ill have to be sold toyield the minimum reuired $600 in profits*

e. "ssume that the booth is rented! and that 10!000 drin&s are being sold each game. The8arco Company managers estimate that hiring five additional ha#&ers #ill result in anadditional 1!000 drin&s being sold each game. 9hould the five additional ha#&ers behired*

f. "ssume again that the booth is rented! and that 10!000 drin&s are being sold each game.The 8arco Company is contemplating increasing the sale price of each cup of drin& from$.,/ to $.0. The company estimates! ho#ever! that if the price is increased the number of drin&s sold may decrease by as much as 0 percent. 9hould the price increase bemade* +f the price increase is made! by ho# much can volume decrease and thecompany still earn at least the profits that #ere being earned before*

g. "ssume again that the booth is rented! and that 10!000 drin&s are being sold each game.The 8arco Company is contemplating placing the ha#&ers on a commission basis! rather than a flat $10'per'game salary. The commission #ould be $.0, per cup sold. Thecompany estimates that if the ha#&ers are placed on a commission basis they #ill sell 1/percent more drin&s each game. 9hould the ha#&ers be paid a commission rather thana flat salary*

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The 9earfoss Company had the follo#ing income statement in February

9ales $1/0!000

Costs 1=0!000<oss ($ ,0!000)

The firm>s contribution margin percentage at its current selling price of $,0 is 0-.

Required:

Consider each uestion independently.

a. etermine the firm>s brea&'even point in sales dollars.b. etermine the firm>s total costs if it sells 2!000 units.c. etermine the firm>s income if it sells !000 units at $12 per unit.d. etermine #hether or not it #ould be #orth the $6!000 cost of a special advertising

campaign if! because of the campaign! the firm could increase its sales by 1!000 unitsper month at $,0 per unit.

e. The firm is considering changing its selling price. The president #ishes the firm to earn$1/!000 per month #ith a sales volume of 10!000 units. %hat selling price #ill achievethis ob?ective*

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9elling 5rice @ $/0

Contribution Aatio @ ,-

Fixed Costs @ $,00!000

a. Compute brea&'even sales in units and dollars. "ssume "lpha>s current operatingincome is $,0!000.

b. 9hould the company initiate a $=0!000 advertising promotion #hich #ould increase sales,!000 units*

c. 3o# many units must be sold to generate operating income of $/0!000. %hat are total

variable costs at this level*

d. "ssume "lpha is considering purchasing euipment costing $0!000 #hich #ill reduceproduction costs and therefore! variable costs $Bunit. %hat #ill happen to "lpha>sbrea&'even point if the euipment is purchased*

e. "lpha #ishes to increase its selling price $6Bunit! ho#ever! it pro?ects sales #ill decline.8y ho# many units can sales decline and "lpha maintain its current operating income of$,0!000*

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