Exercises and Problems Cvp

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CVP: EXERCISES AND PROBLEMS 1. Gilley, Inc., sells a single product. The company's most recent income statement is given below. Sales (4,000 units) $120,000 Less variable expenses (68,000) Contribution margin 52,000 Less fixed expenses (40,000) Net income $ 12,000 Required: a. Contribution margin per unit is $ _______________ per unit b. If sales are doubled to $240,000, total variable costs will equal $ _______________ c. If sales are doubled to $240,000, total fixed costs will equal $ _______________ d. If 10 more units are sold, profits will increase by $ _______________ e. Compute how many units must be sold to break even. # _______________ f. Compute how many units must be sold to achieve profits of $20,000. # _______________ Answer: a. Contribution margin per unit is $30 – $17 = $13 b. $68,000 x 2 = $136,000 c. $40,000 d. Contribution margin of $13 x 10 units = $130 e. Fixed costs of $40,000 / Contribution margin per unit $13 = 3,077 units f. (Fixed costs of $40,000 + Profits $20,000) / CM per unit $13 = 4,616 units

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2. Blankinship, Inc., sells a single product. The company's most recent income statement is given below. Sales $200,000 Less variable expenses (120,000) Contribution margin 80,000 Less fixed expenses (50,000) Net income $ 30,000 Required: a. Contribution margin ratio is __________ % b. Breakeven point in total sales dollars is $ _______________ c. To achieve $40,000 in net income, sales must total $ _______________ d. If sales increase by $50,000, net income will increase by $ _______________ Answer: a. Contribution margin ratio is $80,000 / $200,000 = 40% b. Fixed costs $50,000 / 0.40 CM% = $125,000 in sales c. [Fixed costs $50,000 + Net income $40,000] / 0.40 CM% = $225,000 in sales d. $50,000 x 0.40 CM% = $20,000 increase in net income 3. In 2004, Grant Company has sales of $800,000, variable costs of $200,000, and fixed costs of

$300,000. In 2005, the company expects annual property taxes to decrease by $15,000. Required: a. Calculate operating income and the breakeven point for 2004. b. Calculate the breakeven point for 2005. Answer: a. In 2004, operating income is $800,000 sales revenue – $200,000 variable costs – $300,000 fixed

costs = $300,000. The breakeven point for 2004 is $400,000 in total sales dollars. $600,000 CM / $800,000 sales revenue = 0.75 CM ratio. $300,000 total fixed costs / 0.75 CM

ratio = $400,000 in total sales to break even. b. The breakeven point for 2005 is $380,000 in total sales dollars. $300,000 fixed costs – $15,000 reduction in property taxes = $285,000 estimated fixed costs for

2005. $285,000 total fixed costs / 75% CM ratio = $380,000 in total sales to break even.




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4. Berhannan’s Cellular sells phones for $100. The unit variable cost per phone is $50 plus a selling

commission of 10%. Fixed manufacturing costs total $1,250 per month, while fixed selling and administrative costs total $2,500.

Required: a. What is the contribution margin per phone? b. What is the breakeven point in phones? c. How many phones must be sold to earn pretax income of $7,500? Answer: a. CM per phone = $100 – $50 – 0.1($100) = $40 b. N = Breakeven in phones $100N – $50N – $10N – $1,250 – $2,500 = 0 $40N – $3,750 = 0 N = $3,750 / $40 = 93.75 phones Breakeven is 94 phones c. N = Phones to be sold $100N – $50N – $10N – $1,250 – $2,500 = $7,500 $40N = $11,250 N = $11,250 / $40 = 281.25 phones 282 phones must be sold 5 Alex Miller, Inc., sells car batteries to service stations for an average of $30 each. The variable cost

of each battery is $20 and monthly fixed manufacturing costs total $10,000. Other monthly fixed costs of the company total $8,000.

Required: a. What is the breakeven point in batteries? b. What is the margin of safety, assuming sales total $60,000? c. What is the breakeven level in batteries, assuming variable costs increase by 20%? d. What is the breakeven level in batteries, assuming the selling price goes up by 10%, fixed

manufacturing costs decline by 10%, and other fixed costs decline by $100? Answer: a. N = Breakeven units $30N – $20N – $10,000 – $8,000 = 0 $10N – $18,000 = 0 N = $18,000/$10 = 1,800 batteries b. Margin of safety = $60,000 – ($30 x 1,800) = $6,000




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c. N = Breakeven units $30N – $24N – $10,000 – $8,000 = 0 $6N – $18,000 = 0 N = $18,000/$6 = 3,000 batteries

d. N = Breakeven units $33N – $20N – $9,000 – $7,900 = 0

$13N – $16,900 = 0 N = $16,900/$13 = 1,300 batteries




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6. Furniture, Inc., sells lamps for $30. The unit variable cost per lamp is $22. Fixed costs total $9,600. Required: a. What is the contribution margin per lamp? b. What is the breakeven point in lamps? c. How many lamps must be sold to earn a pretax income of $8,000? d. What is the margin of safety, assuming 1,500 lamps are sold? Answer: a. Contribution margin per lamp = $30 – $22 = $8 b. N = Breakeven point in lamps $30N – $22N - $9,600 = 0 $8N – $9,600 = 0 N = $9,600/$8 = 1,200 lamps

c. N = Target sales in lamps $30N – $22N – $9,600 – $8,000 = 0

$8N – $17,600 = 0 N = $17,600/$8 = 2,200 lamps

d. Margin of safety = Sales – Breakeven sales = ($30.00 x 1,500) – $36,000 = $9,000 7. Yurus Manufacturing Company produces two products, X and Y. The following information is

presented for both products: X Y Selling price per unit $36 $24 Variable cost per unit 28 12 Total fixed costs are $234,000. Required: a. Calculate the contribution margin for each product. b. Calculate breakeven point in units of both X and Y if the sales mix is 3 units of X for every unit

of Y. c. Calculate breakeven volume in total dollars if the sales mix is 2 units of X for every 3 units of

Y. Answer: a. X: $36 – $28 = $8 Y: $24 – $12 = $12 b. (3 x $8) + (1 x $12) = $36 $234,000/$36 = 6,500 units




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X: 6,500 x 3 = 19,500 units Y: 6,500 x 1 = 6,500 units c. (2 x $8) + (3 x $12) = $52 $234,000/$52 = 4,500 units X: 4,500 x 2 = 9,000 x $36 = $324,000 Y: 4,500 x 3 = 13,500 x $24 = $324,000 Total dollar sales = $648,000 8. Bob’s Textile Company sells shirts for men and boys. The average selling price and variable cost for

each product are as follows: Men’s Boys' Selling Price $28.80 Selling Price $24.00 Variable Cost $20.40 Variable Cost $16.80 Fixed costs are $38,400. Required: a. What is the breakeven point in units for each type of shirt, assuming the sales mix is 2:1 in favor

of men's shirts? b. What is the operating income, assuming the sales mix is 2:1 in favor of men's shirts, and sales

total 9,000 shirts? Answer: a. N = breakeven in boys' shirts 2N = breakeven in men's shirts $24N + $28.80(2N) – $16.80N – $20.40(2N) – $38,400 = 0 $81.6N – $57.6N – $38,400 = 0 $24N – $38,400 = 0 N = $38,400/$24 = 1,600 shirts Therefore, to break even, 1,600 boys' shirts and 3,200 men’s shirts need to be sold. b. Boys' Men's Total Sales in units 3,000 6,000 9,000 Revenue $72,000 $172,800 $244,800 Variable costs 50,400 122,400 172,800 Contribution margin $21,600 $50,400 $72,000 Fixed costs 38,400 Operating income $33,600




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9. Mount Carmel Company sells only two products, Product A and Product B.

Product A Product B Total Selling price $40 $50 Variable cost per unit $24 $40 Total fixed costs $840,000

Mount Carmel sells two units of Product A for each unit it sells of Product B. Mount Carmel faces a tax

rate of 30%.

Required: a. What is the breakeven point in units for each product assuming the sales mix is 2 units of Product

A for each unit of Product B? b. What is the breakeven point if Mount Carmel’s tax rate is reduced to 25%, assuming the sales mix

is 2 units of Product A for each unit of Product B? c. How many units of each product would be sold if Mount Carmel desired an after-tax net income

of $73,500, facing a tax rate of 30%? Answer: a. N = breakeven in product B 2N = breakeven in product A ($40 x 2N) + ($50 x N) – ($24 x 2N) – ($40 x N) – $840,000 = 0 ($130 x N) – ($88 x N) – $840,000 = 0 $42N – $840,000 = 0 N = $840,000 / $42 = 20,000 Therefore, to break even, 40,000 units of Product A and 20,000 units of Product B need to be

sold. b. The breakeven point would be the same. At the breakeven point there is no pre-tax income, so the

tax rate change is irrelevant in this situation. c. N = number of units of product B 2N = number of units of product A

($40 x 2N) + ($50 x N) – ($24 x 2N) – ($40 x N) – $840,000 = $73,500 / (1 – .3)

($130 x N) – ($88 x N) – $840,000 = $105,000 $42N – $945,000 = 0 N = $945,000 / $42 =22,500 Therefore, to meet the profit goal, 2 x N = 45,000 units of Product A and N = 22,500 units of

Product B need to be sold. 10. Stephanie’s Stuffed Animals reported the following: Revenues $1,000 Variable manufacturing costs $ 200 Variable nonmanufacturing costs $ 230 Fixed manufacturing costs $ 150




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Fixed nonmanufacturing costs $ 140 Required: a. Compute contribution margin. b. Compute gross margin. c. Compute operating income. Answer: a. Contribution margin $1,000 – $200 – $230 = $570 b. Gross margin $1,000 – $200 – $150 = $650 c. Operating income $1000 – $200 – $230 – $150 – $140 = $280




Exercises and Problems Cvp

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