15 Solutions

Module 15Cost-Volume-Profit Analysis and Planning DISCUSSION QUESTIONS Q3-1. Cost-volume-profit analysis is a technique used to examine the relationships among the total volume of some independent variable, total costs, total revenues, and profits during a time period. It is particularly useful in the early stages of planning when it provides a framework for discussing planning issues. Q3-2. The important assumptions that underlie cost-volume-profit analysis are: 1. All costs are classified as fixed or variable with unit-level activity cost drivers. 2. The total cost function is linear within the relevant range. 3. The total revenue function is linear within the relevant range. 4. The analysis is for a single product, or the sales mix of multiple products is constant. 5. There is only one activity cost driver: unit or dollar sales volume. Q3-3. The use of a single variable in cost-volume-profit analysis is most reasonable when analyzing the profitability of a specific event or the profitability of an organization that produces a single product or service on a continuous basis. Solutions Manual, Module 15 ©Cambridge Business Publishers, 2013 15-1 Q3-4. In a contribution income statement, costs are classified according to behavior as variable or fixed, and the contribution margin (the difference between total revenues and total variable costs) that goes toward covering fixed costs and providing a profit is emphasized. In a functional income statement, costs are classified according to function (rather than behavior), such as manufacturing and selling and administrative. This is the type of income statement typically included in corporate annual reports. Q3-5. The unit contribution margin is equal to the difference between the unit selling price and the unit variable costs. In computing the unit break-even point, the fixed costs are divided by the unit contribution margin. Q3-6. The contribution margin ratio is the portion of each dollar of sales revenue contributed toward covering fixed costs and earning a profit. It is especially useful in situations involving several products or when unit sales information is not available. Q3-7. The desired profit is added to the fixed costs, increasing the sales volume required to cover both. Q3-8. A profit-volume graph contains only one line showing the relationship between volume and profits, while a cost-volumeprofit graph contains two lines – one for total revenues and one for total costs. A profit-volume graph is most likely to be used when management is primarily interested in the impact on profits of changes in sales volume and less interested in the related revenues and costs. Q3-9. Income taxes increase the sales volume required to earn a desired after-tax profit. Q3-10. Other things being equal, the higher the degree of operating leverage, the greater the opportunity for profit with increases in sales. Conversely, a higher degree of operating leverage magnifies the risk of large losses with a decrease in sales. ©Cambridge Business Publishers, 2013 15-2 Financial & Managerial Accounting for MBAs, 3rd Edition MINI EXERCISES M15-11 a. Break-even point = $120,000/(1 − 0.40) = $200,000 b. Margin of safety = $240,000 − $200,000 = $40,000 c. Sales volume for desired profit = ($120,000 + $70,000) = $316,667 (1 − 0.40) M15-12 a. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. b. Total variable costs Total revenue Total costs Variable costs Fixed costs Total costs Contribution margin Break-even unit sales volume Loss area Profit area Line CC 1. Shift downward 2. No change 3. Increase slope (increase) 4. Shift upward (increase) 5. Shift downward and decrease slope Solutions Manual, Module 15 Line OR No change Increase slope No change Break-Even Point Shift left (decrease) Shift left (decrease) Shift right Decrease slope Shift right No change Shift left (decrease) ©Cambridge Business Publishers, 2013 15-3 3rd Edition .M15-13 a. M15-14 a. b. 2. 6.000 Unit sales ©Cambridge Business Publishers. 5. the two changes have opposite effects. 1.000 $12. Can't tell.000 $0 0 2. Shift upward and decrease slope Break-Even Point Shift left (decrease) Shift right (increase) Shift left (decrease) Shift right (increase) 1.000 4.000 $36.000 Total revenues and Total costs $60. 2013 15-4 Financial & Managerial Accounting for MBAs.000 $48. 2. Loss area Profit area Break-even point Axis on which profit and loss are measured Fixed costs Profit at volume E Line CF Increase slope Decrease slope Shift upward Shift downward and decrease slope 5. 3. $72. 4.000 6.000 $24. 4. 3. 000 Total Profit $6. Solutions Manual.000) ($18. Module 15 ©Cambridge Business Publishers.M15-14 (concluded) b.000) 0 2. It is most appropriate to use a profit-volume graph when management is primarily interested in the impact on profits of changes in sales volume and less interested in the related revenues and costs.000 4.000 $18.000) Total units c.000 6.000 ($12. 2013 15-5 .000 $12. $24.000 or $0 (Loss ) ($6. 3rd Edition .000 b. Although a profit-volume graph provides a clear illustration of profits.000 $0 0 500 750 Unit sales (000) c. and profits.000 $3. Hence.50 Break-even point = $750.000 hot dogs 250 1.000 $1.M15-15 a. It is easier to determine profit or loss at any volume with a profit-volume graph than with a cost-volume-profit graph.000/$1.50 per hot dog $1.00 per hot dog −3. such as this.000 Total units (000) d. $750 $600 $450 Total $300 Profit $150 or $0 ($150) (Loss) 0 ($300) (000) ($450) ($600) ($750) 250 500 750 1. where the unit contribution margin is small and the scale of activity is large. This is especially true in situations.000 $2. a manager using a profit-volume graph does not see the relationship between revenues.50 = 500. 2013 15-6 Financial & Managerial Accounting for MBAs. Total revenues and Total costs (000) $5.000 $4. costs. ©Cambridge Business Publishers. Selling price Variable costs Contribution margin $5. it does not illustrate revenues and costs. 60 0.50 Break-even unit sales volume = $112.000 units Units of A at break-even = 75.000 Solutions Manual. Module 15 ©Cambridge Business Publishers. so A = 3 x 2 = 6 Average unit contribution margin = $1.000 x 6/10 = 45. 2013 15-7 .50 = 75.500/$1.60 0.50 *B = 3C and A = 2B.30 $1.M15-16 Product A B C Unit Contribution Margin $1 2 3 Sales Mix (units)* 6 3 1 10 Weight $1 x 6/10 = 2 x 3/10 = 3 x 1/10 = $0. 000 $ 60. and the impact on profits of a change in sales.000 30.000 (132. the margin of safety.000 b.000 x $5) Contribution margin Less fixed costs: Manufacturing overhead Selling and administrative Profit $240. 3rd Edition .000) $ 48.000) 108. Alberta Company Contribution Income Statement For the Month of May 2012 Sales (6. Note: The instructor might extend this assignment in class.000 30.000 x $40) Less variable costs: Direct materials (6.000 (60.EXERCISES E15-17 a.000 12.000 40.000 x $10) Direct labor (6. computing the break-even point.000 20. ©Cambridge Business Publishers. 2013 15-8 Financial & Managerial Accounting for MBAs.000 x $5) Selling and administrative (6.000 x× $2) Manufacturing overhead (6. Sales Variable costs Contribution margin $750.60 At a volume of $1.000 c.000 Variable costs = $450.500 Solutions Manual.000.000 $1.000.000 b.000 $500.000 $1.000 Break-even sales dollars (525.000 Total Revenues d. variable costs are $600.40 = $525.40 = $612.000 $750.000)/0.000.000 + $35. Module 15 ©Cambridge Business Publishers.000 $0 $0 $250. 2013 15-9 .000 (450. Revised annual break-even dollar sales: ($210.000 $750.000 $750. To determine the variable and total cost lines.000 $250.000 Contribution margin ratio = $300. Profit = $90.000/$750.000 = 0.000 = 0.40 Annual break-even dollar sales volume = $210.000 Total Revenues and Total Costs $500.000) Margin of safety $225. Annual margin of safety in dollars: Sales $750.000/0.000 Fixed costs = $210. it is necessary to compute the variable cost ratio: Variable cost ratio = Variable costs Sales = $450.E15-18 a.000.000 sales dollars.000) $300. 38 Break-even point in sales dollars b. Current sales Break-even sales Margin of safety $285.38 $750. Required before-tax income = = $342.500 (112.E15-19 a.000.572.000 $342.500) $ 200. Sales Variable costs (62% of sales) Contribution margin (38% of sales) Fixed costs Net income before taxes Income taxes (36%) Net income after taxes $1.500 Sales volume required to provide an after-tax income of $200. 2013 15-10 Financial & Managerial Accounting for MBAs.000) 312.36) $312.572. 3rd Edition .38 = $1.368 (974.000* *Answer reflects rounding. Contribution margin Sales Contribution margin ratio $ 380.000 ÷1.000/0.000) $ 250.000 + $312.000 (750.38 $900. Current fixed costs Impact of increase New fixed costs Revised break-even point = = $285.000/(1 − 0.000 = = d.500)/0.000 57.000.000 c.000/0.000 $1.868) 597. ©Cambridge Business Publishers.000 $200.000 0.500 (285.000: ($285.368 e. 000) $ 1.500.000 (5.500 ©Cambridge Business Publishers.000 d.750.500.000 (30.000) 15.75) × 5.000] Fixed costs Amount raised e.000) = $10. Contribution [($1. Fixed costs Contribution [($8.000 − $1.000 $10.500 (500) $2.000 ÷ $10 1.000 250.000 (10.000) × 1.25 − $0.500] Endowments and grants Required from other sources $12.000/3.E15-20 a.000) $ 3.00 Revenues (2. Break-even price ($30.700 × $10) Fixed costs Deficit $27. Available funds Fixed costs Available for variable costs Variable costs per present Number of presents Solutions Manual.000 $20. Cost to city ($20 × 10.000 c.000 b.000) = $200.750. 2013 15-11 . Module 15 $2. 00 2.000 ÷ $14. overhead Selling Unit cont.000 500. 3rd Edition .00 $1.000 ÷ $ 8.000 Financial & Managerial Accounting for MBAs. CapitalIntensive Fixed costs: Manufacturing overhead Selling Total Selling price LaborIntensive $2.00 (22.E15-21 a. 2013 15-12 $5.00 2.200.000 $ 6. margin Unit break-even point ©Cambridge Business Publishers.000 500.200.000 $2.00 150.00 $30. margin Fixed costs Unit cont.00 12.00 Variable costs: Direct materials Direct labor Manuf.00 4.00 2.440.940.00 (16.00) $14.000 $ 700.00) $ 8.000 $ 30.940.00 210.000 $1.00 5.00 $2. E15-21 (concluded) b.500. Unit contribution margin Unit sales volume Contribution margin Fixed costs Net income CapitalIntensive $ 14.00 x 250.940.000 $6X X = ($30 − $22)X – $1.000 units and use the capital-extensive method if sales are above 290. rather than cost. Module 15 ©Cambridge Business Publishers.000 LaborIntensive $ 8.000. Solutions Manual.000 = 290. 2013 15-13 . 1.740.50 3. The higher the portion of an organization's fixed costs (in comparison with variable costs).000 units.500.000 = $1.000.000 units Identical results are obtained if profit.200.000 2.000 = 290.00 x 250.25 $2.000 (1. It is also an indication of an organization's cost structure. ($30 − $16)X – $2.000 = $1. Paper Mate would be indifferent between the two methods at the unit volume. the higher its operating leverage. equations are used. The capital-intensive method has a higher operating leverage because of the greater use of fixed assets. The higher a firm's operating leverage.000 3.000 ÷ 560.000) $ 560. $16X + $2.000) $ 800. X.000 units Paper Mate should use the labor-intensive method if sales are less than 290.000 Contribution margin Net income Operating leverage $3. where total costs are equal.000 $6X X = $22X + $1.940.000 6.000 2. Operating leverage is a measure of the responsiveness of income to changes in sales.200. 2.740.000 ÷ 800.000 (2. the more sensitive are its profits to changes in sales volume.940.200. c. 257)].050. 2012 Sales (45. Percentage change in profits = % decrease in sales x Operating leverage = 10 x 2. Florida Berry Basket Contribution Income Statement For the Year Ended December 31. thereby increasing the difference between the contribution margin and net income.025.000 × $90) Variable costs (45.57 c.000 (3. ©Cambridge Business Publishers.000 2. d. computed as: [$175.7 percent decrease Profits should decrease by 25. It will also increase fixed costs. Contribution margin [45.500/$187. Operating leverage = = = $4. 3rd Edition .E15-22 a. The net effect would be an increase in operating leverage.000 Contribution margin/Net income $450.50)] Fixed costs Net income Operating leverage ($562.000 × $80) Contribution margin Fixed costs Net income b.000) 450.600. 2013 15-14 Financial & Managerial Accounting for MBAs.500 3 The acquisition of the berry-picking machines will reduce variable costs.57 = 25.000) $ 175. thereby increasing the contribution margin.000 − ($175.000/$175.7 percent to $130.000 275.500) $ 562.000) $ 187.000 × ($90 − $77.000 x 0.500 (375. E15-23 a. Actual sales volume = 2.500 250/2.500 250/2. 2013 15-15 .500 = Break-even sales volume = $45. $50 Total $25 Prof it or $0 (Loss) $0 (000) ($25) $50 $100 $150 $200 ($50) Total sales (000) Solutions Manual.000/0.500 $100.500 × $85 Break-even sales volume Margin of safety = Weight $35 25 25 $85 Weight $14 10 10 $34 0.500 −112.750/2.40 $112. Product Standard Multiform Complex Average unit selling price Unit Selling Price $ 50 125 250 Sales Mix (units) 1.500 x x x Unit Contribution Product Margin Standard $ 20 x Multiform 50 x Complex 100 x Average unit contribution margin Contribution margin ratio = $34/$85 Sales Mix (units)* 1.500 500/2.000 c.750/2.500 $212. Module 15 ©Cambridge Business Publishers.500 500/2.40 = b. 000 $ 10 x 1.600? $60.000? ÷ 3.000?* $20. margin Unit break-even point Margin of safety (unit sales less unit break. margin: Cont.000? $ 1 x 800 (800) $ 800 (400)? $ 400 $ 12 x 4.300?* Case 4 3.300? $ 20? $45.000? ÷ $15 2.600) $ 86.000) $ 6.000? ÷ 4.000? $ 15 $8.000? (8.000? (30. Unit sales Sales revenue Variable costs: Unit Unit sales Total Contribution margin Fixed costs Net income Unit cont.000?# $10.000?# $ 5? x 3.000? (15.000) $10.000 ÷ $10? 800? $ 400 ÷ $1? 400? $ 80.000 ÷ $20? 4. margin Unit sales Unit contribution Break-even point: Fixed costs Unit cont.600? $137. or a similar.000 Case 2 800 Case 3 4. 2013 15-16 Financial & Managerial Accounting for MBAs.000 $ 10? $ 800 ÷ 800 $ 1? $86. 3rd Edition .even point) Case 1 1. each case is solved by filling in the given information and working toward the unknowns.000) $ 2. format is established.E15-24 Once the following. ©Cambridge Business Publishers.000 *Solved as the unit break-even point plus the margin of safety.000? (80.000)? $45.000 (10. #Solved as the unit contribution margin times margin of safety.000 $30.300 (51.000? ÷ 1.000 200? 400? 300 1.000 $ 1.000)? $15. 2013 15-17 .40 $20.000 × 0.000? 0.40 $25.40? 1.80? $36.60? 0.50 0.000? (35.000)? $16.80 $25. margin ratio Contribution margin Fixed costs Net income Variable cost ratio Contribution margin ratio Total Case A $100.000 Case C $50.000 *Computed as the break-even point plus the margin of safety.000? ÷ 0.00 0.000 × 0.40 1.000? $20. Module 15 ©Cambridge Business Publishers.40? $ 75.50? 1.000 × 0.000 Margin of safety (dollar sales less dollar breakeven point) $ 25.000)? $ 5.000? $35.60? 0.20 0. marg.000) $ 10. ratio Dollar break-even point $ 30. each case can be solved by filling in the known amounts and working toward the unknowns.000? $10.40? $ 40.00 0.E15-25 Once the following or similar format is established.000 Case D $45.000 ÷ 0.000? ÷ 0.000? (20.50 $40.000 ÷ 0.000? 0.50? $70.80? 1.00 Break-even point: Fixed costs Cont. Sales revenue Cont.000? $20.000)? $10.000 ( 30.000 (10.00 Case B $80.000? $25.000* × 0.000? $10. Solutions Manual. 500/4 = $5. Part (a) considers only order-level costs while part (c) also considers customer-level costs. to achieve true break-even. Average order size = $3.0. Minimum order size to break even on order = $200 = $2. Finally.500 f.000 $ 240. Average order size = $22.000 100.08 $3.10 – 0.000.625 d.000 × 100 customers) Facility-level costs Total costs Contribution margin ratio Minimum annual sales to break even $ 80. 2013 15-18 Financial & Managerial Accounting for MBAs.000 E15-27 A a.500 (0.000 ÷ 0. To break even on a customer. and part (e) adds facility-level costs.80) contribution ratio × 1.000.000 e. the company must cover order-level and customer-level costs. Order-level costs ($200 × 4 orders × 100 customers) Customer-level costs ($1. ©Cambridge Business Publishers.02) c.10 – 0.000/(4 orders × 100 customers) = $7.25 × 52 weeks = $273 Customers required for desired profit = ($80.02) b.000 = $22.04 customers in population = 11. 3rd Edition .000)/$273 = 440 Required population = 440 customers / 0.500 (0.75 visits = $5. In order for a company to break even on an order. it need only cover order-level costs.E15-26 A Weekly contribution per average customer: $15 sales per visit × (1 .25 Annual contribution per customer = $5.000 + $40.000 60. Annual sales to break-even on average customer = ($200 x 4 orders) + $1. all costs must be covered. 000 units c. Solutions Manual.000 ÷$90.000 36.000 + $150. Module 15 ©Cambridge Business Publishers.00 2.50 = 22. 2013 15-19 .000 × $10) Fixed costs Net income before taxes Net income after taxes Income taxes Net income before taxes Tax rate b. Contribution margin Current Impact of reduction in variable costs New Fixed costs: Current Impact of increase in fixed costs New $10.000: ($110.000/(1 − 0.50 $110.40) $150.000 units to 22. Required before-tax income = = $200.PROBLEMS P15-28 a.400 units The reduction in variable costs was more than enough to offset the increase in fixed costs.000 20.000 − 54.000 declined from 26.40 $90.000: ($130.000 + $150.000)/$10 = 26.000 −110. Unit contribution margin: $35 − $25 = $10 Total contribution (20.000 Volume required to provide an after-tax income of $90.000)/$12.000 $130. Requirements (a) through (c) assume that taxable income and accounting income are equal and that the tax rate is constant.50 $12. the volume required to achieve an after-tax profit of $90.000 90.000 Volume required to provide an after-tax income of $90. Consequently. d.000 0.400 units. 40) = $25.000 + $25. Margin of safety in units: Actual June sales Break even sales Margin of safety 3.000 × $90) Less variable costs: Admission fees (3.000 (210.000 × .000 units d. Sales for an after-tax profit of $15.000 × $8) Contribution margin Less fixed costs: Operations Selling and administrative Before-tax profit Income taxes ($20.40) After-tax profit $270.P15-29 a.000 $ 12.000 60.000 (40.000 units 1.000 15.000 Required sales = ($40.000 36. 2013 15-20 Financial & Managerial Accounting for MBAs.000/($90 − 70) = 2.000/(1 − 0. New York Tours Contribution Income Statement For the Month of June 2012 Sales (3. 3rd Edition .000 24.000 × $30) Lunch (3.000 8.000)/($90 − 70) = 3.000: Required before-tax profit = $15.000 × $20) Overhead (3.000 units c.000) 20.000 b.: $40.000 25.000 $ 90. Monthly break-even point in units.000) 60.000 × $12) Selling and administrative (3.250 ©Cambridge Business Publishers.000 units 2. 000/$8 = 5. the fixed costs per year. Fixed costs = $40.000 $400.000) = $45.000 3.000/8.625 units b.000/5. ($85.000 − $5(8. Using the high-low method: Variable costs per unit = Fixed costs or. Prior to solving this problem it is necessary to determine the variable costs per unit.000 − $5(5.000: ($45. Module 15 ©Cambridge Business Publishers.000 $200. 2013 15-21 .000) = $5 = $85.000 $100.000 = $13 Unit contribution margin = $13 − $5 = $8 Break-even point = $45.000 − 5.000 Unit sales P15-30 a.875 units Solutions Manual.000 4.000 = $104.000) = $45. and the unit selling price.000 2.000 = $70.000)/(8.P15-29 (concluded) e.000 + $10. Sales volume required to earn a profit of $10.000 Total revenues & Total costs Profit = $20.000 Unit selling price = $65.000 Variable costs = $210.000 $0 0 1.000 − $70.000 $300.000)/ $8 = 6. 40 Break-even point = $1. • It provides less control of operations. • It may enhance quality.40 = $5. Financial & Managerial Accounting for MBAs. ©Cambridge Business Publishers.000 0.000. 3rd Edition .143.545 (rounded) d.40 = $3. Contribution ratio = 1.300.576)/0.454.000 − $300.60 = 0. Weakness: • This alternative has higher risk and a higher break-even point.35X − $1.000) = (1 − 0.46X − $1.000 b.000/(1 − 0.300.65)X − ($1.940 c.P15-31 a.576 (rounded) Required sales volume = ($1. Automation Strength: • It will provide higher profits if sales increase.34) = $757.000 X = $5.54)X − ($1.0 − 0.000 + $757. Weakness: • This alternative will not have as great a potential for high profits. 2013 15-22 Outsourcing Strength: • This alternative has less risk and a lower break-even point. Before-tax profit = $500.300.600.000 + $300.300.250.11X = $600. Profits of automation = Profits of outsourcing (1 − 0. • It allows focusing on core competencies.000) 0.000 = 0. • It is preferred at the current sales volume. • It may provide new opportunities.000/0. ) Solutions Manual.900.333 Number of additional beds × 20 Total increase in fixed charges 966.000 (1. = = $3. 2013 15-23 .660/$200).000 patient-days for 2011.146.P15-32 a. The break-even point in patient-days equals total fixed costs divided by the contribution margin per patient-day. Module 15 ©Cambridge Business Publishers.000/60) $ 48.834 bed days ($966.660) $ (606.000 480. This is an increase of 3.034 bed days (or 152 days for each bed) above the estimated demand of 90 days for each of the 20 beds.000 $3.000.000/$200 16.380.000 patient-days = $100 variable costs per patient-day Break-even point in patient-days b.000 total 2011 revenues/$300 revenue per patient-day equals 20.380.000 $300 (100)* $200 *$6.660) (Note that the break-even on the additional 20 beds is 4. or 242 days for each of the 20 additional beds. 2012 Increase in revenues (20 beds × 90 days × $300/ day) Increase in expenses: Fixed charges by Melford Hospital: Annual charge per bed ($2.900 patient-days Pediatrics Schedule of Change in Earnings from Rental of 20 Additional Beds For the Year Ending June 30. $2.900.000 Net decrease in earnings $ 540. Fixed costs: Melford Hospital charges Salaries Total Unit contribution margin: Revenues per patient-day Variable costs per patient-day Contribution margin per patient-day $2.000 total 2011 variable costs / 20.000.660 Variable charges by Melford Hospital ($100/patient-day × 90 days × 20 beds) 180. Required before-tax profit = $30.000] × (1 – 0.000 $30X – $25X $5X X = = = = =1 Trail Runner Profit ($75 – $50)X – $200.000 – $280. Without further analysis it is apparent that at a volume of 13.000 Required sales for a $30.000 pairs c.000 ©Cambridge Business Publishers.000 – $280. it is only necessary to solve for one product. Hence.40) = $120.40) = $66. The after-tax profit or loss is the same with either product.40) = $50.000 Trail Runner: [($75 – $50)16.000] × (1 – 0.40) = $120.000 6.000 pairs the Trail Runner is preferred.40) = $75.000* + $50.000)/($80 – 50) = 11. 3rd Edition .000 after-tax profit: Sure Foot = ($280. Trail Runner requires fewer sales to achieve a $30.000/( 1– 0.000 $80.000 $80.000 after-tax profit and the profits of both products are not identical until a total of 16.000 Trail Runner: [($75 – $50)13.000 pairs Trail Runner = ($200. b. Sure Foot: [($80 – $50)16.000 pairs *Because only one product will be produced the product-level costs and the facility-level costs are combined: $130.000 d.000 – $200.000] × (1 – 0. Required sales for identical before-tax profit: Sure Foot Profit ($80 – $50)X – $280. 2013 15-24 Financial & Managerial Accounting for MBAs.000 pairs of either product are sold.000 for Sure Foot and $50.000 – $200.000 + $150. This answer can also be demonstrated analytically: Sure Foot: [($80 – $50)13.000 for Trail Runner.000* + $50.000)/($75 – 50) = 10.P15-33 a.000] × (1 – 0.000 + $150. Sure Foot Profit with reduced variable costs = [($80 – $48.000– $200.000 – 13.970 (with rounding error) Solutions Manual.000 $48.85. Required Sure Foot variable costs for identical profit at 13.000 pairs: Because before-tax and after-tax profits will be the same for either product.000X – $280.000 – $280.000 $1.000X X = = = = = Trail Runner Profit ($75 – $50)13.040.40) = $74. Sure Foot Profit ($80 – X)13.15 ($50.85) to $48.000] × (1 – 0.85)13.P15-33 (concluded) e.000 –13. it is simpler to develop a solution based on identical before-tax profits with X representing the required Sure Foot variable costs per pair. 2013 15-25 .000 – $200.00 – $48.000 – $635.000 – $280.85 (rounding) The variable costs of Sure Foot must decline $1.000 $325. Module 15 ©Cambridge Business Publishers. 7 (thousand) Total cost (in thousands) = $133. ©Cambridge Business Publishers. stable prices.139.0 1.503.000. Note the high variable cost ratio.269 × 0.596.205.269.364.8134X Where X is revenue in thousands of dollars.670. as the number of Netflix customers increase with greater use of streaming video. Netflix reported a 2009 operating profit of $191. Annual break-even point: Contribution margin ratio = 1 – 0. The equations assume linear cost behavior. 2013 15-26 Financial & Managerial Accounting for MBAs.939.340 Annual fixed costs = $1. an error of approximately 7 percent.8134) Fixed costs Operating profit $1.1866 Break-even point = ($133.P15-34 a. $13. and a stable cost structure.5 d.7/0. b. higher fixed costs and lower variable costs.155 – ($1.500 more than the amount predicted using equations based on 2007 and 2008 data.406.155 − $1.243.7 $ 178.364.7 + 0. Cost-estimating equation: Variable cost ratio = $1. Predicted 2009 operating profit: Revenues Less: Variable costs (1.358. This under-prediction likely occurred because of changes in Netflix’s cost structure.670.532. 3rd Edition .8134 = 0.567 = 0. as discussed in the chapter opening. See the opening vignette for Chapter 3.2 (thousand) c.139.8134) = $133.8134 $1.139.1866) = $713.661 x 0.8 133.661 − $1.113.139.243. 000) (325.000 e. Annual break-even point in sales dollars: Break-even point = $360. Shifting towards more used books and fewer new books will increase bookstore profitability with the same unit sales.75 to the publisher) of the suggested retail price.05)]} = 15.000/(1 − 0. Publisher project break-even point: Note: Solution is in terms of wholesale price to bookstore. Module 15 ©Cambridge Business Publishers.00 less 0.20 − 0. Publisher’s project-level contribution: Sales to bookstores $120 × 0.000) $143.800.800. On new books the contribution to other costs is 25 percent (1.05) Bookstore’s unit-level contribution $960.15) = $500.000 (768.75 × 8.000/(1 − 0.000 (252.20 + 0.000 2.000) $192. d.000 3.P15-35 A a.000 Less unit-level costs (0. Annual break-even point in units: Break-even point = $360. 2013 15-27 .75 − 0.05) = $1.000 Solutions Manual.000 units (or $1.000 b. Bookstore’s unit-level contribution Final retail sales $120 × 8.25 cost of the book). Project break-even point = $325.75 + 0.15 $108.000/{$120 − [$120(0.75 less 0. Author’s royalties: $720.75 + 0. Profitability analysis of sales of 8.000 new books: 1.000 Unit-level costs (0.15) Project-level costs Publisher’s project contribution $720.000/$120 = 15. not retail price to final buyer. On used books the contribution to other costs is 50 percent of the suggested retail price (0.000) c.000 net to publisher × 0. profits will decrease if the projected shift occurs.000.000/$1.000 The current contribution margin is $400. The current average unit contribution margin is $160.P15-36 a. 3rd Edition . even with a 500-unit sales increase. ©Cambridge Business Publishers.000/0. Current break-even point in sales dollars: Contribution margin ratio = $400.000 units × $120 = $360.000/$160 = 1.000/1. Unit contribution margin and break-even point: Average unit contribution margin = $400. sales reps should emphasize increased sales of the product with the higher unit contribution margin.050.80) + ($200 × 0.000/1. Hence. 2013 15-28 Financial & Managerial Accounting for MBAs. In the absence of capacity constraints.500 units c.20) = $120 Contribution with proposed plan = 3.500 = $160 Unit break-even point = $240.000/2.38095 Break-even point = $240.500 units $200 Shifting the mix to 80:20 will change the average unit contribution margin: ($100 × 0. The contribution margin with a shift in the mix. Current unit contribution margin of individual products: Cozy Kitchen $100. is only $360.004 b.000.000 units $100 All-House $300.38095 = $630.000 = 0. Module 15 ©Cambridge Business Publishers.75 0.000/0.000 Super Burgers Super Chickens Average unit contribution Short-run Mix 0.20 *$2.760/0.000 = $21.35) Less fixed costs ($21.50 Short-run monthly profit: Contribution (20. Selling price Variable costs Unit contribution $30.00)] Contribution ratio 27.000 $30.000 (28.760) Short-run contribution ratio: Contribution margin Revenue [(10.P15-37 a.000 Super Chickens $3.50) + (10.000/$50.000 + 7.50 -1.4909 Weight $0.20 Mix 0.80 $1.000 0.60 $1.0 – 0. Current contribution: Fixed costs Profit Contribution $21.4909 = $58.50 0.00* $1.586 Solutions Manual.50 0.50 0. 1.000 + 9.60) Super Burgers Super Chickens Volume 10.60 $35.50 × (1.000 10.00 -1. 2013 15-29 .50 1.000 units × $1.35 Short-run break-even point = $28.000 × $2.760) Profit (loss) $27.000 Contribution margin ratio = Current break-even point = 2.50 Unit Contribution $1.000 × $3.60 = Super Burgers $2.000 ÷55.760) $ (1. 760) Profit Long-run contribution ratio: Contribution margin Revenue [(30.40 $1.000 units × $1.000 ÷120.00)] Contribution ratio Mix 2/3 1/3 Mix 2/3 1/3 Weight $1.000 (28. While there is a short-run loss.50 1.525 = $54. it is unclear what the time period is for the short run. Introducing the sandwich is taking the business to the next level of size and profitability.50) + (15. • Introduce the sandwich. and an increase in the break-even point. ©Cambridge Business Publishers. There is too much risk.781 b.20 Long-run monthly profit: Contribution (45. Two possible recommendations are as follows: • Do not introduce the sandwich.000 0. Introducing the sandwich causes a short-run loss. Answers to requirement (b) will vary. 3rd Edition . Super Burgers Super Chickens Super Burgers Super Chickens Average unit contribution Volume 30. a permanent decline in the contribution ratio.P15-37 (concluded) 3.760/0.40) Less fixed costs ($21.40 $63. 2013 15-30 Financial & Managerial Accounting for MBAs.00 0.000 Long-run Unit Contribution $1. a permanent decline in the contribution ratio. If the predicted increase in sales does not occur.000 × $2. Also. and an increase in the break-even point.525 Long-run break-even point = $28.000 × $3. these negatives are more than offset by the long-run increase in volume.240 $ 63.760) $34.000 + 7. the company will be in serious difficulty.000 15. 000 (260.000) Solutions Manual.000 Batch movement 40.000 40.000 (1.000 200. Module 15 ©Cambridge Business Publishers. 2013 15-31 .000) Unit-level contribution 750.000) 490. $2.000 750.000 Order filling 20.000 Less unit-level costs: Direct materials $500.000) $ (610.000 (1.100.100.P15-38 A a.000 $500.000 Processing 750.000 Less facility-level costs: Manufacturing overhead 800.510.000) Net income (loss) $ (610.000 20.000.250.000 (1.000 Selling and administrative 300.000 Less lot-level costs: Setup 200.000) AccuMeter Multi-Level Contribution Income Statement For the Year 2012 Sales $2.000 (1. AccuMeter Contribution Income Statement For the Year 2012 Sales Less variable costs: Direct materials Processing Setup Batch movement Order filling Contribution margin Less fixed costs: Manufacturing overhead Selling and administrative Net income (loss) b.000.000) Lot-level contribution 490.000 300.000 800. 600 $2.300 ÷ $33 100 units Financial & Managerial Accounting for MBAs.500 2. Unit contribution margin: Selling price Less unit-level costs: Direct materials Processing Unit contribution ©Cambridge Business Publishers.P15-38 A (concluded) c.900 $60 $12 15 Lot-level costs: Setup Movement Order filling Total Lot-level costs Desired contribution Unit contribution Required lot size $20.000 (27) $33 $2.600 700 $3.100) $ 4.000 7.000 400 200 $2. 3rd Edition . 2013 15-32 $5.000 400 200 (15. Sales (500 at $40) Less unit and lot-level costs: Direct materials (500 at $10) Processing (500 at $15) Setup Batch movement Order filling Contribution per lot d. Art has followed these standards so far. Module 15 ©Cambridge Business Publishers. including management. They should also be shown how a small increase in productivity will make a big difference in financial performance. including employees in the decision is less risky than the alternative. Faced with an issue that concerned him. In particular. perhaps out of a true concern for employees. expressing his concern about what may happen if the speedup is detected (strikes. Solutions Manual. 2013 15-33 . will be adversely affected if the speedup is detected or if productivity is not improved. published by the Institute of Management Accountants. They might even be invited to offer their own suggestions for increasing productivity. They should be treated as team members. He might recommend a general meeting with all employees and suggest that in this meeting financial information be shared. In this case. If it does. mistrust. We do not know if New City Automotive has a code of ethics. plant closure) and what he believes are the advantages of facing the situation directly. legal action. or perhaps out of a desire for a “big bonus. Finally Art might conclude his comments by noting how the careers of all plant employees.” the plant manager is proposing an unethical (illegal?) speedup of the assembly line. he went to the appropriate company official. Art Conroy should refer to it for guidance. In this case. he should follow the procedures for resolution of ethical conflict. rather than as adversaries. he should also refer to the Standards of Ethical Conduct for Management Accountants. he needs to further discuss the situation with Paula. Because Art is a management accountant. At this point. Employees should be made aware of the likelihood of closing the plant if financial performance is not improved.MANAGEMENT APPLICATIONS MA15-39 It is important for senior management to set the ethical climate for the organization. develop a graph with two lines. the likely impact of the changed cost structure on Homestead Telephone’s: Contribution margin percent: Because variable costs decrease. c. Using a unit-level analysis. (1) representing Homestead Telephone’s cost structure in the 1940s and (2) representing Homestead Telephone’s cost structure in the late 1990s. Be sure to label the axes and lines. if sales decrease. the BEP will likely increase because of downward pressure on prices. the percentage decrease in profits will exceed the percentage decrease in sales. b.MA15-40 a. the impact on the break-even point CANNOT BE DETERMINED. 2013 15-34 Financial & Managerial Accounting for MBAs. which means that if sales increase. the percentage increase in before-tax profits will exceed the percentage increase in sales. the contribution margin percent will INCREASE Break-even point With an increase in fixed costs and a decrease in variable costs. ©Cambridge Business Publishers. With sales revenue as the independent variable. The shift from human operators to mechanical devices increased Homestead’s operating leverage. 3rd Edition . Conversely. If there is a change. 000: Required before-tax profit = $480.000.200 ©Cambridge Business Publishers.000 / (1 – 0.435 c.000 (315.000 + $800.661 b.000)/(1 – 0. Regional Distribution.000) 1.000 × 0.857.000/(1 – 0.000 Required sales = ($315. Because there are no taxes at the break-even point.823) = $315.000.000 (298. To determine the break-even point.000 − $5.430.823) = $1. Module 15 $6.823) Contribution margin Fixed costs Before-tax profits Income taxes at 40 percent After-tax profit Solutions Manual.823) = $6.430.800) $ 448. 2013 15-35 .000 (4.000.000) 747.823 Fixed costs = $4.MA15-41 a.000.000 $5.000 Break-even point = $315.000 = 0.000 × 0. Contribution Income Statement For the Year 2012 Sales Variable costs ($6. Inc. you must first find the contribution margin as a percent of sales and the fixed costs per period. our analysis is based on before-tax information: Variable costs as a percent of sales = Change in total costs = Change in Sales $4.062.900 − $4.40) = $800.299.520.000 − ($5. Sales volume required to earn an after-tax profit of $480.938.779. MA15-41 (concluded) d. which used only two data points. The method used for determining the cost equation for Regional Distribution with the available data was the high-low method. such as a particular product line. Also. 2013 15-36 Financial & Managerial Accounting for MBAs. For that reason. 3rd Edition . The cost-volume-profit model works best when there is a single cost driver and all costs are either variable or fixed with respect to that cost driver. it was not possible to determine the possible effects of inflation on the data from 2010 to 2011. There was not sufficient information to determine whether those two data points were representative of the larger population of data points. ©Cambridge Business Publishers. using aggregate data for the company as a whole to estimate its costs and break-even point may not produce accurate results. if Regional Distribution has multiple products and or departments that have varying cost structures. Also. the model is generally more effective for analyzing smaller segments of a business.