Cvp

CHAPTER 7: COST-VOLUME-PROFIT ANALYSIS QUESTIONS7-1 The underlying relationship in cost-volume-profit analysis is that costs, revenues, and profits all change in a predictable way as the volume of activity changes. It is more practical to find the breakeven point in sales dollars for companies having thousands of individual items. Finding the breakeven point for each item would be laborious and meaningless. The contribution margin ratio is: price - variable costs price 7-2 7-3 The contribution margin ratio (CMR) represents the net contribution per sales dollar. The CMR tells us the change in profit associated with a given change in sales dollars. It is a useful measure of the relative contribution to profit of different products, divisions, or sales units. The use of this ratio can give a retail store a good approximation of the sales dollars necessary for the store to break even. A higher CMR is associated with higher risk. A higher CMR can have a more favorable impact on profit. However, if sales fall below breakeven, then a high CMR will yield a relatively more negative impact on profits. 7-4 The basic assumption of the CVP model is that the behavior of revenues and total costs is assumed to be linear over the relevant range of activity. Managers must be careful to remember that the calculations done within the context of a given CVP model cannot be interpreted safely outside of the relevant range of output for that particular model. Other assumptions include: fixed costs are measured by all fixed costs if a long-term perspective (i.e., breakeven over a longer period of time) is to be taken, while only incremental fixed costs for the project or activity are included if a short- term perspective (i.e., to determine when the firm will achieve breakeven on a new product) is taken. Also, allocated fixed costs are not included if a short-term perspective is taken, since these costs will not change in the short term. If part of the costs are fixed, they will remain constant even when the activity level declines. Therefore, the variable costs will need to fall by the entire amount of the budget cut. Fixed costs are sticky; the expected savings from reducing activity levels will be less than the effect on the activity itself. Only include fixed costs that are relevant for a short-term analysis to determine when the new product will reach breakeven. Relevant costs are those additional, new, or incremental fixed costs which will influence the profitability of the new venture. If a new product does not require any new fixed cost, then the breakeven point is zero. CVP is used in profit planning, revenue planning and in cost planning. It is a widely applicable tool for analyzing the relationship between volume and profits, costs, or revenues. The issue of taxes does not affect the calculation of the breakeven point because the breakeven point is determined at the level of zero profit. 7-5 7-6 7-7 7-8 Solutions Manual 7-1 7-9 Technologically advanced firms usually have high fixed costs. Therefore, profits are strongly affected by the level of activity. High profits are earned beyond the breakeven point, but high losses can result from falling below breakeven. Sensitivity analysis deals with the risk that sales may fall short of expectations or that costs will be higher than expected. The breakeven point can be calculated using: 1. The equation method for sales in units 2. The equation method for sales dollars 3. The contribution margin method for sales in units 4. The contribution margin method for sales dollars Margin of safety = expected sales - breakeven sales The margin of safety is measured in either dollars or units. It measures the potential effect of the risk that sales will fall short of planned levels. 7-10 7-11 7-12 7-13 Operating leverage = contribution margin net income Operating leverage uses the percentage change in sales to predict the percentage change in profits. The contribution margin ratio uses the dollar change in sales to predict the dollar change in profits. 7-14 Step costs cause a difficulty in the calculation of breakeven because of the discontinuities in the cost line. This usually requires some trial and error to identify the one unique breakeven point. Exhibit 7-9 illustrates how the breakeven point is determined when there are step costs. 7-15 One over one minus the tax rate. (1/(1-t)) 7-16 In order to use the CVP model to find the breakeven point for multiple products, one must assume that the sales of the products will continue at the present sales mix. (Each product will continue to comprise the same proportion of total sales.) The constant sales mix permits two or more products to be treated as one, by computing a weightedaverage price, unit variable cost, and contribution margin. Sensitivity analysis is used for two important purposes: 1. To determine which factors have the greatest influence on profit, and to assess the magnitude of that influence 2. To examine the sensitivity of profit to a given forecast or estimate for any one of the factors 7-17 Blocher,Chen,Cokins,Lin: Cost Management 3e 2005 7-2 ©The McGraw-Hill Companies, Inc., EXERCISES 7-18 Make or Buy; Two Machines (20 min) 1. S = number of switches Machine X $2S = $.65S + $135,000 S = 100,000 Machine Y $2S = $.3S + $204,000 S = 120,000 2. cost when purchasing from outside supplier: $2 x 200,000 = $400,000 cost when using machine X: $135,000 + $.65 (200,000) = $265,000 cost when using machine Y: $204,000 + $.30 (200,000) = $264,000 When 200,000 switches are needed, it is most profitable to produce them with machine Y, though the difference is only $1,000. 3. cost of using X $.65S + $135,000 $.35S S = cost of using Y $.30S + $204,000 $69,000 = 197,143 units = = When 197,143 switches are needed, the Calista Company is indifferent as to which machine to use. Summary of (1), (2) and (3): If output is less than 100,000, buy the switches; if output is less than 197,143 units but greater than 100,000, buy and use machine X; if output is greater than 197,143 units, then buy and use machine Y. Solutions Manual 7-3 7-19 Operating Leverage (20 min) 1. operating leverage = contribution margin net income A's operating leverage = $40,000/$25,000 = 1.6 B's operating leverage = $70,000/$30,000 = 2.3333 If sales increase, company B will benefit more. Company B has a higher proportion of fixed costs in relation to variable costs; therefore it has a higher operating leverage than does Company A. The degree of operating leverage is a measure, at a specific level of sales, of how a percentage change in sales volume will affect profits. The higher the operating leverage, the more sensitive profits are to changes in sales volume. 2. Sales Less variable costs Contribution margin Less fixed costs Net income COMPANY A Amount % $110,000 100 66,000 60 $ 44,000 40 15,000 $ 29,000 COMPANY B Amount % $110,000 33,000 30 $ 77,000 70 40,000 $ 37,000 100 A’s change in profits = ($29-25)/$25 = 16% B’s change in profits = ($37-30)/$30 = 23.333% = 10% x 1.6 = 10% x 2.333 Yes, these results are what we expected. Operating leverage indicates what change in net income can be expected from a change in sales volume. An operating leverage of 1.6 implies that the change in net income will be 1.6 times as large as the change in sales volume. Therefore, if sales increased by 10%, net income should increase by 16%. This is precisely what happened. The same logic applies to Company B. Blocher,Chen,Cokins,Lin: Cost Management 3e 2005 7-4 ©The McGraw-Hill Companies, Inc., BE units: $65Q = $32Q + $429.000 2.061 units.000($65) -35.$200.000 Q = 36.061 units (to justify the advertising plan.000 + N N = $561.061 units (and breakeven is higher) 5. Sales = variable cost + fixed cost + target income/(1-tax rate) 30. Net Income: 35.000($32) .000= N N = $526. $65Q = $32Q + $629.000 to $526. sales would have to rise to at least 36.000 as a result of the plan to increase sales with increased advertising) 4. BE units: $65Q = $32Q + $629.000 + $561.000 Q = 19.000 (net income falls by $35.000($65) = 30. somewhat above the projected 35.000 units) Solutions Manual 7-5 .$429.000 units 3.000 . from $561.000 Q = 13.7-20 CVP Analysis (25 min) 1.000($32) + $429.000. 7 x $282.90)/(1.6 x $1.5 x $12. 3. Fixed costs are not expected to change.3458 = $455.1 x $282.90) = .822 = $ 28.0750 Magazines: .5 x $12) = .6 x $ 1.Lin: Cost Management 3e 2005 7-6 ©The McGraw-Hill Companies.500 900 2.00 Paperback: . Services Total $19.Cokins.400 $97. 6 x $ 2.40 = $1.6 x $2.3458 Breakeven = $97. and are therefore the same as last year.701 Cost-Volume-Profit Point = ($97.3458 = $282.976 Paperback: .200 7.822 = $197.2333 Paperback: .000/ (1-.822 = $ 56.822 of books and magazines Hardbound: .40) = .5 x $12)/(1.800/.800 + $59.6 x $2.33) = $59.800 2.000 11.00 = $6.470 books and magazines Blocher.6 x $1.1 x (.90 = $1.800 56.7 x (. Inc. Desired before tax profit = $40.44 Magazines: .Chen.. .2 x $282. Weighted Average contribution ratio.564 Magazines: .701)/ .0375 Weighted Average CMR .14 Rent Utilities Salaries Overhead Advertising Prof.282 4. since sales mix is constant in dollars: Hardbound: . Hardbound: .7-21 Multiple Product CVP Analysis (20 min) 1.2 x (.40)/1. .2 breakeven point = fixed costs = CMR $200.000 .7-22 The Role of Income Taxes (20 min) 1.000 / (1-.000 = .000 total sales .total variable cost = total contribution margin total sales .000 contribution margin .000 CM = $300. operating income = $70.000 total sales . Solutions Manual 7-7 .2 x sales = $300.$200.000 = $1.3) = $100. 4.80 x sales = $300.2 3.000 sales = $1.500. 2.fixed cost = before tax profit contribution margin .variable cost ratio x sales = $300.000.000 = $100.000 .500.000 Contribution margin ration (CMR) = $300.000/$1. OR: 3.000/(1-.4) = $75. Q = f + N/(1 .000 + 0 = 75.$3 $75.$3 BE dollars = f + N p-v p = $75.000 + $20.7-23 CVP with Taxes (20 min) 1. 37.000+[$12.000 + $20..4)] = $75.500 .000/(1-.500 x $5 = $237. .000 $5 -$3 $5 42.Cokins.000 = $237.4 $5 2.$3 $2 Using the contribution margin ratio: pQ = f+N/(1-t) = $75.000 + $10.Chen.500 units 4.000 = $207.000 = $187. pQ = f + N = p-v p = 83.500 x $5 = $187. BE units = f + N = $75.000 + 0 = 37.Lin: Cost Management 3e 2005 7-8 ©The McGraw-Hill Companies.4 p $5 OR: 47.000 + $12.500 $5-$3 . Inc.$3 .500 Q=f+N p-v = $ 75.000 = $5 .500 units p-v $5 .000 + $8.4 5.500 units $5 .500 Blocher.500 p-v $5 .000 = 47.t) p-v Q = $75. 000 .7-24 Margin of Safety (20 min) 1.35 Why this works: Margin of Safety x CMR = operating income (Expected Sales – Breakeven)xCMR = Expected Sales x CMR – Breakeven x CMR = Contribution margin – fixed costs = operating income (Note that breakeven sales x CMR = fixed costs) Solutions Manual 7-9 . since all operating costs are fixed and all merchandise cost is variable with sales dollars.85% 2.000 = $350.000 Less fixed costs 105.000/. First.000 = .000 x . If sales fall to $500.000 And Margin of safety = $650.000 = 53.000/$650.35 Breakeven = $105.000 Operating income can be determined in a variety of ways: Contribution margin = $500.35 = $175. calculate the breakeven point. note that the gross margin in this problem is also the contribution margin.000. the breakeven point will remain the same.000 = $200.000 Margin of safety ratio = $350. using the relationship between the margin of safety and operating income: Operating Income = Margin of Safety $ x CMR $70.000 .000 Operating Income $ 70. using the contribution margin ratio: CMR = $227.$300.35 = $300.000 = $200.$300.000 Or.000 x .500/$650. but the margin of safety will change: Margin of Safety = $500. Lin: Cost Management 3e 2005 7-10 ©The McGraw-Hill Companies.33% Blocher. decrease in variable costs last year's variable cost budget $ 40.000 = 33..Chen.000 ($200.000 x 20%). Since fixed costs do not change. the Pharmacy will have to reduce its services by 33.33% Although the budget was cut by only 20%.7-25 Budget Cuts (10 min) If the budget is reduced by 20%. Inc.000 $120. . services will have to decrease by more than 20% because the fixed costs will not change in the short term. variable costs will have to decrease by $40.Cokins. 6 = $220.667 x . respectively.33% Smarter: $300.7-26 Multiple Products CVP (20 min) The sales revenues for Brighter and Smarter are $150.60 Breakeven Point: $132.000/($150.55 Weighted average CM Ratio = .55 = .000 = .000) = 66.000/.000 ($1. (1.67 The contribution margin ratio for the two products is 70% and 55%.000(200 x $750) and $300.000 x 300).7. The proportion of sales dollars for each product is as follows: Brighter: $150.000) = 33.000 + $300.000 + $300.000 Solutions Manual 7-11 . respectively.000/($150.7 + .333 x .000 – 450)/1. (750-225)/750 = . 000 $30-$20 $30 2. BE units = f p-v = $150. BE units = f+N = p-v $150. .$15. If the salary/commissions plan would alienate his sales staff.Chen..000 hats Margin of safety ratio = 10.000 = $450.Cokins.PROBLEMS 7-27 CVP Analysis.$20 = fixed costs p-v p 15.000 20.50 N = net income = $58.000 = 10.000 = 40% 4.000 = $30 . 20. A key strategic issue is that Frank’s sales staff is a critical success factor for the business.000 $30 . the plan could be a big mistake. Margin of safety = 25.000 5.000 hats BE $ = fixed costs CMR = $150.$15.000= $150. and be sure that his sales staff will be as highly motivated under the salary plan as they were under the commissions plan.000/25. Strategy (20 min) 1.50 = 16.000= $150.000 + $82.Lin: Cost Management 3e 2005 7-12 ©The McGraw-Hill Companies. Blocher.000 + N net income = $50.000 = $232.000 + N $30 . His knowledgeable and courteous staff help to bring in and retain customers.000 + N $30 .000 3. Inc.000 – 15. Frank should proceed with caution.$20 $200. 400 35 60.000 20.000 $ 84. Once example is shown below.800 35 60.000 3.400 2.400 units.000 $ 72.667 times faster) than a given change in the sales level.800 132.800) (21.000 2. and the related effect on operating profit.840 35 60.000 4.00 30.00 $180.000 1. The sensitivity analysis shows sales levels from 20% to 200% of expected sales of 2. HFI’s operating leverage is 2 2/3.880 35 60.000 Solutions Manual 7-13 .400 2.320 35 60. A variety of possible spreadsheets could satisfy this requirement.600) (2.000 75 75 75 75 75 75 75 75 75 75 Operating Profit $ (40.000 55. 25 min) 1.400) 16.360 35 60.000 $96.000 2.00 $40.800 36.200 74.00 5.000 12.000 Assumed Level of Sales Unit Var.440 35 60.000 $ 960 35 60.000 4.000 1.920 35 60.000 40.000 36.400 93.7-28 Contribution Income Statements (Excel.000 60.000 3. so that profits change much faster (2.400 Price $75.600 112. Cost Fixed Cost Price 480 $ 35 $ 60. Units Sales Variable Cost of Sales Variable Marketing and GSA Contribution Fixed Cost of Sales Fixed Marketing and GSA Operating Profit 2. .67 in order for HFI to make a $100. Blocher. Inc.Lin: Cost Management 3e 2005 7-14 ©The McGraw-Hill Companies.Problem 7-28 (continued) 2.. An example of how it is used is show below.Chen.Cokins. The Goal Seek tool is available under the Tools menu in Excel. The price would have to increase to $101.000 before tax profit. 000 448.400 x $90 Product B: 1.000 = 8.000 x 80% = 6.680 units Product B = 9.000 224.7-29 Breakeven Analysis for Multiple Products (25 min) 1.400 8.400 x $ 70 Product B: 1.600 units Product A = 9.920 Total 9.600 x $ 140 Total sales Less variable cost: Product A: 6. The management of the company plans $40.000 target-net-profit: Fixed expenses + Target net profit Contribution margin $200.600 x 80% = 7.000 600.600 x $95 Total variable costs Fixed costs Total costs Operating profit $576.000 800.000 units $25 Break-even sales in units: Product A Product B 8.000 -0- 2.000 152.600 x 20% = 1.000 + $40.000 x 20% = 1.000 = $25 9.000 200.000 800. Weighted-average unit contribution = ($20 x 80%) + ($45 x 20%) = $25 The break-even point = $200.600 Solutions Manual 7-15 .600 The following income calculation verifies the break-even point: Sale revenues: Product A: 6. 000 537. Inc.Chen.920 x $140 Total sales Variable costs: Product A: 7.600 182.680 x $70 Product B: 1.Problem 7-29 (continued) So to achieve the target-net-profit Hycel has to sell 7.000 40.000 200.920 units of Product B.680 x $90 Product B: 1.200 268. .680 units of Product A and 1. Income Statement to verify the Target-net-profit calculation: Sale revenues: Product A: 7.Lin: Cost Management 3e 2005 7-16 ©The McGraw-Hill Companies..000 Blocher.920 x $95 Total variable costs Fixed costs Total costs Net Income $ 691.400 720.800 960.Cokins.000 $ 920. 744 Breakeven based on budgeted sales: Small Sales Variable costs Contribution Fixed costs Net Income BE = $175.250/$825.744.250) $225.000 ($392. Solutions Manual 7-17 .000 75 $425. Sales shifted from products with a higher contribution margin (standard and super) to a product with a lower contribution margin (small).000 31 Standard Super Total $825.000) = $731.000 100% 120.612 3. Contribution analysis based on actual sales: Small Sales Variable costs Contribution Fixed costs Net Income $400.000 69 124.744.000 50 125.000 $ 54. the breakeven point increased from $731.000). there was an actual net loss of $32.7-30 Multiple Product CVP Analysis (25 min) 1. Although total sales dollars remained constant ($825.000 50 168.250.000 50 2.000 ($479.750 425.000 ($32.000 100% 276. Breakeven based on actual sales mix: BE = fixed costs = average CM $425.250 31 Standard Super Total $250.000 50 $825.000 25 300.250 425.000 100% 125.250 392. Also.000 100% $200.750 75 100. More sales were necessary to cover the same amount of fixed costs. since the actual sales level fell below $892.000 100% 100.750 69 54.250 $400.612 to $892. the breakeven point changed because the sales mix changed.250 25 100.750 479.000) = $892.000 345.750/$825. Therefore.000 432.000 100% 56. .000 = $350.000 = $840.000 + 0 $60 ..000 3.$35 3. Y = Variable cost + Fixed cost + Income Blocher.Lin: Cost Management 3e 2005 Dollars 7-18 ©The McGraw-Hill Companies.000 + $150.000.000/(1-.000 $350.000 x $60 = $840.000 + $35Q Q = 10. If net income is to increase the contribution margin of the new business must be positive.000 2.000 p-v 6.000 3.000 1.Cokins.000 + $30Q = New = $150. X = f + N/(1-t) = $ 350.000.$35 N = $650.4) = 24.000. Inc.000.500. Original $200.000 500.000 units $60 .$35 = 14.7-31 CVP Analysis. Taxes (25 min) 1.417 $60 2.500.000 1.000 units $60 .000 + 0 = $350. 40. BE units = f + N = p -v $350.000 units BE sales dollars = f + n = p-v p OR: 14.Chen. The CVP Graph appears below: 4.000 + $150.000 = 20.000 + N $60 .000 30.000 Units 60.000 2.$35 5.000 4.500.000 $60 -$35 . BE units = $350.000 7-32 CVP Analysis in a Professional Service Firm (25 min) 1. Y + $50(800) = $5(800 + 900) + $45. the key to the bidding strategy is the desirability of bringing in 800 hours of new business at the going billing rate. Solutions Manual 7-19 .000 + 0 X = 656 The managing partner's estimate of 800 hours of new business leaves a margin of safety of 800 .656 = 144 hours. $20.500 where Y is the minimum revenue that must be earned from the county work in order to insure that net income of the firm does not decrease. Revenue above this level will result in incremental profit.000 + $50(X) = $5(900 + X)+$45.000 + 0 Y = $13. 2. Clearly.500/900 = $15 per hour.500 would be $13. The average billing rate at the breakeven rate of $13. Lin: Cost Management 3e 2005 7-20 ©The McGraw-Hill Companies.($22.000 = 8. Fixed Cost + Target profit = $7.333. New CM = $3.Cokins.000 units $937.000/1.000 * 6.250.500.375 4.000 B/E = $7. CM ratio = $1.375 $3.000 = $3. .000 x 1.000.000 = $39.875 = $1.Chen.000 = $20.125 = 6.50 per unit 12.000 .333 CM ratio .375 3.500.500.$22.000 B/E = Fixed cost CM = $7.000 .125 = . Inc.667 .500.667 units 2.000 + $7.125/unit 12. Contribution margin ratio = Unit contribution margin Unit sales price Thus.$1.500..50/unit Blocher.10) = $937.000 = $3.000 .000 12.000. Break-even in units = Fixed cost/Unit Contribution Margin CM = $36.000 Fixed Cost CM ratio = B/E in dollars $7.500.7-33 CVP Analysis (25 min) 1. 000 = $720. Solutions Manual 7-21 .000 Target before tax profit: $144.2 = $144.000 = $970.000 + 137 x $480 + $100.729 units per year.4) = $240. Total fixed manufacturing expense = 12 x $60.000 + $100.000 + $50.730 units per year Note that the breakeven for the ABC approach is somewhat smaller than that of the volume based analysis.000/(1 .7-34 CVP Analysis. because batch level costs of $480 per batch can be saved if production falls below the budgeted level of 6.000)/$290 = 4.173 units. Activity-based costing. 20 unit batch means 6.5 batches (137 batches.000 Cost per batch = $144.000 + ($100.000 Q = ($970. Taxes (30 min) 1.000 $300X = $10X + ($720.000/$266 X= 2.000 x 2) + $50.000 + $50.000 x .$144.000 x 12 = $144.000 + $240.000 .000 = $576.760/$290 X= 2. 3.000 units.000/$290 X= 3. Total fixed expenses: $720.000 + $100.000 Non-batch costs = $720.000) X= $726..000) X= $870.000 units per year 2. rounded) Exact Breakeven $300X = $10X + ($576. or 136.000 Target profit per year = $12.000/20 = 300 batches per year Batch level costs = $720.000 + $50.000/300 = $480 Cost per unit = $480/20 = $24 Breakeven: $300X = $10X + 24X + ($576.000) X= $791. 000 X = 1.667 – 1.000 x 30% needing blood gas analysis = 1. we need 167/.Lin: Cost Management 3e 2005 7-22 ©The McGraw-Hill Companies.000 patients 5.500 = $40 x 1. Current number of patients needing analysis = 5.3 = 557 additional patients.500 The difference 1.000 p = $90 Blocher.Chen. Alternatively (where X is the breakeven number of tests): $85 X = $40 X + $75. Pro-rated per year fixed cost of blood gas machine = $750.000/10 = $75.667 samples (tests) per year. To generate 167 additional charges. .667 tests 2. 3..Cokins.500 = 167 167 is the additional number of blood gas samples needed to break even at the $85 charge.7-35 CVP Analysis (25 min) 1.000/$45 = 1.000 Savings per sample in direct costs if a gas analysis machine is purchased : $85 $40 = $45 Indifference point:$75. Inc. The amount the diagnostic screening center would have to charge clients at the current patient levels: p x 1.500 + $75. Strategy 1.000 2.000 $20.000 $24.000 Total $200.000/$200.5% Breakeven in dollars = $61.84675 = $75.000) Gasoline Sales Revenue Coupons redeemed (note 1) Cost of Sales (note 2) Contribution Margin Fixed costs (note 3) Loss before tax $100.000 Note 2: Gasoline cost of sales: $100.000/$1.500 Rent.265 = $230. Sensitivity Analysis.000 Other $40.500 $11.000 (16.574 gallons 88.000 36.189 Solutions Manual 7-23 .129 price per gallon = 88.000 53.000 Note 3: Fixed costs Labor $9.000/.000 $(8.000) Food and beverage $60.000) Note 1: Coupons redeemed: total sales of $200.000 = 26.000 20.000 x 80% x 10% ($1 per $10) = $16. GoGo Juice’s profit (loss) before tax.500 Coupon printing cost 500 Total fixed costs $61.000 61. from implementing the promotional coupon with no change in sales volume is ($8.574 x $. power.000 131.7-36 CVP Analysis. etc 46. The breakeven for GoGo: Contribution margin ratio = $53.500 Depreciation 2.000 (16.000 + $2.000 $9. supplies.000) 75. .  The availability of computers and spreadsheet software has made it very quick and easy to compute the impact of changing one or more assumptions in a financial model.000 4. competitive marketplace.  As the business environment is becoming more dynamic and competitive. For example.000 $11. so the variables can be monitored or a decision made to obtain additional information on them.Chen.000 x 1. changing consumer demand.. sensitivity analysis provides management with an understanding of the impact of changes in the environment. shorter product life cycle times.Problem 7-36 (continued) 3. Sales revenue ($200. revenues or costs could be changed from the initial assumptions and a new break-even sales volume calculated.Lin: Cost Management 3e 2005 7-24 ©The McGraw-Hill Companies. Sensitivity analysis is a "what-if' type of analysis used to determine the outcomes if any parameters change from the initial assumptions. At least three factors that make sensitivity analysis prevalent in decision making including the following.000 72.000 x 30%) Less fixed costs Profit before tax $240. Blocher.  Sensitivity analysis aids management in identifying the key variables and assumptions.000 61. and faster obsolescence of technology makes sensitivity analysis more widely used. Inc. The increased emphasis on productivity .Cokins.2) Contribution margin ($240. Sensitivity analysis is used to deal more effectively with uncertainty or risk. 50 per subscription $11.00) .10 weighted average Contribution Margin $306.30 X . 30. Breakeven Point for Target Before Tax Profit of $ 75.30 X .00 per subscription $ 1.037 (9.70) = $11. Weekly: $. 37.30 / $47.556 for HPC-weekly.30 Contribution Margin Per Unit Monthly: $.000 + $75.630 HPC-monthly) Solutions Manual 7-25 .407 for HPC-weekly.Total Variable Cost ($35.222 for HPC-monthly) 4.30 / $19.10 = 47.50 per subscription $35.60 per issue x 52 = $ 31.26 HPC-Weekly $ 7.30 Contribution Margin Per Unit 2.4% 3. Contribution Margin Ratio Weekly: $11. $11.20 per subscription $ 3.000 / $8.60 per issues x 12 = $ 7.10 = 37.70 Total variable cost Selling Price ($47.00) .778 subscriptions (7.000 $381.20 = $2.70 Total Variable Cost Selling Price ($19.70) = $7.7-37 CVP Analysis (30 min) 1.00 per subscription $ 1.000 = $381.20 per subscription $ 3.Total Variable Cost ($11.000 $306.80 = $5.00 = 38.00 = 24% Monthly: $ 7.84 HPC-Monthly $8.000 / $8. Blocher.Problem 7-37 (continued) 5. as well as competitive price. The point of this question is to get the students started thinking about the competitive context in which the firm operates. For example.Lin: Cost Management 3e 2005 7-26 ©The McGraw-Hill Companies. Other factors include changes in literacy rates. There are a number of critical success factors that are likely to be important for both domestic and foreign subscriptions. so that it is critical in these countries to devise new ways to deliver the subscriptions profitably. and investment opportunities in different countries. There are many different relevant points that could be made. . in some countries the cost of distribution including selling and handling costs are quite high. These would include quality of presentation and timeliness and accuracy of information.Cokins.. Inc.Chen. ask them to think about what a firm like HPC must do to be competitive. the business climate. However. other factors will differ across countries. If the discussion is slow to start. 120 . Ethics (50 min) 1.063 greater than budgeted sales Solutions Manual 7-27 . Breakeven dollars (dollars in thousands) Y = Variable cost of goods sold + current fixed costs + fixed cost of hiring + commissions Y = .500 Y = $30.45Y + $6.850 650 $6.120 + $1.7-38 CVP Analysis.$26.23Y = $3.000 = $ 4.890 Breakeven formula set equal to net income: (dollars in thousands) Y .000 = 45% Current fixed costs ($ thousands) Fixed cost of goods sold Fixed advertising cost Fixed administrative cost Fixed interest expense Total Fixed cost of hiring ($ thousands) Sales people (8 x $80) Travel & entertainment Manager/secretary Additional advertising Total 2.890 + ..120 $ 640 600 150 500 $1. $2.800 Supporting Calculations Variable cost of goods sold rate: (dollars in thousands) $11.063 .45Y .10Y Y = $17.870 750 1.$6.700/$26.063 This is $30. Commissions.. 000.000.23Y + $6.538 is less than current sales of $26.890 Y = $14.000 2.45Y + $6.000. there is no basis for an increase in commission rates under the existing plan.120 + $1. Let sales at the indifference point be Y (in 000s).980. the firm would be better off hiring their own agents.600. because the relatively low variable cost offsets the relatively high fixed costs of the new agents when sales are higher than the indifference point. Variable costs vary proportionally to volume.45Y + .Problem 7-38 (continued) 3.13Y = $1.000.000 $3. The analysis is done within the relevant range of the cost and revenue variables 4. Selling prices remain unchanged.240. Total Cost for Current Agents = Total cost for Our Agents .Chen.Lin: Cost Management 3e 2005 7-28 ©The McGraw-Hill Companies. . for which the total compensation was . 5.538 (rounded) Since the point of indifference. $14.000 x 0.120 = .10Y . Thus.1 = Total $ 640.890 + .. Inc.000 This does not compare favorably (from the sales agents’ point of view) to the previous plan. Total compensation under the new plan: Salary Commission: 26. Blocher. The general assumptions underlying breakeven analysis that limit its usefulness include the following: All costs can be divided into fixed and variable elements.Cokins.000 = $5.23 x $26. but there will also be a difficult transition time. However. the plan would be a blow to the sales agents.Problem 7-38 (continued) 6. many of whom may be depend on Marston Corporation for a significant portion (or perhaps all of) their income. The shareholders are a prime concern. employees and agents. The new plan would be a savings for the firm and thus would have an upward effect on stock price and thus benefit the shareholders. Markowitz should consider the firm’s ethical responsibility to its shareholders. but employees and others such as the sales agents must also be given consideration. What is our responsibility to these sales agents who are not our employees. Marston needs to think carefully about the nature and extent of its responsibility to the sales agents. Solutions Manual 7-29 . as part of its overall responsibility to its constituencies. The agents are likely to have alternative job prospects if Marston lets them go. . however.00 Moline Selling price Less variable costs: Manufacturing Commissions G&A Unit contribution Fixed costs calculation: $150. calculated as follows.00 per unit ($48 . Peoria = {$30.50)}x 400 x 240 = $4.000/$64 = 73. the normal capacity at the Moline plant is 76.00 + ($21.000 .000 units (400 x 240).800) will be manufactured at Moline at a reduced contribution of $40.$6.7-39 CVP Analysis. Therefore. Inc.50 6.50 .628.00 .200 units 2.00 + ($25.000 Moline = {$15. 19.200 units (96.600/$48 = 47.800 units (320 x 240).265.000 units at each plant is $3.500 units and at the Moline plant is 47. Different Production Plans (35 min) 1.Chen.00 7.Cokins. Blocher.$6.50 $ 48.00 72. .$8).50)}x 320 x 240 = $2. Unit contribution calculation: Peoria $150.200 units.00 7.50 6.265.800.00 Total fixed costs = (Fixed manufacturing cost + Fixed G & A) x Production rate/day x Normal working days.00 88.50 $ 64.Lin: Cost Management 3e 2005 7-30 ©The McGraw-Hill Companies. The annual breakeven point in units at the Peoria plant is 73.500 units Moline = $2.600 Breakeven calculation: Breakeven units = Fixed costs / Unit contribution Peoria = $4. The operating income that would result from the division production manager's plan to produce 96.76.704. The normal capacity at the Peoria plant is 96.704. 600 $ 4.000 x $64) Peoria (24.000 units at the Moline plant.969.969.000 x $61) Moline (72.000 6.456.400 6. should be utilized as the contribution from these units is higher at all levels of production than the contribution from units produced at the Moline plant. The full capacity of the Peoria plant.800 3.200 x $40) Total contribution Less total fixed costs ($4.400 Solutions Manual 7-31 .265.686.000 $10.600 $ 3.000 units (400 units x 300 days).000 units at the Peoria plant and 72.144.704. 120.628.000 x $48) Total contribution Less total fixed cost Operating income $ 6.144.000 x $64) Moline (76.400 768.000 1.000 + $2.800 x $48) Moline (19.064. Contribution per plant: Peoria (96.Problem 7-39 (continued) Contribution per plant: Peoria (96.464.000 $11.598.094.000 3. The optimal production plan is to produce 120.000 3.600) Operating income $ 6. . should consider before deciding whether or not to submit a bid at the maximum acceptable price of $27. The unit variable cost per blanket is: The total fixed cost for the order is: 800.000 p = $26 2.000 The breakeven price using the firm’s full cost system is $26: p x 800.00 contribution per blanket to fixed costs. The minimum price per blanket that Jason Fibers Inc.15* x $26.Lin: Cost Management 3e 2005 .Cokins.  If the order is accepted at $27. they are irrelevant in the decision.000 x $8/4 = $1.Chen. 3. This is covered in Chapter 9.90 Bid price $ 29.00/hr.000 + $1.00 Allowable return (. there will be a $3.000 = $24.00 since the fixed costs will not change whether or not Jason takes the order. Strategic actors that Jason Fibers Inc.90 * 9% / (1 . the company should consider whether or not there are other jobs that would make a greater contribution.'s bid price per blanket would be $29.00 x 800.40%) Problem 7-40 (continued) 4. could bid without reducing the company's net income is $24. However. Relevant costs from Requirement 1 $24.00 per blanket.90 calculated as follows. Using the full cost criteria and the maximum allowable return specified. and the irrelevance of fixed costs for short term pricing decisions.) 2. 1.7-40 CVP Analysis.00 per blanket include the following. Bid Pricing (40 min) This problem (part 2) can be used to introduce the concepts of contribution margin decision making.600. Inc.25 hrs. Jason Fibers Inc. Since the fixed costs will not change.  Blocher.00 Plus: Fixed overhead (.00 Subtotal 26.600. @$8.00) 3. Acceptance of the order at a low price could cause problems with current customers 7-32 ©The McGraw-Hill Companies. who might demand a similar pricing arrangement. Solutions Manual 7-33 . 420 Q= 8.420 $ 2.10) + (30 x . it is feasible for the law office to break even during the first year of operations as the breakeven point is 8.800 7.000 as calculated below.177..30) + (55 x .000 22. 10.500 900.220 clients must visit the law office being considered by Don Masters and his colleagues as calculated below.186 clients per year 2.7-41 CVP Analysis.000 $892. Probability Analysis (40 min) 1. .2)Q = $4Q + $2.260.Chen. the expected number of new clients during the first year is 18.5 + 200x$10x1. Based on the report of the marketing consultant. Therefore.Lin: Cost Management 3e 2005 7-34 ©The McGraw-Hill Companies.000/4) Wages and Fringe Benefits Regular Wages ($95+$35+$15+$10)x16hrsx360days) Overtime Wages (200x$15x1.000 180.Cokins. Fixed Expenses for First Year of Operations Advertising Rent (6. In order to break even.3 x .40) + (85 x . during the first year of operations. Inc.5) Total Wages Fringe Benefits @40% Total Fixed Expenses $500.000 168.000 x .420 Breakeven Calculation: Revenues = Variable cost (supplies) + Fixed cost (from above) 30Q + ($4.186 clients.000 15.000 32.177. Expected value = (20 x .000 x 28) Property Insurance Utilities Malpractice Insurance Depreciation ($60.300 360.120 1.20) = 50 clients per day Blocher. with the objective of determining the potential loss if in fact the number of clients falls short of the forecast. At least three factors that make sensitivity analysis prevalent in decision making including the following: As the business environment is becoming more dynamic and competitive. as a means to get at the degree of uncertainty – higher standard deviations for greater uncertainty. Solutions Manual 7-35 . shorter product life cycle times. This approach allows Masters to see the distribution of costs and profits.Problem 7-41 (continued) Annual number of clients = 50 x 360 days = 18. The availability of spreadsheet software has made it very quick and easy to compute the impact of changing one or more assumptions in a financial model. as they are affected by the distribution of potential demand (number of clients). The use of probability distributions to determine expected values is an excellent way to conduct a sensitivity analysis. Sensitivity analysis is used to deal more effectively with uncertainty or risk. based on a probability distribution.186 clients per year. competitive marketplace. the use of operating leverage. revenues or costs could be changed from the initial assumptions and a new break-even sales volume calculated. so the variables can be monitored or a decision made to obtain additional information. graphical analysis. 3. and faster obsolescence of technology makes sensitivity analysis more prevalent. Since there is uncertainty in the prediction of the number of clients per year. Other approaches to sensitivity analysis include Excel-based analysis (see problem 7-43). Sensitivity analysis is a "what-if” type of analysis used to determine the outcomes if any parameters change from the initial assumptions. Masters can enhance this analysis by using standard deviations to measure the dispersion of the distributions. The increased emphasis on productivity. sensitivity analysis provides management with an understanding of the impact of changes in the environment. further sensitivity analysis should be considered. Sensitivity analysis aids management in identifying the key variables and assumptions.000 clients per year. and the contribution margin ratio. changing consumer demand. For example. which is well above the breakeven of 8. 000 + $242.40 x [($1. GSI fees for flat fee option = $9.000)] = $440 x N -$84.400/(1 . Operating profit (OF) = $169. The target number of participants equals the fixed costs plus the desired operating profit. A minimum of 1. a.400/ . A total of 700 seminar participants is needed for the joint venture to earn a net income of $169..000/$1.Lin: Cost Management 3e 2005 7-36 ©The McGraw-Hill Companies.30) = $169.100 = 480 seminar participants b.000 GSI fees for 40% of Eastern's profit-before-tax option = 40% x [(contribution margin x number of participants) -fixed cost) = .100 = $770.500 per seminar x 40 seminars = $380.000/$1. The desired operating profit equals the net income divided by (1 minus the tax rate). calculated as follows.000 Target participants = (FC + OF)/CM = ($528.000 Blocher. Strategy (45 min) 1. calculated as follows.100 x N) -$210.000 from Eastern = $528.7-42 CVP Analysis. The break-even number of participants equals the fixed costs divided by the contribution margin per participant Fixed costs (FC) = $318.200 fee . calculated as follows. Inc.000 from GSI + $210.70 = $242. .Cokins.($47 + $18 + $35) variable costs = $1.100 = 700 participants 2.055 participants is needed in order for GSI to prefer the 40 percent fee option rather than the flat fee. divided by the contribution margin per participant.400.000)/$1.000 Contribution margin (CM) = $1.100 Break-even = FC/CM = $528.. A total of 480 seminar participants is needed for the joint venture to break even.Chen. All costs and revenues are known with certainty.000/$440 = $440 x N . total costs can be divided into a fixed component and a component that is variable with respect to volume.055 or higher. 3.Problem 7-42 (continued) GSI fees are equal for the two options at the following number of participants.055 rounded) Therefore.5 participants (1. and selling price remain constant within the relevant range. then this should be considered in the decision.000 $464. GSI will earn more revenue and prefer the 40 percent option when the number of participants is 1. per unit variable cost.000 $464. For example.  Alternative uses of capacity? Since the Eastern U seminars would occupy all GSI’s available capacity. Total costs and total revenues have a linear relationship to volumes within the relevant range. Would the commitment include an implied or explicit promise to continue the seminars in future years. Technology has no impact on cost relationships or selling prices. GSI should consider whether there might be more profitable uses for that capacity before making this commitment.$84. Total fixed costs.  Does the collaboration make sense strategically? Are Eastern and GSI likely to enhance each other’s reputation and to provide operating synergies and efficiencies that will make the alliance a profitable one.000 = $440 x N = N = 1054. Solutions Manual 7-37 . Some of the strategic and implementation issues facing GSI in this decision are the following:  Are the CVP assumptions satisfied? That is. if successful this year? Can GSI expand its capacity quickly and easily if desired?  Has GSI considered the uncertainty in the situation? What happens if the breakeven level of participants is not met? GSI and Eastern should use various sensitivity analysis methods to assess the potential impact of this uncertainty on future profits. $380. if the Eastern University’s academic reputation might suffer from this alliance. 000.000.000.75-$10=$31. Contribution Margin Breakeven* Current Plan $100-$43.25 ($3. the firm would prefer the low fixed cost strategy.000+$1.000) /$46.50 = 155. ABC Costing.000 = $58.75 X + $3.50-$10 = $46.000 X = 196.250.50 ($6.000 units.50 X + $6. Strategy.000. Inc.000) /$31.Cokins..914 units Proposed Plan $100-$58.000 units sold x $20 = $3. .000 2.000 units * Manufacturing fixed costs are determined from the fixed overhead rates: Current Plan Proposed Plan 150. the new plan) Blocher.000.000+$1. Uncertainty (50 min) 1.7-43 CVP Analysis.250.Lin: Cost Management 3e 2005 7-38 ©The McGraw-Hill Companies.25 = 136.000 units sold x $40 = $6.000 150.722 units (The above calculations show that at the current level of 150. To determine the number of sales units at which CG would be indifferent between the current manufacturing plan and the proposed plan: Solve for X: $43. that is.000.Chen. and will continue to be lower for the new plan as long as volume stays below 196. by reducing manufacturing fixed costs from $6.722 units. The reduction in fixed costs also helps the firm to manage cash flows. since the firm has succeeded by innovation in product design. By reducing operating leverage (that is.000 to $3.000. c) Sensitivity analysis. Note that the current method looks good if projected demand rises. Since uncertainty is important in this case. which appears to be product innovation. simultaneously. Thus. Thus. b) Thinking strategically. the new plan is also preferred since it is an appropriate response to the firm’s risk.000 units. CG Graphics should use some of the tools as illustrated below. An important element of the firm’s strategy is also the fact that the technology. costs are lower for the new plan. at the current level of 150. Further. a strategy which goes to less focus on manufacturing would be consistent with this strategy. CG’s strategy is best described as differentiation. more focus should be retained in product design and development. Also. the firm must advance and market its technological prowess and develop a plan to deal with the possibility that the technology might fail. as for many firms in the industry. is not proven.000) the firm is less exposed to a possible failure of the innovation and then drop off in sales.Problem 7-43 (continued) 3. a) The calculations in part 2 above support a decision to go to the new plan. the firm operates in an industry in which innovation and product design are critical to success. there is a significant level of risk that the firm’s product will fail to meet customer’s expectations. one could look at the proposal as consistent with the firm’s core strength. The overall strategy then must both support the firm’s innovative image and also protect against the possibility of loss due to a failure of the technology – that is. There is no evidence that the firm is particularly innovative or cost-effective in manufacturing. the new plan is more consistent with the firm’s strategy of developing an innovative product and also dealing with the risk of potential loss because of a possible failure of the technology in the market place.000. as noted in Part 3 above. 4. That is. Solutions Manual 7-39 . 000 $ (5.00 53.000 $ (4.00 10.910.00 30.670.Proposed 30.000 210.000 270.000) $ (500.000 $ 3.Lin: Cost Management 3e 2005 7-40 ©The McGraw-Hill Companies.000.000 $ $ 4.000 $ 1.000 $ 2.50 $ 100 31.914 150.375.500 240.00 136.500) 120.000) $ (1..000 $ (3.460. Inc.000 $ (1.515.500 (275.000) $ (3.250.250.00 $ 15.000.375.000 $ (275.000 Materials and purchased parts Direct labor Variable GS&A Variable overhead Total Variable cost Price CM Fixed Cost Breakeven Demand Profit Indifference Point $ $ $ $ 7.312.120.721.250.000 $ 2.855.00 12.Current Profit .Problem 7-43 (continued) Current Proposed Difference 6.00 25.305.312.50 $ 68.50 13.000) 150.75 10.000) $ 196.000) $ 437.25 $ 3.000 150.00 155.000.000) $ (2.500) 60.Chen.437. .000) 90.000 $ 3.000 $ 4.000 437.25 100 46.065.75 $ 15.000 $ 1.Cokins.187.000 $ 5.500 Blocher.500 180.3 Assumed Levels of Demand Profit. 000)/($100-43.000 x $300). breakeven analysis under ABC gives a higher breakeven number than the volume-based approach.200.000 (=$6.7-44 CVP Analysis.100. since the operating level of 150. and: $1.000 each.000) for the remaining fixed costs.000/50).000 batches. the proposed manufacturing plan is preferred. Also.800 + = $796.800.136 x $300 = To figure the exact breakeven.250.000+$1.000 units. If there are 50 units per batch and setup costs are $300 per setup. to achieve breakeven will require more than 3.000)/31.654 x $300 Q = ($5.100.250. ABC Costing (30 min) 1.25= 132.000 units. The ABC breakeven can be determined as follows. then there must be 3.250. and they both point to the same answer -. and: total setup costs are 2. total setup costs are 3.000 .673 units (or 2.000.250.000 for setups and $5.000 + $940. and total setup costs must be $900.25 Margin Breakeven ($5.25 156. $940. The ABC costing breakeven calculations do not differ much from that for the volume based calculations in problem 7-43. where the unit cost of setup is $300/50 = $6: Breakeven can be determined as follows: Current Plan Proposed Plan Contribution $100-$43. 3.790 units = (or.50 $100-$58.000 + 796. Problem 7-44 (continued) 2.679 units Note as before that the breakeven for the current manufacturing plan is above the current operating level of 150.100.000 batches (150.000) /$40.50-$10-$6 = $40. the total fixed costs for the current manufacturing plan must be $900.136 batches) 132.654 batches) To figure the exact breakeven.000).100.$900. it recognizes a larger number of setups and therefore larger setup cost ($940.000+$1.200 + 156.at the current volume level of approximately 150.792 units $1.50 = ($2.000) /$25.000 (3. Solutions Manual 7-41 .75-$10-$6=$25.100. Thus.50-10) = Q = ($2.800 versus $900.000 is based on the assumption of 50 batches of 3. Thus. Strategy (20 min) The plan to build the new plant would be consistent with a cost leadership strategy. the firm’s strategy should be to maintain their leadership in design and continue to use sub contractors for the manufacturing work when necessary. and would enable ICL to become more cost competitive. which is potentially more profitable than the manufacturing.7-45 New Manufacturing Facility. instead of manufacturing. ICL should consider additional investment in the research and engineering groups that Julius supervises.Chen.Cokins. Blocher. Rather than to be highly leveraged from large investments in manufacturing capacity and technology. ICL should carefully determine: is it a design firm or a manufacturing firm? It may be difficult to accomplish both. ..Lin: Cost Management 3e 2005 7-42 ©The McGraw-Hill Companies. it is apparent that ICL’s plant is really following a differentiation strategy – their growing market is for design work. Inc. However. and which builds on their core competencies. and thus improve the overall value to the customer? Solutions Manual 7-43 . On the other hand.000 Q = 5.667. will not be affected by the decision to make or to buy. to maintain control over quality.667 brake assemblies The indifference point is 5. and prefer to buy if volume is less than 5. The quest for quality might cause them to stick with the internal manufacturing option. BBC apparently competes on the basis of differentiation because of their emphasis on quality and their distribution through specialty shops. BBC should consider the alternative uses of the manufacturing space. it might be that a higher quality brake could be obtained from the outside vendor.667. Also. Could this be used to manufacture accessories or other parts for their bicycles.667. The strategic issues facing BBC will certainly affect this decision. except for the cost of the lease. irrespective of the cost differential. they are excluded from the analysis: Cost to Buy = Cost to Make $25 x Q = Q x ($10 + $6 + $3) + $34. meaning that BBC would prefer to make if volume is expected to be above 5.7-46 CVP Analysis Since fixed costs. and prefer to buy if volume is less than 8.000 Q = 8. In this context. If there are 1. so these costs are excluded: The approximate solution (assuming 10 batches. ABC Costing (25 min) In contrast to problem 7-46 which treats inspection.000 ($20. while under the volume-based approach in problem 7-46. then BBC expects 10 batches and batch-level costs are $2. Inc.667 brake assemblies The indifference point is 8.. the following considers them batch related and solves for breakeven using an ABC costing approach. meaning that BBC would prefer to make if volume is expected to be above 8. . The indifference point is somewhat higher under ABC costing because the batch level costs are now considered a relevant cost of the “make” strategy.000/10) per batch. The indifference quantity is slightly larger when adjusted for batch level costs because the cost of the 9th and last batch. $2.Lin: Cost Management 3e 2005 7-44 ©The McGraw-Hill Companies.000 units per batch.000+ assemblies: Cost to Buy = Cost to Make $25 x Q = Q x ($10 + $6 + $3) + $2.667. setup and materials handling costs as fixed costs.667.000 Q = 8.667.Chen.000 x 9 + $34. Blocher.Cokins. using 9 batches to manufacture 8.000 units. these costs were considered as fixed and therefore irrelevant. and batch-level costs are $2/brake assembly) Cost to Buy = Cost to Make $25 x Q = Q x ($10 + $6 + $3) + $2 x Q + $34.500 brake assemblies The exact solution. The cost of the allocated fixed overhead will not be different whether BBC purchases or makes the brakes. the ABC costing approach probably produces a more reliable answer.7-47 CVP Analysis.000 is spread over fewer than 1. and the ABC indifference point can be determined as follows. First.859.000 + $12.3693 x 72.50 15.3693 Total Fixed Cost = $71.7-48 CVP Analysis (20 min) 1.00 15.000 pounds for the average size farm: Revenue = Total operating cost p x 72.00 Fertilizer 38.20 p = $ .44 $71. Based on estimates given.72 From the above: Variable cost per pound = $147.00 Interest Total Cost $147. a farmer interested in the production of hemp would need to receive a price of at least $.57 Cleaning costs 5. as shown in the following analysis.44 Solving for breakeven price per lb (Q).00 Fuel 11. separate the fixed and variable costs.50 5.000 = $.55/lb to breakeven on farming for hemp.5479 Solutions Manual 7-45 .00 7.859.00 7.00 Machinery costs Crop insurance Other costs Land taxes Licensing fee Sampling and analytical fees Drying costs 3.00 6.15 Chemicals 10.44 x 180 = $12.20 Fixed/acre 15.72/400 = $. where Q= 180 x 400 = 72. Variable/400lb Seed $80.