15 Solutions

Module 15
Cost-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.

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
Line OR
No change
Increase slope
No change
Break-Even Point
Shift left (decrease)
Shift right
Decrease slope
Shift right
No change

15-3
M15-13
a. 1.
2.
3.
4.
5.
6.
b.
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. Shift upward and
decrease slope
Break-Even Point
Shift right (increase)
Shift right (increase)
1.
2.
3.
4.
Can't tell; the two changes

have opposite effects.
M15-14
a.
$72,000
Total
revenues
and
Total
costs
$60,000
$48,000
$36,000
$24,000
$12,000
$0
0
2,000
4,000
6,000
Unit sales

15-4
M15-14 (concluded)
b.
$24,000
$18,000
$12,000
Total
Profit
$6,000
or
$0
(Loss ) ($6,000) 0
2,000
4,000
6,000
($12,000)
($18,000)
Total units
c. 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.

15-5
M15-15
a. Selling price
Variable costs
Contribution margin
$5.00 per hot dog

3.50 per hot dog
$1.50
Break-even point
$750,000/$1.50
= 500,000 hot dogs
250
1,000
b.
Total
revenues
and
Total
costs
(000)
$5,000
$4,000
$3,000
$2,000
$1,000
$0
0
500
750
Unit sales (000)
c.
$750
$600
$450
Total
$300
Profit $150
or
$0
($150)
(Loss)
0
($300)
(000) ($450)
($600)
($750)
250
500
750
1,000
Total units (000)
d. It is easier to determine profit or loss at any volume with a profit-volume

graph than with a cost-volume-profit graph. This is especially true in
situations, such as this, where the unit contribution margin is small and
the scale of activity is large. Although a profit-volume graph provides a
clear illustration of profits, it does not illustrate revenues and costs.
Hence, a manager using a profit-volume graph does not see the
relationship between revenues, costs, and profits.

15-6
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 =
$0.60
0.60
0.30
$1.50
*B = 3C and A = 2B, so A = 3 x 2 = 6
Average unit contribution margin = $1.50
Break-even unit sales volume = $112,500/$1.50 = 75,000 units
Units of A at break-even = 75,000 x 6/10 = 45,000

15-7
EXERCISES
E15-17
a.
Alberta Company
Contribution Income Statement
For the Month of May 2012
Sales (6,000 x $40)
Less variable costs:
Direct materials (6,000 x $10)
Direct labor (6,000 x $2)
Manufacturing overhead (6,000 x $5)
Selling and administrative (6,000 x $5)
Contribution margin
Less fixed costs:
Manufacturing overhead
Selling and administrative
Profit
$240,000
$ 60,000
12,000
30,000
30,000
40,000
20,000
(132,000)
108,000
(60,000)
$ 48,000
b.
Note: The instructor might extend this assignment in class, computing

the break-even point, the margin of safety, and the impact on profits of a
change in sales.

15-8
E15-18
a. Sales
Variable costs
Contribution margin
$750,000
(450,000)
$300,000
Contribution margin ratio = $300,000/$750,000 = 0.40

Annual break-even dollar sales volume = $210,000/0.40 = $525,000
b. Annual margin of safety in dollars:
Sales
$750,000
Break-even sales dollars
(525,000)
Margin of safety
$225,000
c. To determine the variable and total cost lines, it is necessary to compute
the variable cost ratio:
Variable cost ratio
Variable costs
Sales
$450,000
$750,000
0.60
At a volume of $1,000,000 sales dollars, variable costs are $600,000.

Profit =
$90,000
$1,000,000
Fixed costs =
$210,000
$750,000
Total Revenues and
Total Costs
$500,000
Variable costs =
$450,000
$250,000
$0
$0
$250,000
$500,000
$750,000
$1,000,000
Total Revenues
d. Revised annual break-even dollar sales:

($210,000 + $35,000)/0.40 = $612,500

15-9
E15-19
a. Contribution margin
Sales
Contribution margin ratio
$ 380,000
1,000,000
0.38
Break-even point in sales dollars

b. Current sales
Break-even sales
Margin of safety
$285,000/0.38
$750,000
$1,000,000
(750,000)
$ 250,000
c. Current fixed costs

Impact of increase
New fixed costs
Revised break-even point
=
=
$285,000
57,000
$342,000
=
=
d. Required before-tax income =

=
$342,000/0.38
$900,000
$200,000/(1 0.36)
$312,500
Sales volume required to provide an after-tax income of $200,000:

($285,000 + $312,500)/0.38 = $1,572,368
e. Sales
Variable costs (62% of sales)
Contribution margin (38% of sales)
Fixed costs
Net income before taxes
Income taxes (36%)
Net income after taxes
$1,572,368
(974,868)
597,500
(285,000)
312,500
(112,500)
$ 200,000*
*Answer reflects rounding.

15-10
E15-20
a. Fixed costs
Contribution
[($8,000 $1,000) 1,500]
Endowments and grants
Required from other sources
$12,500,000
$10,500,000
250,000
(10,750,000)
$ 1,750,000
b. Break-even price ($30,000/3,000) = $10.00

Revenues (2,700 $10)
Fixed costs
Deficit
$27,000
(30,000)
$ 3,000
c. Cost to city ($20 10,000) = $200,000

d. Contribution [($1.25 $0.75) 5,000]
Fixed costs
Amount raised
e. Available funds
Fixed costs
Available for variable costs
Variable costs per present
Number of presents
$2,500
(500)
$2,000
$20,000
(5,000)
15,000
$10
1,500

15-11
E15-21
a.
CapitalIntensive
Fixed costs:
Manufacturing
overhead
Selling
Total
Selling price
LaborIntensive
$2,440,000
$ 700,000
500,000
$2,940,000
500,000
$1,200,000
$ 30.00
$30.00
Variable costs:
Direct materials
Direct labor
Manuf. overhead
Selling
Unit cont. margin
Fixed costs
Unit cont. margin
Unit break-even point

15-12
$5.00
5.00
4.00
2.00
(16.00)
$14.00
$2,940,000
$14.00
210,000
$ 6.00
12.00
2.00
2.00
(22.00)
$ 8.00
$1,200,000
$ 8.00
150,000
E15-21 (concluded)
b. Paper Mate would be indifferent between the two methods at the unit
volume, X, where total costs are equal.
$16X + $2,940,000
$6X
X
= $22X + $1,200,000
= $1,740,000
= 290,000 units
Identical results are obtained if profit, rather than cost, equations are
used.
($30 $16)X $2,940,000
$6X
X
= ($30 $22)X $1,200,000

= $1,740,000
= 290,000 units
Paper Mate should use the labor-intensive method if sales are less than
290,000 units and use the capital-extensive method if sales are above
290,000 units.
c. 1. Operating leverage is a measure of the responsiveness of income to
changes in sales. The higher a firm's operating leverage, the more
sensitive are its profits to changes in sales volume. It is also an
indication of an organization's cost structure. The higher the portion
of an organization's fixed costs (in comparison with variable costs),
the higher its operating leverage.
2.
Unit contribution margin
Unit sales volume
Contribution margin
Fixed costs
Net income
CapitalIntensive
$
14.00
x 250,000
3,500,000
(2,940,000)
$ 560,000
LaborIntensive
$
8.00
x 250,000
2,000,000
(1,200,000)
$ 800,000
Contribution margin
Net income
Operating leverage
$3,500,000
560,000
6.25
$2,000,000
800,000
2.50
3. The capital-intensive method has a higher operating leverage because

of the greater use of fixed assets.

15-13
E15-22
a.
Florida Berry Basket

For the Year Ended December 31, 2012
Sales (45,000 $90)
Variable costs (45,000 $80)
Contribution margin
Fixed costs
Net income
b. Operating leverage
=
=
=
$4,050,000
(3,600,000)
450,000
275,000)
$ 175,000
Contribution margin/Net income

$450,000/$175,000
2.57
c. Percentage change in profits = % decrease in sales x Operating leverage

= 10 x 2.57
= 25.7 percent decrease
Profits should decrease by 25.7 percent to $130,025, computed as:
[$175,000 ($175,000 x 0.257)].
d. Contribution margin [45,000 ($90 $77.50)]
Fixed costs
Net income
Operating leverage ($562,500/$187,500)
$ 562,500
(375,000)
$ 187,500
3
The acquisition of the berry-picking machines will reduce variable costs,

thereby increasing the contribution margin. It will also increase fixed
costs, thereby increasing the difference between the contribution margin
and net income. The net effect would be an increase in operating
leverage.

15-14
E15-23
a.
Product
Standard
Multiform
Complex
Average unit selling price
Unit
Selling
Price
$ 50
125
250
Sales
Mix
(units)
1,750/2,500
500/2,500
250/2,500
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)*
1,750/2,500
500/2,500
250/2,500
=
Break-even sales volume = $45,000/0.40 =

b. Actual sales volume = 2,500 $85
Break-even sales volume
Margin of safety
Weight
$35
25
25
$85
Weight
$14
10
10
$34
0.40
$112,500
$212,500
112,500
$100,000
c.
$50
Total
$25
Prof it
or
$0
(Loss)
$0
(000) ($25)
$50
$100
$150
$200
($50)
Total sales (000)

15-15
E15-24
Once the following, or a similar, format is established, each case is solved
by filling in the given information and working toward the unknowns.
Unit sales
Sales revenue
Variable costs:
Unit
Unit sales
Total
Contribution margin
Fixed costs
Net income
Unit cont. margin:
Cont. margin
Unit sales
Unit contribution
Break-even point:
Fixed costs
Unit cont. margin
Unit break-even point
Margin of safety
(unit sales less unit
break- even point)
Case 1
1,000
Case 2
800
Case 3
4,300?*
Case 4
3,000?*
$20,000
$ 1,600?
$137,600?
$60,000
$
10
x 1,000
(10,000)
$10,000?
(8,000)
$ 2,000?
$
1
x 800
(800)
$ 800
(400)?
$ 400
$
12
x 4,300
(51,600)
$ 86,000?
(80,000)
$ 6,000?#
$
5?
x 3,000?
(15,000)?
$45,000?
(30,000)?
$15,000?#
$10,000?
1,000
$
10?
$ 800
800
$
1?
$86,000?
4,300?
$
20?
$45,000?
3,000?
$
15
$8,000
$10?
800?
$ 400
$1?
400?
$ 80,000
$20?
4,000
$30,000?
$15
2,000
200?
400?
300
1,000
*Solved as the unit break-even point plus the margin of safety.
#Solved as the unit contribution margin times margin of safety.

15-16
E15-25
Once the following or similar format is established, each case can be
solved by filling in the known amounts and working toward the unknowns.
Sales revenue
Cont. margin ratio
Contribution margin
Fixed costs
Net income
Variable cost ratio
Total
Case A
$100,000
0.40?
$ 40,000
( 30,000)
$ 10,000?
0.60?
0.40?
1.00
Case B
$80,000
0.50
$40,000?
(35,000)?
$ 5,000
Case C
$50,000
0.40
$20,000
(10,000)?
$10,000
Case D
$45,000*
0.80?
$36,000?
(20,000)?
$16,000?
0.50
0.50?
1.00
0.60?
0.40
1.00
0.20
0.80?
1.00
Break-even point:
Fixed costs
Cont. marg. ratio
Dollar break-even point
$ 30,000
0.40?
$ 75,000?
$35,000
0.50?
$70,000?
$10,000?
0.40
$25,000?
$20,000?
0.80
$25,000
Margin of safety (dollar

sales less dollar breakeven point)
$ 25,000?
$10,000?
$25,000?
$20,000
*Computed as the break-even point plus the margin of safety.

15-17
E15-26 A
Weekly contribution per average customer:
$15 sales per visit (1 - 0.80) contribution ratio 1.75 visits = $5.25
Annual contribution per customer = $5.25 52 weeks = $273
Customers required for desired profit = ($80,000 + $40,000)/$273 = 440
Required population = 440 customers / 0.04 customers in population
= 11,000
E15-27 A
a. Minimum order size to break even on order =
$200
= $2,500
(0.10 0.02)
b. Annual sales to break-even on average customer =

($200 x 4 orders) + $1,000 = $22,500
(0.10 0.02)
c. Average order size = $22,500/4 = $5,625
d. Order-level costs ($200 4 orders 100 customers)
Customer-level costs ($1,000 100 customers)
Facility-level costs
Total costs
Minimum annual sales to break even
80,000
100,000
60,000
$ 240,000
0.08
$3,000,000
e. Average order size = $3,000,000/(4 orders 100 customers) = $7,500

f. Part (a) considers only order-level costs while part (c) also considers
customer-level costs, and part (e) adds facility-level costs. In order for a
company to break even on an order, it need only cover order-level costs.
To break even on a customer, the company must cover order-level and
customer-level costs. Finally, to achieve true break-even, all costs must
be covered.

15-18
PROBLEMS
P15-28
a. Unit contribution margin: $35 $25 = $10
Total contribution (20,000 $10)
Fixed costs
Net income after taxes
Income taxes
Tax rate
b. Required before-tax income =
=
$200,000
110,000
90,000
54,000
36,000
$90,000
0.40
$90,000/(1 0.40)
$150,000
Volume required to provide an after-tax income of $90,000:

($110,000 + $150,000)/$10 = 26,000 units
c. Contribution margin
Current
Impact of reduction in variable costs
New
Fixed costs:
Current
Impact of increase in fixed costs
New
$10.00
2.50
$12.50
$110,000
20,000
$130,000
Volume required to provide an after-tax income of $90,000:

($130,000 + $150,000)/$12.50 = 22,400 units
The reduction in variable costs was more than enough to offset the
increase in fixed costs. Consequently, the volume required to
achieve an after-tax profit of $90,000 declined from 26,000 units to
22,400 units.
d. Requirements (a) through (c) assume that taxable income and
accounting income are equal and that the tax rate is constant.

15-19
P15-29
a.
New York Tours

For the Month of June 2012
Sales (3,000 $90)

Admission fees (3,000 $30)
Lunch (3,000 $20)
Overhead (3,000 $12)
Selling and administrative (3,000 $8)
Contribution margin
Less fixed costs:
Operations
Before-tax profit
Income taxes ($20,000 .40)
After-tax profit
$270,000
$ 90,000
60,000
36,000
24,000
25,000
15,000
(210,000)
60,000
(40,000)
20,000
8,000
$ 12,000
b. Monthly break-even point in units.: $40,000/($90 70) = 2,000 units

c. Margin of safety in units:
Actual June sales
Break even sales
Margin of safety
3,000 units
2,000 units
1,000 units
d. Sales for an after-tax profit of $15,000:

Required before-tax profit = $15,000/(1 0.40) = $25,000
Required sales = ($40,000 + $25,000)/($90 70) = 3,250

15-20
P15-29 (concluded)
e.
Fixed costs =
$40,000
$400,000
Total
revenues
&
Total
costs
Profit =
$20,000
$300,000
$200,000
Variable costs =
$210,000
$100,000
$0
0
1,000
2,000
3,000
4,000
Unit sales
P15-30
a. Prior to solving this problem it is necessary to determine the variable
costs per unit, the fixed costs per year, and the unit selling price.
Using the high-low method:
Variable costs per unit
=
Fixed costs
or,
($85,000 $70,000)/(8,000 5,000) = $5
= $85,000 $5(8,000) = $45,000

= $70,000 $5(5,000) = $45,000
Unit selling price = $65,000/5,000 = $104,000/8,000 = $13

Unit contribution margin = $13 $5 = $8
Break-even point = $45,000/$8 = 5,625 units
b. Sales volume required to earn a profit of $10,000: ($45,000 + $10,000)/
$8 = 6,875 units

15-21
P15-31
a. Contribution ratio = 1.0 0.60 = 0.40
Break-even point = $1,300,000/0.40 = $3,250,000
b. Before-tax profit = $500,000/(1 0.34) = $757,576 (rounded)
Required sales volume = ($1,300,000 + $757,576)/0.40 = $5,143,940
c. Profits of automation = Profits of outsourcing
(1 0.54)X ($1,300,000 + $300,000) = (1 0.65)X ($1,300,000
$300,000)
0.46X $1,600,000 = 0.35X $1,000,000
0.11X = $600,000
X = $5,454,545 (rounded)
d.
Automation
Strength:
It will provide higher profits if
sales increase.
It may provide new
opportunities.
It may enhance quality.
Weakness:
This alternative has higher risk
and a higher break-even point.

15-22
Outsourcing
Strength:
This alternative has less risk
and a lower break-even point.
It is preferred at the current
sales volume.
It allows focusing on core
competencies.
Weakness:
This alternative will not have
as great a potential for high
profits.
It provides less control of
operations.
P15-32
a. The break-even point in patient-days equals total fixed costs divided by
the contribution margin per patient-day.
Fixed costs:
Melford Hospital charges
Salaries
Total
Unit contribution margin:
Revenues per patient-day
Variable costs per patient-day
Contribution margin per patient-day
$2,900,000
480,000
$3,380,000
$300
(100)*
$200
*$6,000,000 total 2011 revenues/$300 revenue per patient-day equals

20,000 patient-days for 2011.
$2,000,000 total 2011 variable costs / 20,000 patient-days = $100 variable
costs per patient-day
Break-even point in patient-days
b.
=
$3,380,000/$200
16,900 patient-days
Pediatrics
Schedule of Change in Earnings from Rental of 20 Additional Beds
For the Year Ending June 30, 2012
Increase in revenues (20 beds 90 days $300/ day)
Increase in expenses:
Fixed charges by Melford Hospital:
Annual charge per bed ($2,900,000/60)
$ 48,333
Number of additional beds
20
Total increase in fixed charges
966,660
Variable charges by Melford Hospital
($100/patient-day 90 days 20 beds)
180,000
Net decrease in earnings
540,000
(1,146,660)
$ (606,660)
(Note that the break-even on the additional 20 beds is 4,834 bed days
($966,660/$200), or 242 days for each of the 20 additional beds. 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.)

15-23
P15-33
a. Required before-tax profit = $30,000/( 1 0.40) = $50,000
Required sales for a $30,000 after-tax profit:
Sure Foot = ($280,000* + $50,000)/($80 50) = 11,000 pairs
Trail Runner = ($200,000* + $50,000)/($75 50) = 10,000 pairs
*Because only one product will be produced the product-level costs
and the facility-level costs are combined: $130,000 + $150,000 for
Sure Foot and $50,000 + $150,000 for Trail Runner.
b. Required sales for identical before-tax profit:
Sure Foot Profit
($80 $50)X $280,000
$30X $25X
$5X
X
=
=
=
=
=1
Trail Runner Profit

($75 $50)X $200,000
$80,000
$80,000
6,000 pairs
c. The after-tax profit or loss is the same with either product. Hence, it is
only necessary to solve for one product.
Sure Foot: [($80 $50)16,000 $280,000] (1 0.40) = $120,000
Trail Runner: [($75 $50)16,000 $200,000] (1 0.40) = $120,000
d. Without further analysis it is apparent that at a volume of 13,000 pairs
the Trail Runner is preferred. Trail Runner requires fewer sales to
achieve a $30,000 after-tax profit and the profits of both products are not
identical until a total of 16,000 pairs of either product are sold. This
answer can also be demonstrated analytically:
Sure Foot: [($80 $50)13,000 $280,000] (1 0.40) = $66,000
Trail Runner: [($75 $50)13,000 $200,000] (1 0.40) = $75,000

15-24
P15-33 (concluded)
e. 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, it is simpler to develop a solution based on identical before-tax
profits with X representing the required Sure Foot variable costs per
pair.
Sure Foot Profit
($80 X)13,000 $280,000
$1,040,000 13,000X $280,000
13,000X
X
=
=
=
=
=
Trail Runner Profit

($75 $50)13,000 $200,000
$325,000 $200,000
$635,000
$48.85 (rounding)
The variable costs of Sure Foot must decline $1.15 ($50.00 $48.85) to
$48.85.
Sure Foot Profit with reduced variable costs = [($80 $48.85)13,000
$280,000] (1 0.40) = $74,970 (with rounding error)

15-25
P15-34
a. Cost-estimating equation:
Variable cost ratio = $1,243,155 $1,113,567 = 0.8134
$1,364,661 $1,205,340
Annual fixed costs = $1,243,155 ($1,364,661 x 0.8134) = $133,139.7 (thousand)
Total cost (in thousands) = $133,139.7 + 0.8134X
Where X is revenue in thousands of dollars.
Note the high variable cost ratio, as discussed in the chapter opening.
b. Annual break-even point:
Contribution margin ratio = 1 0.8134 = 0.1866
Break-even point = ($133,139.7/0.1866) = $713,503.2 (thousand)
c. Predicted 2009 operating profit:
Revenues
Less:
Variable costs (1,670,269 0.8134)
Fixed costs
Operating profit
$1,670,269.0
1,358,596.8
133,139.7
$ 178,532.5
d. The equations assume linear cost behavior, stable prices, and a stable
cost structure.
Netflix reported a 2009 operating profit of $191,939,000, $13,406,500
more than the amount predicted using equations based on 2007 and
2008 data, an error of approximately 7 percent. This under-prediction
likely occurred because of changes in Netflixs cost structure, higher
fixed costs and lower variable costs, as the number of Netflix customers
increase with greater use of streaming video. See the opening vignette
for Chapter 3.

15-26
P15-35 A
a. Annual break-even point in sales dollars:
Break-even point = $360,000/(1 0.75 0.05) = $1,800,000
b. Annual break-even point in units:
Break-even point = $360,000/{$120 [$120(0.75 + 0.05)]} = 15,000 units
(or $1,800,000/$120 = 15,000)
c. On new books the contribution to other costs is 25 percent (1.00 less 0.75
to the publisher) of the suggested retail price. On used books the
contribution to other costs is 50 percent of the suggested retail price (0.75
less 0.25 cost of the book). Shifting towards more used books and fewer
new books will increase bookstore profitability with the same unit sales.
d. Publisher project break-even point:
Note: Solution is in terms of wholesale price to bookstore, not retail
price to final buyer.
Project break-even point = $325,000/(1 0.20 0.15) = $500,000
e. Profitability analysis of sales of 8,000 new books:
1. Bookstores unit-level contribution
Final retail sales $120 8,000
Less unit-level costs (0.75 + 0.05)
Bookstores unit-level contribution
$960,000
(768,000)
$192,000
2. Publishers project-level contribution:

Sales to bookstores $120 0.75 8,000
Unit-level costs (0.20 + 0.15)
Project-level costs
Publishers project contribution
$720,000
(252,000)
(325,000)
$143,000
3. Authors royalties: $720,000 net to publisher 0.15
$108,000

15-27
P15-36
a. Current break-even point in sales dollars:
Contribution margin ratio = $400,000/$1,050,000 = 0.38095
Break-even point = $240,000/0.38095 = $630,004
b. Unit contribution margin and break-even point:
Average unit contribution margin = $400,000/2,500 = $160
Unit break-even point = $240,000/$160 = 1,500 units
c. The current average unit contribution margin is $160.
Current unit contribution margin of individual products:
Cozy Kitchen $100,000/1,000 units
$100
All-House $300,000/1,500 units
$200
Shifting the mix to 80:20 will change the average unit contribution
margin:
($100 0.80) + ($200 0.20) =
$120
Contribution with proposed plan = 3,000 units $120 = $360,000
The current contribution margin is $400,000. The contribution margin with
a shift in the mix, even with a 500-unit sales increase, is only $360,000.
Hence, profits will decrease if the projected shift occurs. In the absence of
capacity constraints, sales reps should emphasize increased sales of the
product with the higher unit contribution margin.

15-28
P15-37
a. 1. Current contribution:
Fixed costs
Profit
Contribution
$21,000
+ 9,000
$30,000
Contribution margin ratio =

Current break-even point =
2.
Selling price
Variable costs
Unit contribution
$30,000/$50,000 =
$21,000/0.60
=
Super
Burgers
$2.50
-1.00*
$1.50
0.60
$35,000
Super
Chickens
$3.00
-1.80
$1.20
*$2.50 (1.0 0.60)
Super Burgers
Super Chickens
Volume
10,000
10,000
Super Burgers
Super Chickens
Average unit contribution
Short-run
Mix
0.50
0.50
Unit
Contribution
$1.50
1.20
Mix
0.50
0.50
Short-run monthly profit:

Contribution (20,000 units $1.35)
Less fixed costs ($21,000 + 7,760)
Profit (loss)
$27,000
(28,760)
$ (1,760)
Short-run contribution ratio:

Contribution margin
Revenue [(10,000 $2.50) + (10,000 $3.00)]
Contribution ratio
27,000
55,000
0.4909
Weight
$0.75
0.60
$1.35
Short-run break-even point = $28,760/0.4909 = $58,586

15-29
P15-37 (concluded)
3.
Super Burgers
Super Chickens
Super Burgers
Super Chickens
Average unit contribution
Volume
30,000
15,000
Long-run
Unit
Contribution
$1.50
1.20
Long-run monthly profit:

Contribution (45,000 units $1.40)
Less fixed costs ($21,000 + 7,760)
Profit
Long-run contribution ratio:
Contribution margin
Revenue [(30,000 $2.50) + (15,000 $3.00)]
Contribution ratio
Mix
2/3
1/3
Mix
2/3
1/3
Weight
$1.00
0.40
$1.40
$63,000
(28,760)
$34,240
$ 63,000
120,000
0.525
Long-run break-even point = $28,760/0.525 = $54,781

b. Answers to requirement (b) will vary. Two possible recommendations
are as follows:
Do not introduce the sandwich. There is too much risk. Introducing
the sandwich causes a short-run loss, a permanent decline in the
contribution ratio, and an increase in the break-even point. If the
predicted increase in sales does not occur, the company will be in
serious difficulty. Also, it is unclear what the time period is for the
short run.
Introduce the sandwich. While there is a short-run loss, a permanent
decline in the contribution ratio, and an increase in the break-even
point, these negatives are more than offset by the long-run increase
in volume. Introducing the sandwich is taking the business to the
next level of size and profitability.

15-30
P15-38 A
a.
AccuMeter
For the Year 2012
Sales
Direct materials
Processing
Setup
Batch movement
Order filling
Contribution margin
Less fixed costs:
Net income (loss)
b.
$2,000,000
$500,000
750,000
200,000
40,000
20,000
800,000
300,000
(1,510,000)
490,000
(1,100,000)
$ (610,000)
AccuMeter
Multi-Level Contribution Income Statement
For the Year 2012
Sales
$2,000,000
Less unit-level costs:
Direct materials
$500,000
Processing
750,000
(1,250,000)
Unit-level contribution
750,000
Less lot-level costs:
Setup
200,000
Batch movement
40,000
Order filling
20,000
(260,000)
Lot-level contribution
490,000
Less facility-level costs:
800,000
300,000
(1,100,000)
Net income (loss)
$ (610,000)

15-31
P15-38 A (concluded)
c. 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. Unit contribution margin:
Selling price
Less unit-level costs:
Direct materials
Processing
Unit contribution

15-32
$5,000
7,500
2,000
400
200
(15,100)
$ 4,900
$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
$2,000
400
200
$2,600
$2,600
700
$3,300
$33
100 units
MANAGEMENT APPLICATIONS
MA15-39
It is important for senior management to set the ethical climate for the
organization. In this case, perhaps out of a true concern for employees, or
perhaps out of a desire for a big bonus, the plant manager is proposing
an unethical (illegal?) speedup of the assembly line.
We do not know if New City Automotive has a code of ethics. If it does, Art
Conroy should refer to it for guidance. Because Art is a management
accountant, he should also refer to the Standards of Ethical Conduct for
Management Accountants, published by the Institute of Management
Accountants.
Art has followed these standards so far. Faced with an issue that
concerned him, he went to the appropriate company official. At this point,
he should follow the procedures for resolution of ethical conflict. In
particular, he needs to further discuss the situation with Paula, expressing
his concern about what may happen if the speedup is detected (strikes,
legal action, mistrust, plant closure) and what he believes are the
advantages of facing the situation directly.
He might recommend a general meeting with all employees and suggest
that in this meeting financial information be shared. Employees should be
made aware of the likelihood of closing the plant if financial performance is
not improved. They should also be shown how a small increase in
productivity will make a big difference in financial performance. They might
even be invited to offer their own suggestions for increasing productivity.
They should be treated as team members, rather than as adversaries.
Finally Art might conclude his comments by noting how the careers of all
plant employees, including management, will be adversely affected if the
speedup is detected or if productivity is not improved. In this case,
including employees in the decision is less risky than the alternative.

15-33
MA15-40
a. Using a unit-level analysis, develop a graph with two lines, (1)
representing Homestead Telephones cost structure in the 1940s and (2)
representing Homestead Telephones cost structure in the late 1990s. Be
sure to label the axes and lines.
b. With sales revenue as the independent variable, the likely impact of the
changed cost structure on Homestead Telephones:
Contribution margin percent: Because variable costs decrease, the
contribution
margin
percent
will
INCREASE
Break-even point
With an increase in fixed costs and a

decrease in variable costs, the impact on
the break-even point CANNOT BE
DETERMINED. If there is a change, the
BEP will likely increase because of
downward pressure on prices.
c. The shift from human operators to mechanical devices increased

Homesteads operating leverage, which means that if sales increase, the
percentage increase in before-tax profits will exceed the percentage
increase in sales. Conversely, if sales decrease, the percentage decrease
in profits will exceed the percentage decrease in sales.

15-34
MA15-41
a. To determine the break-even point, you must first find the contribution
margin as a percent of sales and the fixed costs per period. Because there
are no taxes at the break-even point, our analysis is based on before-tax
information:
Variable costs as a percent of sales =
Change in total costs =
Change in Sales
$4,857,900 $4,430,000
$5,520,000 $5,000,000
0.823
Fixed costs = $4,430,000 ($5,000,000 0.823) = $315,000

Break-even point = $315,000 / (1 0.823) = $1,779,661
b. Sales volume required to earn an after-tax profit of $480,000:
Required before-tax profit = $480,000/(1 0.40) = $800,000
Required sales = ($315,000 + $800,000)/(1 0.823) = $6,299,435
c.
Regional Distribution, Inc.

For the Year 2012
Sales
Variable costs ($6,000,000 0.823)
Contribution margin
Fixed costs
Before-tax profits
Income taxes at 40 percent
After-tax profit
$6,000,000
(4,938,000)
1,062,000
(315,000)
747,000
(298,800)
$ 448,200

15-35
MA15-41 (concluded)
d. The method used for determining the cost equation for Regional
Distribution with the available data was the high-low method, which used
only two data points. There was not sufficient information to determine
whether those two data points were representative of the larger population
of data points. Also, it was not possible to determine the possible effects
of inflation on the data from 2010 to 2011. Also, if Regional Distribution
has multiple products and or departments that have varying cost
structures, using aggregate data for the company as a whole to estimate
its costs and break-even point may not produce accurate results. 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.
For that reason, the model is generally more effective for analyzing smaller
segments of a business, such as a particular product line.

15-36

15 Solutions

Hochgeladen von

Dokumentinformationen

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

15 Solutions

Hochgeladen von

Copyright:

Verfügbare Formate

Module 15

Cost-Volume-Profit Analysis and

Cost-volume-profit analysis is a technique used to examine the

The important assumptions that underlie cost-volume-profit

The use of a single variable in cost-volume-profit analysis is most

Solutions Manual, Module 15

Cambridge Business Publishers, 2013

In a contribution income statement, costs are classified according

The unit contribution margin is equal to the difference between the

The contribution margin ratio is the portion of each dollar of sales

A profit-volume graph contains only one line showing the

Income taxes increase the sales volume required to earn a desired

Other things being equal, the higher the degree of operating

Cambridge Business Publishers, 2013

Financial & Managerial Accounting for MBAs, 3rd Edition

Total variable costs

Solutions Manual, Module 15

Shift left (decrease)

Cambridge Business Publishers, 2013

Can't tell; the two changes

Cambridge Business Publishers, 2013

Financial & Managerial Accounting for MBAs, 3rd Edition

c. It is most appropriate to use a profit-volume graph when management is

Solutions Manual, Module 15

Cambridge Business Publishers, 2013

$5.00 per hot dog

= 500,000 hot dogs

Unit sales (000)

Total units (000)

d. It is easier to determine profit or loss at any volume with a profit-volume

Cambridge Business Publishers, 2013

Financial & Managerial Accounting for MBAs, 3rd Edition

Solutions Manual, Module 15

Cambridge Business Publishers, 2013

Note: The instructor might extend this assignment in class, computing

Cambridge Business Publishers, 2013

Financial & Managerial Accounting for MBAs, 3rd Edition

Contribution margin ratio = $300,000/$750,000 = 0.40

At a volume of $1,000,000 sales dollars, variable costs are $600,000.

Total Revenues and

d. Revised annual break-even dollar sales:

Solutions Manual, Module 15

Cambridge Business Publishers, 2013

Break-even point in sales dollars

c. Current fixed costs

d. Required before-tax income =

Sales volume required to provide an after-tax income of $200,000:

*Answer reflects rounding.

Cambridge Business Publishers, 2013

Financial & Managerial Accounting for MBAs, 3rd Edition

b. Break-even price ($30,000/3,000) = $10.00

c. Cost to city ($20 10,000) = $200,000

Solutions Manual, Module 15

Cambridge Business Publishers, 2013

Cambridge Business Publishers, 2013

Financial & Managerial Accounting for MBAs, 3rd Edition

= ($30 $22)X $1,200,000

3. The capital-intensive method has a higher operating leverage because

Solutions Manual, Module 15

Cambridge Business Publishers, 2013

Florida Berry Basket

Contribution margin/Net income

c. Percentage change in profits = % decrease in sales x Operating leverage

The acquisition of the berry-picking machines will reduce variable costs,