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Exercise 5-13: B/E Analysis and CVP Graphing

Given:
Chi Omega Sorority is planning its annual Riverboat Extravaganza. The Extravaganza committee has
assembled the following expected costs for the event:
Variable Costs:
Dinner (per person)
Favors and programs (per person)
Total variable costs per person

$7
3
$10

Fixed costs:
Band
Tickets and Advertising
Riverboat Rental
Floorshow and Strolling Entertainers
Total fixed costs

$1,500
700
4,800
1,000
$8,000

The committee members would like to charge $30 per person for the evening's activities.
Required:
1. Compute the break-even point for the Extravaganza (in terms of the number of persons
that must attend).
Sales = TVC + TFC + Operating Profit
$30(X) = $10(X) + $8,000 + $0
$20(X) = $8,000
X = $8,000 / $20 =
400 People
$30X = ($30)(400) =

$12,000 Ticket sales

2. Assume that only 250 persons attended the Extravaganza last year. If the same number
attend this year, what price per ticket must be charged to breakeven?
Sales = TVC + TFC + Operating Profit
(X)(250) = $10(250) + $8,000 + $0
(X)(250) = $2,500 + $8,000
(250)(X) = $10,500
X = $10,500 / 250
X=
$42 price per ticket
3. Refer to the original data ($30 ticket price per person). Prepare a CVP graph for the
Extravaganza from zero tickets up to 600 tickets sold.
Graph Data:

Persons
Attending

Total
Estimated
Cost

Total
Fixed
Cost

Total
Sales
Values

Total
Variable
Cost

0
100
200
300
400
500
600

$8,000
$9,000
$10,000
$11,000
$12,000
$13,000
$14,000

$8,000
$8,000
$8,000
$8,000
$8,000
$8,000
$8,000

$0
$3,000
$6,000
$9,000
$12,000
$15,000
$18,000

$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000

CVP Chart
$20,000

$18,000

f(x) = 30x

$16,000

Cost

$14,000

f(x) = 10x + 8000

$12,000

$10,000

$8,000

f(x) = 2.57817514245217E-015x + 8000

$6,000

$4,000

$2,000

$0
0

100

200

300

400

Persons Attending

$2,000

$0
0

100

200

300

400

Persons Attending

CVP Chart

Column E
Total Cost
Column F
TFC

400

ending

500

600

700

Column F
TFC

400

ending

500

600

700

CVP Chart
$20,000
$18,000

f(x) = 30x

$16,000

Cost

$14,000

f(x) = 10x + 8000

$12,000
$10,000
$8,000

f(x) = 2.57817514245217E-015x + 8000

$6,000
Column E
Total Cost
Column F
TFC

$4,000
$2,000
$0
0

100

200

300

400

Persons Attending

500

600

700

Exercise 5-11: B/E Analysis; Target Profit; Margin of Safety; C/M Ratio
Given:
Pringle Company distributes a single product. The company's sales and expenses for a recent month were
Total
$600,000
420,000
$180,000
150,000
$30,000

Sales
Variable expenses
Contribution margin
Fixed expenses
Net operating income

Per Unit
$40
$28
$12

Required:
1. What is the monthly break-even point in units sold and in sales dollars?
Sales = TVC + TFC + Operating Profit
$40(X) = $28(X) + $150,000 +0
$12(X) = $150,000
X = $150,000/$12
X = 12,500
12,500 units
$500,000 Sales dollars
2. Without resorting to computations, what is the total contribution margin at the break-even
point?
At the break-even point, the total contribution must be equal to total fixed costs
3. How many units would have to be sold each month to earn a target profit of $18,000?
Verify your answer by preparing a contribution format income statement at the target
level of sales.
Sales = TVC + TFC + Operating Profit
$40(X) = $28(X) + $150,000 + $18,000
$12(X) = $168,000
X = $168,000/$12
X = 14,000
14,000 units
Pringle Company
Contribution Margin Income Statement
For the Month ended _______________
Sales
Variable Expenses
Contribution Margin
Less: Fixed Expenses
Net Income

14,000

$40
28
$12

$560,000
392,000
$168,000
150,000
$18,000

$168,000

4. Refer to the original data. Compute the company's margin of safety in both dollar and
percentage terms.
Margin of safety = Current or budgeted sales level - breakeven.

M/S = $600,000 - ($40 X 12,500)


M/S = $600,000 - $500,000 = $100,000
M/S % = $100,000/$600,000 =

16.667%

5. What is the company's CM ratio?


Contribution ratio = TCM/Sales or (CM/Unit)/(Unit SP)
Contribution ratio = TCM/Sales = $168,000/$560,000 =
Contribution ratio = (CM/Unit)/(Unit SP) = $12/$40 =

30.0%
30.0%

If monthly sales increase by $80,000 and there is no change in fixed expenses, by


how much would you expect monthly net operating income to increase?
Change in sales dollars X C/M % = Change in operating income
$80,000 X 30% =
$24,000

cent month were

Problem 5-21: Basic CVP Analysis


Given:
Stratford Company distributes a lightweight lawn chair that sells for $15 per unit. Variable costs are $6
per unit, and fixed costs $180,000 annually.
Selling price per unit
$15
Variable cost per unit
$6
Total fixed costs
$180,000
Required: Answer the following independent questions.
1. What is the product's CM ratio?
CM% = TCM / Sales or CM per unit / Selling price = ($15 - $6) / $15 =

60%

2. Use the CM ratio to determine the BE point in sales dollars.


Sales = TVC + TFC + Operating Income
1X = VC%(X) + TFC
1(X) - VC%(X) = TFC
(1 - VC%)(X) = TFC
VC% = 0.4
CM%(X) = TFC
X = TFC/CM%
X =$180,000 / .60
X=
$300,000
3. The company estimates that sales will increase by $45,000 during the coming year due to
increased demand. By how much should net operating income increase?
Change in sales
CM Ratio
Change in OI

$45,000
60%
$27,000

4. Assume that the operating results for last year were as follows:
Sales
Variable expenses
Contribution margin
Fixed expenses
Operating income

$360,000
144,000
$216,000
180,000
$36,000

24,000
0.40
0.60

a. Complete the degree of operating leverage at the current level of sales.


Degree of operating leverage (DOL) = TCM / Net Operating Income
DOL = $216,000 / $36,000 =
6
b. The president expects sales to increase by 15% next year. By how much should net
operating income increase?
Proof:
% Change in Sales X DOL = % Change in OI
Sales

$45,000

15% X 6 =

90%

Original operating income


% increase in OI resulting from a 15% increase in sales
Dollar increase in OI resulting from a 15% increase in sales

Variable expenses
Contribution margin
$36,000 Fixed expenses
90% Operating income
$32,400

5. Refer to the original data. Assume that the company sold 28,000 units last year. The sales
manager is convinced that a 10% reduction in the selling price, combined with a $70,000
increase in advertising expenditures, would cause annual sales in units to increase by 50%.
Prepare two contribution format income statements, one showing the results of last year's
operations and one showing what the results of operations would be if these changes were
made. Would you recommend that the company do as the sales manager suggests?
Stratford Company
Contribution Format Income Statements
Last Year and Pro-forma Based on Proposal

Sales
Variable expenses
Contribution margin
Fixed expenses
Operating income

Volume
Per Unit
$15.00
$6.00
$9.00

Q5
Last Year
28,000
$420,000
168,000
$252,000
180,000
$72,000

Volume
Per Unit
$13.50
$6.00
$7.50

Q5
Projected
42,000
$567,000
$252,000
$315,000
250,000
$65,000

Volume
Per Unit
$15.00
$8.00
$7.00

Proof
Q6
Projected
56,000
$840,000
$448,000
$392,000
320,000
$72,000

No, the changes should not be made because the projected OI is lower than last year's OI.
6. Refer to the original data. Assume again that the company sold 28,000 units last year.
The president feels that it would be unwise to change the selling price. Instead, he wants
to increase the sales commission by $2 per unit. He thinks that this move, combined
with some increase in advertising, would cause annual unit sales to double. By how much
could advertising be increased with profits remaining unchanged? Do not prepare an
income statement; use the incremental analysis approach.
Long Way:
Sales = TVC + TFC + OI
Let X = increase in advertising expense
(28,000 X 2)($15) = (28,000 X 2)($6 + $2) + ($180,000 + $X) + $72,000
(56,000)($15) = (56,000)($8) + ($180,000 + $X) + $72,000
$840,000 = $448,000 +$180,000 + X + $72,000
X = $140,000
Incremental Approach:
Estimated New Total Contribution Margin (28,000 X 2 X ($9 - $2))
Original Total Contribution Margin (28,000 X $9.00)
Increase in TCM assuming TFC remain the same

$392,000
252,000
$140,000

140,000

Thus, fixed costs can increase by $140,000 without a change in OI.

$414,000

$248,400

165,600
$248,400
180,000
$68,400

140,000

$248,400
$32,400

Problem 5-22: Sales Mix; Multiproduct Break-Even Analysis


Given:
Marlin Company, a wholesale distributor, has been operating for only a few months. The company sells
three products - sinks, mirrors, and vanities. Budgeted sales by product and in total for the coming
month are shown below:
Product
Sinks
Mirrors
Vanities
Percentage of total sales
48%
20%
32%
Sales
$240,000
100% $100,000
100% $160,000
Variable expenses
72,000
30%
80,000
80%
88,000
Contribution margin
$168,000
70% $20,000
20% $72,000
Fixed expenses
Net operating income
Break-even point in sales dollars = Fixed expenses / CM ratio = $223,600 / .52 = $430,000
As shown by these data, net operating income is budgeted at $36,400 for the month, and break-even sales at
Assume that actual sales for the month total $500,000 as planned. Actual sales by product are:
Sinks
Mirrors
Vanities
Total

$160,000
200,000
140,000
$500,000

0.32
0.40
0.28

Required:
1. Prepare a contribution format income statement for the month based on actual sales data.
Product
Percentage of total sales
Sales
Variable expenses
Contribution margin
Fixed expenses
Net operating income

Sinks
32%
$160,000
48,000
$112,000

Mirrors
Vanities
40%
28%
100% $200,000
100% $140,000
30% 160,000
80%
77,000
70% $40,000
20% $63,000

2. Compute the break-even point in sales dollars for the month, based on your actual data.
Break-even point in sales dollars = Fixed expenses / CM ratio = $223,600 / .43 = $520,000
3. Considering the fact that the company met its $500,000 sales budget for the month, the president is shocked at
the results shown on your income statement in (1) above. Prepare a brief memo for the president explaining
why both the operating results and the break-even point in sales dollars are different from what was budgeted.

Although the company met its sales budget of $500,000 for the month, the mix of products sold changed significan
that budgeted. This change in sales mix is the reason that the budgeted NOI was not met, and that BE sales incre

As shown by the data in the table below, sales shifted away from Sinks, which provides the greatest CM per dollar
of sales, and shifted strongly toward Mirrors, which provides the least CM per dollar of sales. Consequently, altho

the company met its budgeted level of total sales, these sales provided considerably less CM than we had planned
with a resulting decrease in NOI.

The company's overall CM ratio decreased to 43%, from a planned level of 52%. With less average CM per dollar o
a greater level of sales had to be achieved to provide sufficient CM to cover fixed costs. Hence the rise in BE sale

Product
Sinks
Mirrors
Vanities
Total

Actual
Budgeted
Sales
Sales
$160,000 $240,000
200,000 $100,000
140,000 $160,000
$500,000 $500,000

Actual
Mix
32%
40%
28%
100%

Budgeted Budgeted
Mix
CM%
48%
70%
20%
20%
32%
45%
100%
52%

Actual
CM%
70%
20%
45%
43%

The company sells


l for the coming

oduct
Vanities
32%

Total
100%
100% $500,000
55% 240,000
45% $260,000
223,600
$36,400

100%
48%
52%

$430,000

nth, and break-even sales at $430,000.


by product are:

oduct
Vanities
28%

Total
100%
100% $500,000
55% 285,000
45% $215,000
223,600
($8,600)

100%
57%
43%

$520,000

nth, the president is shocked at


for the president explaining
erent from what was budgeted.

f products sold changed significantly from


s not met, and that BE sales increased.

rovides the greatest CM per dollar


ollar of sales. Consequently, although

43%

ably less CM than we had planned,

With less average CM per dollar of sales,


d costs. Hence the rise in BE sales.

Sales
$500,000
$500,000
$500,000

Mix
32%
40%
28%

CM%
70%
20%
45%
TCM
TFC
NOI

TCM
$112,000
$40,000
$63,000
$215,000
223,600
($8,600)