Beruflich Dokumente
Kultur Dokumente
Selling price
VC:
Fixed costs
P:
Profit
TP:
Target profit
Question 4.1
Cost-volume-profit (CVP) analysis examines the
behaviour of total revenues, total costs, and profit as changes occur in the
units sold, selling price, variable cost per unit, or fixed costs of a product.
Question 4.2
in Chapter 4 are:
1.
Changes in the level of revenues and costs arise only because of
changes in the number of product (or service) units sold.
2.
Total costs can be separated into a fixed component that does not
vary with the units sold and a component that is variable with respect to
the units sold.
3.
When represented graphically, the behaviour of total revenues and
total costs are linear (represented as a straight line) in relation to units sold
within a relevant range and time period.
4.
The selling price, variable cost per unit, and fixed costs are known
and constant.
Question 4.4
Contribution margin is the difference between total
revenues and total variable costs. Contribution margin per unit is the
difference between selling price and variable cost per unit. Contributionmargin percentage is the contribution margin per unit divided by selling
price per unit (or contribution margin divided by sales revenue).
Question 8.2
Relevant costs are expected future costs that differ
among the alternative courses of action being considered. Historical costs
are irrelevant because they are past costs and, therefore, cannot differ
among alternative future courses of action.
Question 8.3
No. Relevant costs are defined as those expected
future costs that differ among alternative courses of action being
considered. Thus, future costs that do not differ among the alternatives are
irrelevant to deciding which alternative to choose.
Exercise -4-16
Revenues
CVP Computations
Variable
Fixed
Total
Operating
Contribution
Contribution
Costs
Costs
Costs
Income
Margin
Margin %
a.
A$2000
A$ 500
A$300
A$ 800
A$1200
A$1500
A75.0%
b.
2000
1500
300
1800
200
500
25.0%
c.
1000
700
300
1000
300
30.0%
d.
1500
900
300
1200
300
600
40.0%
Q=
CMPU
A$23 500
A$47 per ticket
= 500 tickets
(b) Q =
FC + TP
CMPU
A$40 500
FC
CMPU
A$23500
A$50 per ticket
= 470 tickets
(b)
Q=
FC + TP
CMPU
A$40 500
A$50 per ticket
= 810 tickets
3.
(a)
FC
CMPU
A$23 500
A$20 per ticket
= 1175 tickets
2
(b)
Q=
FC + TP
=
CMPU
=
A$40 500
A$20 per ticket
= 2025 tickets
The reduced commission sizably increases the break-even point and the
number of tickets required to yield a target profit of A$17 000:
6%
Commission
Fixed
(Requirement 2)
Commission of A$60
Break-even point
470
1175
810
2025
4.
(a)
The A$5 delivery fee can be treated as either an extra source of
revenue (as done below) or as a cost offset. Either approach increases CMPU by
A$5:
SP = A$65 (A$60 + A$5) per ticket
VC = A$40 per ticket
CMPU = A$65 A$40 = A$25 per ticket
FC = A$23 500 a month
Q =
FC
CMPU
A$23 500
A$25 per ticket
= 940 tickets
(b) Q =
FC + TP
CMPU
A$40 500
A$25 per ticket
= 1620 tickets
The A$5 delivery fee results in a higher contribution margin which reduces
both the break-even point and the tickets sold to attain profit of A$17 000.
Exercise 4-22
1.
A$105 000
1- 0.30
A$105 000
1 0.30
= A$450 000 +
0.60
=A$1 000 000
Proof:
Revenues
400 000
Contribution margin
600 000
Fixed costs
450 000
Profit
150 000
45 000
A$ 105 000
2.
a.
Unit
Change in
480 000
Contribution margin
720 000
Fixed costs
450 000
Profit
270 000
81 000
A$ 189 000
Upgrade
Customers
Customers
SP
$420
$240
VC
180
80
CMPU
240
160
The 60%/40% sales mix implies that, 60% of products are sold to new
customers and 40% are sold to upgrade customers.
Weighted average contribution margin per unit
$160)
$28,000,000
= 134,616 units (rounded up)
$208
Sales to upgrade
customers:
80,770 units
53,846 units
134,616 units
Check
Revenues ($420 80,770) + ($240 53,846)
Variable costs ($180 80,770) + ($80 53,846)
18,846,280
Contribution margin
28,000,160
Fixed costs
28,000,000
$46,846,440
160
120,000
80,000
$69,600,000
28,000,000
Contribution margin
41,600,000
Fixed costs
28,000,000
Profit
$ 13,600,000
3.
a.
At New 50%/Upgrade 50% mix, 50% of products are sold to new
customers and 50% are sold to upgrade customer.
Weighted average contribution margin per unit
$160)
$28,000,000
= 140,000 units
$200
70,000 units
70,000 units
140,000 units
Check
Revenues ($420 70,000) + ($240 70,000)
$46,200,000
18,200,000
Contribution margin
28,000,000
Fixed costs
28,000,000
Profit
b.
At New 90%/ Upgrade 10% mix, 90% of products are sold to new
customers and 10% are sold to upgrade customer.
Weighted average contribution margin per unit
$160)
$28,000,000
= 120,690 units (rounded up)
$232
108,621 units
12,069 units
120,690 units
Check
Revenues ($420 108,621) + ($240 12,069)
$48,517,380
20,517,300
Contribution margin
28,000,080
Fixed costs
28,000,000
80
c.
As Ziggy increases its percentage of new customers, which have a
higher contribution margin per unit than upgrade customers, the number of
units required to break even decreases:
New
Customers
Upgrade
Customers
Break-even
Point
Requirement 3(a)
50%
50%
140,000
Requirement 1
60
40
134,616
Requirement 3(b)
90
10
120,690
Revenues
A$600 000
A$300 000
Sales commissions
60 000
30 000
390 000
Contribution margin
2.
3.
A$210 000
A$210 000
= 35%
A$600 000
A$90 000
A$31 500
13 000
A$18 500
If Mr. Cruze spends A$13 000 more on advertising, the profit will increase by
A$18 500, converting a loss of A$49 000 to a loss of A$30 500.
Exercise 8-16 Disposal of assets
1.
This is an unfortunate situation, yet the A$78 000 costs are irrelevant
regarding the decision to re-machine or sold as scrap. The only relevant
factors are the future revenues and future costs. By ignoring the accumulated
costs and deciding on the basis of expected future costs, operating income
will be maximised (or losses minimised). The difference in favour of remachining is A$2000:
7
(a)
(b)
Re-machine
Future revenues
sold as scrap
A$33 000
A$6 500
24 500
Operating income
A$8 500
A$6 500
A$2 000
2. This, too, is an unfortunate situation. But the A$101 000 original cost is
irrelevant to this decision. The difference in relevant costs in favour of
replacing is A$3500 as follows:
(a)
Replace
New truck
(b)
Rebuild
A$103 500
17 500
A$89 500
A$86 000
A$89 500
A$3 500
Note, here, that the current disposal price of A$17 500 is relevant, but the
original cost (or carrying amount, if the truck were not brand new) is
irrelevant.
Direct materials cost per unit (A$262 500 7 500 units) = A$35 per unit
Direct manufacturing labour cost per unit (A$300 000 7 500 units)
= A$40 per unit
Variable cost per batch = A$500 per batch
Award Plus profits under the alternatives of accepting/rejecting the special
order are:
Revenues
7 500 Units
10 000 Units
Difference
2 500 Units
A$250 000
Variable costs:
1
87 500
Direct materials
262 500
350 000
300 000
400 000
75 000
87 500
12 500
275 000
275 000
175 000
175 000
100 000
Fixed costs:
Total costs
1 087 500
1 287 500
200 000
Profit
A$37 500
A$87 500
A$50 000
A$250 000
87 500
100 000
12 500
200 000
A$50 000
Award Plus should accept the one-time-only special order if it has no longterm implications because accepting the order increases Award Plus profit by
A$50 000.
If, however, accepting the special order would cause the regular customers to
be dissatisfied or to demand lower prices, then Award Plus will have to trade
9
off the A$50 000 gain from accepting the special order against the profit it
might lose from regular customers.
Award Plus has a capacity of 9000 medals. Therefore, if it accepts the
special one-time order of 2500 medals, it can sell only 6500 medals instead of
the 7500 medals that it currently sells to existing customers. That is, by
accepting the special order, Award Plus must forgo sales of 1000 medals to its
regular customers. Alternatively, Award Plus can reject the special order and
continue to sell 7500 medals to its regular customers.
Award Plus profit from selling 6500 medals to regular customers and 2500
medals under one-time special order follow:
Revenues (6 500 A$150) + (2 500 A$100)
315 000
360 000
77 500
275 000
175 000
Total costs
1 202 500
Profit
A$22 500
Award Plus makes regular medals in batch sizes of 50. To produce 6500 medals
requires 130 (6500 50) batches.
Accepting the special order will result in a decrease in profit of A$15 000
(A$37 500 A$22 500). The special order should, therefore, be rejected.
A more direct approach would be to focus on the incremental effectsthe
benefits of accepting the special order of 2500 units versus the costs of selling
1000 fewer units to regular customers. Increase in profit from the 2500-unit
special order equals A$50 000 (requirement 1). The loss in profit from selling
1000 fewer units to regular customers equal:
Lost revenue, A$150 1 000
A$(150 000)
35 000
40 000
10 000
Profit lost
A$(65 000)
Accepting the special order will result in a decrease in profit of A$15 000
(A$50 000 A$65 000). The special order should, therefore, be rejected.
Even if profit had increased by accepting the special order, Award Plus should
consider the effect on its regular customers of accepting the special order.
For example, would selling 1000 fewer medals to its regular customers cause
these customers to find new suppliers that might adversely impact Award
Pluss business in the long run.
3.
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A$50 000
(75 000)
A$(25 000)
A$5 000
3 700
A$1 300
2.
A$520 000
= 400 tour packages
A$2300 per package
A$2300
= 26%
A$6000
Revenue to achieve target income = (Fixed costs + target OI) Contribution
margin ratio
=
Break-even (packages) =
Fixed costs
Contribution margin per package
Fixed costs
Breakeven (packages)
A$552 000
= A$1 380 per tour package
226 tour packages
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Alternative cost
1.
Contribution margin assuming fixed rental arrangement = $50 $30 =
$20 per bouquet
Fixed costs = $5,000
Break-even point = $5,000 $20 per bouquet = 250 bouquets
Contribution margin assuming $10 per arrangement rental agreement
= $50 $30 $10 = $10 per bouquet
Fixed costs = $0
Break-even point = $0 $10 per bouquet = 0
(i.e. EB makes a profit no matter how few bouquets it sells)
2.
Let x denote the number of bouquets EB must sell for it to be
indifferent between the fixed rent and royalty agreement.
To calculate x we solve the following equation.
$50 x $30 x $5,000 = $50 x $40 x
$20 x $5,000 = $10 x
$10 x = $5,000
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Tap filter:
Selling price
$80
20
$60
Pitcher-cum-filter:
Selling price
$90
25
$65
$945,000
= 15,000 units
$63
6,000 units
9,000 units
15,000 units
Break-even point in dollars for tap models and pitcher models is:
Tap models: 6,000 units $80 per unit
$480,000
810,000
Break-even revenues
2.
$ 1,290,000
Tap filter:
Selling price
Variable cost per unit
$80
15
$65
Pitcher-cum-filter:
Selling price
Variable cost per unit
Contribution margin per unit
$90
16
$74
$945,000 + $181,400
= 16,000 units
$70.40
6,400 units
9,600 units
16,000 units
Break-even point in dollars for tap models and pitcher models is:
Tap models: 6,400 units $80 per unit
$512,000
864,000
Break-even revenues
$ 1,376,000
3.
Let x be the number of units for Pure Water Products to be indifferent
between the old and new production equipment.
Profit using old equipment = $63 x $945,000
Profit using new equipment = $70.40 x $945,000 $181,400
At point of indifference:
$63 x $945,000 = $70.40 x $1,126,400
$70.40 x $63 = $1,126,400 $945,000
$7.40 x = $181,400
9,806 units
14,709 units
24,515 units
Special order
1.
Revenues from special order (A$25 10 000
bats)
A$250 000
(160 000)
A$90 000
A$250 000
Variable manufacturing
costs
(A$16 10 000 bats)
(160 000)
Contribution margin
foregone
([A$32-A$181] 10 000
bats)
(140 000)
Decrease in operating
profit
if Woden order accepted
A$(50 000)
in profit of A$50 000 becomes $0. Kingston will be indifferent between the
special order and continuing to sell to regular customers if revenues from the
special order = A$250 000 + A$50 000 = A$300 000 or A$30 per bat (A$300 000
10 000 bats).
Looked at a different way, Kingston expects the full price of A$32 less the
AUD two, saved on variable selling costs.
2c.
Kingston may be willing to accept a loss on this special order if the
possibility of future long-term sales seems likely at a higher price. However,
Kingston should also consider the negative long-term effect on customer
relationships of not selling to existing customers. Also, Kingston cannot afford
to sell bats to customers at the special order price for the long term because
the A$25 price is less than the full cost of the product of A$27. This means
that in the long term, the contribution margin earned will not cover the fixed
costs and result in a loss. Kingston will then be better off shutting down.
17