Chapter 9

CHAPTER 9
BREAK-EVEN POINT AND
COST-VOLUME-PROFIT ANALYSIS
QUESTIONS
1.

The variable costing income statement classifies costs by the way they react
relative to changes in volume. Variable costs are deducted from revenues to
determinecontributionmarginandthenfixedcostsaredeductedfromcontribution
margin to determine operating profit. Breakeven analysis involves a study of
fixedcosts,variablecosts,andrevenuestodeterminethevolumeatwhichtotal
costsequaltotalrevenues.Hence,variablecostingprovidesthevariableandfixed
costclassificationsneededtocomputebreakeven.Theabsorptioncostingincome
statement uses functional classificationsmanufacturing andnonmanufacturing
coststocomputegrossprofitandoperatingincome,respectively.Afunctional
classificationrequiresacosttobeclassifiedbasedonthereasonitwasincurred,
i.e.,selling,administrative,orproduction.Thisclassificationdoesnotseparate
variablefromfixedcostsandisthereforenotusefulincomputingbreakeven.

2.

ThebreakevenpointisthestartingpointforCVPanalysis,becausebeforea
companycanearnprofits,itmustfirstcoverallofitsvariableandfixedcosts;the
pointatwhichallcostsarejustcoveredisthebreakevenpoint.Theformula
approachrequiressolvingfortheexactbreakevenusingthefollowingalgebraic
equation:R(X)V(X)FC=0;whereRisrevenueperunit,Xisvolume,Vis
variablecostperunit,andFCisfixedcost.
Thegraphapproachprovidesavisualrelationshipbetweenrevenuesandcosts.
Thebreakevenpointiswherethetotalrevenuelineintersectsthetotalcostline
onthetraditionalorcostvolumeprofitgraphorwheretheprofitlineintersects
the xaxisontheprofitvolumegraph.Unliketheformulaapproach,thegraph
approach does not provide a precise solution because exact points cannot be
determinedfromavisualviewofthegraph.
Theincomestatementapproachrequirespreparinganincomestatementtoprove
theaccuracyofthecomputationsofbreakeven.Onlybytrialanderrorcanthe
exactbreakevenbedeterminedusingtheincomestatementapproach.

3. Thecontributionmarginratioiscontributionmarginperunitdividedbyselling
priceperunit.Itrepresentstheproportionofrevenuethatremainsaftervariable
costsarecovered.Thecontributionmarginratiocanbeusedtocalculatebreak
eveninsalesdollarsbydividingfixedcostsbythecontributionmarginratio.
4. TheusefulnessofCVPanalysisisitsabilitytoclearlyforecastincomeexpectedto
resultfromtheshortruninterplayofcost,volume,price,andquantity.Itisoften
usefulinanalyzingcurrentproblemsregardingproductmix,makeorbuy,sellor
processfurther,andpricing.
2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.

Chapter 9

In the long run, however, all of these factors and their relationships and the
assumptionsthatunderlieCVPregardingthesefactorsarelikelytochange.This
emphasizes that CVP only holds true for the short run. Results must be
recalculatedperiodicallytomaintainvalidity.
5.

The bag or basket assumption means that a multiproduct firm will

considerthattheproductsitsellsaresoldinaconstant,proportionalsalesmixas
ifinabagofgoods.Itisnecessarytomakethisassumptiontodeterminethe
contribution margin for the entire company product line, since individual
products contribution margins may differ significantly. A single contribution
marginmustbeusedinCVPanalysissothebagorbasketassumptionallows
CVPcomputationstobemade.

6.

Ifthecompanyincludesmoreofitshighercontributionmarginproducts
squigeesthan its lower contribution margin productswidgeesin its
multiproductmix,thenitsweightedaveragecontributionmarginwillbehigher
and its breakeven point lower. This is because the contribution margin is
weighted based on the relative quantities of each product. In the contribution
marginweightingprocess,theproductmakingupthelargerproportionofthebag
has the greatest impact on the average contribution margin. Previously, the
productwidgees,withthelowestcontributionmarginhadthegreaterimpacton
the average contribution margin. However when the sales mix changed, the
productsquigees,withthehighercontributionmargin,hasthegreaterimpacton
theaveragecontributionmargin.

7.

Marginofsafetyisthedifferencebetweenactualorprojectedsalesandbreak
evenlevelsales.Marginofsafetycanbeexpressedinunits,indollars,orasa
percentageoftotalsalesdollars.Itidentifiestheamountbywhichsalescouldfall
andstillleavethefirms bottomlineintheblack. Marginofsafetymeasures
provide either comfort or risk depending on whether the margin of safety is
positiveornegative.Operatingleveragereferstotheamountoffixedcostsrelative
to variable costs in a companys cost structure. It indicates how sensitive a
companyssalesaretosalesvolumeincreasesanddecreases.
Higheroperatingleverageisassociatedwithahigherproportionoffixedcosts;
loweroperatingleverageisassociatedwithalowerleveloffixedcosts.Thelevel
ofoperatingleveragevarieswiththelevelofrevenues.Further,operatingleverage
providesinformationabouthowprofitwillchangewhenrevenuechanges.High
operatingleverageindicatesthatthelevelofprofitisverysensitivetoachangein
revenuelevel.Thereverseistrueforlowoperatingleverage.Marginofsafety
percentageis1Degreeofoperatingleverage;degreeofoperatingleverageis1
Margin of safety percentage. Thus, the margin of safety percentage is the
reciprocalofthedegreeofoperatingleverageandthedegreeofoperatinglevelis
thereciprocalofthemarginofsafetypercentage.

2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.

Chapter 9

EXERCISES
Ingredients
Labor
Variableoverhead
Totalvariablecost
Dividedbyunits
Variableproductioncostperunit

a.

b.

$56,000
26,000
48,000
$130,000
104,000
$1.25

Variablecostofgoodssold=98,000$1.25
=$122,500

c.

andd.
Contributionmarginratiois:
Sales(98,000$3.10)
Lessvariablecosts
Costofgoodssold
Variableselling&admin.
Contributionmarginandratio

Dollars

Percent

$303,800

100

$122,500
10,000
(132,500)
$171,300

44

56

Contributionmarginperunit=$171,30098,000=$1.75perbottle(rounded)
9.a.

Directmaterial
Directlabor
Manufacturingoverhead
Totalvariableproductioncost
Dividedbyunitsproduced
Variableproductioncostpercap

b.

Contributionmarginperunit:
Revenue
Lessvariablecosts
Costofgoodssold(180,000$1.00)
Sellingandadministrative
Contributionmargin
Dividedbyunitssold
Contributionmarginperunit

c.

$150,000
100,000
75,000
$325,000
325,000
$1.00
$450,000
$180,000
90,000

270,000

$180,000
180,000
$1.00

TopDisc
IncomeStatement
For2013
Salesrevenue
Lessvariablecosts
Costofgoodssold(180,000$1.00)
Sellingandadministrative
Contributionmargin
Lessfixedexpenses

$450,000
$180,000
90,000

(270,000)

$180,000

2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.

Chapter 9

Manufacturingoverhead
Sellingandadministrative
Netloss

$112,500
100,000

(212,500)
$(32,500)

10. a. Totalrevenuerisesby$25+$21=$46
b.

Totalcostsrisebytheamountofvariablecosts,$21

c. TotalpretaxprofitrisesattherateoftheCMperunit,$25
11. a. Breakeveninunits=$90,000($70$40)=3,000units
b. Indollarsbreakeven=3,000$70=$210,000
12. a. Breakevenpointinrings=$345,000($600$300)=1,150
b.
c.

Breakevenpointinsalesdollars=1,150$600=$690,000

(rounded)

d.

Breakeven point $345,000 ($600 $306) = 1,174 rings

Breakevenpointwouldbe$339,000($600$300)=1,130

rings
13. a. Thebreakevenpointisthepointatwhichtotalrevenueequalstotalcost.
FixedcostsContributionmargin=Breakevenpoint
$52,200($8$3.50)=$52,200$4.50=11,600unitsor$92,800inrevenue
b.

2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.

Chapter 9

2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.

10

Chapter 9

c.

Breakevenpoint

d.

e.

Graph(b)demonstrateshowtotalcostsandtotalrevenueschangeas
volumechanges. Profit or loss is the distance between the total revenue and
total cost lines. Ingraph(c),variablecostsarenotexplicitlyshownbutcanbe
inferredasthedistancebetweenthetotalcostandfixedcostlines.Graph(c)
showsonlyhowprofitchangeswithchangesinvolume.Theshadedareato
therightoftheprofitlineistheprofitarea;theshadedareatotheleftisthe
lossarea.Noactualrevenuesorcostscanbedeterminedbylookingatthis
graph.
PittsburgTarCo.

IncomeStatement
FortheYearEnded2013

Sales(11,600gal.$8pergal.)
Variablecosts
Production(11,600gal.$3.00pergal.)
Selling(11,600$0.50pergal.)
Contributionmargin
Fixedcosts
Production
Sellingandadministrative
Netincome

$92,800
$34,800
5,800
$46,000
6,200

40,600

$52,200
52,200

$0

2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.

Chapter 9

14.
Sales
Lessvariablecost
Contributionmargin
Lessfixedcosts
Profit

Given
Plugged
$?
0.7(S)
$?
$900,000
(600,000)

(600,000)

$300,000
$300,000

LetS=sales
ThenS0.7S=$900,000
0.3S=$900,000
S=$3,000,000
Thentheminimumsellingpriceis$3,000,00030,000units=$100.
15. a. Breakeveninunitsis$260,000($1,800$1,000)=325gardensheds.
b. Toearnapretaxprofitof$200,000=($260,000+$200,000)$800=575
gardensheds
c. Toearnapretaxprofitof$280,000=($260,000+$280,000)$800=675
gardensheds
16. a. Contributionmarginperunit=Saleslessvariablecosts
$180($30+$25+$17)=$108
b. Contributionmarginratio=ContributionmarginSales
$108$180=60%
c. BreakeveninunitsisfixedcostsContributionmarginperunit
$62,640$108=580units
d.
Breakeven in dollars is fixed costs
Contributionmarginratio
$62,6400.60=$104,400
e.
Toearn$51,840inpretaxprofit,Austin
Automotivemustsell:
($62,640+$51,840)$108=1,060units
17.a. Convertaftertaxtopretaxprofit:$182,000(10.35)=$280,000
Thenumberofgardenshedsthatmustbesoldtogenerate$280,000=
($260,000+$280,000)$800=675gardensheds.
b. LetR=revenue;then0.08R=Aftertaxincomedesired
Beforetaxincome=0.08R(10.35)=0.123R
RevenueVariablecostsFixedcosts=Incomebeforetax
LetX=Unitssold
SP(X)VC(X)FC=Incomebeforetax
2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.

12

Chapter 9

$1,800X$1,000X$260,000=0.123($1,800)X
$800X$260,000=$221.4X
$578.6X=$260,000
X=450units(rounded)soldtoearn8percentofrevenueaftertax
Amountofrevenue=450$1,800=$810,000

Check:$810,0000.08=$64,800aftertaxincomeneeded(roundto
$65,000)$64,8000.65=$99,692beforetaxincome(roundto
$100,000)$1,800(450)$1,000(450)$260,000=$100,000
(beforetaxincome)
$100,0000.35($100,000)=$100,000$35,000=$65,000
$65,000$810,000=8%
18. a. Converttheaftertaxincometopretaxdesiredincome:
$135,800(10.30)=$194,000
Thenumberofunitsrequiredtoearnanaftertaxprofitof$135,800:
($62,640+$194,000)$108=2,376.3or2,376units
b.

19.

Converttheaftertaxtopretaxprofit:
$7.20$180=0.04,or4%;0.04(10.30)=5.7%ofsales
Apretaxreturnonsalesof5.7percentisrequiredtogenerateanaftertax
profitof$7.20perunit
LetR=theLevelofrevenuethatgeneratesapretaxreturnof5.7%:
Variablecosts=($30+$25+17)$180=0.4,or0.4R
R$62,6400.4R=0.057R
0.543R=$62,640
R=$115,359
$115,359$180=640.88or641units(rounded)

LetY=Levelofsalesgeneratingincomeequalto30%ofsales,then:
Y0.60Y($25,000permonth12months) =0.30Y
0.10Y =$300,000
Y =$3,000,000
Sinceexistingsalesare$2,250,000,saleswouldneedtoincreaseby$3,000,000
$2,250,000=$750,000.

20.

a.

First,convertthedesiredaftertaxincometoapretaxdesiredincome:
$600,000(10.40)=$1,000,000
Note that total variable costs per unit = $3,000, and total fixed costs =
$370,000.
Next,letPrepresentthenumberofgolfcartsthatmustbesoldtogenerate
$1,000,000inpretaxincome:
$5,000P$3,000P$370,000=$1,000,000
$2,000P=$1,370,000
=685golfcarts
2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.

Chapter 9

b.

Findaftertaxequivalentof20%:20%(10.40)=33.33%
Variablecostsasapercentageofsales:$3,000$5,000=60%
LetR=Levelofrevenuethatgeneratesapretaxreturnof33.33%:
R0.6R$370,000=0.3333R
0.0667R=$370,000
R=$5,547,226

Proof:Sales
$5,547,226
Variablecosts(60%)
(3,328,336)

Contributionmargin
$2,218,890
Fixedcosts

(370,000)
Incomebeforetax
$1,848,890
Incometax(40%)

(739,556)
Netincome
$1,109,334
$1,109,334$5,547,226=20%
21.

Each student will have a different answer; nosolutionprovided.

22. a. $1,450$0.50=2,900passengersperday
b.

Breakeven:$2,0002,900=$0.69(rounded)perpassenger
Earn$250:($2,000+$250)2,900=$0.78(rounded)

c.

Totalvariablecost=$2,000($2,0000.80)=$400
Variablecostperpassenger=$4002,900=$0.14(rounded)
Profitiffareis$0.60=(2,900 0.90$0.60)(2,9000.9$0.14)
$1,600=$(399.40)
Currentloss=$1,450$2,000=$(550)
Countywillbebetteroffby$(399.40)($550)=$150.60.

d.

At a fare of $0.70:
(2,900$0.700.95)(2,900$0.140.95)$1,600=$(57.20)
Thecountywouldincuraslightlossatafareof$0.70.
At a fare of $0.90:
(2,900$0.900.90)(2,900$0.140.90)$1,600=$383.60
Thecompanywouldfirstmakeaprofitwhenthefareissetat$0.90.

e.

Increasingvolumewillhelpimproveprofitabilityonlyifthevolumechange
increasestotalcontributionmargin.Becauseanincreaseinvolumecanoften
beachievedonlywithadecreaseinprice,thechangeincontributionmargin
maybenegativeratherthanpositive.

23. a. Currentsalesvolumeforbothcompanies=$2,000,000$40=50,000
Newsellingprice$40(0.3$40)=$28;Variablecosts=$1,400,000
50,000=$28
2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.

14

Chapter 9

Ainsley:(50,0001.60$28)(50,0001.60$28)$0=$0
Bard:(50,0001.60$28)(50,0001.60$0)$1,400,000=$840,000
ThisstrategyisbestusedbyBard.
b. Newsellingprice:$401.3=$52
Ainsley:(50,0000.85$52)(50,0000.85$28)$0=$1,020,000
Bard:(50,0000.85$52)(50,0000.85$0)$1,400,000=$810,000
ThisstrategyisbestusedbyAinsley.
c.

Ainsley:(65,000$40)(65,000$28)$200,000=$580,000
Bard:(65,000$40)(65,000$0)$1,600,000=$1,000,000
ThisstrategyisbestusedbyBard.

24. a. CMperunitofsalesmix=($38)+(1$6)=$30
Breakeven=$180,000$30=6,000unitsofsalesmix,or18,000wallets
and6,000moneyclips
Totalrevenue=(18,000$30)+(6,000$15)=$630,000
b.

Salesmixunits=($180,000+$150,000)$30=11,000=33,000wallets
and11,000moneyclips
Totalrevenue=(33,000$30)+(11,000$15)=$1,155,000

c.

Equivalentpretaxprofit=$150,000(10.40)=$250,000
Salesmixunits=($180,000+$250,000)$30=14,333.33=43,000wallets
and14,333moneyclips
Totalrevenue=(43,000$30)+(14,333$15)=$1,504,995

d.

Unitsofsalesmix=$1,155,000[(5$30)+(2$15)]=6,417(rounded)
=32,085walletsand12,834moneyclips
Income=(32,085$8)+(12,834$6)$180,000=$153,684
Thesalesmixshiftedsuchthattheratioofwalletstomoneyclipsdeclined,
and the breakeven point was reduced because money clips have a higher
contribution margin ratio than money clips. Hence, at a sales level of
$1,155,000,morecontributionmarginisgeneratedattheactualsalesmixthan
attheplannedsalesmix.

25. a. FixedcostsContributionmargin=Breakevenpointinunits
$1,080,000,000[(3$300)+(5$700)+(2$1,000)]=
$1,080,000,000$6,400=168,750bags
Mod=3168,750=506,250units$2,200=
Rad=5168,750=843,750units$3,700=
Xtreme=2168,750=337,500units$6,000=
Revenuetobreakeven

$1,113,750,000
3,121,875,000
2,025,000,000

$6,260,625,000

b.Convertaftertaxtopretaxincome.$1,000,000,000(10.5)=$2,000,000,000
($2,000,000,000+$1,080,000,000)$6,400=481,250bags
Mod=3481,250=1,443,750units$2,200=

$3,176,250,000

2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.

Chapter 9

Rad=5481,250=2,406,250units$3,700=
Xtreme=2481,250=962,500units$6,000=
Totalrevenueneeded
c.

8,903,125,000
5,775,000,000
$17,854,375,000

This change will increase the number of units required to break even
becausefewerunitsofRadandXtreme,whichhavethegreatestcontribution
margin, are being sold and more units of Mod, which has the lowest
contributionmargin,arebeingsold.

2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.

16

Chapter 9

Scooter
Mod
Rad
Xtreme
Total

ContributionMargin
5$300
=
$1,500
4$700
=
2,800
1$1,000 =
1,000

$5,300

Now the contribution margin is $5,300 per bag, which is less than the
contributionmarginperbagof$6,400in(a)above.
d.

If Green Rider sells more of its scooters with the greatest contribution
margin (Xtreme) and fewer of the scooters with the lowest contribution
margin(Mod),thenfewerscooterswouldbeneededtobesoldtobreakeven.

26. a. Breakevenis$264,000($9.60$7.60)=132,000bushels
132,000bushels$9.60=$1,267,200
Bushelsperacre=132,0001,200=110bushelsperacre
b.

BushelssoldBreakevenbushels=Marginofsafety
174,000132,000=42,000bushels
(174,000$9.60)$1,267,200=$403,200
$403,200$1,670,400=24.1%

27. a. Breakeven=FixedcostsContributionmargin
$450,000$30=15,000tirespermonth
15,000$60=$900,000permonth
b.

Profitbeforetaxdesiredis25%ofsalesrevenue
PBT=0.25$60=$15
CM(X)PBT(X)=FC
$30(X)$15(X)=$450,000
$15(X)=$450,000
X=30,000units

c.

Degreeofoperatingleverage=ContributionmarginProfitbeforetax
($3020,000)$150,000a=4
a

d.

Profit=ContributionmarginFixedcosts
$30(20,000)$450,000=$150,000

(Totalcontributionmargin1.15)=$3020,0001.15=$690,000
ContributionmarginFixedcost=Netincome
$690,000$450,000=$240,000newnetincome
Increaseinnetincomeis$240,000$150,000=$90,000

2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.

Chapter 9

RacineTireCo.
IncomeStatement
FortheMonthXXX
Current
Proposed
Sales$60(20,000;23,000)
$1,200,000
$1,380,000
Lessvariableexpense
$30(20,000;23,000)

(600,000)
(690,000)
Contributionmargin
$600,000
$690,000
Lessfixedcosts

(450,000)
(450,000)
Netincome
$150,000
$240,000
28.

a.Sales($7.20125,000)
Variablecosts($4.32125,000)
Contributionmargin
Fixedcosts
Netincome

$900,000
(540,000)
$360,000
(316,600)
$43,400

Breakevenpoint=$316,6000.40a=$791,500or109,931packages
(rounded)
Marginofsafety,dollars:$900,000$791,500=$108,500
Marginofsafetyinunits:$108,500$7.20=15,069packages(rounded)

($7.20$4.32)$7.20=Contributionmarginratio

b. $360,000$43,400=8.295
c.Incomewillincreaseby:8.29530%=249%
Proof:
Sales($7.20125,0001.30)
Variablecosts($4.32125,0001.30)
Contributionmargin
Fixedcosts
Netincome

$1,170,000

(702,000)
$468,000

(316,600)
$151,400

($151,400$43,400)$43,400=249%
d. Breakevenpoint=($316,600+$41,200)0.40=$894,500
Sales($7.20125,0001.15)
Variablecosts($4.32125,0001.15)
Contributionmargin
Fixedcosts($316,600+$41,200)
Netincome

$1,035,000

(621,000)
$414,000

(357,800)
$56,200

Operatingleverage=$414,000$56,200=7.37
29.

Substantialcoststructureimplicationsmustbeconsideredinselectingfrom
thealternativeproductiontechnologies.Machinebasedtechnologieswilltendto
havemuchhigherlevelsoffixedcostsandlowerlevelsofvariablecoststhan
laborintense technologies. Accordingly, the machinebased technologies will
2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.

18

Chapter 9

havehigheroperatingleverage.Havinghigheroperatingleveragemeansthatthe
firmsincomewillbemuchmoresensitivetochangesinthelevelofsales.
Becausehigheroperatingleverageisassociatedwithhigherincomesensitivityto
volumechanges,highoperatingleverageisdesirediffuturesalesareexpectedto
beincreasing.Higherleverageallowsnetincometogrowatahigherrateassales
increase.Alternatively,ifsaleswillbedecreasing,firmswillprefertohavelow
operatingleveragebecausecostswilltendtofallmorerapidlyassalesdiminish.
With high operating leverage, costs will remain more constant as sales drop
causingnetincometodropveryrapidly.
Inanidealworld,onewoulddesiretohaveaverylowleveloffixedcostsbelow
thebreakevenpointandonlyfixedcostsabovethebreakevenpoint.Ifthecost
structurecontainedonlyfixedcosts,theneachdollarofrevenueabovethebreak
evenpointwouldgenerateadollarofincomebeforeprofit.CVPanalysisisuseful
todeterminewhenafirmshouldconsidertradingvariablecostsforfixedcostsin
ordertoshiftthecoststructurefrommorevariabletomorefixed,orviceversa.
Foragivenlevelofsales,acompanywithmostlyvariablecostswillhaveahigher
marginofsafetythanasimilarfirmwithmostlyfixedcosts.Ifafirmhadonly
variablecosts,itssalescouldfalltozerowithoutcausingthefirmtoincuraloss.
Consequently,itsbreakevenpointiszero.Thefirmwithahighleveloffixed
costswouldhaveamuchhigherbreakevenpoint.
30.

AnissueintheuseofCVPanalysisisthatCVPanalysisrequirescoststobe
classifiedaseithervariableorfixed.TheoutcomeofCVPanalysisissensitiveto
variationsinthisclassification.InmakingdecisionsthatrelyonCVPanalyses,it
isimportanttobemindfuloftherequirementtodichotomizecostsbetweenthese
twocategories(fixedandvariable).Further,itisimportanttorecognizethatinthe
longterm,allcostsarevariable.Aproblemariseswhenshorttermdecisionshave
longtermconsequences.Inthiscircumstance,costswillhavebeenincorrectly
consideredintheCVPanalysisbecausetoomanyofthecostswouldhavebeen
classified as fixed. Accordingly, the greatest potential for problems arises in
situations inwhichalongterm decisionis madeonthe basis ofashortterm
classificationofcosts.AfinalobservationisthatCVPdecisionsaremadeinan
incrementalfashion.Thismeansthateachdecisionismadeindependentlyofall
otherdecisions.Therealityisthatpastdecisionsaffectfuturedecisionsandshort
termdecisionscanaffectlongtermdecisions.
CVPanalysiscanbeusedinlong,medium,andshorttermdecisionmaking.The
keyistouseaclassificationofcoststhatisappropriateforthetimehorizon.For
longerterm decisions, newer cost control technologies such as activitybased
costingcanbeusedtodetermine whichcostsarelikely tovarywithdecision
alternativesbeingconsidered.Byrelatingthecostdriverstothedecisionathand,
managerscandeterminewhichcostsarelikelytobeaffected,andbyhowmuch,
bythedecisionbeingmade.

31. a. Eachbagcontainsoneunitofliquidandtwounitsofspray.Thus,eachbag
generatescontributionmarginof:(1$10)+(2$5)=$20.
2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.

Chapter 9

Thebreakevenpointwouldbe:$100,000$20=5,000bags.Sinceeachbag
containstwounitsofspray,atthebreakevenpoint5,0002or10,000unitsof
spraymustbesold.
b.

Atthebreakevenpoint,TotalCM=TotalFC;andtheCMperunitwould
be$1,6004,000=$0.40.Ifoneunitissoldbeyondthebreakevenpoint,net
incomewouldriseby$0.40.

c. $10X0.40($10X)$216,000 =0.25($10X)
$3.50X =$216,000
X =61,715units(rounded)
d.

Inunits:3,2002,800=400units
Indollars:400units$65perunit=$26,000
Percentage:$26,000($653,200)=12.5%

32. a. Fixedcoststhatwouldincreaseincludetheadditionalequipmentcostsand
salariesfortesting,treating,storage,anddisposaloftreatedwaste.Increased
variablecostswouldincludelaborwages,thetreatmentsupplies,andenergy
costsofperformingthetreatmentanddisposingoftheneutralizedwaste.The
increasesinthesevariablecostswouldlowertheproductcontributionmargin
unlesspricesareraisedtocompensate.
b.

Afterdetermining that thesubstance is toxic, thepresidenthastoconsider

businessasusualversusthecostsoftreatmentand/orproperdisposalthatmay
makeproductpricesuncompetitive,preservingthehealthofhumansdownriver,
theeffectsonfish,wildlifeandtheenvironment,maintainingthegoodnameand
reputationofthecompany,theimpactonthestakeholdersshouldthedumping
be discovered, the legality of falsifying the reports, the impact on the
employeesshouldtheplantbeclosedfromlackofprofitability,theeconomic
stabilityofthetown,anditsdependenceontheplantforsurvival.

c.

Theemployeesareimplyingthat(1)notaddressingtheproblemisthelesser
ofevilsbecausethereisnoproofthatthewastecausescancer;(2)tocleanup
theproblemmaycausethecompany tobecomeuncompetitive; (3)10,000
employeescouldlosetheirjobs;and(4)thetownseconomycouldcollapse.
Thefaultwiththeaboverationalizationsaboutthewastenotbeingtoxicto
humans lies partially in the fact that the company failed to recognize the
damage to other nonhuman environmental participants. The waste may be
potentially harmful to the fish and other organisms in the river, and the
pollutedwaterisabsorbedbythesurroundingland(thuspollutingtheland).
Furthermore,thefishermenselltheirpollutedcatchestooutsidemarkets,thus
spreadingtheeffectsofthepollutionevenfurther.
Fault is also seen in the rationalization because the company falsified the
levelsofsuspectedcancercausingmaterialsinitsreportstoauthorities.Ifthe
company truly believed that no harm was being done toeither the people
downstream or the environment, why were the reports falsified? Doing so
instilled a false sense of security in the members of its society (both
2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.

20

Chapter 9

employeesandtownspeople)regardingtheirgeneralwelfare.Ifthecompany
hadprovidedaccuratedisclosureoftoxicitylevels,thepublicwouldhavehad
theopportunitytodecidewhethertoremainontheirjobsorinthevicinityof
the polluters, look for work elsewhere or relocate to an area where better
conditionsexist,ortoseekthenecessaryassistanceinrequiringthecompany
totakecorrectiveaction.
Theserationalizationsseemtoindicatethatunhealthyandunethicalactscan
bepermittedandtoleratedifalargenumberofdirectlyaffectedpeoplebenefit
withoutregardfortheeffectsonpeopleorentitiesthatareindirectlyaffected.
Whileutilitarianismdoeslookatthegreatestgoodforthegreatestnumber,it
considersallpartiesdirectlyandindirectlyaffectedinmakingthatcost
benefit analysis. The company in this case is not considering the indirect
effectsofitsactions.
d.

Thepresidentmusttakesomeactiontodealwiththeproblem.First,the
dumping should be discontinued altogether until the waste is tested to
determine if it is cancer causing. If it is not, obtain information on the
environmentaleffectsofthedumpingand,ifnotharmful,continuetodump.
Thecompanyshouldthenreportitsfindingstotheauthoritiesanddiscontinue
falsifyingitsreports.
Ifthewasteiscancercausingorcausessignificantenvironmentaldamage,the
company should immediately issue a policy statement that no additional
dumpingshalltakeplace.Thenthecostsoftreatingthewastetoneutralizeit
shouldbecomparedtootheralternativesthatmightexistorcouldbecreated
suchasusingitasarawmaterialinanotherproductorintroducingalternative
processing methods. The company could solicit the employees and
townspeoplesassistancesinceallhavealargevestedinterestinfindinga
solutiontotheproblem.Investigationofhowothercompaniesproducingthe
same waste handle the problem would be helpful; some of this type of
information should be available from the EPA or state environmental
agencies.Ifothercompaniesarehandlingthewasteinasimilarmanner,all
companiescouldbeliableforthecostsofcleanup,whichwoulddisallowany
economicadvantagetotheothercompanies.Inaddition,thecompanyshould
investigatethecostsofcleaningupthewaste(ifpossible)thathasalready
beendumped.Sincealloftheseoptionstaketime,however,thecompanywill
mostlikelyhavetoincuradditionalshortruncostssothatthelongruneffects
canbeminimized.

33. a. Revenueisconstantperunitwithintherelevantrange.
b. Variable costs are constant per unit within the relevant range. Labor
productivitywillnotchange.
c.

Thesalesmixremainsconstantasvolumechangeswithintherelevantrange.

d.

Mixed costs can be accurately separated into their fixed and variable
components.
2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.

Chapter 9

e.

Allvariablecostsareconstantperunitwithintherelevantrangeandtotal
fixedcostisconstantwithintherelevantrange.

f.

Salesandproductionareequal.

g.

Nocapacityadditionswillbemadewithinaperiod.

34. Joannascalculationsassumethatthecurrentcostandrevenuestructurewillbe
maintained in future periods. Over time productivity can be improved and
revenuescanbeincreased.ClosingthebusinessisalongtermdecisionandCVP
isshorttermanalysis.TheCVPanalysisisbasedontheassumptionthatcostand
revenuestructureswillnotchange.Overthelongterm,pricesmaybeincreased,
volumemaybeincreased,andcoststructurescanbeimproved.Hence,Joannas
recommendationshouldbetakenwithskepticism,andAireshouldexamineher
longtermprospectstoenhancerevenuesandreducecosts.

2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.

22

Chapter 9

PROBLEMS
35. a. CM%=($5,000$2,800$200)$5,000=40%
Breakeven=$280,0000.40=$700,000
b. FixedcostsinCGS=$400,000(100$2,800)=$120,000
Only$120,000offixedoverheadwasassignedtoCGS,thereforeunitssold=
$120,000$200,000ofunitsproduced=1000.6=167units(rounded)
c. Becausethecompanymanufacturedmoreunitsthanitsold,$80,000offixed
overheadwasassignedtoendinginventoriesratherthantheCostofGoods
Sold.Accordingly,thecompanyreportedbreakevenresultseventhoughsales
fellfarshortofthebreakevenlevel.
d.

Sales
Variablecosts
Production
Selling
Contributionmargin
Fixedcosts
Production
Selling&admin.
Operatingincome(loss)

$500,000
$280,000
20,000 (300,000)
$200,000
$200,000
80,000
(280,000)
$(80,000)

e. No,itwouldnotbeunethicaltopresenttheabsorptioncostingincomeformat.
Infact,thatisthemostacceptedformatforreportingoutsideofthefirm.The
lendinginstitution,withadequateinformationregardingtheinventories,can
adjusttheincomestatementtoavariablecostingformatifitdesirestodoso.

Sales
Variablecosts
Contributionmargin
b.

e.

DollarsperUnit Percent
$60.00
100%
(45.00)
(75)
$15.00
25%

Breakevenpoint=$975,000$15.00perunit=65,000carts

c.

Targetpretaxprofitof$900,000
($975,000+$900,000)$15.00percart=125,000carts

d.

Targetaftertaxprofitof$750,000
Beforetaxprofit=$750,000(10.40)=$1,250,000
($975,000+$1,250,000)$15percart=148,333carts(rounded)
Sellingprice
Variablecosts
Manufacturing($350.40)
Manufacturinglabor(0.60$350.90)
Selling
Contributionmargin

$60.00
14.00
18.90
10.00

$17.10

2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.

Chapter 9

Fixedcosts:
Manufacturing($975,0000.400.90)
Selling($975,0000.60)
Totalfixedcosts

$351,000
585,000

$936,000

Breakevenpoint=$936,00017.10=54,737carts(roundedup)
Thebreakevenpointwilldecreaseby10,263carts
f.

Targetunitsales600,0000.25=150,000carts
SalesVCFC=$1,350,000
LetX=variablecostperunit
($60150,000)150,000X$975,000 =$1,350,000
$9,000,000150,000X =$2,325,000
$6,675,000 =150,000X
X =$44.50
Variablecostswillneedtobereducedby$0.50($45.00$44.50).
Studentanswerswillvary.Nosolutionprovided.

Sales
Variablecosts
Contributionmargin
b.

Breakevenpointinunits=$1,250,000$2.50perunit=500,000baseballs

c.

Breakevenpointindollars=$1,250,0000.3846=$3,250,130

d.

e.

DollarsperUnit
Percent
$6.50
100.00%
(4.00)
(61.54)
$2.50
38.46%

MS,inunits=960,000500,000=460,000baseballs
MS,indollars=($6.50460,000)=$2,990,000
MS,percentage=$2,990,000$6,240,000=47.9%
Currentsales(960,000$6.50)
Variablecosts(960,000$4)
Contributionmargin
Fixedcosts
Incomebeforetaxes

$6,240,000
(3,840,000)

$2,400,000
(1,250,000)

$1,150,000

Degreeofoperatingleverage=$2,400,000$1,150,000=2.087
Percentageincreaseinincome=30%2.087=62.6%
f. Requiredsales=($1,250,000+$1,096,000)$2.50perbaseball=
938,400baseballs
g. Pretaxequivalentof$750,000=$750,000(10.40)=$1,250,000
Requiredsales=($1,250,000+$1,250,000)$2.50perbaseball=
1,000,000baseballs
2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.

24

Chapter 9

h. Breakevenpoint=($1,250,000+$50,000)$2.50perbaseball=
520,000baseballs
e.

Additionalsales($4.4020,000)
Additionalvariablecosts($4.2020,000)
Additionalcontributionmargin
Additionalfixedcosts
Additionalpretaxincome(loss)

$88,000
(84,000)
$4,000

(6,000)
$(2,000)

No,theordershouldnotbeacceptedasprofitswilldecreaseby$2,000.
Eventhoughnormalsaleswouldnotbeaffected,regularcustomersmayfind
outaboutthespecialdealandbecomeupsetbecausetheirpriceshavebeen
undercut. Alternatively, by making this onetime sale at a loss to this
customer,goodwillandfuturebusinessfromthiscustomercouldfollow.
38. a.Totalvariablecost=$28+$12+$8=$48
Contributionmarginperunit=$70$48=$22perunit
Contributionmarginratio=$22$70=31.4%(rounded)
Totalfixedcosts=$10,000+$24,000=$34,000
Breakevenpointinunits=$34,000$22perunit=1,545units(rounded)
Breakevenpointindollars=$34,0000.314=$108,280(rounded)
b.

($40,000+$34,000)0.314=$235,669(rounded)
($235,669$70)=3,367units(rounded)

c. Convertaftertaxearningstopretaxearnings:$40,000(10.40)=$66,667
Requiredsales=($66,667+$34,000)0.314=$320,596(rounded)
$320,596$70=4,580units(rounded)
d.

Converttheaftertaxrateofearningstoapretaxrateofearnings:
[20%(10.40)]=33.33%
BecausetheCM%isonly31.4%,nolevelofsaleswouldgeneratenetincome
equalto,onapretaxbasis,33.33%ofsales.

e.

Variablecostsavings(5,000$6.00)
Additionalfixedcosts
Decreaseinprofit

$30,000

(40,000)
$(10,000)

Thecompanyshouldnotbuythenewsewingmachine.
f.

ExistingCMperunit=$22
CMunderproposal=($700.90)$48=$15
TotalCMunderproposal(3,0001.30$15)
ExistingCM(3,000$22)
ChangeinCM
Changeinfixedcosts
Changeinnetearningsbeforetaxes

$58,500

(66,000)
$(7,500)
(10,000)
$(17,500)

2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.

Chapter 9

No,thesetwochangesshouldnotbemadebecausetheywouldlowerpretax
profitsby$17,500relativetoexistinglevels.
39.a.Revenues:
Gametickets($60,0000.08
Airlinetickets($9,0000.10)
Hotelbookings($14,0000.20)
Costs:
Advertising
Rent

Utilities
Other
Netloss
b.

$4,800
900
2,800

$8,500

$2,200
1,800
500
4,400

(8,900)

(400)

Increaseinrevenue($9,0000.400.10)
Increaseincost
Increaseinprofit

$360

(1,200)
$(840)

No,Weatherbyshouldnotincurthe$1,200ofadvertisingexpensebecauseit
wouldcauseprofittodropby$840.
c.

Increaseinrevenues:
Gameticket($8,0000.08)
Airlineticket($1,5000.10)
Hotelbooking($6,0000.20)
Increaseincosts:
Rustyscommission($1,9900.50)
Rustyswage
Increaseinprofits

$640
150
1,200
$995
400

$1,990
(1,395)
$595

Yes,WeatherbyshouldhireRustybecauseitwouldincreasehisprofitsby$595.
d.

Increaseinrevenues:
Airlinetickets($13,0000.10)
Increaseincosts:
Rustyscommission($1,3000.50)
Increaseinfixedcosts
Increase(decrease)

$1,300
$650
600

(1,250)
$50

Becausetherewasatleastaslightincreaseinprofits,Weatherbydidmakea
gooddecision.
40.a.TotalRevenue

2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.

26

Chapter 9

b.

c. Thebreakevenchartwouldprobablybemorehelpful.Thepointcouldbe
madethattheclubhasonly20membersinexcessofthebreakevenlevelof
100 members. Additional information should be provided indicating the
contributionmarginandcontributionmarginratio.Armedwiththechartand
theadditionalinformation,averygoodpointcouldbemadeforamembership
recruitingproject.
41. a. Totalsalespriceperbag:
Commercial($5,6001)
Residential($1,8003)
Totalvariablecostsperbag:
Commercial($3,8001)
Residential($1,0003)
Totalcontributionmargin

$5,600
5,400

$3,800
3,000

$11,000

(6,800)
$4,200

Breakevenpointinunits=$8,400,000$4,200=2,000bags
Commercial:2,0001=2,000mowers
Residential:2,0003=6,000mowers
b. ($8,400,000+$1,260,000)$4,200=2,300bags
Commercial:2,3001=2,300mowers
Residential:2,3003=6,900mowers
c.

Pretax equivalent of $1,008,000 aftertax = $1,008,000 (1 0.40) =

$1,680,000
($8,400,000+$1,680,000)$4,200=2,400bags
Commercial:2,4001=2,400mowers
2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.

Chapter 9

Residential:2,4003=7,200mowers
d. LetX=numberofbagsthatmustbesoldtoproducepretaxearnings
equaling12percentofsalesrevenue,then:
$4,200X$8,400,000 =0.12($11,000X)
X =2,917bags(rounded)
Commercial:2,9171=2,917mowers
Residential:2,9173 =8,751mowers
e. Converttheaftertaxreturntoapretaxrateofreturn:
0.08(10.40)=13%(rounded)
$4,200X$8,400,000 =0.13($11,000X)
X =3,032bags(rounded)
Commercial:3,0321=3,032mowers
Residential:3,0323 =9,096mowers
42.
a.

Ducks Ducklings
Sales
$24.00
$12.00
Variablecosts
(12.00)
(8.00)
Contributionmargin
$12.00
$4.00
Mix
1
5
Totalcontributionmargin
$12.00
$20.00
Theaveragecontributionmarginratiois$32$84=38.1%(rounded)
b. Breakevenpoint=$288,000$32=9,000bagsperyearor750bagsamonth
Ducks:7501=750permonth
Ducklings:7505=3,750permonth
c. Targetprofitis$96,00012=$1,152,000
($288,000+$1,152,000)$32=45,000bagsperyearor3,750bagsamonth.
Ducks:3,7501=3,750permonth
Ducklings:3,7505=18,750permonth

d.
Sales
Variablecosts
Contributionmargin
Mix
Totalcontributionmargin

Ducks Ducklings
$24.00
$12.00
(12.00)
(8.00)
$12.00
$4.00
1
9
$12.00
$36.00

Targetprofitaftertaxis$31,680.
Pretaxprofitis$31,680(10.40)=$52,800monthlyor$633,600peryear.
Breakeven=($633,600+$288,000)$48=19,200bagsperyear,or1,600
permonth
Ducks(19,200$24)
Ducklings(19,2009$12)
Total

Units
19,200
172,800

Revenue
$460,800
2,073,600

$2,534,400

2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.

28

Chapter 9

e. [$288,000+($8,50012)][$12+($85)]
($288,000+$102,000)$52=7,500
Yes,thecompanywouldwanttomakethechangebecausethebreakeven
pointisreducedfrom9,000mixunitsto7,500mixunits.
43.

a.andb.
Totalvariablecosts:
Variableproductcost
Variablesellingexpenses
Variableadministrativeexp.
Total

Sales
Variablecosts
Contributionmargin
Mix
Totalcontributionmargin

Reindeer
$12.00
6.00
3.00
$21.00

Snowmen
$15.00
4.50
5.50
$25.00

Flamingos
$25.00
8.00
6.00
$39.00

Reindeer
$40.00
(21.00)

$19.00
1
$19.00

Snowmen
$35.00
(25.00)

$10.00
2
$20.00

Flamingos
$60.00
(39.00)

$21.00
4
$84.00

Contributionmarginperbag=$19+20+$84=$123
Breakevenpointinunits=($420,000+$150,000+$80,178)$123
=5,286bags
Reindeer(5,286$40.00)
Snowmen(5,2862$35.00)
Flamingos(5,2864$60.00)
Total

UnitsSold
5,286
10,572
21,144

Revenues
$211,440
370,020
1,268,640

$1,850,100

c. Units=($650,178+$250,428)$123=7,322bags
Reindeer(7,322$40.00)
Snowmen(7,3222$35.00)
Flamingos(7,3224$60.00)
Total

UnitsSold
7,322
14,644
29,288

Revenues
$292,880
512,540
1,757,280

$2,562,700

d. Pretaxprofit=$155,718(10.40)=$259,530
Breakeveninunits=($650,178+$259,530)$123=7,396bags
Reindeer(7,396$40.00)
Snowmen(7,3962$35.00)
Flamingos(7,3964$60.00)

UnitsSold
7,396
14,792
29,584

Revenues
$295,840
517,720
1,775,040

2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.

Chapter 9

Total

$2,588,600

e. MSbags=7,396bags5,286bags=2,110bags
MS$=2,110[$40+($352)+($604)]=$738,500
MS%=2,1107,396=28.5%
44.

a.andb.
Totalvariablecosts:
Directmaterial
Directlabor
Variableoverhead
Variableselling
Variableadministrative
Total

Oak
$10.40
3.60
2.00
1.00
0.40
$17.40

Hickory
$6.50
0.80
0.30
0.50
0.20

$8.30

Determinationofsalesratio:
SalesinYards %ofSales
Oak
9,000
10.34
Hickory
72,000
82.76
Cherry
6,000

6.90
Total
87,000
100.00

Cherry
$17.60
12.80
3.50
4.00
0.60
$38.50

PerBag*
3
24
2

29

*Thecontentperbagisdeterminedbydividingthesalesinyardsby3,000.
Sales
Variablecosts
Contributionmargin
Oak
Hickory
Cherry
Total

Oak
Hickory Cherry
$32.80
$16.00
$50.00
(17.40)
(8.30) (38.50)
$15.40
$7.70
$11.50

ContributionMargin
$15.403=$46.20
$7.7024=184.80
$11.502=23.00
$254.00

Sales
$32.803=$98.40
$16.0024=384.00
$50.002=100.00
$582.40

Totalfixedcosts=$760,000+$240,000+$200,000=$1,200,000
Breakevenpointinunits=$1,200,000$254=4,724.409or4,725bags
Oak:4,7253=14,175squareyards
Hickory:4,72524=113,400squareyards
Cherry:4,7252=9,450squareyards
Contributionmarginratioperbag=$254$582.40=0.4(rounded)
Breakevenpointindollars=$1,200,0000.4=$3,000,000
c. ($1,200,000+$800,000)$254=7,875bags(rounded)
2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.

30

Chapter 9

Oak:
Hickory:
Cherry:
Total
d.

Yards
7,8753=23,625$32.80=
7,87524=189,00016.00=
7,8752=15,75050.00=

Revenue
$774,900
3,024,000
787,500
$4,586,400

Revenueperbag:
Oak($32.803)
Hickory($16.0024)
Cherry($50.002)
Total

$98.40
384.00
100.00
$582.40

Contributionmarginratio=$254$582.40=43.6%
{$1,200,000+[$680,000(10.40)]}0.436=$5,351,681
e. Breakevenpointindollars=$1,200,0000.436=$2,752,294
Marginofsafetyindollars=$5,351,681$2,752,294=$2,599,387
Marginofsafetypercentage=$2,599,387$5,351,681=48.6%

2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.

Chapter 9

45.
a.

Fixedcosts:
Depreciation
Labor
Utilities
Miscellaneous
Total
Variablecosts:
Labor
Utilities
Miscellaneous
Food
Total

$160,000
320,000
158,000
100,000

$738,000
Coaches
$5.00
1.00
6.00
40.00

$52.00

Players
$5.00
1.00
6.00
15.00

$27.00

Totalfixedcosts
$738,000
Totalvariablecosts
Coaches:(10$52.0036080%)
$149,760
Players:(50$27.0036080%)
388,800

538,560
Desiredprofit
240,000
Totalrequiredrevenue
$1,516,560
Guestdays:
Coaches:1036080%=
2,880
Players:5036080%=
14,400
Total
17,280
Requiredchargeperguestday:$1,516,56017,280=$87.76(rounded)
b.
(1)
Salespriceperday
Variablecosts
Contributionmargin

Coaches

Players

$240.00
52.00
$188.00

$200.00
27.00
$173.00

CMperbagofguestdays=$188.00+($173.004)=$880
Breakeven in bags = $738,000 $880 per bag = 839 (rounded) bags,
whichrepresents839coachdaysand3,356playerdays.
(2) ($738,000 + $400,000) $880 per bag = 1,293 (rounded) bags, which
represents1,293coachdaysand5,172playerdays.
(3) {$738,000+[$400,000(1 0.35)]}$880perbag=1,538(rounded)
bags,whichrepresents1,538coachdaysand6,152playerdays.
c. $500,000(839+3,356)=$119.19perguestday(rounded)
46. a.Contributionmargin=$140$60=$80perpassenger
Contributionmarginratio=$80$140=57.1%
2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.

32

Chapter 9

Breakevenpointinpassengers=FixedcostsContributionmargin=
$2,400,000$80perpassenger=30,000passengers
Breakevenpointindollars=FixedcostsContributionmarginratio=
$2,400,0000.571=$4,203,152
b. 600.75=45seatspertraincar
30,00045=667traincars(rounded)
c. CM=$170$60=$110perpassenger
600.60=36filledseats
Breakevenpointinpassengers=FixedcostsContributionmargin=
$2,400,000$110perpassenger=21,818passengers(rounded)
21,81836=606traincars(rounded)
d. Contributionmargin=$140$80=$60perpassenger
Breakevenpointinpassengers=FixedcostsContributionmargin=
$2,400,000$60perpassenger=40,000passengers
40,0004=889traincars(rounded)
e. Aftertaxincome

=$800,000(1Taxrate)
=$800,000(10.40)
=$800,0000.60
=$1,333,333

$160X$3,000,000$70X=$1,333,333
$90X=$4,333,333
X=48,148(rounded)
f. Numberofdiscountedseats=600.05=3seats
Contributionmarginfordiscountedfares=$100$60=$403discounted
seats=$120eachtrain40traincarsperday30dayspermonth=
$144,000$160,000additionalfixedcosts=$16,000pretaxloss.
g.(1) No.
Contributionmargin=$150$60=$90perpassenger
600.60=36seats$9015traincars=
$48,600
Increasedfixedcosts
(200,000)
Pretaxlossonnewroute
$(151,400)
(2) $150X$60X$200,000=$101,000
$90X=$301,000
X=3,345passengers(rounded)
3,34536=93traincars(rounded)
(3) 600.75=45seatsfilled
3,34545=74traincars(rounded)
(4) Fairbanksshouldconsidersuchthingsas:
connections to other Fairbanks trains that might be made by these
passengers
2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.

Chapter 9

longrangepotentialforincreasedloadfactors
increasedcustomergoodwillinthisnewmarket
increasedemploymentopportunitiesforlaborinthearea
competitioninthemarket

47. a. Breakevenpointinunits=FixedcostsContributionmargin
Contributionmargin=$94.00($18.40+$13.00+$8.60+$4.60+$3.00)
=$46.40
Breakevenpointinunits=($1,200,000+$960,000+$480,000)$46.40
=$2,640,000$46.40=56,897unitsor$5,348,318
b. Marginofsafety
Dollars=TotalsalesBreakevensales=(150,000$94)$5,343,318
=$14,100,000$5,343,318=$8,756,682
Units=150,00056,897=93,103
Percentage=93,103150,000=62%

Sales
Variablecost
Contribution
margin
Fixed
expenses
Netincome

Original
$14,100,000
(7,140,000)

1
$16,920,000
(11,160,000)

2
3
$16,215,000 $14,734,500
(8,211,000) (7,854,000)

$6,960,000

$5,760,000

$8,004,000

(2,640,000)
$4,320,000

(2,640,000)
$3,120,000

(3,160,000) (2,640,000)
$4,844,000 $4,240,500

$6,880,500

The best alternative is idea number 2; this is the plan management should
implement.
Olson
48. a.
IncomeStatements
2013
2014
Sales
$600,000
$960,000
a
Lessvariableexpense
(420,000)
(672,000)

Contributionmarginb
$180,000
$288,000
Lessfixedexpenses

(60,000)
(60,000)
Netincomebeforetaxc
$120,000
$228,000
Taxexpense
(48,000)
(91,200)
Netincome
$72,000
$136,800
Variableexpense=SalesContributionmargin
2013=$600,000$180,000=$420,000
2014=$960,000$288,000=$672,000

Contributionmargin=Netincomebeforetax+Fixedcosts
2013=$120,000+$60,000=$180,000

2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.

34

Chapter 9

2014=$228,000+$60,000=$288,000
Netincomebeforetax2013=$72,000(10.40)=$120,000
2014=$136,800(10.40)=$228,000

Sales
Lessvariableexpensea
Contributionmarginb
Lessfixedexpenses
Netincomebeforetaxc
Taxexpense
Netincome

Miami
IncomeStatements
2013
2014
$600,000
$840,000
(180,000)

(252,000)

$420,000
$588,000
(300,000)

(300,000)

$120,000
$288,000
(48,000)
(115,200)

$72,000
$172,800

Variableexpense=Saleslesscontributionmargin
2013=$600,000$420,000=$180,000
2014=$840,000$588,000=$252,000

Contributionmargin=Netincomebeforetax+Fixedcosts
2013=$120,000+$300,000=$420,000
2014=$288,000+$300,000=$588,000

Netincomebeforetax=
2013=$72,000(10.40)=$120,000
2014=$172,800(10.40)=$288,000

b. Breakevensales

2013

Olson
$60,000($180,000$600,000)
$60,000($288,000$960,000)

$200,000

Miami
$300,000($420,000$600,000)
$300,000($588,000$840,000)

428,572

2014
$200,000

428,572

c. Olson
Profitbeforetaxes=0.12(ofinvestment);taxrate=40%
=0.12($1,200,000)=$144,000
Profitaftertaxes =$144,000(10.4)=$240,000
($60,000+$240,000)0.30=$1,000,000
Miami
2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.

Chapter 9

Profitbeforetaxes=0.12(ofinvestment);taxrate=40%
=0.12($1,200,000)=$144,000
Profitaftertaxes =$144,000(10.4)=$240,000
($300,000+$240,000)0.70=$771,429
d. Marginofsafety=ActualsalesBreakevensales
Olson
2013
$600,000$200,000=$400,000
2014
$960,000$200,000=$760,000
Miami
2013
$600,000$428,572=$171,428
2014
$840,000$428,572=$411,428
Operatingleverage=ContributionmarginProfitbeforetax
Olson
2013
2014
Miami
2013
2014

$180,000$120,000=1.50
$288,000$228,000=1.26
$420,000$120,000=3.50
$588,000$288,000=2.04

e.

f.

Contributionmargin

Olson
$288,000

Miami
$588,000

Increase(1.15CM)
Lessfixedcosts
Netincomebeforetaxes
Taxes(40%)
Netincome

$331,200
(60,000)
$271,200
(108,480)

$162,720

$676,200

(300,000)
$376,200

(150,480)
$225,720

Contributionmargin

Olson
$288,000

Miami
$588,000

Decrease(0.80CM)
Lessfixedcosts
Netincomebeforetaxes
Taxes(40%)
Netincome

$230,400 $470,400

(60,000)
(300,000)
$170,400
$170,400

(68,160)
(68,160)
$102,240 $102,240

g. Olson

2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.

36

Chapter 9

Miami

49. a.DaytonCompany
IncomeStatement(VariableCosting)
Sales
Costofgoodssold
BeginningFG
CGM
Variableproduction
Availablegoods
EndingFG
Othervariablecosts
Contributionmargin
Fixedcosts
Production
Operating
Pretaxincome
Incometaxes
Netincome

FirstQtr.of2013
$4,500,000
$0

SecondQtr.of2013
$5,250,000
$588,000

4,116,000

3,528,000

$4,116,000
$4,116,000
(588,000)
(0)
342,000 (3,870,000) 399,000 (4,515,000)
$630,000
$735,000
$195,000
42,800

(237,800)
$392,200

(137,270)
$254,930

$195,000
42,800

(237,800)
$497,200

(174,020)
$323,180

b. 1.$75.00($58.80+$5.70)=$10.50

4.

2.

$10.50$75.00=14%

3.

260,000$10.50=$2,730,000
Contributionmargin

$2,730,000

2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.

Chapter 9

Fixedcosts[($195,000+$42,800)4]
Pretaxincome
Incometaxes(35%)
Netincome

951,200
$1,778,800
622,580
$1,156,220

5.

$2,730,000$1,778,800=1.5(rounded)

6.

$951,200$10.50perunit=90,590units(rounded)

7.

$951,2000.14=$6,794,286(rounded)

8.
9.

260,00090,590=169,410
169,410260,000=65%(rounded)
260,00090,590=169,410units

50. Accountantsdontbelievethattheirassumptionsareperfectlydescriptive,nordo
theybelievethattheyarereasonableforanypossiblelevelofactivity.Rather,
accountants only believe their assumptions are reasonably valid within a
relevantrangeofactivity.Thesimplifyingassumptionsarejustifiedbecausethey
allowtheaccountanttoworkwithlinearcostandrevenuefunctions,whichare
much more manageable than nonlinear functions. Significant time and effort
would be required to model nonlinear functions and the improvement in
predictabilitywouldlikelybesmall.Thus,theeffortwouldlargelybewasted.
51. a.AtlanticFishCompany
ContributionIncomeStatement
FortheYearEndedDecember31,2013
Sales
$3,600,000
Variablecosts:
Costofcod
$2,240,000
Shipping
160,000
Commissions
360,000 (2,760,000)
Contributionmargin
$840,000
Fixedcosts:
Sellingandadministrative

(650,000)
Incomebeforetax
$190,000
Incometaxexpense

(76,000)
Netincome
$114,000
b.

Sellingprice
Variablecostsperunit:
Costofcod
Shipping
Salescommissions
Contributionmargin

$9.00
$5.60
0.40
0.90

(6.90)
$2.10

Contributionmarginratio:$2.10$9.00=23.3%
2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.

38

Chapter 9

c. BEPu = FC CM per unit

BEPu = $650,000 $2.10 = 309,524 pounds (rounded)
BEP$ = 309,524$9.00=$2,785,716
Or
BEPu = FC CM%
BEPu = $650,000 0.233 = $2,789,700 (off due to rounding)
d.

Degreeofoperatingleverage:
DOL = CM Income before tax

DOL = $840,000 $190,000 = 4.4

Marginofsafety: Projected2013sales
Breakevensales
Marginofsafety

$3,600,000
(2,785,716)
$814,284

e. SalesincreaseDegreeofoperatingleverage=Projectedincreaseinprofit
beforeincometaxes
20%4.4=88%expectedincreaseinoperatingprofit
Projectedprofitbeforetaxes(a)
$190,000
Expectedincreaseinprofit($190,0000.88)

167,200
Expectedprofitbeforetaxesafter20%increase
$357,200

f. Convertdesiredaftertaxincometobeforetaxincome:Aftertaxincome(1
Taxrate)
$900,000(10.4)=$900,0000.6=$1,500,000
Poundsrequired:(Totalfixedcosts+Desiredbeforetaxprofit)CMper
pound
($650,000+$1,500,000)$2.10=$2,150,000$2.10=1,023,810pounds
(rounded)

2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.