Solutions Ch04

CHAPTER 4
COST-VOLUME-PROFIT ANALYSIS:
A MANAGERIAL PLANNING TOOL
DISCUSSION QUESTIONS
1. CVP analysis allows managers to focus on 8. Packages of products, based on the
selling prices, volume, costs, profits, and expected sales mix, are defined as a single
sales mix. Many different what-if questions product. Selling price and cost information
can be asked to assess the effect of for this package can then be used to carry
changes in key variables on profits. out CVP analysis.
2. The units sold approach defines sales 9. This statement is wrong; break-even
volume in terms of units of product and analysis can be easily adjusted to focus on
gives answers in these same terms. The unit target profit.
contribution margin is needed to solve for
10. The basic break-even equation is adjusted
the break-even units. The sales revenue
for target profit by adding the desired target
approach defines sales volume in terms of
revenues and provides answers in these profit to the total fixed costs in the
same terms. The overall contribution margin numerator. The denominator remains the
ratio can be used to solve for the break-even contribution margin per unit.
sales dollars. 11. A change in sales mix will change the
3. Break-even point is the level of sales activity contribution margin of the package (defined
where total revenues equal total costs, or by the sales mix), and thus will change the
where zero profits are earned. units needed to break even.
4. At the break-even point, all fixed costs are 12. Margin of safety is the sales activity in excess
covered. Above the break-even point, only of that needed to break even. The higher the
variable costs need to be covered. Thus, margin of safety, the lower the risk.
contribution margin per unit is profit per unit,
provided that the unit selling price is greater 13. Operating leverage is the use of fixed costs
than the unit variable cost (which it must be to extract higher percentage changes in
for break even to be achieved). profits as sales activity changes. It is
achieved by increasing fixed costs while
5. Variable cost ratio = Variable costs/Sales lowering variable costs. Therefore, increased
Contribution margin ratio leverage implies increased risk, and vice
= Contribution margin/Sales versa.
Contribution margin ratio 14. Sensitivity analysis is a what-if technique
= 1 Variable cost ratio that examines the impact of changes in
underlying assumptions on an answer. A
6. No. The increase in contribution is $9,000 company can input data on selling prices,
(0.3 $30,000), and the increase in variable costs, fixed costs, and sales mix
advertising is $10,000. If the contribution
and set up formulas to calculate break-even
margin ratio is 0.40, then the increased
points and expected profits. Then, the data
contribution is $12,000 (0.4 $30,000). This
is $2,000 above the increased advertising can be varied as desired to see what impact
expense, so the increased advertising would changes have on the expected profit.
be a good decision. 15. A declining margin of safety means that
7. Sales mix is the relative proportion sold of sales are moving closer to the break-even
each product. For example, a sales mix of point. Profit is going down, and the
3:2 means that three units of one product possibility of loss is greater. Managers
are sold for every two of the second product. should analyze the reasons for the
decreasing margin of safety and look for
Copyright 2015 by Nelson Education Ltd. 4-1

ways to increase revenue and/or decrease
costs.

CORNERSTONE EXERCISES
Cornerstone Exercise 41
1. Variable cost per unit = Direct materials + Direct labour

+ Variable factory overhead + Variable selling expense
= $30 + $5 + $12 + $2
= $49
2. Total fixed expense = $14,000 + $15,400 = $29,400
3. Head-First Company
Contribution Margin Income Statement
For the Coming Year
Total Per Unit
Sales ($70 5,000 helmets).................................. $350,000 $70
Total variable expense ($49 5,000).................... 245,000 49
Total contribution margin...................................... 105,000 $21
Total fixed expense................................................ 29,400
Operating income ................................................. $ 75,600
Total fixed cost

1. Break-even units = (Price - Unit variable cost)
$29,400
= ($70 - $49)
= 1,400 helmets
At Break-Even
Total
Sales ($70 1,400 helmets)................................................... $98,000
Total variable expense ($49 1,400).................................... 68,600
Total contribution margin...................................................... 29,400
Total fixed expense................................................................ 29,400
Operating income................................................................... $ 0
4-4 Copyright 2015 by Nelson Education Ltd.

Variable cost per unit

1. Variable cost ratio = Price
$49
= $70
= 0.70, or 70%
(Price - Variable cost per unit)

2. Contribution margin ratio = Price
Contribution margin per unit

= Price
($70 - $49)
= $70
= 0.30, or 30%
For the Coming Year
Percent
of Sales
Sales ($70 5,000 helmets).................................. $350,000 100%
Total variable expense ($49 5,000).................... 245,000 70
Total contribution margin...................................... 105,000 30
Total fixed expense................................................ 29,400
Operating income ................................................. $ 75,600
Total fixed cost

1. Break-even sales dollars = Contribution margin ratio
$29,400
= 0.30
= $98,000

Cornerstone Exercise 44 (Concluded)
At Break-Even
Total
Sales........................................................................................ $98,000
Total variable expense ($98,000 0.70)............................... 68,600
(Total fixed cost + Target income)

1. Break-even units = (Price - Unit variable cost
($29,400 + $81,900)
= ($70 - $49)
= 5,300 helmets
At 5,300 Helmets Sold
Total
Sales ($70 5,300 helmets)................................................... $371,000
Total variable expense ($49 5,300).................................... 259,700
Operating income................................................................... $ 81,900
(Total fixed cost + Target income)

1. Sales for target income = Contribution margin ratio
($29,400 + $81,900)
= 0.30
= $371,000

At Sales Revenue of $371,000
Total
Sales........................................................................................ $371,000
Total variable expense ($371,000 0.70)............................. 259,700
Operating income................................................................... $ 81,900
3. A Contribution Margin Income Statement helps

managers make better decisions in that it focuses their
attention on those areas that are easiest to control.
Variable costs are usually more easily controlled than
fixed costs.
1. Any package with 5 bicycle helmets for every 1 motorcycle helmet is fine; for
example, 5:1, or 10:2, or 30:6. Throughout the rest of this exercise, we will use
5:1.
Unit Unit Package Unit

Variable Contribution Sales Contribution
Product Price Cost Margin Mix Margin
Bicycle helmet $ 70 $ 49 $21 5 $105
Motorcycle helmet 220 143 77 1 77
Package total $182

Fixed cost
2. Break-even packages = Package contributi on margin
$54,600
= $182
= 300 packages
Break-even bicycle helmets = Number of packages Sales mix amount

= 300 5
= 1,500
Break-even motorcycle helmets = Number of packages Sales mix amount

= 300 1
= 300
At Break-Even
Total
Sales [($70 1,500) + ($220 300)]...................................... $171,000
Total variable expense [($49 1,500) + ($143 300)]......... 116,400
($570,000 - $388,000)
1. Contribution margin ratio = $570,000
= 0.3193
Total fixed cost

Break-even sales dollars = Contributi on margin ratio
$54,600
= 0.3193

= $170,999
At Break-Even Sales Dollars
Total
Sales........................................................................................ $170,999
Total variable expense ($170,999 0.6807)......................... 116,399
1. Margin of safety in units = Budgeted units Break-even units

= 5,000 1,400
= 3,600
2. Margin of safety in sales revenue = Budgeted sales Break-even sales

= $350,000 $98,000
= $252,000
Total contribution margin

Degree of operating leverage = Operating income
$105,000 *
= $75,600
= 1.4
* 5,000 ($70 - $49)

1. Percent change in operating income = DOL % Change in sales

= 1.4 15%
= 21%
2. Expected operating income = Original income + (% Change Original income)

= $75,600 + (0.21 $75,600)
= $91,476

EXERCISES
Exercise 412
1. Direct materials...................................................................... $ 5.85

Direct labour........................................................................... 2.10
Variable overhead................................................................... 3.15
Variable selling and administrative expense...................... 2.40
Unit variable cost................................................................... $13.50
Unit contribution margin = Price Unit variable cost
= $24.00 $13.50
= $10.50
$10.50
2. Contribution margin ratio = $24 = 0.4375, or 43.75%
$13.50
Variable cost ratio = $24 = 0.5625, or 56.25%
3. Break-even units ($78,000 + $56,925) / ($24 - $13.50) = 12,850
4. Sales ($24 12,850)............................................................... $308,400

Variable costs ($13.50 12,850)........................................... 173,475
......................................................Total contribution margin
134,925
Less: Fixed expenses ($78,000 + $ 56,925)......................... 134,925
...................................................................Operating income $ 0
Exercise 413
1. Unit variable cost = $19.00 0.60 = $11.40
Unit contribution margin = $19.00 $11.40 = $7.60
$874,000
2. Break-even units = $7.60 = 115,000

Exercise 413 (Concluded)
3. Break-even sales revenue = $19.00 115,000 = $2,185,000

OR
$874,000
Break-even sales revenue = 0.40 = $2,185,000
4. Sales........................................................................................ $2,185,000
Less: Variable costs (0.6 x $2,185,000)................................ 1,311,000
Contribution margin............................................................... 874,000
Less: Fixed costs................................................................... 874,000
5. Break-even operations always result in a profit of zero.
Exercise 414
Contribution margin
1. Contribution margin ratio = Sales
$63,000
= $315,000 = 0.20, or 20%
2. Variable cost ratio = $252,000 / $315,000 = 0.80 or 80%

OR
Variable cost ratio = 1 Contribution margin ratio = 1.00 0.20 = 0.80
Fixed cost
3. Break-even sales revenue = Contribution margin ratio
$24,150
= 0.20 = $120,750

Exercise 415
1. Cameco CompanyIncome Statement for Last Year

Sales ($35 27,000)............................................................................ $945,000
Variable cost ($23.75 27,000)............................................. 641,250
303,750
Less: Fixed expenses............................................................ 315,000
Operating income (loss)........................................................ $ (11,250)
2. Break-even units = $315,000 / ($35.00 $23.75) = 28,000
3. Units to earn target income = ($315,000 + $24,750) / ($35.00 $23.75) =

30,200
Exercise 416
($131,650 + $18,350)
1. Break-even units = ($2.45 - $1.65)
$150,000
= $0.80
= 187,500
2. Unit variable cost includes all variable costs on a unit basis:

......................................................................Direct materials
$0.27
...........................................................................Direct labour
0.58
...................................................................Variable overhead
0.63
.......................................................................Variable selling
0.17
...................................................................Unit variable cost
$1.65
Unit variable manufacturing cost includes the variable costs of production on
a unit basis:
......................................................................Direct materials
$0.27
...........................................................................Direct labour
0.58

...................................................................Variable overhead
0.63
.........................................Unit variable manufacturing cost
$1.48
Unit variable cost is used in CVP because it includes all variable costs, not
just manufacturing costs.

($131,650 + $18,350 + $12,600)

3. Units to earn $12,600 = ($2.45 - $1.65)
= 203,250
4. Sales revenue to earn $12,600 = 203,250 $2.45 = $497,962.50

or
$131,650 + $18,350 + $12,600 = $162,600 .3265* = $498,009
*contribution margin ratio = ($2.45 - $1.65) $162,600 = .3265 (rounded)
Exercise 417
1. Break-even units = ($347,475 + $473,085) / ($9.42 - $5.48) = 208,264
2. Expected sales in units......................................................... 570,000

Break-even units.................................................................... (208,264)
Margin of safety (in units)..................................................... 361,736
3. Expected sales revenue ($9.42 570,000)........................... $5,369,400

Break-even sales revenue*.................................................... 1,961,847
Margin of safety (in dollars).................................................. $3,407,553
*Break-even revenue = Price Break-even units = $9.42 208,264 units

Exercise 418
A B C D
Sales $15,000 $15,600* $16,250* $10,600
Total variable costs 5,000 11,700 9,750 5,300*
Total contribution margin 10,000 3,900 6,500* 5,300*
Total fixed costs 9,500* 4,000 6,136* 4,452
Operating income (loss) $ 500 $ (100)* $ 364 $ 848
Units sold 3,000* 1,300 125 1,000

Price per unit $5.00 $12* $130 $10.60*
Variable cost per unit $1.67* $9 $78* $5.30*
Contribution margin per unit $3.33* $3 $52* $5.30*
Contribution margin ratio 67%* 25%* 40% 50%*
Break even in units 2,853* 1,333* 118* 840*
*Designates calculated amount.
(Note: Calculated break-even units that include a fractional amount have been
rounded to the nearest whole unit.)
Exercise 419
$141,750
1. Variable cost ratio = $315,000 = 0.45, or 45%
$173,250
Contribution margin ratio = $315,000 = 0.55, or 55%
2. Because all fixed costs are covered by break even, any revenue above break
even contributes directly to operating income.
Sales Contribution margin ratio = Increased operating income
$30,000 0.55 = $16,500
Therefore, operating income will be $16,500 higher.

$63,000
3. Break-even sales revenue = 0.55 = $114,545 (rounded to the nearest
dollar)
Sales........................................................................................ $114,545
Less: Variable cost ($114,545 0.45)................................... 51,545
...............................................................Contribution margin
63,000
Less: Fixed cost..................................................................... 63,000
...................................................................Operating income $
0
4. Expected sales....................................................................... $315,000

Break-even sales.................................................................... 114,545
......................................................................Margin of safety
$200,455
5. Sales revenue......................................................................... $280,000

Break-even sales.................................................................... 114,545
......................................................................Margin of safety
$165,455
Exercise 420
1. Sales mix is 2:1 (twice as many DVDs are sold as equipment sets).
2. Variable Sales Total

Product Price Cost = CM Mix = CM
DVDs $12 $4 $8 2 $16
Equipment sets 15 6 9 1 9
Total $25
$70,000
Break-even packages = $25 = 2,800
Break-even DVDs = 2 2,800 = 5,600
Break-even equipment sets = 1 2,800 = 2,800

Exercise 421
1. Sales mix is 2:1:4 (twice as many DVDs will be sold as equipment sets, and
four times as many yoga mats will be sold as equipment sets).

DVDs $12 $4 $8 2 $16
Equipment sets 15 6 9 1 9
Yoga mats 18 13 5 4 20
Total $45
$118,350
Break-even DVDs = 2 2,630 = 5,260
Break-even equipment sets = 1 2,630 = 2,630
Break-even yoga mats = 4 2,630 = 10,520
3. Switzer Company
Income Statement
For the Coming Year
Sales........................................................................................ $555,000
Less: Total variable costs..................................................... 330,000
225,000
Less: Total fixed costs........................................................... 118,350
...................................................................Operating income
$106,650
$225,000
Contribution margin ratio = $555,000 = 0.405, or 40.5%
$118,350
Break-even revenue = 0.405 = $292,222
4. Margin of safety = $555,000 $292,222 = $262,778

Exercise 422
1. Sales mix is 3:5:1 (three times as many small basics will be sold as carved
models, and five times as many large basics will be sold as carved models).

Small basic $180 $105 $75 3 $225
Large basic 300 225 75 5 375
Carved model 525 412 113 1 113
Total $713
$669,750
Break-even packages = $713 = 940 (rounded up)
Break-even small basic models = 3 940 = 2,820
Break-even large basic models = 5 940 = 4,700
Break-even carved models = 1 940 = 940
3. Sonora Company
Income Statement
For the Coming Year
Sales........................................................................................ $25,650,000
Less: Total variable costs..................................................... 18,520,000
7,130,000
Less: Total fixed costs........................................................... 669,750
6,460,250
$7,130,000
Contribution margin ratio = $25,650,00 0 = 0.2780, or 27.80%
$669,750
Break-even revenue = 0.2780 = $2,409,173
4. Margin of safety = $25,650,000 $2,409,173 = $23,240,827

Exercise 423
Break-even point = 2,500 units; + line is total revenue, and X line is total cost.

Exercise 423 (Continued)
2. a. Fixed costs increase by $5,000:
Break-even point = 3,750 units

2. b. Unit variable cost increases to $7:

2. c. Selling price increases to $12:

2. d. Both fixed costs and unit variable cost increase:
Exercise 424
$486,000
1. Unit contribution margin = 18,000 = $27
$540,000
Break-even units = $27 = 20,000 units
2. Operating income = 30,000 $27 = $810,000
$27
3. Contribution margin ratio = $60 = 0.45, or 45%
$540,000
Break-even sales revenue = 0.45 = $1,200,000
Profit = ($200,000 0.45) $54,000 = $36,000

Exercise 425
$1,833,300
1. Break-even sales dollars = 0.58 * = $3,160,862
$2,610,000
*Contribution margin ratio = $4,500,000 = 0.58, or 58%
2. Margin of safety = $4,500,000 $3,160,862 = $1,339,138
Contribution margin
3. Degree of operating leverage = Operating income
$2,610,000
= $776,700
= 3.36
4. Percent change in operating income = 3.36 0.20 = 0.67

New operating income = $776,700 + (0.67 $776,700) = $1,297,089
Exercise 426
1. Variable Sales Package

Vases $100 $75 $25 2 $ 50
Figurines 175 105 70 1 70
Total $120
$75,000
Break-even packages = $120 = 625
Break-even vases = 2 625 = 1,250
Break-even figurines = 1 625 = 625

2. The new sales mix is 3 vases to 2 figurines.

Variable Sales Package
Vases $100 $75 $25 3 $ 75
Figurines 175 105 70 2 140
Total $215
$88,150
Break-even packages = $215 = 410
Break-even vases = 3 410 = 1,230
Break-even figurines = 2 410 = 820
3. It is better to use contribution margin ratio in determining break-even for a

multi-product company because it makes the calculations easier when dealing
with sales mix.
Exercise 427
$6,720,000
1. a. Variable cost per unit = 350,000 = $19.20
$1,680,000
b. Contribution margin per unit = 350,000 = $4.80
$4.80
c. Contribution margin ratio = $24.00 = 0.20, or 20%
$1,512,000
d. Break-even units = $4.80 = 315,000
$1,512,000
e. Break-even sales dollars = 0.20 = $7,560,000
OR
Break-even sales dollars = 315,000 $24 = $7,560,000

($1,512,000 + $300,000)
2. Units for target income = $4.80 = 377,500
3. Additional operating income = $50,000 0.20 = $10,000
4. Margin of safety in units = 350,000 315,000 = 35,000 units

Margin of safety in sales dollars = $8,400,000 $7,560,000 = $840,000
$1,680,000
5. Degree of operating leverage = $168,000 = 10.0
6. New operating income = $168,000 + [(10 0.10) ($168,000)] = $336,000

PROBLEMS
Problem 428
Fixed cost
= $1,792,000 / ($50 -$30)
$1,792,000
= $20
= 89,600 units
2. Units for target profit = ($1,792,000 + $1,600,000) / $20
$3,392,000
= $20
= 169,600 units
$20
3. Contribution margin ratio = $50 = 0.40
With additional sales of $125,000, the additional profit would be 0.40

$125,000 = $50,000.
$6,200,000
4. Current units = = 124,000 units
$50
Margin of safety in units = 124,000 89,600 = 34,400 units

Problem 429
Fixed cost
$96,000
= ($10 - $5)
= 19,200 units
($96,000 - $13,500)
2. Break-even units = ($10 - $5)
= 16,500 units
3. The reduction in fixed costs reduces the break-even point because less
contribution margin is needed to cover the new, lower fixed costs. Operating
income goes up, and the margin of safety also goes up.
Problem 430
$5,760,000
1. Unit contribution margin = 384,000 = $15
$3,000,000
Break-even point = $15 = 200,000 units
$15
Contribution margin ratio = $50 = 0.3
$3,000,000
Break-even sales = 0.3 = $10,000,000
OR
= $50 200,000 = $10,000,000
2. Increased contribution margin ($3,000,000 0.3).............. $900,000

Less: Increased advertising expense.................................. 300,000
......................................................................Increased profit
$600,000

Problem 430 (Concluded)
3. $945,000 0.3 = $283,500
4. We can simply focus on increased sales revenue to determine profitability

because any increase in profit will automatically add the gross margin of
those sales to profit.
5. Margin of safety = $19,200,000 $10,000,000 = $9,200,000
$5,760,000
6. $2,760,000 = 2.09 (operating leverage)
20% 2.09 = 41.8% (profit increase)
Problem 431
1. Sales mix:
$300,000
Squares: $30 = 10,000 units
$2,500,000
Circles: $50 = 50,000 units
Variable Contribution Sales Total

Product Price Cost* = Margin Mix = CM
Squares $30 $10 $20 1 $ 20
Circles 50 10 40 5 200
Package $220
$100,000
* 10,000 = $10
$500,000
50,000 = $10
$1,628,000
Break-even packages = $220 = 7,400 packages
Break-even squares = 7,400 1 = 7,400

Break-even circles = 7,400 5 = 37,000

2. New mix:
Product Price Cost = Margin Mix = CM
Squares $30 $10 $20 3 $ 60
Circles 50 10 40 5 200
Package $260
$1,628,000
Break-even packages = $260 = 6,262 packages
Break-even squares = 6,262 3 = 18,786
Break-even circles = 6,262 5 = 31,310
3. Increase in contribution margin for squares (25,000 $20) $

500,000
Decrease in contribution margin for circles (5,000 $40). (200,000)
...................................Increase in total contribution margin
300,000
Less: Additional fixed expenses.......................................... 245,000
.................................................................Increase in income $
55,000
Kenno would gain $55,000 by increasing advertising for the squares. This
is a good strategy.
Problem 432
$58,500
1. Break-even units = ($0.36 - $0.27) = 650,000
Margin of safety in units = 830,000 650,000 = 180,000
2. Sales revenue ($0.36 830,000)........................................... $298,800

Total variable cost ($0.27 830,000).................................... 224,100
74,700
16,200
($58,500 + $36,000)
3. Units for target profit = ($0.36 - $0.27)

= 1,050,000

4. Operating income = Sales (Variable cost ratio Sales) Fixed cost

0.20 Sales = Sales (0.75 Sales) $58,500
0.20 Sales = 0.25 Sales $58,500
$58,500 = (0.25 Sales 0.20 Sales)
$58,500 = 0.05 Sales
Sales = $1,170,000
Problem 433
$302,616
1. Contribution margin ratio = $560,400 = 0.54, or 54%
$150,000
2. Break-even revenue = 0.54 = $277,778
3. $560,400 110% = $616,440

$257,784 110% = 283,562
$332,878
$332,878
Contribution margin ratio = $616,440 = 0.54
The contribution margin ratio remains at 0.54.
4. Additional variable expense: $560,400 0.03 = $16,812

New contribution margin = $302,616 $16,812 = $285,804
$285,804
New contribution margin ratio = $560,400 = 0.51
$150,000
Break-even revenue = 0.51 = $294,118
The effect is to increase the break-even revenue.

5. Present contribution margin................................................. $302,616

Projected contribution margin*............................................ 326,604
Increase in contribution margin/profit................................. $ 23,988
*($560,400 + $80,000) 0.51 = $326,604
Operating leverage will decrease from 19.8 ($302,616/$152,616) to 18.5

($326,604/$176,604) because the increase in the contribution margin of $23,988
is exactly equal to the increase in the operating income, which results in a
decrease in the operating leverage.
Alonzo should pay the commission because profit would increase by $23,988.
Problem 434
Fixed cost
1. Revenue = (1 - Variable rate)
$150,000
= (1/3)
= $450,000
2. Of total sales revenue, 60 percent is produced by floor lamps and 40 percent

by desk lamps.
$360,000
$30 = 12,000 units
$240,000
$20 = 12,000 units
Thus, the sales mix is 1:1.


Floor lamps $30 $20.00 $10.00 1 $10.00
Desk lamps 20 13.33 6.67 1 6.67
Package $16.67
Fixed cost
Number of packages = (Package contribution margin)
$150,000
= $16.67
= 8,998 packages
Floor lamps: 1 8,998 = 8,998

Desk lamps: 1 8,998 = 8,998
Contribution margin
3. Operating leverage = Operating income
$200,000
= $50,000
= 4.0
Percentage change in profits = 4.0 40% = 160%

4. The theory behind the operating leverage concept is that a company will
increase its profit in direct relationship to the relationship between its fixed
costs and its variable costs. The more fixed costs a company has the more
impact an increase in revenues will have on profit because its fixed costs have
been covered.
Problem 435
1. Door Handles Trim Kits

CM $12 $9 = $3 $8 $5 = $3
CM ratio $3/$12 = 0.25 $3/$8 = 0.375

2. Contribution margin:
($3 20,000) + ($3 40,000) $180,000
Less: Fixed costs 146,000
Operating income $ 34,000
3. Sales mix (from Requirement 2): 1 door handle to 2 trim kits
Price V = CM Sales Mix = Total CM

Door handle $12 $9 $3 1 $3.00
Trim kit 8 5 3 2 6.00
Package $9.00
$146,000
Door handles = 1 16,222 = 16,222
Trim kits = 2 16,222 = 32,444
4. Revenue (70,000 $8)............................................................ $560,000

Variable cost (70,000 $5)..................................................... 350,000
210,000
Fixed costs.............................................................................. 111,000
99,000
Yes, operating income is $65,000 higher than when both door handles and trim
kits are sold.

Problem 436
$300,000
1. Break-even units = $14* = 21,429
$406,000
* 29,000 = $14
Break-even in dollars = 21,429 $42** = $900,018

OR
$300,000
= (1/3) = $900,000
The difference is due to rounding.
$1,218,000
** 29,000 = $42
2. Margin of safety = $1,218,000 $900,000 = $318,000
3. Sales........................................................................................ $1,218,000
Variable cost (0.45 $1,218,000).......................................... 548,100
669,900
Fixed costs.............................................................................. 550,000
119,900
$550,000
Break-even in units = $23.10* = 23,810
$550,000
Break-even in sales dollars = 0.55** = $1,000,000
$669,900
* 29,000 = $23.10
$669,900
** $1,218,000 = 55%

Problem 437
Variable costs
1. Variable cost ratio = Sales
$353,400
= $930,000 = 0.38, or 38%
(Sales - Variable costs)
Contribution margin ratio = Sales
($930,000 - $353,400)
= $930,000
= 0.62, or 62%
$310,000
2. Break-even sales revenue = 0.62 = $500,000
3. Margin of safety = Sales Break-even sales

= $930,000 $500,000 = $430,000
4. Contribution margin from increased sales = ($7,500)(0.62) = $4,650

Cost of advertising = $5,000
No, the advertising campaign is not a good idea, because the companys
operating income will decrease by $350 ($4,650 $5,000).
Problem 438
1. Income = Revenue Variable cost Fixed cost

$0 = 1,500P $300(1,500) $120,000
$0 = 1,500P $450,000 $120,000
$570,000 = 1,500P
P = $380
$160,000
2. ($3.50 - Unit variable cost) = 128,000
Unit variable cost = $2.25

Problem 439
1. Contribution margin per unit = $5.60 $4.20*

= $1.40
*Variable costs per unit:
$0.70 + $0.35 + $1.85 + $0.34 + $0.76 + $0.20 = $4.20
$1.40
Contribution margin ratio = $5.60 = 0.25
($32,300 + $12,500)
2. Break-even in units = $1.40 = 32,000 boxes
Break-even in sales = 32,000 $5.60 = $179,200
OR
($32,300 + $12,500)
= 0.25 = $179,200
3. Sales ($5.60 35,000)............................................................ $196,000

Variable cost ($4.20 35,000)............................................... 147,000
49,000
Fixed cost................................................................................ 44,800
4,200
4. Margin of safety = $196,000 $179,200 = $16,800
$44,800
5. Break-even in units = ($6.20 - $4.20) = 22,400 boxes
New operating income = $6.20(31,500) $4.20(31,500) $44,800
= $195,300 $132,300 $44,800 = $18,200
Yes, operating income will increase by $14,000 ($18,200 $4,200).
Problem 440
$100,000
1. Company A: $50,000 = 2

$300,000
Company B: $50,000 = 6

2. Company A Company B
$50,000 $250,000
X = (1 - 0.8) X = (1 - 0.4)
$50,000 $250,000
X= 0.2 X= 0.6
X = $250,000 X = $416,667
Company B must sell more than Company A to break even because it must
cover $200,000 more in fixed costs (it is more highly leveraged).
3. Company A: 2 50% = 100%

Company B: 6 50% = 300%
The percentage increase in profits for Company B is much higher than

Company As increase because Company B has a higher degree of operating
leverage (i.e., it has a larger amount of fixed costs in proportion to variable
costs as compared to Company A). Once fixed costs are covered, additional
revenue must cover only variable costs, and 60 percent of Company Bs
revenue above break even is profit, whereas only 20 percent of Company As
revenue above break even is profit.
Problem 4-41
1. Total sales = $500,000 + $1,080,000 + $2,760,000 + $3,600,000 = $7,940,000
Total variable costs = $300,000 + $630,000 + $1,650,000 + $2,350,000 + $25,000

+ $150,000 + $240,000 + $213,000 = $5,558,000
Contribution margin = $7,940,000 - $5,558,000 = $2,382,000
Contribution margin % = $2,382,000 / $7,940,000 = 30%
Total fixed costs = $25,000 + $220,000 + $300,000 + $300,000 + $64,200 +

$50,000 + $50,000 + $150,000 + $270,000 = $1,429,200
Revenue needed to break-even = $1,429,200 /.30 = $4,764,000

Problem 4-41 (Continued)
2. Contribution Margin Per Product
Product A Product B Product C Product D

Revenue $500 $1,800 $9,200 $36,000
Variable
Product 300 1,050 5,500 23,500
Sell/Admin 25 250 800 2,130
Contribution $175 $ 500 $2,900 $10,370
Package of products: A= 10; B= 6; C= 3; D= 1
Contribution per package: (10 x 175) + (6 x 500) + (3 x 2,900) + (1 x 10,370) =

$23,820
Packages required to break-even:
Fixed costs ($1,429,200) divided by contribution per package ($23,820) = 60.
Quantity of each product: A=60 x 10 = 600; B= 60 x 6 = 360; C= 60 x 3 = 180; D=

60 x 1 = 60.
Calculation to check: Revenue = (600 x $500) + (360 x $1,800) + (180 x $9,200) +

(60 x $36,000) = $300,000 + $648,000 + $1,656,000 + $2,160,000) = $4,764,000.
3. After-tax profit of $1,625,000 is pre-tax profit of ($1,625,000 divided by (1 - .35))

or $2,500,000.
Fixed costs plus target profit = $1,429,200 + $2,500,000 = $3,929,200.
Target revenues = $3,929,200 divided by gross margin percentage of .30 or

$13,096,667.

Problem 4-41 (Concluded)
4. After-tax profit of $1,300,000 is pre-tax profit of $2,000,000.
Target units are calculated by taking the fixed costs plus the target pre-tax
profit divided by the contribution margin per package and then calculating the
number of each unit in a package.
Fixed costs ($1,429,200) plus target profit ($2,000,000) = $3,429,200.
Target packages: $3,429,200 / $23,820 = 144 packages (rounded)
By product: A: 10 x 144 = 1440; B: 6 x 144 = 864; C: 3 x 144 = 432; D: 1 x 144 =

144.

Problem 442
1. Contribution margin calculated in Problem 4-41 was:
Revenue $7,940,000
Less: Variable costs 5,558,000
Contribution $2,382,000
Revised contribution margin

Revenue $7,940,000
Less: Variable costs 6,113,800
Contribution $1,826,200
Contribution margin % 23%
Revised contribution margin by product
Product A: $500 [1.1 (300 + 25)] = $ 142.50

Product B: $1,800 [1.1 ($1,050 + 250)] = $ 370.00
Product C: $9,200 [1.1 ($5,500 + $800)] = $2.270.00
Product D: $36,000 [1.1 ($23,500 + $2,130)] = $7,807.00
Revised contribution by package
Product A: 10 x $142.50 = $ 1,425

Product B: 6 x $370.00 = $ 2,220
Product C: 3 x $2,270.00 = $ 6.810
Product D: 1 x $7,807.00 = $ 7,807
Total revised package contribution $18,262
Revised fixed costs $1,429,200 + $1,000,000 = $2,429,200
Revised breakeven in revenues: $2,429,200 /.23 = $10,561,739
Revised packages to breakeven: $2,429,200 / $18.262 = 133 packages (rounded)
Per product: A: 133 x 10 = 1,330; B: 133 x 6 =798; C: 133 x 3 =399; D: 133 x 1 = 133.

2. Revised sales revenue = ($500 x 900) + ($1,800 x 400) + ( $9,200 x 500) +

($36,000 x 200) = $12,970,000
Revised contribution
Product A $142.50 x 900 = $128,250
Product B $370.00 x 400 = $148,000
Product C $2,270 x 500 = $1,135,000
Product D $7,807 x 200 = $1,561,400
Total revised contribution $2,972,650
Revised contribution margin % = $2,972,650 / $12,970,000 = 22.92%
New break even in revenue: $2,429,200 / 22.92% = $10,598,604
Revised sales mix is: A; 9; B: 4; C: 5; D: 2
Revised package contribution: (9 x $142.50) + (4 x $370) + (5 x $2,270) + (2

$7,807) = $29,727 (rounded)
Revised packages to breakeven: $2,429,200 / $29,727 = 82 packages (rounded)
Revised units to break even: A: 82 x 9 = 738; B: 82 x 4 = 328; C: 82 x 5 = 410; D:

82 x 2 = 164.
3. Using the changes outlined in part 1:
Pre-tax net income is: $2,470,000 / .65 = $3,800,000
Fixed cost plus target income = $2,429,200 + $3,800,000 = $6,229,200
Revenue to meet new target: $6,229,200 / .23 (from 1 above) = $27,083,478
Using changes outlined in part 2:
Fixed costs plus target pre-tax income = $6,229,200
New contribution margin % (from 2 above) = 22.92%
Revenues needed to meet target: $6,229,200 / .2292 = $27,178,010

Problem 443
1. Contribution margin ratios:
$23,910
May of current year = $43,560 = 0.549, or 54.9%
$23,400
May of prior year = $41,700 = 0.561, or 56.1%
2. Break-even point in sales dollars (in thousands):
$20,330
May of current year = 0.549 = $37,031
$13,800
May of prior year = 0.561 = $24,599
3. Margin of safety (in thousands):

May of current year = $43,560 $37,031 = $6,529
May of prior year = $41,700 $24,599 = $17,101
4. Clearly, the sharp rise in fixed costs from the prior year to the current year has
had a strong impact on the break-even point and the margin of safety.
Bissonette will need to ensure that tight cost control is exercised since the
margin of safety is much slimmer. Still, the decision to go with the OEM
investment program could pay large dividends in the future. Note that the
margin of safety and break-even point give the company important information
on the potential risk of the venture but do not tell it the upside potential.

PROFESSIONAL EXAMINATION PROBLEM1
Professional Examination Problem 444
a. CM/unit = $4 - $2.40 = $1.60

After-tax net income = [(390,000 1.60) - $440,000].6
= ($624,000 $440,000).6
= $110,400
b. $440,000 / $1.60
= 275,000 boxes
c. Current CM ratio = $1.60 / $4 = 40%

New variable costs = $2 1.15 + $0.40 = $2.70
Let SP = new selling price

(SP - $2.70) / SP = 0.4
SP - $2.70 = 0.4SP
SP 0.4SP = $2.70
0.6SP = $2.70
SP = $4.50
d. CM = $4 - $2.70 = $1.30
CM ratio = $1.30 / $4 = 32.5%
Desired operating income = $110,400 / .6 = $184,000
Desired sales volume = ($184,000 + $440,000) / 0.325

= $1,920,000
e. Let X = volume of boxes
1.30X 440,000 = $4X(0.10) / 0.60

1.30X 440,000 = 0.6667X
0.6333X = $440,000
X = $440,000 / 0.6333
= 694,737 boxes
1 2010 CMA Ontario. Reproduced with Permission.

CASES
Case 445
1.Let X be a package of 3 Grade I cabinets and 7 Grade II cabinets.
0.3X($3,400) + 0.7X($1,600) = $1,600,000
X = 748 packages
Grade I: 0.3 748 = 224 units
Grade II: 0.7 748 = 524 units
2. Variable Contribution Sales Total

I $ 3,400 $ 2,686 $714 3 $2,142
II 1,600 1,328 272 7 1,904
Package 21,400 17,354 $4,046
Direct fixed costs I $ 95,000

Direct fixed costs II 95,000
Common fixed costs 35,000
Total fixed costs $225,000
$225,000
$4,046 = 56 packages
Grade I: 3 56 = 168
Grade II: 7 56 = 392

Case 445 (Continued)

I $ 3,400 $ 2,444 $956 3 $2,868
II 1,600 1,208 392 7 2,744
Package 21,400 15,788 $5,612
$21,400X = $1,600,000 $600,000
X = 47 packages remaining
Grade I: 3 47 = 141
Grade II: 7 47 = 329
Additional contribution margin:
141($956 $714) + 329($392 $272) $73,602
Increase in fixed expenses 44,000
Increase in operating income $29,602
($225,000 + $44,000)
Break-even point: $5,612 = 48 packages
Grade I: 3 48 = 144
Grade II: 7 48 = 336
If the new break-even point is the revised break-even point for the current
year, therefore total fixed costs must be reduced by the contribution margin
already earned (through the first five months) to obtain the units that must be
sold for the last seven months. These units would then be added to those sold
during the first five months:
Contribution margin earned = $600,000 (83* $2,686) (195* $1,328)
= $118,102
*224 141 = 83; 524 329 = 195
($225,000 + $44,000 - $118,102)
X= $5,612 = 27 packages
From the first five months, 28 packages were sold (83/3 or 195/7). Thus, the
revised break-even point is 55 packages (27 + 28)in units, 165 of I and 385 of
II.

Case 445 (Concluded)

I $3,400 $2,686 $714 1 $714
II 1,600 1,328 272 1 272
Package 5,000 4,014 $986
New 7-month sales revenue $1,000,000 130% = $1,300,000
$5,000X = $1,300,000
X = 260 packages
Thus, 260 units of each cabinet will be sold during the rest of the year.
Effect on profits:
Change in contribution margin:
$714(260 141) $272(329 260) $66,198
Increase in fixed costs:
$70,000(7/12) 40,833
Increase in operating income $25,365
Fixed cost
X = (Price - Variable cost)
$295,000
= $986
= 299 packages (or 299 of each cabinet)
The break-even point is computed as follows:
($295,000 - $118,102)
X = $986
$176,898
= $986
= 179 packages (179 of each)
To this, add the units already sold, yielding the revised break-even point:
I: 83 + 179 = 262
II: 195 + 179 = 374

Case 446
Per-unit product contribution analysis
T-shirts Sweatshirts Fleece
Jackets
Revenue $6.50 $16.00 $38.50
Materials 1.50 3.00 12.00
Direct labour 2.50 3.00 8.00
Variable selling 0.65 1.60 3.85
Contribution 1.85 8.40 14.65
Product per package 5 3 2
Contribution per package $9.25 $25.20 $29.30
Package revenues = ($6.50 x 5) + ($16.00 x 3) + ($38.50 x 2) = $157.50
Total contribution per package = $9.25 + $25.20 + $29.30 = $63.75
Contribution margin % = $63.75 / $157.50 = 40.48%
Fixed costs: $300,000 + $150,000 + $250,000 = $700,000
Break-even revenues = Fixed costs / contribution margin %
Break-even revenues = $700,000 / .4048 = $1,729,249
Target profit of $140,000 after tax is ($140,000 /.6) = $233,333 pre-tax.
Revenue to achieve target = profit fixed costs plus pre-tax target / Contribution
margin %
Revenue is $700,000 + $233,333 / .4048 = $2,305.665
Packages to achieve break-even $700,000 / $63.75 = 10,981

Units: 54,905 t-shirts (10,981 x 5); 32,943 sweatshirts (10,981 x 3); 21,962 fleece
(10,981 x 2).
Packages to achieve target profit $933,333 / $63.75 = 14,641
Units: 73,105 t-shirts (14,641 x 5); 43,863 sweatshirts (14,641 x 3); 29,242 fleece
(14,641 x 2).
Case 447
Fixed expense
1. Break-even point =
(Price-Variable cost)
$100,000
First process: ($30 - $10) = 5,000 cases
$200,000
Second process: ($30 - $6) = 8,333 cases
2. Income = X(Price Variable cost) Fixed cost

X($30 $10) $100,000 = X($30 $6) $200,000
$20X $100,000 = $24X $200,000
$100,000 = $4X
X = 25,000 cases
The manual process is more profitable if sales are less than 25,000 cases; the
automated process is more profitable at a level greater than 25,000 cases. It is
important for the manager to have a sales forecast to help in deciding which
process should be chosen.

3. The right to decide which process should be chosen belongs to the divisional
manager. Donna has an ethical obligation to report the correct information to
her superior. By altering the sales forecast, Donna unfairly and unethically
influenced the decision-making process. Managers certainly have a moral
obligation to assess the impact of their decisions on employees, and every
effort should be taken to be fair and honest with employees. Donnas
behaviour, however, is not justified by the fact that it helped a number of
employees retain their employment. First, Donna had no right to make that
decision. Donna certainly has the right to voice her concerns about the impact
of automation on the employees well-being. In so doing, perhaps the
divisional manager would come to the same conclusion, even though the
automated system appears to be more profitable. Second, the choice to select
the manual system may not be the best for the employees anyway. The
divisional manager may possess more information, making the selection of
the automated system the best alternative for all concerned, provided the
sales volume justifies its selection. For example, if the automated system is
viable, the divisional manager may have plans to retrain and relocate the
displaced workers in better jobs within the company. Third, her motivation for
altering the forecast seems more driven by her friendship with Hussan Khalil
than any legitimate concerns for the layoff of other employees. Donna should
examine her reasoning carefully to assess the real reasons for her behaviour.
Perhaps in so doing, the conflict of interest that underlies her decision will
become apparent.

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CHAPTER 4

Copyright 2015 by Nelson Education Ltd. 4-1

Copyright 2015 by Nelson Education Ltd. 4-3

1. Variable cost per unit = Direct materials + Direct labour

2. Total fixed expense = $14,000 + $15,400 = $29,400

Total fixed cost

4-4 Copyright 2015 by Nelson Education Ltd.

Variable cost per unit

(Price - Variable cost per unit)

Contribution margin per unit

Total fixed cost

Copyright 2015 by Nelson Education Ltd. 4-5

(Total fixed cost + Target income)

(Total fixed cost + Target income)

4-6 Copyright 2015 by Nelson Education Ltd.

3. A Contribution Margin Income Statement helps

Unit Unit Package Unit

Copyright 2015 by Nelson Education Ltd. 4-7

Break-even bicycle helmets = Number of packages Sales mix amount

Break-even motorcycle helmets = Number of packages Sales mix amount

Total fixed cost

4-8 Copyright 2015 by Nelson Education Ltd.

Cornerstone Exercise 48 (Concluded)

1. Margin of safety in units = Budgeted units Break-even units

2. Margin of safety in sales revenue = Budgeted sales Break-even sales

Cornerstone Exercise 410

Total contribution margin

Copyright 2015 by Nelson Education Ltd. 4-9

1. Percent change in operating income = DOL % Change in sales

2. Expected operating income = Original income + (% Change Original income)

4-10 Copyright 2015 by Nelson Education Ltd.

1. Direct materials...................................................................... $ 5.85

3. Break-even units ($78,000 + $56,925) / ($24 - $13.50) = 12,850

4. Sales ($24 12,850)............................................................... $308,400

1. Unit variable cost = $19.00 0.60 = $11.40

Unit contribution margin = $19.00 $11.40 = $7.60

Copyright 2015 by Nelson Education Ltd. 4-11

3. Break-even sales revenue = $19.00 115,000 = $2,185,000

5. Break-even operations always result in a profit of zero.

2. Variable cost ratio = $252,000 / $315,000 = 0.80 or 80%

4-12 Copyright 2015 by Nelson Education Ltd.

1. Cameco CompanyIncome Statement for Last Year

2. Break-even units = $315,000 / ($35.00 $23.75) = 28,000

3. Units to earn target income = ($315,000 + $24,750) / ($35.00 $23.75) =

2. Unit variable cost includes all variable costs on a unit basis:

Copyright 2015 by Nelson Education Ltd. 4-13

4-14 Copyright 2015 by Nelson Education Ltd.

($131,650 + $18,350 + $12,600)

4. Sales revenue to earn $12,600 = 203,250 $2.45 = $497,962.50

1. Break-even units = ($347,475 + $473,085) / ($9.42 - $5.48) = 208,264

2. Expected sales in units......................................................... 570,000

3. Expected sales revenue ($9.42 570,000)........................... $5,369,400

Copyright 2015 by Nelson Education Ltd. 4-15

Units sold 3,000* 1,300 125 1,000

4-16 Copyright 2015 by Nelson Education Ltd.

4. Expected sales....................................................................... $315,000

5. Sales revenue......................................................................... $280,000

2. Variable Sales Total

Copyright 2015 by Nelson Education Ltd. 4-17

2. Variable Sales Total

4. Margin of safety = $555,000 $292,222 = $262,778

4-18 Copyright 2015 by Nelson Education Ltd.

2. Variable Sales Total

4. Margin of safety = $25,650,000 $2,409,173 = $23,240,827