CHAPTER 7

CHAPTER 7
Cost-Volume-Profit Analysis


Solutions to exercises


Exercise 7-23 (20 minutes)

1. Break-even point (in units) = [pic]

= [pic]= 13,500 pizzas


2. Contribution-margin ratio = [pic]

= [pic]= .4


3. Break-even point (in sales dollars) = [pic]


= [pic]= $135,000


4. Let X denote the sales volume of pizzas required to earn a target net
profit of $60,000.


$10X - $6X - $54,000 = $60,000


$4X = $114,000


X = 28,500 pizzas



Exercise 7-27 (25 minutes)


1. Break-even point (in units) = [pic]


= [pic]= 4,000 components


p denotes Argentina's peso.


2. New break-even point (in units) = [pic]


=[pic]= 4,200 components


3. Sales revenue (7,000 ( 1,500p) 10,500,000p
Variable costs (7,000 ( 1,000p) 7,000,000p
Contribution margin 3,500,000p
Fixed costs 2,000,000p
Net income 1,500,000p

4. New break-even point (in units) = [pic]


= 5,000 components


5. Analysis of price change decision:

| |Price |
| |1,500p |1,400p |
|Sales revenue: (7,000 ( 1,500p) | 10,500,000p| |
|(8,000 ( 1,400p) | |11,200,000p |
|Variable costs: (7,000 ( 1,000p) | | |
|(8,000 ( 1,000p) |7,000,000p |8,000,000p |
|Contribution margin | |3,200,000p |
|Fixed expenses |3,500,000p |2,000,000p |
|Net income (loss) |2,000,000p |1,200,000p |
| |1,500,000p | |



The price cut should not be made, since projected net income will
decline by 300,000p.


Exercise 7-28 (25 minutes)

1. (a) Traditional income statement:

Pacific Rim Publications, Inc.
Income Statement
For the Year Ended December 31, 20xx

Sales $2,000,000
Less: Cost of goods sold 1,500,000
Gross margin $ 500,000
Less: Operating expenses:
Selling expenses $150,000
Administrative expenses 150,000 300,000
Net income $ 200,000

(b) Contribution income statement:

Pacific Rim Publications, Inc.
Income Statement
For the Year Ended December 31, 20xx

Sales $2,000,000
Less: Variable expenses:
Variable manufacturing $1,000,000
Variable selling 100,000
Variable administrative 30,000
1,130,000
Contribution margin $ 870,000
Less: Fixed expenses:
Fixed manufacturing $ 500,000
Fixed selling 50,000
Fixed administrative 120,000 670,000
Net income $ 200,000


|2. |[pic] | |
| | | |
|3. |[pic] |
| | | |
| | |= 15% ( 4.35 |
| | |= 65.25% |

|4. |Most operating managers prefer the contribution income statement for |
| |answering this type of question. The contribution format highlights |
| |the contribution margin and separates fixed and variable expenses. |


Exercise 7-33 (20 minutes)


|1. |[pic] |
| | |
|2. |[pic] |


|3. |Service revenue required to |[pic] |
| |earn target after-tax income| |
| |of $120,000 | |
| | |
|4. |A change in the tax rate will have no effect on the firm's break-even |
| |point. At the break-even point, the firm has no profit and does not |
| |have to pay any income taxes. |


Solutions to Problems


Problem 7-34 (30 minutes)

|1. |Break-even point in sales dollars, using the contribution-margin |
| |ratio: |
| |[pic] |
| | |
|2. |Target net income, using contribution-margin approach: |
| |[pic] |
| | | |
|3. |New unit variable manufacturing|= $15 ( 120% |
| |cost | |
| | |= $18.00 |
| |Break-even point in sales | |
| |dollars: | |
| |[pic] |
|4. |Let P denote the selling price that will yield the same |
| |contribution-margin ratio: |
| |[pic] |
| | |
| |Check: New contribution-margin ratio is: |
| |[pic] |


Problem 7-35 (30 minutes)


|1. |[pic] |
| | |
|2. |[pic] |
| | | |
|3. |Number of sales units |[pic] |
| |required to earn target net | |
| |profit | |
| | | |
|4. |Margin of |= budgeted sales revenue - break-even sales revenue |
| |safety | |
| | |= (140,000)($25) - $3,375,000 = $125,000 |
| | |
|5. |Break-even point if direct-labor costs increase by 10 percent: |
| | | |
| |New unit contribution | = $25.00 - $8.20 - ($4.00)(1.10) - $6.00 - |
| |margin |$1.60 |
| | | = $4.80 |
| |Break-even point |[pic] |
|6. |Contribution-margin |[pic] |
| |ratio | |
| |Old contribution-margin |[pic] |
| |ratio | |
| | |
| |Let P denote sales price required to maintain a contribution-margin |
| |ratio of .208. Then P is determined as follows: |
| |[pic] |
| |Check: |New |[pic] |
| | |contribution- | |
| | |margin ratio | |

PROBLEM 7-37 (30 MINUTES)

1. Unit contribution margin:
|Sales | |$32.00|
|price..........................| | |
|............. | | |
|Less variable costs: | | |
|Sales commissions ($32 x |$ 1.60| |
|5%)...... | | |
|System variable | | |
|costs.................. |8.00 |9.60 |
|Unit contribution | |$22.40|
|margin.................... | | |


Break-even point = fixed costs ÷ unit contribution margin
= $1,971,200 ÷ $22.40
= 88,000 units


2. Model B is more profitable when sales and production average 184,000
units.

| |Model A |Model B |
| | | |
|Sales revenue (184,000 units x |$5,888,000|$5,888,000|
|$32.00)......... | | |
|Less variable costs: | | |
|Sales commissions ($5,888,000 x |$ |$ |
|5%)... |294,400 |294,400 |
|System variable | | |
|costs:........................ |