CVP Analysis Practice Problem 1

Chad's Chocolates produces premium chocolate candy. For Easter, Chad's produces and sells
20,000 boxes of a special collection of chocolates that sell for $50 a box. Costs for producing a
box of the chocolates are as follows:
Direct Material
Direct Labor
MOH, variable
Variable S,G, & A
MOH, fixed
Fixed S, G, & A

$18
$15
$ 7
$ 4
$ 75,000
$ 15,000

Unless otherwise instructed, return to this original data for each problem.
1. What is Chad's break-even point in units? in dollars?

2. Chad has just received notice from his chocolate supplier that prices have been reduced by
20%. What is the new break-even point in units? in dollars?

7-1

7-2

3. Chad has just completed union negotiations that resulted in a 10% increase in the wage rates
for his direct laborers. What is the new break-even point in units? in dollars?

4. Chad has just been approached by his marketing vice-president who says that if we spend
$25,000 on extra advertising in The Lariat, we can increase our sales by 15% (in terms of
units). Should Chad advertise in The Lariat?

5. Chad has just received a brochure in the mail describing a new candy press that sells for
$35,000. Chad believes that the machine will last for 5 years and will have no salvage value.
The new press will decrease the required direct labor by 10%. Should Chad invest in the new
machine?

7-3

7-4

6. The marketing department has developed a new pricing policy calling for a 15% increase in
current prices. Research indicates that this will result in a 5% decrease in our sales volume.
What is the effect of the new pricing policy on the firm's net income?

7. Clinton has gotten part of his economic recovery plan in place. Direct materials costs have
increased by 10%. Direct labor has increased by 15%. Manufacturing overhead has
decreased by 20%, and our fixed costs have increased by $20,000. We have increased our
price by 20% and sales volume has increased by 5%. What has been the effect of all these
changes on net income?

7-5

CVP Analysis Practice Problem 2

The Grager Company currently sells its product for $10 and has variable costs of $6 per
unit. Fixed costs are $30,000.
Required: Answer the following questions, considering each independently.
a.
b.
c.
d.
e.
f.
g.
h.

i.

What is the break-even point in (a) units and (b) dollars?

If fixed costs rise by 20%, what is the break-even point in (a) units and (b) dollars?
If variable costs decline to $4, what is the break-even point in (a) units and (b) dollars?
If the selling price per unit declines by 10%, what is the break-even point in (a) units and
(b) dollars?
If the events described in questions b, c, and d all occur, what is the break-even point in
(a) units and (b) dollars?
What sales dollars are required to earn $50,000 in profit?
If fixed costs increase by 20% and variable costs decline by $1 per unit, what sales
dollars are required to earn $50,000 profit?
Which of the following actions would lower the break-even point in units the most:
(a)
Increasing selling price by 10%?
(b)
Decreasing variable costs by $0.80?
(c)
Decreasing fixed costs by $5,000?
If it is expected that an advertising campaign would generate an increase of 5,000 units
of sales, how much could the firm spend on the campaign without changing profits?
(Hint: Your answer does not depend on the existing level of sales.)

7-6

CVP Analysis Practice Problem 3

The controller of the Anderson Company is preparing data for a conference concerning
certain independent aspects of its operations.
Required: Prepare answers to the following questions for the controller.
a.
b.
c.
d.
e.

Total fixed costs are $500,000 and a unit of product is sold for $4 in excess of its unit
variable cost. What is break-even unit sales volume?
The company will sell 60,000 units of product--each having a unit variable cost of $9--at
a price that will enable the product to absorb $240,000 of fixed costs. What minimum
unit sales price must be charged to break even?
Net income before taxes of $120,000 is desired after covering $600,000 of fixed costs.
What minimum contribution margin ratio must be maintained if total sales revenue is to
be $1,800,000?
Net income before taxes is 10% of sales revenue, the contribution margin is 30%, and
the break-even dollar sales volume is $300,000. What is the amount of total revenue?
Total fixed costs are $240,000, variable cost per unit is $6, and unit sales price is $20.
What dollar sales volume will generate a profit of $24,000 after paying income taxes of
40%?

7-7

CVP Analysis Practice Problem 4

The Barco Company provides the following cost information:
Sale price per cup
Variable expense per cup:
Commission to State University
Soft drink in each cup
Cost of each paper cup
Contribution margin per cup
Fixed expenses (per game):
Lease cost of booth
Wages of 15 hawkers at $10 each
Liability insurance
Total

$.06
.05
.02

$.25

100%

.13
$.12

52%
48%

$200
150
10
$360

Should The Barco Company enter into a lease agreement with State University for a booth in the
new stadium? In coming to a decision, the company will have to resolve questions such as the
following:
a.

What would be the break-even point for the booth in number of cups sold, and in dollars
of sales?

b.

If The Barco Company needs a minimum $600 in profits per game, how many cups will
have to be sold? What will the dollar sales be?

c.

If the booth is very successful and State University decides to double the lease cost,
what will be the effect on the break-even point? How many cups will have to be sold to
yield the minimum required $600 in profits?

7-8

d.

Assuming the original data, if the cost of each paper cup doubles what will be the effect
on the break-even point in number of cups sold? How many cups will have to be sold to
yield the minimum required $600 in profits?

e.

Assume that the booth is rented, and that 10,000 drinks are being sold each game. The
Barco Company managers estimate that hiring five additional hawkers will result in an
additional 1,000 drinks being sold each game. Should the five additional hawkers be
hired?

f.

Assume again that the booth is rented, and that 10,000 drinks are being sold each game.
The Barco Company is contemplating increasing the sale price of each cup of drink from
$.25 to $.30. The company estimates, however, that if the price is increased the number
of drinks sold may decrease by as much as 30 percent. Should the price increase be
made? If the price increase is made, by how much can volume decrease and the
company still earn at least the profits that were being earned before?

g.

Assume again that the booth is rented, and that 10,000 drinks are being sold each game.
The Barco Company is contemplating placing the hawkers on a commission basis, rather
than a flat $10-per-game salary. The commission would be $.02 per cup sold. The
company estimates that if the hawkers are placed on a commission basis they will sell 15
percent more drinks each game. Should the hawkers be paid a commission rather than
a flat salary?

7-9

CVP Analysis Practice Problem 5

The Searfoss Company had the following income statement in February:
Sales
Costs
Loss

$150,000
170,000
($ 20,000)

The firm's contribution margin percentage at its current selling price of $20 is 40%.
Required:
Consider each question independently.
a.
b.
c.
d.
e.

Determine the firm's break-even point in sales dollars.

Determine the firm's total costs if it sells 8,000 units.
Determine the firm's income if it sells 9,000 units at $18 per unit.
Determine whether or not it would be worth the $6,000 cost of a special advertising
campaign if, because of the campaign, the firm could increase its sales by 1,000 units
per month at $20 per unit.
The firm is considering changing its selling price. The president wishes the firm to earn
$15,000 per month with a sales volume of 10,000 units. What selling price will achieve
this objective?

7-10

CVP Analysis Practice Problem 6

Selling Price = $50
Contribution Ratio = 32%
Fixed Costs = $200,000
a.

Compute break-even sales in units and dollars. Assume Alpha's current operating
income is $20,000.

b.

Should the company initiate a $70,000 advertising promotion which would increase sales
2,000 units?

c.

How many units must be sold to generate operating income of $50,000. What are total
variable costs at this level?

d.

Assume Alpha is considering purchasing equipment costing $30,000 which will reduce
production costs and therefore, variable costs $4/unit. What will happen to Alpha's
break-even point if the equipment is purchased?

e.

Alpha wishes to increase its selling price $6/unit, however, it projects sales will decline.
By how many units can sales decline and Alpha maintain its current operating income of
$20,000?

7-11