Professional Documents
Culture Documents
Cost-Volume-Profit Relationships
Problem 4-18
1. The CM ratio is 60%:
Selling price ...................... $30 100%
Variable expenses ............. 12 40%
Contribution margin........... $18 60%
4 a. Contribution margin
Degree of operating leverage =
Operating income
$360,000
= =4
$90,000
3.
Proposed:
42,000 units*
Total Per Unit
Sales ............................ $567,000 $13.50**
Variable expenses ......... 252,000 6.00
Contribution margin ...... 315,000 $ 7.50
Fixed expenses ............. 280,000 ***
Operating income ......... $ 35,000
1. Product
Sinks Mirrors Vanities Total
Percentage of total
sales ......................... 25% 42% 33% 100%
Sales ............................ $126,000 100% $210,000 100% $168,000 100% $504,000 100%
Variable expenses ......... 37,800 30% 168,000 80% 92,400 55% 298,200 59%
Contribution margin ...... $88,200 70% $ 42,000 20% $ 75,600 45% 205,800 41%*
Fixed expenses ............. 223,600
Operating income
(loss) ......................... $( 17,800)
*$205,800 $504,000 = 41% (rounded).
3. The break-even point in units for the company as a whole would be:
(1) X (2)
Weighted
CM Sales Average CM
Products Per Unit Mix* Per Unit
Sinks $168 25% $42
Mirrors $ 40 50% 20
Vanities $144 25% 36
Total $98
*Sinks: 525 units 2,100 (525 + 1,050 + 525)
Mirrors: 1,050 units 2,100 (525 + 1,050 + 525)
Vanities: 525 units 2,100 (525 + 1,050 + 525)
Breakeven units =
Total fixed expenses $223,600
2,282 units rounded
Weighted average CM per unit $98
our greatest contribution per dollar of sales, and shifted strongly toward
Mirrors, which provides our least contribution per dollar of sales.
Consequently, although the company exceeded its budgeted level of
sales, these sales provided considerably less contribution margin than
we had planned, with a resulting decrease in operating income. Notice
from the attached statements that the companys overall CM ratio was
only 41%, as compared to a planned CM ratio of 52% and the weighted
average contribution margin per unit was only $98 compared to the
budgeted amount of $130 per unit. This also explains why the break-
even point was higher than planned. With less average contribution
margin per dollar of sales, a greater level of sales had to be achieved to
provide sufficient contribution margin to cover fixed costs.
$9.30X = $386,000
X = 41,505 units (rounded)