Chapter 7: Cost-Volume-Profit Analysis Questions: Solutions Manual

CHAPTER 7: COST-VOLUME-PROFIT ANALYSIS
QUESTIONS
7-1 The underlying relationship in cost-volume-profit analysis is that costs, revenues,

and profits all change in a predictable way as the volume of activity changes.
7-2 It is more practical to find the breakeven point in sales dollars for companies
having thousands of individual items. Finding the breakeven point for each item
would be laborious and meaningless.
7-3 The contribution margin ratio is: price - variable costs

price
The contribution margin ratio (CMR) represents the net contribution per
sales dollar. The CMR tells us the change in profit associated with a given
change in sales dollars. It is a useful measure of the relative contribution to
profit of different products, divisions, or sales units. The use of this ratio can
give a retail store a good approximation of the sales dollars necessary for the
store to break even. A higher CMR is associated with higher risk. A higher CMR
can have a more favorable impact on profit. However, if sales fall below
breakeven, then a high CMR will yield a relatively more negative impact on
profits.
7-4 The basic assumption of the CVP model is that the behavior of revenues and
total costs is assumed to be linear over the relevant range of activity. Managers
must be careful to remember that the calculations done within the context of a
given CVP model cannot be interpreted safely outside of the relevant range of
output for that particular model. Other assumptions include: fixed costs are
measured by all fixed costs if a long-term perspective (i.e., breakeven over a
longer period of time) is to be taken, while only incremental fixed costs for the
project or activity are included if a short- term perspective (i.e., to determine
when the firm will achieve breakeven on a new product) is taken. Also, allocated
fixed costs are not included if a short-term perspective is taken, since these
costs will not change in the short term.
7-5 If part of the costs are fixed, they will remain constant even when the activity
level declines. Therefore, the variable costs will need to fall by the entire amount
of the budget cut. Fixed costs are sticky; the expected savings from reducing
activity levels will be less than the effect on the activity itself.
7-6 Only include fixed costs that are relevant for a short-term analysis to determine
when the new product will reach breakeven. Relevant costs are those additional,
new, or incremental fixed costs which will influence the profitability of the new
venture. If a new product does not require any new fixed cost, then the
breakeven point is zero.
Solutions Manual 7-1

7-7 CVP is used in profit planning, revenue planning and in cost planning. It is a
widely applicable tool for analyzing the relationship between volume and profits,
costs, or revenues.
7-8 The issue of taxes does not affect the calculation of the breakeven point
because the breakeven point is determined at the level of zero profit.
7-9 Technologically advanced firms usually have high fixed costs. Therefore, profits
are strongly affected by the level of activity. High profits are earned beyond the
breakeven point, but high losses can result from falling below breakeven.
7-10 Sensitivity analysis deals with the risk that sales may fall short of expectations or
that costs will be higher than expected.
7-11 The breakeven point can be calculated using:

1. The equation method for sales in units
2. The equation method for sales dollars
3. The contribution margin method for sales in units
4. The contribution margin method for sales dollars
7-12 Margin of safety = expected sales - breakeven sales
The margin of safety is measured in either dollars or units. It measures the

potential effect of the risk that sales will fall short of planned levels.
7-13 Operating leverage = contribution margin

net income
Operating leverage uses the percentage change in sales to predict the

percentage change in profits. The contribution margin ratio uses the dollar
change in sales to predict the dollar change in profits.
7-14 Step costs cause a difficulty in the calculation of breakeven because of the
discontinuities in the cost line. This usually requires some trial and error to
identify the one unique breakeven point. Exhibit 7-9 illustrates how the
breakeven point is determined when there are step costs.
7-15 One over one minus the tax rate.
(1/(1-t))
7-16 In order to use the CVP model to find the breakeven point for multiple products,
one must assume that the sales of the products will continue at the present sales
mix. (Each product will continue to comprise the same proportion of total sales.)
The constant sales mix permits two or more products to be treated as one, by
computing a weighted-average price, unit variable cost, and contribution margin.
7-17 Sensitivity analysis is used for two important purposes:
1. To determine which factors have the greatest influence on profit, and to
Blocher,Chen,Cokins,Lin: Cost Management 3e 7-2 The McGraw-Hill Companies, Inc.,
2005
assess the magnitude of that influence
2. To examine the sensitivity of profit to a given forecast or estimate for any one
of the factors

EXERCISES
7-18 Make or Buy; Two Machines (20 min)
1. S = number of switches
Machine X Machine Y
$2S = $.65S + $135,000 $2S = $.3S + $204,000
S = 100,000 S = 120,000
2. cost when purchasing from outside supplier:

$2 x 200,000 = $400,000
cost when using machine X:

$135,000 + $.65 (200,000) = $265,000
cost when using machine Y:

$204,000 + $.30 (200,000) = $264,000
When 200,000 switches are needed, it is most profitable to produce

them with machine Y, though the difference is only $1,000.
3. cost of using X = cost of using Y

$.65S + $135,000 = $.30S + $204,000
$.35S = $69,000
S = 197,143 units
When 197,143 switches are needed, the Calista Company is

indifferent as to which machine to use.
Summary of (1), (2) and (3): If output is less than 100,000, buy the
switches; if output is less than 197,143 units but greater than 100,000,
buy and use machine X; if output is greater than 197,143 units, then
buy and use machine Y.

2005
7-19 Operating Leverage (20 min)
1. operating leverage = contribution margin

net income
A's operating leverage = $40,000/$25,000 = 1.6
B's operating leverage = $70,000/$30,000 = 2.3333
If sales increase, company B will benefit more. Company B has a

higher proportion of fixed costs in relation to variable costs; therefore it
has a higher operating leverage than does Company A. The degree of
operating leverage is a measure, at a specific level of sales, of how a
percentage change in sales volume will affect profits. The higher the
operating leverage, the more sensitive profits are to changes in sales
volume.
2. COMPANY A COMPANY B
Amount % Amount %
Sales $110,000 100 $110,000 100
Less variable costs 66,000 60 33,000 30
Contribution margin $ 44,000 40 $ 77,000 70
Less fixed costs 15,000 40,000
Net income $ 29,000 $ 37,000
As change in profits = ($29-25)/$25 = 16% = 10% x 1.6
Bs change in profits = ($37-30)/$30 = 23.333% = 10% x 2.333
Yes, these results are what we expected. Operating leverage

indicates what change in net income can be expected from a change
in sales volume. An operating leverage of 1.6 implies that the change
in net income will be 1.6 times as large as the change in sales volume.
Therefore, if sales increased by 10%, net income should increase by
16%. This is precisely what happened. The same logic applies to
Company B.

7-20 CVP Analysis (25 min)
1. Sales = variable cost + fixed cost + target income/(1-tax rate)

30,000($65) = 30,000($32) + $429,000 + N
N = $561,000
2. BE units: $65Q = $32Q + $429,000

Q = 13,000 units
3. Net Income: 35,000($65) -35,000($32) - $429,000 - $200,000= N

N = $526,000
(net income falls by $35,000, from $561,000 to $526,000 as a
result of the plan to increase sales with increased advertising)
4. BE units: $65Q = $32Q + $629,000

Q = 19,061 units
(and breakeven is higher)
5. $65Q = $32Q + $629,000 + $561,000

Q = 36,061 units
(to justify the advertising plan, sales would have to rise to at
least 36,061 units, somewhat above the projected 35,000 units)

2005
7-21 Multiple Product CVP Analysis (20 min)
1. Hardbound: .5 x $12.00 = $6.00

Paperback: . 6 x $ 2.40 = $1.44
Magazines: .6 x $ 1.90 = $1.14
2. Rent $19,200
Utilities 7,800
Salaries 56,000
Overhead 11,500
Advertising 900
Prof. Services 2,400
Total $97,800
Fixed costs are not expected to change, and are therefore the same
as last year.
3. Weighted Average contribution ratio, since sales mix is constant in

dollars:
Hardbound: .7 x (.5 x $12)/(1.5 x $12) = .2333
Paperback: .2 x (.6 x $2.40)/1.6 x $2.40) = .0750
Magazines: .1 x (.6 x $1.90)/(1.6 x $1.90) = .0375
Weighted Average CMR .3458
Breakeven = $97,800/.3458 = $282,822 of books and magazines
Hardbound: .7 x $282,822 = $197,976

Paperback: .2 x $282,822 = $ 56,564
Magazines: .1 x $282,822 = $ 28,282
4. Desired before tax profit = $40,000/ (1-.33) = $59,701

Cost-Volume-Profit Point = ($97,800 + $59,701)/ .3458 = $455,470
books and magazines

7-22 The Role of Income Taxes (20 min)
1. operating income = $70,000 / (1-.3) = $100,000
2. contribution margin - fixed cost = before tax profit

contribution margin - $200,000 = $100,000
CM = $300,000
3. total sales - total variable cost = total contribution margin

total sales - variable cost ratio x sales = $300,000
total sales - .80 x sales = $300,000
.2 x sales = $300,000
sales = $1,500,000
4. Contribution margin ration (CMR) = $300,000/$1,500,000 = .2
breakeven point = fixed costs = $200,000 = $1,000,000

CMR .2

2005
7-23 CVP with Taxes (20 min)
1. BE units = f + N = $75,000 + 0 = 37,500 units

p-v $5 - $3
2. BE dollars = f + N = $75,000 + 0 = 75,000 = $187,500

p-v $5-$3 .4
p $5
OR: 37,500 x $5 = $187,500
3. Q=f+N = $ 75,000 + $10,000 = 42,500 units

p-v $5 - $3
4. pQ = f + N = $75,000 + $8,000 = 83,000 = $207,500

p-v $5 -$3 .4
p $5
5. Q = f + N/(1 - t)
p-v
Q = $75,000 + $12,000/(1-.4) = $75,000 + $20,000 = 47,500

units
$5 - $3 $2
Using the contribution margin ratio:
pQ = f+N/(1-t) = $75,000+[$12,000/(1-.4)] = $75,000 + $20,000 = $237,500

p-v $5 - $3 .4
p $5
OR: 47,500 x $5 = $237,500

7-24 Margin of Safety (20 min)
1. First, note that the gross margin in this problem is also the contribution
margin, since all operating costs are fixed and all merchandise cost is
variable with sales dollars.
calculate the breakeven point, using the contribution margin ratio:
CMR = $227,500/$650,000 = .35
Breakeven = $105,000/.35 = $300,000

And
Margin of safety = $650,000 - $300,000 = $350,000
Margin of safety ratio = $350,000/$650,000 = 53.85%
2. If sales fall to $500,000, the breakeven point will remain the same, but
the margin of safety will change:
Margin of Safety = $500,000 - $300,000 = $200,000
Operating income can be determined in a variety of ways:
Contribution margin = $500,000 x .35 = $175,000

Less fixed costs 105,000
Operating Income $ 70,000
Or, using the relationship between the margin of safety and operating
income:
Operating Income = Margin of Safety $ x CMR
$70,000 = $200,000 x .35
Why this works:

Margin of Safety x CMR = operating income
(Expected Sales Breakeven)xCMR = Expected Sales x CMR Breakeven x CMR

= Contribution margin fixed costs = operating income
(Note that breakeven sales x CMR = fixed costs)

2005
7-25 Budget Cuts (10 min)
If the budget is reduced by 20%, services will have to decrease by

more than 20% because the fixed costs will not change in the short
term. Since fixed costs do not change, variable costs will have to
decrease by $40,000 ($200,000 x 20%).
decrease in variable costs $ 40,000 = 33.33%

last year's variable cost budget $120,000
Although the budget was cut by only 20%, the Pharmacy will have to
reduce its services by 33.33%

7-26 Multiple Products CVP (20 min)
The sales revenues for Brighter and Smarter are $150,000(200 x

$750) and $300,000 ($1,000 x 300), respectively. The proportion of
sales dollars for each product is as follows:
Brighter: $150,000/($150,000 + $300,000) = 33.33%
Smarter: $300,000/($150,000 + $300,000) = 66.67
The contribution margin ratio for the two products is 70% and 55%,
respectively.
(750-225)/750 = .7; (1,000 450)/1,000 = .55
Weighted average CM Ratio = .333 x .7 + .667 x .55 = .60

Breakeven Point: $132,000/.6 = $220,000

2005
PROBLEMS
7-27 CVP Analysis; Strategy (20 min)
1. BE units = f+N = $150,000 = 15,000 hats

p-v $30 - $20
BE $ = fixed costs = fixed costs = $150,000 =

$450,000
CMR p-v $30-$20
p $30
2. 20,000= $150,000 + N
$30 - $20
$200,000= $150,000 + N
net income = $50,000
3. Margin of safety = 25,000 15,000 = 10,000 hats

Margin of safety ratio = 10,000/25,000 = 40%
4. BE units = f = $150,000 + $82,000 = 16,000

p-v $30 - $15.50
20,000 = $232,000 + N
$30 - $15.50
N = net income = $58,000
5. A key strategic issue is that Franks sales staff is a critical success

factor for the business. His knowledgeable and courteous staff help to
bring in and retain customers. If the salary/commissions plan would
alienate his sales staff, the plan could be a big mistake. Frank should
proceed with caution, and be sure that his sales staff will be as highly
motivated under the salary plan as they were under the commissions
plan.

7-28 Contribution Income Statements (Excel; 25 min)
1. A variety of possible spreadsheets could satisfy this requirement.

Once example is shown below. The sensitivity analysis shows sales
levels from 20% to 200% of expected sales of 2,400 units, and the
related effect on operating profit. HFIs operating leverage is 2 2/3, so
that profits change much faster (2.667 times faster) than a given
change in the sales level.
Units Price
Sales 2,400 $75.00 $180,000
Variable Cost of Sales 2,400 30.00 $ 72,000
Variable Marketing and GSA 2,400 5.00 12,000 84,000
Contribution $40.00 $96,000
Fixed Cost of Sales 40,000
Fixed Marketing and GSA 20,000 60,000
Operating Profit $ 36,000
Unit Var. Operating

Assumed Level of Sales Cost Fixed Cost Price Profit
480 $ 35 $ 60,000 $ 75 $ (40,800)
960 35 60,000 75 (21,600)
1,440 35 60,000 75 (2,400)
1,920 35 60,000 75 16,800
2,400 35 60,000 75 36,000
2,880 35 60,000 75 55,200
3,360 35 60,000 75 74,400
3,840 35 60,000 75 93,600
4,320 35 60,000 75 112,800
4,800 35 60,000 75 132,000

2005
Problem 7-28 (continued)
2. The Goal Seek tool is available under the Tools menu in Excel. An
example of how it is used is show below. The price would have to
increase to $101.67 in order for HFI to make a $100,000 before tax
profit.

7-29 Breakeven Analysis for Multiple Products (25 min)
1. Weighted-average unit contribution

= ($20 x 80%) + ($45 x 20%) = $25
The break-even point = $200,000 = 8,000 units

$25
Break-even sales in units:
Product A 8,000 x 80% = 6,400

Product B 8,000 x 20% = 1,600
The following income calculation verifies the break-even point:
Sale revenues:
Product A: 6,400 x $90 $576,000
Product B: 1,600 x $ 140 224,000
Total sales 800,000
Less variable cost:
Product A: 6,400 x $ 70 448,000
Product B: 1,600 x $95 152,000
Total variable costs 600,000
Fixed costs 200,000
Total costs 800,000
Operating profit -0-
2.The management of the company plans $40,000 target-net-

profit:
Fixed expenses + Target net profit

Contribution margin
$200,000 + $40,000 =9,600 units

$25
Product A = 9,600 x 80% = 7,680 units

Product B = 9,600 x 20% = 1,920
Total 9,600

2005
So to achieve the target-net-profit Hycel has to sell 7,680 units of

Product A and 1,920 units of Product B.
Income Statement to verify the Target-net-profit calculation:
Sale revenues:
Product A: 7,680 x $90 $ 691,200
Product B: 1,920 x $140 268,800
Total sales 960,000
Variable costs:
Product A: 7,680 x $70 537,600
Product B: 1,920 x $95 182,400
Total variable costs 720,000
Fixed costs 200,000
Total costs 920,000
Net Income $ 40,000

7.30 Multiple Product CVP Analysis (25 min)
1. Contribution analysis based on actual sales:
Small Standard Super

Total
Sales $400,000 100% $225,000 100% $200,000 100%

$825,000
Variable costs 276,000 69 56,250 25 100,000 50
432,250
Contribution 124,000 31 168,750 75 100,000 50
392,750
Fixed costs 425,000
Net Income
($32,250)
2. Breakeven based on actual sales mix:
BE = fixed costs = $425,000 = $892,744

average CM ($392,750/$825,000)
Breakeven based on budgeted sales:
Small Standard Super

Total
Sales $175,000 100% $400,000 100% $250,000 100%

$825,000
Variable costs 120,750 69 100,000 25 125,000 50 345,750
Contribution 54,250 31 300,000 75 125,000 50 479,250
Fixed costs 425,000
Net Income $ 54,250
BE = $425,000 = $731,612
($479,250/$825,000)
3. Although total sales dollars remained constant ($825,000), the

breakeven point changed because the sales mix changed. Sales
shifted from products with a higher contribution margin (standard and
super) to a product with a lower contribution margin (small). More
sales were necessary to cover the same amount of fixed costs.
Therefore, the breakeven point increased from $731,612 to $892,744.
Also, since the actual sales level fell below $892,744, there was an
2005
actual net loss of $32,250.

7-31 CVP Analysis; Taxes (25 min)
1. BE units = f + N = $350,000 + 0 = 14,000 units

p -v $60 - $35
BE sales dollars = f + n = $350,000 + 0 = $350,000 =

$840,000
p-v $60 -$35 .417
p $60
OR: 14,000 x $60 = $840,000
2. BE units = $350,000 + $150,000 = 20,000 units

$60 - $35
3. 40,000 = $350,000 + N
$60 - $35
N = $650,000
4. X = f + N/(1-t) = $ 350,000 + $150,000/(1-.4) = 24,000 units

p-v $60 - $35
5. Original = New
$200,000 + $30Q = $150,000 + $35Q
Q = 10,000
6. The CVP Graph appears below:
4,000,000
3,500,000
3,000,000
2,500,000
Dollars
2,000,000
1,500,000
1,000,000
500,000
-
- 30,000 60,000
Units
7-32 CVP Analysis in a Professional Service Firm (25 min)

2005
1. If net income is to increase the contribution margin of the new
business must be positive.
Y = Variable cost + Fixed cost + Income
Y + $50(800) = $5(800 + 900) + $45,000 + 0
Y = $13,500
where Y is the minimum revenue that must be earned from the county
work in order to insure that net income of the firm does not decrease.
Revenue above this level will result in incremental profit. The average
billing rate at the breakeven rate of $13,500 would be $13,500/900 =
$15 per hour. Clearly, the key to the bidding strategy is the
desirability of bringing in 800 hours of new business at the going
billing rate.
2. $20,000 + $50(X) = $5(900 + X)+$45,000 + 0
X = 656
The managing partner's estimate of 800 hours of new business leaves

a margin of safety of 800 - 656 = 144 hours.

1. Break-even in units = Fixed cost/Unit Contribution Margin
CM = $36,000,000 - $22,500,000 = $3,000 - $1,875 =

$1,125/unit
12,000 12,000
B/E = $7,500,000/1,125 = 6,667 units
2. Contribution margin ratio = Unit contribution margin

Unit sales price
Thus, CM ratio = $1,125 = .375

$3,000
Fixed Cost = B/E in dollars

CM ratio
$7,500,000 = $20,000,000 = $3,000 * 6,667

.375
3. Fixed Cost + Target profit = $7,500,000 + $7,250,000 =

$39,333,333
CM ratio .375
4. New CM = $3,000 - ($22,500,000 x 1.10) = $937.50 per unit

12,000
B/E = Fixed cost = $7,500,000 = 8,000 units

CM $937.50/unit

2005
7-34 CVP Analysis; Activity-based costing; Taxes (30 min)
1. Total fixed manufacturing expense = 12 x $60,000 = $720,000
$300X = $10X + ($720,000 + $100,000 + $50,000)

X= $870,000/$290
X= 3,000 units per year
2. 20 unit batch means 6,000/20 = 300 batches per year

Batch level costs = $720,000 x .2 = $144,000
Non-batch costs = $720,000 - $144,000 = $576,000
Cost per batch = $144,000/300 = $480
Cost per unit = $480/20 = $24
Breakeven:
$300X = $10X + 24X + ($576,000 + $100,000 + $50,000)
X= $726,000/$266
X= 2,729 units per year, or 136.5 batches (137 batches,
rounded)
Exact Breakeven
$300X = $10X + ($576,000 + 137 x $480 + $100,000 +
$50,000)
X= $791,760/$290
X= 2,730 units per year
Note that the breakeven for the ABC approach is somewhat smaller
than that of the volume based analysis, because batch level costs of
$480 per batch can be saved if production falls below the budgeted
level of 6,000 units.
3. Total fixed expenses: $720,000 + ($100,000 x 2) + $50,000 =

$970,000
Target profit per year = $12,000 x 12 = $144,000
Target before tax profit: $144,000/(1 - .4) = $240,000
Q = ($970,000 + $240,000)/$290 = 4,173 units.

1. Pro-rated per year fixed cost of blood gas machine =
$750,000/10
= $75,000
Savings per sample in direct costs if a gas analysis machine is

purchased : $85 - $40 = $45
Indifference point:$75,000/$45 = 1,667 samples (tests) per

year.
Alternatively (where X is the breakeven number of tests):
$85 X = $40 X + $75,000

X = 1,667 tests
2. Current number of patients needing analysis = 5,000 patients

5,000 x 30% needing blood gas analysis = 1,500
The difference 1,667 1,500 = 167
167 is the additional number of blood gas samples needed to

break even at the $85 charge. To generate 167 additional
charges, we need 167/.3 = 557 additional patients.
3. The amount the diagnostic screening center would have to

charge clients at the current patient levels:
p x 1,500 = $40 x 1,500 + $75,000
p = $90

2005
7-36 CVP Analysis; Sensitivity Analysis; Strategy
1. GoGo Juices profit (loss) before tax, from implementing the promotional
coupon with no change in sales volume is ($8,000)
Gasoline Food and Other Total

beverage
Sales Revenue $100,000 $60,000 $40,000 $200,000
Coupons (16,000) (16,000)
redeemed
(note 1)
Cost of Sales 75,000 36,000 20,000 131,000
(note 2)
Contribution $9,000 $24,000 $20,000 53,000
Margin
Fixed costs 61,000
(note 3)
Loss before tax $(8,000)
Note 1: Coupons redeemed: total sales of $200,000 x 80% x 10% ($1 per
$10) = $16,000
Note 2: Gasoline cost of sales: $100,000/$1.129 price per gallon = 88,574
gallons
88,574 x $.84675 = $75,000
Note 3: Fixed costs
Labor$9,000 + $2,500 $11,500
Rent, power, supplies, etc 46,500
Depreciation 2,500
Coupon printing cost 500
Total fixed costs $61,000
2. The breakeven for GoGo:
Contribution margin ratio = $53,000/$200,000 = 26.5%
Breakeven in dollars = $61,000/.265 = $230,189

3.
Sales revenue ($200,000 x 1.2) $240,000
Contribution margin ($240,000 x 30%) 72,000

Less fixed costs 61,000
Profit before tax $11,000
4. Sensitivity analysis is used to deal more effectively with uncertainty or

risk. Sensitivity analysis is a "what-if' type of analysis used to determine the
outcomes if any parameters change from the initial assumptions. For
example, revenues or costs could be changed from the initial assumptions
and a new break-even sales volume calculated. At least three factors that
make sensitivity analysis prevalent in decision making including the
following.
The availability of computers and spreadsheet software has made it very
quick and easy to compute the impact of changing one or more
assumptions in a financial model.
As the business environment is becoming more dynamic and
competitive, sensitivity analysis provides management with an
understanding of the impact of changes in the environment. The
increased emphasis on productivity , competitive marketplace, changing
consumer demand, shorter product life cycle times, and faster
obsolescence of technology makes sensitivity analysis more widely used.
Sensitivity analysis aids management in identifying the key variables and
assumptions, so the variables can be monitored or a decision made to
obtain additional information on them.

2005
1. Weekly: $.60 per issue x 52 = $ 31.20 per subscription

$ 3.00 per subscription
Total variable cost $35.70
Selling Price ($47.00) - Total Variable Cost ($35.70)

= $11.30 Contribution Margin Per Unit
Monthly: $.60 per issues x 12 = $ 7.20 per subscription

Total Variable Cost $11.70
Selling Price ($19.00) - Total Variable Cost ($11.70)

= $7.30 Contribution Margin Per Unit
2. Contribution Margin Ratio

Weekly: $11.30 / $47.00 = 24%
Monthly: $ 7.30 / $19.00 = 38.4%
3. $11.30 X .20 = $2.26 HPC-Weekly

$ 7.30 X .80 = $5.84 HPC-Monthly
$8.10 weighted average Contribution Margin
$306,000 / $8.10 = 37,778 subscriptions

(7,556 for HPC-weekly; 30,222 for HPC-monthly)
4. Breakeven Point for Target Before Tax Profit of $ 75,000
$306,000 + $75,000 = $381,000

$381,000 / $8.10 = 47,037 (9,407 for HPC-weekly; 37,630 HPC-
monthly)

5. The point of this question is to get the students started thinking

about the competitive context in which the firm operates. There are
many different relevant points that could be made. If the discussion is
slow to start, ask them to think about what a firm like HPC must do to
be competitive.
There are a number of critical success factors that are likely to
be important for both domestic and foreign subscriptions. These
would include quality of presentation and timeliness and accuracy of
information, as well as competitive price. However, other factors will
differ across countries. For example, in some countries the cost of
distribution including selling and handling costs are quite high, so that
it is critical in these countries to devise new ways to deliver the
subscriptions profitably. Other factors include changes in literacy
rates, the business climate, and investment opportunities in different
countries.

2005
7-38 CVP Analysis; Commissions; Ethics (50 min)
1. Breakeven dollars (dollars in thousands)

Y = Variable cost of goods sold + current
fixed costs + fixed cost of hiring +
commissions
Y = .45Y + $6,120 + $1,890 + .10Y
Y = $17,800
Supporting Calculations
Variable cost of goods sold rate:
(dollars in thousands)
$11,700/$26,000 = 45%
Current fixed costs ($ thousands)

Fixed cost of goods sold $2,870
Fixed advertising cost 750
Fixed administrative cost 1,850
Fixed interest expense 650
Total $6,120
Fixed cost of hiring ($ thousands)

Sales people (8 x $80) $ 640
Travel & entertainment 600
Manager/secretary 150
Additional advertising 500
Total $1,890
2. Breakeven formula set equal to net income:

(dollars in thousands)
Y - .45Y - $6,120 - .23Y = $3,500
Y = $30,063
This is $30,063 - $26,000 = $ 4,063 greater than budgeted sales

3. The general assumptions underlying breakeven analysis that limit

its usefulness include the following:
All costs can be divided into fixed and variable elements.
Variable costs vary proportionally to volume.
Selling prices remain unchanged.
The analysis is done within the relevant range of the cost and
revenue variables
4. Let sales at the indifference point be Y (in 000s).
Total Cost for Current Agents = Total cost for Our Agents
.45Y + .23Y + $6,120 = .45Y + $6,120 + $1,890 + .10Y

.13Y = $1,890
Y = $14,538 (rounded)
Since the point of indifference, $14,538 is less than current sales of

$26,000, the firm would be better off hiring their own agents, because
the relatively low variable cost offsets the relatively high fixed costs of
the new agents when sales are higher than the indifference point.
5. Total compensation under the new plan:

Salary $ 640,000
Commission: 26,000,000 x 0.1 = 2,600,000
Total $3,240,000
This does not compare favorably (from the sales agents point of view)
to the previous plan, for which the total compensation was
.23 x $26,000,000 = $5,980,000.
Thus, there is no basis for an increase in commission rates under the
existing plan.

2005
6. Markowitz should consider the firms ethical responsibility to its

shareholders, employees and agents. The new plan would be a
savings for the firm and thus would have an upward effect on stock
price and thus benefit the shareholders. However, the plan would be
a blow to the sales agents, many of whom may be depend on Marston
Corporation for a significant portion (or perhaps all of) their income.
The agents are likely to have alternative job prospects if Marston lets
them go, but there will also be a difficult transition time. Marston
needs to think carefully about the nature and extent of its responsibility
to the sales agents, as part of its overall responsibility to its
constituencies. What is our responsibility to these sales agents who
are not our employees. The shareholders are a prime concern, but
employees and others such as the sales agents must also be given
consideration.

7-39 CVP Analysis; Different Production Plans (35 min)
1. The annual breakeven point in units at the Peoria plant is

73,500 units and at the Moline plant is 47,200 units, calculated as
follows.
Unit contribution calculation:
Peoria Moline
Selling price $150.00 $150.00
Less variable costs:
Manufacturing 72.00 88.00
Commissions 7.50 7.50
G&A 6.50 6.50
Unit contribution $ 64.00 $ 48.00
Fixed costs calculation:
Total fixed costs = (Fixed manufacturing cost + Fixed G & A) x

Production rate/day x Normal working days.
Peoria = {$30.00 + ($25.50 - $6.50)}x 400 x 240
= $4,704,000
Moline = {$15.00 + ($21.00 - $6.50)}x 320 x 240

= $2,265,600
Breakeven calculation:
Breakeven units = Fixed costs / Unit contribution
Peoria = $4,704,000/$64
= 73,500 units
Moline = $2,265,600/$48
= 47,200 units
2. The operating income that would result from the division production
manager's plan to produce 96,000 units at each plant is $3,628,800.
The normal capacity at the Peoria plant is 96,000 units (400 x 240);
however, the normal capacity at the Moline plant is 76,800 units (320
x 240). Therefore, 19,200 units (96,000 - 76,800) will be manufactured
at Moline at a reduced contribution of $40.00 per unit ($48 - $8).

2005
Contribution per plant:

Peoria (96,000 x $64) $ 6,144,000
Moline (76,800 x $48) 3,686,400
Moline (19,200 x $40) 768,000
Total contribution $10,598,400
Less total fixed costs
($4,704,000 + $2,265,600) 6,969,600
Operating income $ 3,628,800
3. The optimal production plan is to produce 120,000 units at the

Peoria plant and 72,000 units at the Moline plant. The full capacity of
the Peoria plant, 120,000 units (400 units x 300 days), should be
utilized as the contribution from these units is higher at all levels of
production than the contribution from units produced at the Moline
plant.
Contribution per plant:

Peoria (96,000 x $64) $ 6,144,000
Peoria (24,000 x $61) 1,464,000
Moline (72,000 x $48) 3,456,000
Total contribution $11,064,000
Less total fixed cost 6,969,600
Operating income $ 4,094,400

7-40 CVP Analysis; Bid Pricing (40 min)
This problem (part 2) can be used to introduce the concepts of
contribution margin decision making, and the irrelevance of fixed
costs for short term pricing decisions. This is covered in Chapter 9.
1. The unit variable cost per blanket is:
The total fixed cost for the order is:

800,000 x $8/4 = $1,600,000
The breakeven price using the firms full cost system is $26:
p x 800,000 = $24.00 x 800,000 + $1,600,000

p = $26
2. The minimum price per blanket that Jason Fibers Inc. could bid
without reducing the company's net income is $24.00 since the fixed
costs will not change whether or not Jason takes the order. Since the
fixed costs will not change, they are irrelevant in the decision.
3. Using the full cost criteria and the maximum allowable return
specified, Jason Fibers Inc.'s bid price per blanket would be $29.90
calculated as follows.
Relevant costs from Requirement 1 $24.00
Plus: Fixed overhead (.25 hrs. @$8.00/hr.) 2.00
Subtotal 26.00
Allowable return (.15* x $26.00) 3.90
Bid price $ 29.90
* 9% / (1 - 40%)

2005
4. Strategic actors that Jason Fibers Inc. should consider before
deciding whether or not to submit a bid at the maximum acceptable
price of $27.00 per blanket include the following.
If the order is accepted at $27.00 per blanket, there will be a
$3.00 contribution per blanket to fixed costs. However, the
company should consider whether or not there are other jobs that
would make a greater contribution.
Acceptance of the order at a low price could cause problems
with current customers who might demand a similar pricing
arrangement.

7-41 CVP Analysis; Probability Analysis (40 min)
1. In order to break even, during the first year of operations, 10,220

clients must visit the law office being considered by Don Masters and
his colleagues as calculated below.
Fixed Expenses for First Year of Operations
Advertising $500,000
Rent (6,000 x 28) 168,000
Property Insurance 22,000
Utilities 32,000
Malpractice Insurance 180,000
Depreciation ($60,000/4) 15,000
Wages and Fringe Benefits
Regular Wages ($95+$35+
$15+$10)x16hrsx360days) $892,800
Overtime Wages (200x$15x1.5
+ 200x$10x1.5) 7,500
Total Wages 900,300
Fringe Benefits @40% 360,120 1,260,420
Total Fixed Expenses $ 2,177,420
Breakeven Calculation:
Revenues = Variable cost (supplies) + Fixed cost (from
above)
30Q + ($4,000 x .3 x .2)Q = $4Q + $2,177,420
Q= 8,186 clients per year
2. Based on the report of the marketing consultant, the expected

number of new clients during the first year is 18,000 as calculated
below. Therefore, it is feasible for the law office to break even
during the first year of operations as the breakeven point is 8,186
clients.
Expected value = (20 x .10) + (30 x .30) + (55 x .40) + (85 x .20)
= 50 clients per day

2005
Annual number of clients = 50 x 360 days = 18,000 clients per
year, which is well above the breakeven of 8,186 clients per year.
Since there is uncertainty in the prediction of the number of clients per
year, based on a probability distribution, further sensitivity analysis
should be considered, with the objective of determining the potential
loss if in fact the number of clients falls short of the forecast.
3.
Sensitivity analysis is used to deal more effectively with uncertainty or
risk. Sensitivity analysis is a "what-if type of analysis used to
determine the outcomes if any parameters change from the initial
assumptions. For example, revenues or costs could be changed from
the initial assumptions and a new break-even sales volume calculated.
The availability of spreadsheet software has made it very quick
and easy to compute the impact of changing one or more assumptions
in a financial model. At least three factors that make sensitivity
analysis prevalent in decision making including the following:
As the business environment is becoming more dynamic and
competitive, sensitivity analysis provides management with an
understanding of the impact of changes in the environment. The
increased emphasis on productivity, competitive marketplace,
changing consumer demand, shorter product life cycle times, and
faster obsolescence of technology makes sensitivity analysis more
prevalent.
Sensitivity analysis aids management in identifying the key
variables and assumptions, so the variables can be monitored or a
decision made to obtain additional information.
The use of probability distributions to determine expected values
is an excellent way to conduct a sensitivity analysis. This approach
allows Masters to see the distribution of costs and profits, as they are
affected by the distribution of potential demand (number of clients).
Masters can enhance this analysis by using standard deviations to
measure the dispersion of the distributions, as a means to get at the
degree of uncertainty higher standard deviations for greater
uncertainty.
Other approaches to sensitivity analysis include Excel-based
analysis (see problem 7-43), graphical analysis, the use of operating
leverage, and the contribution margin ratio.

7-42 CVP Analysis; Strategy (45 min)
1. a. A total of 480 seminar participants is needed for the joint venture

to break even, calculated as follows.
The break-even number of participants equals the fixed costs divided

by the contribution margin per participant
Fixed costs (FC) = $318,000 from GSI + $210,000 from Eastern =

$528,000
Contribution margin (CM) = $1,200 fee - ($47 + $18 + $35) variable

costs = $1,100
Break-even = FC/CM = $528,000/$1,100 = 480 seminar participants
b. A total of 700 seminar participants is needed for the joint venture to

earn a net income of $169,400, calculated as follows.
The target number of participants equals the fixed costs plus the
desired operating profit, divided by the contribution margin per
participant. The desired operating profit equals the net income divided
by (1 minus the tax rate).
Operating profit (OF) = $169,400/(1 - .30) = $169,400/ .70 =
$242,000
Target participants = (FC + OF)/CM = ($528,000 + $242,000)/
$1,100
= $770,000/$1,100
= 700 participants
2. A minimum of 1,055 participants is needed in order for GSI to prefer

the 40 percent fee option rather than the flat fee, calculated as follows.
GSI fees for flat fee option =

$9,500 per seminar x 40 seminars = $380,000
GSI fees for 40% of Eastern's profit-before-tax option =
40% x [(contribution margin x number of participants) -fixed
cost) =
.40 x [($1,100 x N) -$210,000)] = $440 x N -$84,000

2005
GSI fees are equal for the two options at the following number of
participants.
$380,000 = $440 x N - $84,000

$464,000 = $440 x N
$464,000/$440 = N = 1054.5 participants (1,055 rounded)
Therefore, GSI will earn more revenue and prefer the 40 percent
option when the number of participants is 1,055 or higher.
3. Some of the strategic and implementation issues facing GSI in this

decision are the following:
Are the CVP assumptions satisfied? That is, total costs can be
divided into a fixed component and a component that is variable
with respect to volume. Total costs and total revenues have a
linear relationship to volumes within the relevant range. Total fixed
costs, per unit variable cost, and selling price remain constant
within the relevant range. Technology has no impact on cost
relationships or selling prices. All costs and revenues are known
with certainty.
Alternative uses of capacity? Since the Eastern U seminars
would occupy all GSIs available capacity, GSI should consider
whether there might be more profitable uses for that capacity
before making this commitment. Would the commitment include an
implied or explicit promise to continue the seminars in future years,
if successful this year? Can GSI expand its capacity quickly and
easily if desired?
Has GSI considered the uncertainty in the situation? What
happens if the breakeven level of participants is not met? GSI and
Eastern should use various sensitivity analysis methods to assess
the potential impact of this uncertainty on future profits.
Does the collaboration make sense strategically? Are Eastern
and GSI likely to enhance each others reputation and to provide
operating synergies and efficiencies that will make the alliance a
profitable one. For example, if the Eastern Universitys academic
reputation might suffer from this alliance, then this should be
considered in the decision.

7-43 CVP Analysis; Strategy; ABC Costing; Uncertainty (50 min)
1.
Current Plan Proposed Plan
Contribution $100-$43.50-$10 = $100-$58.75-$10=$31.25
Margin $46.50
Breakeven* ($6,000,000+ ($3,000,000+$1,250,000) /
$1,250,000) /$46.50 = $31.25 =
155,914 units 136,000 units
* Manufacturing fixed costs are determined from the fixed overhead

rates:
150,000 units sold x $40 = 150,000 units sold x $20 =
$6,000,000 $3,000,000
2. To determine the number of sales units at which CG would be

indifferent between the current manufacturing plan and the proposed
plan:
Solve for X:
$43.50 X + $6,000,000 = $58.75 X + $3,000,000
X = 196,722 units
(The above calculations show that at the current level of 150,000

units, the firm would prefer the low fixed cost strategy, that is, the new
plan)

2005
3. CGs strategy is best described as differentiation, since the firm has
succeeded by innovation in product design. Further, the firm operates
in an industry in which innovation and product design are critical to
success. An important element of the firms strategy is also the fact
that the technology, as for many firms in the industry, is not proven.
That is, there is a significant level of risk that the firms product will fail
to meet customers expectations. The overall strategy then must both
support the firms innovative image and also protect against the
possibility of loss due to a failure of the technology that is,
simultaneously, the firm must advance and market its technological
prowess and develop a plan to deal with the possibility that the
technology might fail.
4.
a) The calculations in part 2 above support a decision to go to
the new plan; at the current level of 150,000 units, costs are lower for
the new plan, and will continue to be lower for the new plan as long as
volume stays below 196,722 units.
b) Thinking strategically, the new plan is also preferred since it is
an appropriate response to the firms risk, as noted in Part 3 above.
By reducing operating leverage (that is, by reducing manufacturing
fixed costs from $6,000,000 to $3,000,000) the firm is less exposed to
a possible failure of the innovation and then drop off in sales. The
reduction in fixed costs also helps the firm to manage cash flows.
Thus, the new plan is more consistent with the firms strategy of
developing an innovative product and also dealing with the risk of
potential loss because of a possible failure of the technology in the
market place.
Also, one could look at the proposal as consistent with the firms
core strength, which appears to be product innovation. There is no
evidence that the firm is particularly innovative or cost-effective in
manufacturing. Thus, a strategy which goes to less focus on
manufacturing would be consistent with this strategy; more focus
should be retained in product design and development.
c) Sensitivity analysis. Since uncertainty is important in this case, CG
Graphics should use some of the tools as illustrated below. Note that
the current method looks good if projected demand rises.

Current Proposed Difference

Materials and purchased parts $ 6.00 $ 15.00
Direct labor 12.50 13.75
Variable GS&A 10.00 10.00
Variable overhead 25.00 30.00
Total Variable cost $ 53.50 $ 68.75 $ 15.25
Price 100 100

CM $ 46.50 $ 31.25
Fixed Cost $ 7,250,000.00 $ 4,250,000.00 $ 3,000,000
Breakeven 155,914 136,000
Demand 150,000 150,000
Profit $ (275,000) $ 437,500
Indifference Point 196,721.3
Assumed Levels of Demand Profit- Current Profit - Proposed

30,000 $ (5,855,000) $ (3,312,500)
60,000 $ (4,460,000) $ (2,375,000)
90,000 $ (3,065,000) $ (1,437,500)
120,000 $ (1,670,000) $ (500,000)
150,000 $ (275,000) $ 437,500
180,000 $ 1,120,000 $ 1,375,000
210,000 $ 2,515,000 $ 2,312,500
240,000 $ 3,910,000 $ 3,250,000
270,000 $ 5,305,000 $ 4,187,500

2005
7-44 CVP Analysis; ABC Costing (30 min)
1. If there are 50 units per batch and setup costs are $300 per setup,
then there must be 3,000 batches (150,000/50), and total setup costs
must be $900,000 (3,000 x $300). Thus, the total fixed costs for the
current manufacturing plan must be $900,000 for setups and
$5,100,000 (=$6,000,000 - $900,000) for the remaining fixed costs.
The ABC breakeven can be determined as follows, where the unit cost
of setup is $300/50 = $6:
Breakeven can be determined as follows:

Contribution $100-$43.50-$10-$6 = $100-$58.75-$10-
Margin $40.50 $6=$25.25
Breakeven ($5,100,000+$1,250,000) / ($2,100,000+$1,250,000) /
$40.50 = 156,790 units $25.25 =
(or, 3,136 batches) 132,673 units
(or 2,654 batches)
To figure the exact
breakeven, total setup costs To figure the exact
are 3,136 x $300 = breakeven, total setup
$940,800, and: costs are 2,654 x $300 =
Q = ($5,100,000 + $940,800 $796,200, and:
+ $1,250,000)/($100-43.50- Q = ($2,100,000 +
10) = 156,792 units 796,200 +
$1,250,000)/31.25=
132,679 units
Note as before that the breakeven for the current manufacturing plan
is above the current operating level of 150,000 units. Also, since the
operating level of 150,000 is based on the assumption of 50 batches
of 3,000 each, to achieve breakeven will require more than 3,000
batches. Thus, breakeven analysis under ABC gives a higher
breakeven number than the volume-based approach; it recognizes a
larger number of setups and therefore larger setup cost ($940,800
versus $900,000).

2. The ABC costing breakeven calculations do not differ much from
that for the volume based calculations in problem 7-43, and they both
point to the same answer -- at the current volume level of
approximately 150,000 units, the proposed manufacturing plan is
preferred.

2005
7-45 New Manufacturing Facility; Strategy (20 min)
The plan to build the new plant would be consistent with a cost
leadership strategy, and would enable ICL to become more cost
competitive. However, it is apparent that ICLs plant is really following
a differentiation strategy their growing market is for design work,
which is potentially more profitable than the manufacturing, and which
builds on their core competencies. ICL should consider additional
investment in the research and engineering groups that Julius
supervises, instead of manufacturing. Rather than to be highly
leveraged from large investments in manufacturing capacity and
technology, the firms strategy should be to maintain their leadership
in design and continue to use sub-contractors for the manufacturing
work when necessary. ICL should carefully determine: is it a design
firm or a manufacturing firm? It may be difficult to accomplish both.

7-46 CVP Analysis
Since fixed costs, except for the cost of the lease, will not be affected
by the decision to make or to buy, they are excluded from the
analysis:
Cost to Buy = Cost to Make

$25 x Q = Q x ($10 + $6 + $3) + $34,000
Q = 5,667 brake assemblies
The indifference point is 5,667, meaning that BBC would prefer to

make if volume is expected to be above 5,667, and prefer to buy if
volume is less than 5,667.
The strategic issues facing BBC will certainly affect this decision.
BBC apparently competes on the basis of differentiation because of
their emphasis on quality and their distribution through specialty
shops. The quest for quality might cause them to stick with the
internal manufacturing option, irrespective of the cost differential, to
maintain control over quality. On the other hand, it might be that a
higher quality brake could be obtained from the outside vendor. Also,
BBC should consider the alternative uses of the manufacturing space.
Could this be used to manufacture accessories or other parts for their
bicycles, and thus improve the overall value to the customer?

2005
7-47 CVP Analysis; ABC Costing (25 min)
In contrast to problem 7-46 which treats inspection, setup and

materials handling costs as fixed costs, the following considers them
batch related and solves for breakeven using an ABC costing
approach.
If there are 1,000 units per batch, then BBC expects 10 batches and
batch-level costs are $2,000 ($20,000/10) per batch, and the ABC
indifference point can be determined as follows. The cost of the
allocated fixed overhead will not be different whether BBC purchases
or makes the brakes, so these costs are excluded:
The approximate solution (assuming 10 batches, and batch-level

costs are $2/brake assembly)

$25 x Q = Q x ($10 + $6 + $3) + $2 x Q + $34,000
The exact solution, using 9 batches to manufacture 8,000+

assemblies:

$25 x Q = Q x ($10 + $6 + $3) + $2,000 x 9 + $34,000
The indifference point is 8,667, meaning that BBC would prefer to

make if volume is expected to be above 8,667, and prefer to buy if
volume is less than 8,667. The indifference quantity is slightly larger
when adjusted for batch level costs because the cost of the 9th and
last batch, $2,000 is spread over fewer than 1,000 units.
The indifference point is somewhat higher under ABC costing because

the batch level costs are now considered a relevant cost of the make
strategy, while under the volume-based approach in problem 7-46,
these costs were considered as fixed and therefore irrelevant. In this
context, the ABC costing approach probably produces a more reliable
answer.

1. Based on estimates given, a farmer interested in the production of

hemp would need to receive a price of at least $.55/lb to breakeven on
farming for hemp, as shown in the following analysis.
First, separate the fixed and variable costs.

Variable/400lb Fixed/acre
Seed $80.00
Fertilizer 38.15
Chemicals 10.00
Fuel 11.00
Machinery costs 15.00
Crop insurance 6.00
Other costs 7.50
Land taxes 5.50
Licensing fee 15.00
Sampling and 15.00
analytical fees
Drying costs 3.57
Cleaning costs 5.00
Interest 7.44
Total Cost $147.72 $71.44
From the above:

Variable cost per pound = $147.72/400 = $.3693
Total Fixed Cost = $71.44 x 180 = $12,859.20
Solving for breakeven price per lb (Q), where Q= 180 x 400 = 72,000
pounds for the average size farm:
Revenue = Total operating cost

p x 72,000 = $.3693 x 72,000 + $12,859.20
p = $ .5479
Based on information from: Industrial Hemp for Manitoba,

http://www.gov.mb.ca/agriculture/crops/hemp/bko04s00.html).

2005

Chapter 7: Cost-Volume-Profit Analysis Questions: Solutions Manual

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CHAPTER 7: COST-VOLUME-PROFIT ANALYSIS

7-1 The underlying relationship in cost-volume-profit analysis is that costs, revenues,

7-3 The contribution margin ratio is: price - variable costs

Solutions Manual 7-1

7-11 The breakeven point can be calculated using:

7-12 Margin of safety = expected sales - breakeven sales

The margin of safety is measured in either dollars or units. It measures the

7-13 Operating leverage = contribution margin

Operating leverage uses the percentage change in sales to predict the

7-15 One over one minus the tax rate.

Solutions Manual 7-3

7-18 Make or Buy; Two Machines (20 min)

2. cost when purchasing from outside supplier:

cost when using machine X:

cost when using machine Y:

When 200,000 switches are needed, it is most profitable to produce

3. cost of using X = cost of using Y

When 197,143 switches are needed, the Calista Company is

Blocher,Chen,Cokins,Lin: Cost Management 3e 7-4 The McGraw-Hill Companies, Inc.,

1. operating leverage = contribution margin

A's operating leverage = $40,000/$25,000 = 1.6

B's operating leverage = $70,000/$30,000 = 2.3333

If sales increase, company B will benefit more. Company B has a

As change in profits = ($29-25)/$25 = 16% = 10% x 1.6

Bs change in profits = ($37-30)/$30 = 23.333% = 10% x 2.333

Yes, these results are what we expected. Operating leverage

Solutions Manual 7-5

1. Sales = variable cost + fixed cost + target income/(1-tax rate)

2. BE units: $65Q = $32Q + $429,000

3. Net Income: 35,000($65) -35,000($32) - $429,000 - $200,000= N

4. BE units: $65Q = $32Q + $629,000

5. $65Q = $32Q + $629,000 + $561,000

Blocher,Chen,Cokins,Lin: Cost Management 3e 7-6 The McGraw-Hill Companies, Inc.,

1. Hardbound: .5 x $12.00 = $6.00

3. Weighted Average contribution ratio, since sales mix is constant in

Breakeven = $97,800/.3458 = $282,822 of books and magazines

Hardbound: .7 x $282,822 = $197,976

4. Desired before tax profit = $40,000/ (1-.33) = $59,701

Solutions Manual 7-7

1. operating income = $70,000 / (1-.3) = $100,000

2. contribution margin - fixed cost = before tax profit

3. total sales - total variable cost = total contribution margin

4. Contribution margin ration (CMR) = $300,000/$1,500,000 = .2

breakeven point = fixed costs = $200,000 = $1,000,000

Blocher,Chen,Cokins,Lin: Cost Management 3e 7-8 The McGraw-Hill Companies, Inc.,

1. BE units = f + N = $75,000 + 0 = 37,500 units

2. BE dollars = f + N = $75,000 + 0 = 75,000 = $187,500

OR: 37,500 x $5 = $187,500

3. Q=f+N = $ 75,000 + $10,000 = 42,500 units

4. pQ = f + N = $75,000 + $8,000 = 83,000 = $207,500

Q = $75,000 + $12,000/(1-.4) = $75,000 + $20,000 = 47,500

Using the contribution margin ratio:

pQ = f+N/(1-t) = $75,000+[$12,000/(1-.4)] = $75,000 + $20,000 = $237,500

OR: 47,500 x $5 = $237,500

Solutions Manual 7-9

calculate the breakeven point, using the contribution margin ratio:

CMR = $227,500/$650,000 = .35

Breakeven = $105,000/.35 = $300,000

Margin of safety ratio = $350,000/$650,000 = 53.85%

Margin of Safety = $500,000 - $300,000 = $200,000

Operating income can be determined in a variety of ways:

Contribution margin = $500,000 x .35 = $175,000

Why this works: