Practice Chapter 3

1. At a monthly volume of £25,000, a company incurs variable cost of £19,000 and fixed costs of
£6,000.

Required:

Determine each of the following values:

a. Variable cost ratio
b. Contribution margin ratio
c. Monthly break-even pound sales volume
d. Monthly margin of safety in monetary terms

ANSWER:
a. Variable cost ratio = £19,000/£25,000 = 0.76
b. Contribution margin ratio = 1.00 - 0.76 = 0.24
c. Monthly break-even pound sales volume = £6,000/0.24 = £25,000
d. Monthly sales volume £25,000
Monthly break-even sales volume 25,000
Monthly margin of safety £ -0-

2.The Young Manufacturing Company produces the following three products:

Hammers Screwdrivers Saws

Selling price per unit £40 £16 £50
Variable costs per unit 28 12 30
Contribution per unit £12 £4 £20

Fixed costs are £76,000 per year.

Fifty percent of all sales in units are hammers, 30 percent are screwdrivers, and 20 percent are
saws.

Required:
Calculate the following values:
a. Break-even point in total units
b. Number of hammers that will be sold at break-even
c. Total sales in units to obtain a before-tax profit of £19,000

ANSWER:
a. Ave. CM/unit = (£12 × 0.5) + (£4 × 0.3) + (£20 × 0.2) = £11.20
£76,000/£11.20 = 6,786 units of hammers, screwdrivers, and saws

b. 6,786 × 0.5 = 3,393 hammers

c. (£76,000 + £19,000)/£11.20 = 8,482 units

3.Arnold Ltd.has the following information for 2001:

Selling price per unit £10
Variable costs per unit £6
Fixed costs £1,000

Required:

Prepare a cost-volume-profit graph identifying the following items:

a. Total costs line
b. Total fixed costs line
c. Total variable costs line
d. Total revenues line
e. Break-even point in monetary sales
f. Break-even point in units
g. Profit area
h. Loss area
4.Chopra Company developed the following income statement using a contribution margin
approach:
CHOPRA COMPANY
PROJECTED INCOME STATEMENT
FOR THE CURRENT YEAR ENDING DECEMBER 31
Sales £240,000

Less variable costs:

Variable manufacturing costs £60,000
Variable selling costs 36,000
Total variable costs 96,000
Contribution margin £144,000

Less fixed costs:

Fixed manufacturing costs £85,000
Fixed selling and administrative costs 35,000
Total fixed costs 120,000
Operating income £ 24,000

The projected income statement was based on sales of 12,000 units. Chopra has the capacity to
produce 15,000 units during the year.

Required:
a. Determine the break-even point in units.
The sales manager believes the company could increase sales by 1,000 units if
b. advertising expenditures were increased by £15,000. Determine the effect on income if
the company increases advertising expenditures.
What is the maximum amount the company could pay for advertising if the advertising
c.
would increase sales by 1,000 units?

ANSWER:
a. 10,000 units £120,000/(£20 - £8)
b. £3,000 decrease (1,000 x £12) - £15,000
c. £12,000 1,000 x £12
5.Supply the missing data in each independent case.

Case 1 Case 2 Case 3 Case 4 Case 5

Unit sales
700 300 ? ? ?
Sales revenue
£42,000 ? ? £58,000 £40,000
Variable cost per unit
£ 45 £ 1 £ 15 ? ?
Contribution Margin
? £1,200 ? ? £10,000
Fixed costs
£ 7,500 ? £60,000 ? ?
Operating income
? £ 100 ? ? ?
Unit contribution margin
? ? ? £ 1 £ 2
Break-even point (units)
? ? 5,000 30,000 ?
Margin of Safety
? ? 1,000 -1,000 600

ANSWER: Case 1 Case 2 Case 3 Case 4 Case 5

Unit sales
700 300 6,000 29,000 5,000
Sales revenue
£42,000 £1,500 £162,000 £58,000 £40,000
Variable cost per unit
£ 45 £ 1 £ 15 £ 1 £ 6
Contribution Margin
£10,500 £1,200 £ 72,000 £29,000 £10,000
Fixed costs
£ 7,500 £1,100 £ 60,000 £30,000 £ 8,800
Operating income
£ 3,000 £ 100 £ 12,000 -£ 1,000 £ 1,200
Unit contribution margin
£ 15 £ 4 £ 12 £ 1 £ 2
Break-even point (units)
500 275 5,000 30,000 4,400
Margin of Safety
200 25 1,000 -1,000 600

Case 1:
Price = £42,000 / 700 = £60;
Unit C. M. = £60 - £45 = £15;
Total C. M. = (£15)(700) = £10,500;
Op. SA. = £10,500 - £7,500 = £3,000;
B. E. point = £7,500 / £15 = 500;
Margin Safety = 700 - 500 = 200;

Case 2:
Revenue = £1,200 + (300)(£1) = £1,500;
Fixed Costs = £1,200 - £100 = £1,100;
Unit C. M. = £1,200 / 300 = £4;
B. E. point = £1,100 / £4 = 275;
Margin Safety = 300 - 275 = 25;

Case 3:
Unit Sales = 5,000 + 1,000 = 6,000;
Price = (£60,000 / 5,000) + (£15) = £27;
Revenue = (£27)(6,000) = £162,000;
C. M. = £162,000 - (6,000)(£15) = £72,000;
Op. SA. = £72,000 - £60,000 = 12,000;
Unit C. M. = £27 - £15 = £12;

Case 4:
Unit Sales = 30,000 - 1,000 = 29,000;
Fixed Costs = (30,000)(£1) = £30,000;
Price = £58,000 / 29,000 = £2;
V. C. per unit = £2 - £1 = £1;
C. M. = (£1)(29,000) = £29,000;
Op. SA. = £29,000 - £30,000 = -£1,000;

Case 5:
Unit Sales = £10,000 / £2 = 5,000;
Price = £40,000 / 5,000 = £8;
V. C. per unit = £8 - £2 = £6;
B. E. point = 5,000 - 600 = 4,400;
Fixed Costs = (4,400)(£2) = £8,800;
Op. SA. = £10,000 = £8,800 = £1,200;