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CHAPTER 3

COST-VOLUME-PROFIT ANALYSIS
NOTATION USED IN CHAPTER 3 SOLUTIONS
SP:
VCU:
CMU:
FC:
TOI:

Selling price
Variable cost per unit
Contribution margin per unit
Fixed costs
Target operating income

3-16

(10 min.) CVP computations.

a.
b.
c.
d.

Revenues
$2,000
2,000
1,000
1,500

Variable
Costs
$ 500
1,500
700
900

Fixed
Costs
$300
300
300
300

Total
Costs
$ 800
1,800
1,000
1,200

Operating
Income
$1,200
200
0
300

Contribution
Margin
$1,500
500
300
600

Contribution
Margin %
75.0%
25.0%
30.0%
40.0%

3-20

(20 min.) CVP exercises.

1a.

[Units sold (Selling price Variable costs)] Fixed costs = Operating income
[5,000,000 ($0.50 $0.30)] $900,000 = $100,000

1b.

Fixed costs Contribution margin per unit = Breakeven units


$900,000 [($0.50 $0.30)] = 4,500,000 units
Breakeven units Selling price = Breakeven revenues
4,500,000 units $0.50 per unit = $2,250,000
or,
Selling price -Variable costs
Selling price
$0.50 - $0.30
=
= 0.40
$0.50

Contribution margin ratio =

Fixed costs Contribution margin ratio = Breakeven revenues


$900,000 0.40 = $2,250,000
2.

5,000,000 ($0.50 $0.34) $900,000

= $ (100,000)

3.

[5,000,000 (1.1) ($0.50 $0.30)] [$900,000 (1.1)]

= $ 110,000

4.

[5,000,000 (1.4) ($0.40 $0.27)] [$900,000 (0.8)]

= $ 190,000

5.

$900,000 (1.1) ($0.50 $0.30)

4,950,000 units

6.

($900,000 + $20,000) ($0.55 $0.30)

3,680,000 units

3-21

(10 min.) CVP analysis, income taxes.

1. Monthly fixed costs = $50,000 + $60,000 + $10,000 =


$120,000
Contribution margin per unit = $25,000 $22,000 $500 =
2,500
Monthly fixed costs
$120,000
Breakeven units per month =
=
=
Contribution margin per unit
$2,500 per car
cars
2. Tax rate

$
48

40%

Target net income


$54,000
Target operating income =

Target net income $54, 000 $54, 000


=
=
=
1 - tax rate
(1 0.40)
0.60

$90,000
Quantity of output units Fixed costs + Target operating income = $120, 000 + $90, 000 =
required to be sold =
Contribution margin per unit
$2,500
84 cars
3-24
1.

(10 min.) CVP analysis, margin of safety.


Fixed costs

Breakeven point revenues = Contributi on margin percentage


$400,000

2.

Contribution margin percentage = $1,000,000


Contribution
margin

Selling price Variable cost per unit


Selling price

0.40 =

= 0.40 or 40%
percentage

SP $12
SP

0.40 SP = SP $12
0.60 SP = $12
SP = $20
3.

Revenues, 80,000 units $20


Breakeven revenues
Margin of safety

$1,600,000
1,000,000
$ 600,000

3-27

(30 min.) Sales mix, new and upgrade customers.

1.
SP
VCU
CMU

New
Customers
$210
90
120

Upgrade
Customers
$120
40
80

Let S = Number of units sold to upgrade customers


1.5S = Number of units sold to new customers
Revenues Variable costs Fixed costs = Operating income
[$210 (1.5S) + $120S] [$90 (1.5S) + $40S] $14,000,000 = OI
$435S $175S $14,000,000 = OI
Breakeven point is 134,616 units when OI = 0 because
$260S
S
1.5S
BEP

=
=
=
=

$14,000,000
53,846 units sold to upgrade customers (rounded)
80,770 units sold to new customers (rounded)
134,616 units

Check
Revenues ($210 80,770) + ($120 53,846)
Variable costs ($90 80,770) + ($40 53,846)
Contribution margin
Fixed costs
Operating income (caused by rounding)
2.

$23,423,220
9,423,140
14,000,080
14,000,000
$
80

When 200,000 units are sold, mix is:


Units sold to new customers (60% 200,000)
120,000
Units sold to upgrade customers (40% 200,000) 80,000
Revenues ($210 120,000) + ($120 80,000)
Variable costs ($90 120,000) + ($40 80,000)
Contribution margin
Fixed costs
Operating income

$34,800,000
14,000,000
20,800,000
14,000,000
$ 6,800,000

3a.

Let S = Number of units sold to upgrade customers


then S = Number of units sold to new customers

[$210S + $120S] [$90S + $40S] $14,000,000 = OI


330S 130S
= $14,000,000
200S
= $14,000,000
S
=
70,000 units sold to upgrade customers
S
=
70,000 units sold to new customers
BEP
=
140,000 units
Check
Revenues ($210 70,000) + ($120 70,000)
$23,100,000
Variable costs ($90 70,000) + ($40 70,000)
9,100,000
Contribution margin
14,000,000
Fixed costs
14,000,000
Operating income
$
0
3b.

Let
S = Number of units sold to upgrade customers
then 9S = Number of units sold to new customers
[$210 (9S) + $120S] [$90 (9S) + $40S] $14,000,000 = OI
2,010S 850S
= $14,000,000
1,160S
= $14,000,000
S
=
12,069 units sold to upgrade customers (rounded up)
9S
=
108,621 units sold to new customers (rounded up)
120,690 units

Check
Revenues ($210 108,621) + ($120 12,069)
Variable costs ($90 108,621) + ($40 12,069)
Contribution margin
Fixed costs
Operating income (caused by rounding)

$24,258,690
10,258,650
14,000,040
14,000,000
$
40

3c. As Zapo increases its percentage of new customers, which have a higher
contribution margin per unit than upgrade customers, the number of units required to
break even decreases:

Requirement 3(a)
Requirement 1
Requirement 3(b)

New
Customers
50%
60
90

Upgrade
Customers
50%
40
10

Breakeven
Point
140,000
134,616
120,690

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