CH 18

CHAPTER 18
Cost-Volume-Profit
ASSIGNMENT CLASSIFICATION TABLE
Brief Exercises 1 A Problems 1A, 6A B Problems 1B, 6B
Study Objectives 1. Distinguish between variable and fixed costs. Explain the significance of the relevant range. Explain the concept of mixed costs. List the five components of cost-volume-profit analysis. Indicate what contribution margin is and how it can be expressed. Identify the three ways to determine the break-even point. Give the formulas for determining sales required to earn target net income. Define margin of safety, and give the formulas for computing it.
Questions 1, 2, 3, 6
Do It! 1
Exercises 1, 2, 3, 4, 5, 6 2
2.
4, 5
3.
6, 7, 8
1, 3, 4, 5
1, 2
1, 3, 4, 5, 6 7
1A
1B
4.
5.
10, 11, 17
6, 7
8, 9, 10, 11, 12, 13, 17
1A, 2A, 3A, 4A, 5A, 6A
1B, 2B, 3B, 4B, 5B, 6B
6.
12, 13, 14
8, 9
3, 4
8, 9, 10, 11, 12, 13, 14, 16, 17 14, 15, 17
1A, 2A, 3A, 4A, 5A
1B, 2B, 3B, 4B, 5B
7.
16
10, 12
2A, 5A, 6A
2B, 5B, 6B
8.
15
11
16, 17
2A, 4A, 5A, 6A
2B, 4B, 5B, 6B
Copyright 2011 John Wiley & Sons, Inc.
Kimmel, Accounting, 4/e, Solutions Manual
(For Instructor Use Only)
18-1
ASSIGNMENT CHARACTERISTICS TABLE

Problem Number 1A Difficulty Level Simple Time Allotted (min.) 2030
Description Determine variable and fixed costs, compute break-even point, prepare a CVP graph, and determine net income. Prepare a CVP income statement, compute break-even point, contribution margin ratio, margin of safety ratio, and sales for target net income. Compute break-even point under alternative courses of action. Compute break-even point and margin of safety ratio, and prepare a CVP income statement before and after changes in business environment. Compute contribution margin, fixed costs, break-even point, sales for target net income, and margin of safety ratio. Determine contribution margin ratio, break-even point, and margin of safety. Determine variable and fixed costs, compute break-even point, prepare a CVP graph, and determine net income. Prepare a CVP income statement, compute break-even point, contribution margin ratio, margin of safety ratio, and sales for target net income. Compute break-even point under alternative courses of action. Compute break-even point and margin of safety ratio, and prepare a CVP income statement before and after changes in business environment. Compute break-even point and margin of safety ratio, and prepare a CVP income statement before and after changes in business environment. Determine contribution margin ratio, break-even point, and margin of safety.
2A
Moderate
3040
3A
Simple
2030
4A
Moderate
2030
5A
Moderate
2030
6A
Moderate
2030
1B
Simple
2030
2B
Moderate
3040
3B
Simple
2030
4B
Moderate
2030
5B
Moderate
2030
6B
Moderate
2030
18-2
Correlation Chart between Blooms Taxonomy, Study Objectives and End-of-Chapter Exercises and Problems
Knowledge Q18-1 Q18-2 Q18-3 Q18-6 Q18-4 Q18-5 E18-4 E18-5 E18-7 Q18-10 Q18-11 Q18-17 BE18-6 BE18-7 E18-8 E18-9 Q18-13 BE18-8 BE18-9 DI18-3 DI18-4 E18-8 E18-9 Q18-16 BE18-10 BE18-12 DI18-4 Q18-15 BE18-11 DI18-4 Communication E18-10 E18-11 E18-12 E18-13 E18-14 E18-17 E18-10 E18-11 E18-12 E18-13 E18-17 BE18-6 P18-1A P18-2A P18-1B P18-2B E18-16 P18-1A P18-2A P18-1B P18-2B Q18-9 P18-3A P18-3B P18-4A P18-5A P18-6A P18-4B P18-3A P18-4A P18-3B P18-4B P18-5A P18-5B E18-12 P18-2A E18-14 P18-2B E18-15 E18-17 E18-17 E18-16 P18-2A P18-2B P18-5A P18-5B Real-World Focus Decision Making Exploring the Web Across the Organization P18-5A P18-6A P18-5B P18-6B P18-4A P18-6A P18-4B P18-6B P18-5B P18-6B Q18-6 Q18-7 BE18-1 DI18-1 E18-1 Q18-8 BE18-4 BE18-5 DI18-2 BE18-3 E18-5 E18-3 E18-6 P18-1A P18-1B E18-2 BE18-2 BE18-1 E18-5 E18-1 E18-2 DI18-1 E18-3 E18-6 P18-1A P18-1B P18-6A P18-6B Comprehension Application Analysis Synthesis Evaluation
Study Objective
* 1.
Distinguish between variable and E18-4 fixed costs.
* 2.
Explain the significance of the relevant range.
BLOOMS TAXONOMY TABLE
* 3.
Explain the concept of mixed costs.
* 4.
List the five components of cost-volume-profit analysis.
* 5.
Indicate what contribution margin is and how it can be expressed.
* 6.
Identify the three ways to determine the break-even point.
Q18-12 Q18-14
* 7.
Give the formulas for determining sales required to earn target net income.
* 8.
Define margin of safety, and give the formulas for computing it.
Broadening Your Perspective
Managerial Analysis Ethics Case All About You
18-3
ANSWERS TO QUESTIONS
1. (a) Cost behavior analysis is the study of how specific costs respond to changes in the level of activity within a company. (b) Cost behavior analysis is important to management in planning business operations and in deciding between alternative courses of action. (a) The activity index identifies the activity that causes changes in the behavior of costs. Once the index is determined, it is possible to classify the behavior of costs in response to changes in activity levels into three categories: variable, fixed, or mixed. (b) Variable costs may be defined in total or on a per-unit basis. Variable costs in total vary directly and proportionately with changes in the activity level. Variable costs per unit remain the same at every level of activity. Fixed costs remain the same in total regardless of changes in the activity level. In contrast, fixed costs per unit vary inversely with activity. As volume increases, fixed costs per unit decline and vice versa. (a) The relevant range is the range of activity over which a company expects to operate during the year. (b) Disagree. The behavior of both fixed and variable costs are linear only over a certain range of activity. CVP analysis is based on the assumption that both fixed and variable costs remain linear within the relevant range.
2.
3.
4.
5.
This is true. Most companies operate within the relevant range. Within this range, it is possible to establish a linear (straight-line) relationship for both variable and fixed costs. If a relevant range cannot be established, segregation of costs into fixed and variable becomes extremely difficult. Apartment rent is fixed because the cost per month remains the same regardless of how much Todd uses the apartment. Rent on a Hertz rental truck is a mixed cost because the cost usually includes a per day charge (a fixed cost) plus an activity charge based on miles driven (a variable cost). For CVP analysis, mixed costs must be classified into their fixed and variable elements. One approach to the classification of mixed costs is the high-low method. Variable cost per unit is $1.20, or [($160,000 $100,000) (90,000 40,000)]. At any level of activity, fixed costs are $52,000 per month [$160,000 (90,000 X $1.20)]. No. Only two of the basic components of cost-volume-profit (CVP) analysis, unit selling prices and variable cost per unit, relate to unit data. The other components, volume, total fixed costs, and sales mix, are not based on per-unit amounts. There is no truth in Saras statement. Contribution margin is sales less variable costs. It is the revenue that remains to cover fixed costs and to produce income (profit) for the company. Contribution margin is $12 ($40 $28). The contribution margin ratio is 30% ($12 $40).
6.
7.
8.
9.
10.
11.
18-4
Questions Chapter 18 (Continued) 12. Disagree. Knowledge of the break-even point is useful to management in deciding whether to introduce new product lines, change sales prices on established products, and enter new market areas. $25,000 25% = $100,000 (a) The break-even point involves the plotting of three lines over the full range of activity: the total revenue line, the total fixed cost line, and the total cost line. The break-even point is determined at the intersection of the total revenue and total cost lines. (b) The break-even point in units is obtained by drawing a vertical line from the break-even point to the horizontal axis. The break-even point in sales dollars is obtained by drawing a horizontal line from the break-even point to the vertical axis. Margin of safety is the difference between actual or expected sales and sales at the break-even point. 1,250 X $12 = $15,000; $15,000 $12,000 = $3,000; $3,000 $15,000 = 20%. At break-even sales, the contribution margin is equal to the fixed costs. The contribution margin ratio is:
13. 14.
15.
16.
$180,000 $600,000
= 30%
The sales volume to achieve net income of $60,000 is as follows:
$180,000 + $60,000 .30

17.
= $800,000 RENFRO COMPANY CVP Income Statement
Sales................................................................................................................... Variable expenses Cost of goods sold ($500,000 X .70) .................................................. Operating expenses ($200,000 X .70)................................................ Total variable expenses................................................................ Contribution margin .........................................................................................
$900,000 $350,000 140,000 490,000 $410,000
18-5
SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 18-1 Indirect labor is a variable cost because it increases in total directly and proportionately with the change in the activity level. Supervisory salaries is a fixed cost because it remains the same in total regardless of changes in the activity level. Maintenance is a mixed cost because it increases in total but not proportionately with changes in the activity level.
BRIEF EXERCISE 18-2

VARIABLE COST Relevant Range $10,000 8,000 6,000 4,000 2,000 0 20 40 60 80 100 $10,000 8,000 6,000 4,000 2,000 0 20 40 60 80 100 FIXED COST Relevant Range
Activity Level
Activity Level
18-6
BRIEF EXERCISE 18-3
$80,000 Total Cost Line 60,000 COST
40,000
Variable Cost Element
20,000 Fixed Cost Element 0 500 1,000 1,500 2,000 2,500
Direct Labor Hours
BRIEF EXERCISE 18-4 High Low Difference $1,400 1,000
$15,000 $13,600 = 8,500 7,500 =
$1,400 1,000 = $1.40Variable cost per mile. High Total cost Less: Variable costs 8,500 X $1.40 7,500 X $1.40 Total fixed costs $15,000 11,900 $ 3,100 10,500 $ 3,100 Low $13,600
The mixed cost is $3,100 plus $1.40 per mile.
18-7
BRIEF EXERCISE 18-5 High Low Difference $33,000 22,000
$65,000 $32,000 = 40,000 18,000 = $33,000 22,000
= $1.50 per unit. Activity Level High Low
Total cost Less: Variable costs 40,000 X $1.50 18,000 X $1.50 Total fixed costs
$65,000 60,000 000,000 $ 5,000
$32,000
27,000 $ 5,000
BRIEF EXERCISE 18-6 1. (a) (b) (c) (d) (e) (f) $256 = ($640 $384) 40% ($256 $640) $210 = ($300 $90) 30% ($90 $300) $1,280 = ($320 25%) $960 ($1,280 $320)
2.
3.
BRIEF EXERCISE 18-7 RADIAL MANUFACTURING INC. CVP Income Statement For the Quarter Ended March 31, 2012 Sales ................................................................................................ Variable costs ($920,000 + $70,000 + $86,000)................... Contribution margin ................................................................... Fixed costs ($440,000 + $45,000 + $98,000)........................ Net income..................................................................................... $2,200,000 1,076,000 1,124,000 583,000 $ 541,000
18-8
BRIEF EXERCISE 18-8 (a) $520Q = $286Q + $187,200 + $0 $234Q = $187,200 Q = 800 units (b) Contribution margin per unit $234, or ($520 $286) X = $187,200 $234 X = 800 units
BRIEF EXERCISE 18-9 Contribution margin ratio = [($300,000 $180,000) $300,000] = 40% Required sales in dollars = $160,000 40% = $400,000
BRIEF EXERCISE 18-10 If variable costs are 60% of sales, the contribution margin ratio is ($1 $0.60) $1 = .40. Required sales in dollars = ($195,000 + $75,000) .40 = $675,000 BRIEF EXERCISE 18-11 Margin of safety = $1,200,000 $840,000 = $360,000 Margin of safety ratio = $360,000 $1,200,000 = 30%
BRIEF EXERCISE 18-12 Contribution margin per unit $1.50 is ($6.00 $4.50) Required sales in units = ($480,000 + $1,500,000) $1.50 = 1,320,000.
18-9
SOLUTIONS FOR DO IT! REVIEW EXERCISES
DO IT! 18-1 Variable costs: Indirect labor, direct labor, and direct materials. Fixed costs: Property taxes and depreciation. Mixed costs: Utilities and maintenance.
DO IT! 18-2 (a) Variable cost: ($18,750 $16,200) (10,500 8,800) = $1.50 per unit Fixed cost: $18,750 ($1.50 X 10,500 units) = $3,000 or $16,200 ($1.50 X 8,800) = $3,000 (b) Total cost to produce 8,500 units: $3,000 + ($1.50 X 8,500) = $15,750
DO IT! 18-3 (a) The formula is $250Q = $160Q + $135,000. Therefore, 90Q = $135,000, and the breakeven point in units is 1,500 ($135,000 $90). The contribution margin per unit is $90 ($250 $160). The formula therefore is $135,000 $90, and the breakeven point in units is 1,500.
(b)
DO IT! 18-4 (a) CM per unit = Unit selling price Unit variable costs $10 = $30 $20 CM ratio = CM per unit/Unit selling price 33 1/3% = $10/$30 Break-even point in dollars = Fixed costs Contribution margin ratio = $200,000 33 1/3% = $600,000
18-10
DO IT! 18-4 (Continued) (b) Margin of safety Actual sales Breakeven sales Actual sales $750,000 $600,000 = $750,000 = = (c) 20%
Sales = Variable costs + Fixed costs + Net income $30Q = $20Q + $200,000 + $120,000 $10Q = $320,000 Q = 32,000 units 32,000 units X $30 = $960,000 required sales
18-11
SOLUTIONS TO EXERCISES
EXERCISE 18-1 (a) The determination as to whether a cost is variable, fixed, or mixed can be made by comparing the cost in total and on a per-unit basis at two different levels of production. Variable Costs Fixed Costs Mixed Costs Vary in total but remain constant on a per-unit basis. Remain constant in total but vary on a per-unit basis. Contain both a fixed element and a variable element. Vary both in total and on a per-unit basis.
(b) Using these criteria as a guideline, the classification is as follows: Direct materials Direct labor Utilities EXERCISE 18-2 (a) Variable Variable Mixed Rent Maintenance Supervisory salaries Fixed Mixed Fixed
18-12
EXERCISE 18-2 (Continued) (b) The relevant range is 4,000 9,000 units of output since a straight-line relationship exists for both direct materials and rent within this range. Variable cost per unit Within the relevant range (4,000 9,000 units) = = Cost Units $10,000* 5,000*
(c)
$2 per unit
*Any costs and units within the relevant range could have been used to calculate the same unit cost of $2. (d) Fixed cost within the relevant range (4,000 9,000 units)
$7,000
EXERCISE 18-3 (a) Maintenance Costs:
$4,900 $2,400 $2,500 = = $5 variable cost per machine hour 800 300 500
800 Machine Hours Total costs Less: Variable costs 800 X $5 300 X $5 Total fixed costs $4,900 4,000 $ 900 1,500 $ 900 300 Machine Hours $2,400
Thus, maintenance costs are $900 per month plus $5 per machine hour.
18-13
EXERCISE 18-3 (Continued) (b)
$5,000 Total Cost Line $4,000 Variable Cost Element COSTS $3,000 $4,900
$2,000
$1,000 $ 900 Fixed Cost Element 0 200 400 600 800
Machine Hours
EXERCISE 18-4 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. Wood used in the production of furniture. Fuel used in delivery trucks. Straight-line depreciation on factory building. Screws used in the production of furniture. Sales staff salaries. Sales commissions. Property taxes. Insurance on buildings. Hourly wages of furniture craftsmen. Salaries of factory supervisors. Utilities expense. Telephone bill. Variable. Variable. Fixed. Variable. Fixed. Variable. Fixed. Fixed. Variable. Fixed. Mixed. Mixed.
18-14
EXERCISE 18-5 (a) Maintenance Costs:
$5,000 $2,800 $2,200 = = $.44 variable cost per machine hour 8,000 3,000 5,000
Activity Level High Total cost Less: Variable costs 8,000 X $.44 3,000 X $.44 Total fixed costs $5,000 3,520 00,000 $1,480 Low $2,800
1,320 $1,480
Thus, maintenance costs are $1,480 per month plus $.44 per machine hour. (b)
$5,000 Total Cost Line $4,000 Variable Cost Element COSTS $3,000
$2,000 $1,480 $1,000 Fixed Cost Element
2,000
4,000
6,000
8,000
Machine Hours
18-15
EXERCISE 18-6 (a) Cost Direct materials Direct labor Utilities Property taxes Indirect labor Supervisory salaries Maintenance Depreciation Fixed costs Fixed Variable X X Mixed
X X X X X X = $1,000 + $1,800 + $2,400 + $300 + $200 = $5,700
(b)
Variable costs to produce 3,000 units = $7,500 + $15,000 + $4,500 = $27,000 Variable cost per unit Variable cost portion of mixed cost = $27,000/3,000 units = $9 per unit = Total cost Fixed portion
Utilities: Variable cost to produce 3,000 units = $1,800 $300 = $1,500 Variable cost per unit = $1,500/3,000 units = $.50 per unit
Maintenance: Variable cost to produce 3,000 units = $1,100 $200 = $900 Variable cost per unit = $900/3,000 units = $.30 per unit
Cost to produce 5,000 units = (Variable costs per + Fixed cost unit X 5,000 units) = (($9 + $.50 + $.30) X 5,000) + $5,700 = $49,000 + $5,700 = $54,700
18-16
EXERCISE 18-7 MEMO To: From: Re: Kenny Deines Student Assumptions underlying CVP analysis
CVP analysis is a useful tool in analyzing the effects of changes in costs and volume on a companys profits. However, there are some assumptions which underline CVP analysis. When these assumptions are not valid, the results of CVP analysis may be inaccurate. The five assumptions are: 1. The behavior of both costs and revenues is linear throughout the relevant range of the activity index. 2. All costs can be classified with reasonable accuracy as either fixed or variable. 3. Changes in activity are the only factors that affect costs. 4. All units produced are sold. 5. When more than one type of product is sold, the sales mix will remain constant. If you want further explanation of any of these assumptions, please contact me. EXERCISE 18-8 (a) Contribution margin per lawn Contribution margin per lawn Contribution margin ratio = = = $60 ($13 + $12 + $2) $33 $33 $60 = 55%
Fixed costs = $1,500 + $200 + $2,000 = $3,700 Break-even point in lawns = $3,700 $33 = 112(rounded) (b) Break-even point in dollars = 112 lawns X $60 per lawn = $6,720 per month OR Fixed costs Contribution margin ratio = $3,700 .55 = 6,727* per month *$7 difference is due to rounding.
18-17
EXERCISE 18-9 1. Contribution margin per room Contribution margin per room Contribution margin ratio = = = $60 ($8 + $28) $24 $24 $60 = 40%
Fixed costs = $7,200 + $1,500 + $1,200 + $300 = $10,200 Break-even point in rooms = $10,200 $24 = 425 2. Break-even point in dollars = 425 rooms X $60 per room = $25,500 per month
OR Fixed costs Contribution margin ratio = $10,200 .40 = $25,500 per month EXERCISE 18-10 (a) Contribution margin in dollars:
Sales = 570 X $120 = $68,400 Variable costs = $68,400 X .65 = 44,460 Contribution margin $23,940
Contribution margin per unit: Contribution margin ratio:
$120 $78 ($120 X 65%) = $42. $42 $120 = 35%.
(b) Break-even sales in dollars: Break-even sales in units:
$21,000 = $60,000. 35%
$21,000 = 500. $42
18-18
EXERCISE 18-11 (a) 1. Contribution margin ratio is: $27,360 = 76% $36,000 Break-even point in dollars = 2. Round-trip fare = $15,428 = $20,300 76%
$36,000 = $25 1,440 fares
Break-even point in fares = $20,300 = 812 fares $25 (b) At the break-even point fixed costs and contribution margin are equal. Therefore, the contribution margin at the break-even point would be $15,428. EXERCISE 18-12 (a) Unit contribution margin =
Fixed costs Break-even sales in units
$105,000 ($350,000 $7)
= $2.10 Variable cost per unit = Unit selling price Unit contribution margin = $7.00 $2.10 = $4.90 = 50,000 X $7.00 = 50,000X + $105,000 = where X = Variable cost per unit = Variable cost per unit = $4.90 Contribution margin ratio = $2.10 $7.00 = 30%
OR
18-19
EXERCISE 18-12 (Continued) (b) Fixed costs Contribution margin ratio = Break-even sales in dollars Fixed costs .30 = $420,000 = $126,000 ($420,000 X.30) Since fixed costs were $105,000 in 2012, the increase in 2013 is $21,000 ($126,000 $105,000). EXERCISE 18-13 (a) NAYLOR COMPANY CVP Income Statement For the Month Ended September 30, 2012 Sales (620 video game consoles) ...................... Variable costs........................................................... Contribution margin ............................................... Fixed costs ................................................................ Net income................................................................. Total $248,000 167,400 80,600 52,000 $ 28,600 Per Unit $400 270 $130
(b)
Sales = Variable costs + Fixed costs $400X = $270X + $52,000 $130X = 52,000 X = 400 units
(c)
NAYLOR COMPANY CVP Income Statement For the Month Ended September 30, 2012 Total $160,000 108,000 52,000 52,000 $ 0 Per Unit $400 270 $130
Sales (400 video game consoles)....................... Variable costs ........................................................... Contribution margin ............................................... Fixed costs ................................................................ Net income.................................................................
18-20
EXERCISE 18-14 (a) Sales = Variable cost + Fixed cost + Target net income $150X = $90X + $570,000 + $150,000 $60X = $720,000 X = 12,000 units OR Units sold in 2012 =
$570,000 + $150,000 = 12,000 units $150 $90
(b) Units needed in 2013 =
$570,000 + $210,000 * = 13,000 units $150 $90
*$150,000 + $60,000 = $210,000
(c)
$570,000 + $210,000 = 12,000 units, where X = new selling price X $90

$780,000 = 12,000X $1,080,000 $1,860,000 = 12,000X X = $155
EXERCISE 18-15 1. Unit sales price = $350,000 5,000 units = $70 Increase selling price to $77, or ($70 X 110%). Net income = $385,000 $210,000 $90,000 = $85,000. Reduce variable costs to 55% of sales. Net income = $350,000 $192,500 $90,000 = $67,500.
2.
Alternative 1, increasing selling price, will produce the highest net income.
18-21
EXERCISE 18-16 (a)

$3,200 2,800 2,400 DOLLARS (000) 2,000 1,600 1,200 800 400 100 200 300 400 500 600 700 800 Number of Units (in thousands) Fixed Cost Line Break-even Point Total Cost Line Sales Line
(b) 1.
Break-even sales in units: $4X = $2.40X + $800,000 $1.60X = $800,000 X = 500,000 units
2.
Break-even sales in dollars: X = .60X + $800,000 .40X = $800,000 X = $2,000,000 or $800,000 40%
(c) 1. 2.
Margin of safety in dollars: $2,500,000 $2,000,000 = $500,000 Margin of safety ratio: $500,000 $2,500,000 = 20%
18-22
EXERCISE 18-17 (a) Contribution ratio = Contribution margin Sales ($40 $14) $40 = 65% (b) Break-even in dollars: $19,500 65% = $30,000 (c) Margin of safety = $96,000* $30,000 = $66,000 $66,000 $96,000 = 68.75% *(2,400 X $40) (d) Current contribution margin $40 $14 = $26 Total contribution margin is $26 X 2,400 = $62,400 40% increase in contribution margin in $62,400 X 40% = $24,960 Total increase in sales required: $24,960 65% = $38,400
18-23
SOLUTIONS TO PROBLEMS
PROBLEM 18-1A (a) Variable costs (per haircut) Barbers commission Barber supplies Utilities Total variable cost per haircut Fixed costs (per month) Barbers salaries Managers extra salary Advertising Rent Utilities Magazines Total fixed *(5 X $1,000) (b) $10.00X = $6.00X + $6,800 $ 4.00X = $6,800 X = 1,700 haircuts (c) 1,700 haircuts X $10 = $17,000
$5.50 .30 .20 $6.00
$5,000* 500 200 900 175 25 $6,800
18 15 DOLLARS (000) 12 9 6 3
Break-even Point
Sales Line Total Cost Line
Fixed Cost Line
300
600
900 1,200 1,500 1,800
Number of Haircuts
(d) Net income = $19,000 [($6.00 X 1,900) + $6,800] = $800

18-24
Copyright 2011 John Wiley & Sons, Inc. Kimmel, Accounting, 4/e, Solutions Manual (For Instructor Use Only)
PROBLEM 18-2A (a) LYMAN COMPANY CVP Income Statement (Estimated) For the Year Ending December 31, 2012 Net sales................................................................... Variable expenses Cost of goods sold ...................................... Selling expenses .......................................... Administrative expenses ........................... Total variable expenses .................... Contribution margin ............................................. Fixed expenses Cost of goods sold ...................................... Selling expenses .......................................... Administrative expenses ........................... Total fixed expenses .......................... Net income............................................................... $1,800,000 $1,098,000* 70,000 20,000 1,188,000 612,000 283,000 65,000 60,000 408,000 $ 204,000
*Direct materials $430,000 + direct labor $352,000 + variable manufacturing overhead $316,000. (b) Variable costs = 66% of sales ($1,188,000 $1,800,000) or $.33 per bottle ($.50 X 66%). Total fixed costs = $408,000. 1. $.50X = $.33X + $408,000 $.17X = $408,000 X = 2,400,000 units 2,400,000 X $.50 = $1,200,000
2.
(c) Contribution margin ratio = ($.50 $.33) $.50 = 34% (or 1 .66) Margin of safety ratio (d) Required sales X= = ($1,800,000 $1,200,000) $1,800,000 = 33% (rounded)
$408,000 + $238,000 = $1,900,000 .34
18-25
PROBLEM 18-3A
(a) Sales were $2,400,000, variable expenses were $1,560,000 (65% of sales), and fixed expenses were $980,000. Therefore, the break-even point in dollars is:
$980,000 = $2,800,000 .35

(b) 1. The effect of this alternative is to increase the selling price per unit to $4.80 ($4* X 120%). Total sales become $2,880,000 (600,000 X $4.80). Thus, the contribution margin ratio changes to 46% [($2,880,000 $1,560,000) $2,880,000]. The new break-even point is:
$980,000 = $2,130,435 (rounded) .46

*($2,400,000/600,000) 2. The effects of this alternative are to change total fixed costs to $890,000 ($980,000 $90,000) and to change the contribution margin to 30% [($2,400,000 $1,560,000 $120,000*) $2,400,000]. The new break-even point is:
$890,000 = $2,966,667 (rounded) .30

*($2,400,000 X .05) Alternative 1 is the recommended course of action because it has a lower break-even point.
18-26
PROBLEM 18-4A
(a) Current break-even point: $40X = $22X + $270,000 (where X = pairs of shoes) $18X = $270,000 X = 15,000 pairs of shoes New break-even point: $38X = $22X + ($270,000 + $34,000) $16X = $304,000 X = 19,000 pairs of shoes
(b) Current margin of safety percentage =
(20,000 X $40) (15,000 X $40) (20,000 X $40) 0
= 25%
New margin of safety percentage
(24,000 X $38) (19,000 X $38) (24,000 X $38) 3
= 21% (rounded)
(c)
VALUE SHOE STORE CVP Income Statement

Current Sales (20,000 X $40) Variable expenses (20,000 X $22) Contribution margin Fixed expenses Net income $800,000 440,000 360,000 270,000 $ 90,000 New $912,000 528,000 384,000 304,000 $ 80,000 (24,000 X $38) (24,000 X $22)
The proposed changes will raise the break-even point 4,000 units. This is a significant increase. Margin of safety is 4% lower and net income is $10,000 lower. The recommendation is to not accept the proposed changes.
18-27
PROBLEM 18-5A
(a) (1) Net sales Variable costs Direct materials Direct labor Manufacturing overhead ($360,000 X .70) Selling expenses ($240,000 X .40) Administrative expenses ($280,000 X .20) Total variable costs Contribution margin Sales Variable costs Direct materials Direct labor Manufacturing overhead Selling expenses Administrative expenses Total variable costs Contribution margin Current Year $1,600,000
511,000 285,000 252,000 96,000 56,000 1,200,000 $ 400,000 Projected Year $1,760,000
Current Year $1,600,000 X 1.1
511,000 285,000 252,000 96,000 56,000 1,200,000 $ 400,000
X 1.1 X 1.1 X 1.1 X 1.1 X 1.1 X 1.1 X 1.1
562,100 313,500 277,200 105,600 61,600 1,320,000 $ 440,000
(2) Fixed Costs Current Year Manufacturing overhead ($360,000 X .30) $108,000 Selling expenses ($240,000 X .60) 144,000 Administrative expenses ($280,000 X .80) 224,000 $476,000 Total fixed costs
Projected year $108,000 144,000 224,000 $476,000
18-28
PROBLEM 18-5A (Continued) (b) Unit selling price = $1,600,000 100,000 = $16 Unit variable cost = $1,200,000 100,000 = $12 Unit contribution margin = $16 $12 = $4 Contribution margin ratio = $4 $16 = .25
Break-even point in units = Fixed costs Unit contribution margin 119,000 units = $476,000 $4 Break-even point in dollars = Fixed costs Contribution margin ratio $1,904,000 = $476,000 .25
(c) Sales dollars

required for = (Fixed costs + Target net income) Contribution margin ratio target net income $3,144,000 = ($476,000 + $310,000) .25
(d) Margin of safety = (Expected sales Break-even sales) Expected sales

ratio 39.4% = ($3,144,000 $1,904,000) $3,144,000
18-29
PROBLEM 18-6A
(a) 1.
Let variable selling and administrative expenses = VSA Sales Variable cost of goods sold VSA = Contribution Margin $1,200,000 ($400,000 + $500,000 + $100,000 + VSA) = $100,000 VSA = $100,000 Let fixed manufacturing overhead = FMO Sales Variable cost of goods sold FMO = Gross profit $1,200,000 ($400,000 + $500,000 + $100,000 + FMO) = $100,000 FMO = $100,000 Let fixed selling and administrative expenses = FSA Contribution margin ratio = $100,000 $1,200,000 = 8.33% Contribution margin at break-even = $1,350,000 X 8.33% = $112,455 At break-even, Contribution margin = Fixed costs (FSA + FMO) $112,455 = FSA + $100,000 FSA = $12,455
2.
3.
(b) Incremental sales = $1,200,000 X 20% = $240,000 Incremental contribution margin = $240,000 X 8.33% = $19,992 The maximum increased advertising expenditure would be equal to the incremental contribution margin earned on the increased sales, which is $19,992. The other fixed costs are irrelevant to this decision, because they would be incurred whether or not the advertising expenditure is increased.
18-30
PROBLEM 18-1B
(a) Variable costs (per haircut) Barbers commission Rent Barber supplies Total variable $2.00 .60 .40 $3.00
Fixed costs (per month) Barbers salaries Rent Depreciation Utilities Advertising Total fixed *($1,900 X 3) + $3,900 $ 9,600* 700 500 300 100 $11,200
(b) $10X = $3X + $11,200 $7X = $11,200 X = 1,600 haircuts
1,600 haircuts X $10 = $16,000
(c)
18 15 DOLLARS (000) 12
Break-even Point
Sales Line Total Cost Line
Fixed Cost Line 9 6 3
300
600
900 1,200 1,500 1,800
Number of Haircuts
(d) Net income = $17,000* [($3.00 X 1,700) + $11,200] = $700 *($10 X 1,700)
Copyright 2011 John Wiley & Sons, Inc. Kimmel, Accounting, 4/e, Solutions Manual (For Instructor Use Only)
18-31
PROBLEM 18-2B (a) COLAW COMPANY CVP Income Statement (Estimated) For the Year Ending December 31, 2012 Net sales .......................................................... Variable expenses Cost of goods sold.............................. Selling expenses.................................. Administrative expenses................... Total variable expenses............ Contribution margin .................................... Fixed expenses Cost of goods sold.............................. Selling expenses.................................. Administrative expenses................... Total fixed expenses.................. Net income...................................................... $2,000,000 $1,080,000 (1) 80,000 40,000 1,200,000 800,000 280,000 150,000 70,000 500,000 $ 300,000
(1) Direct materials $360,000 + direct labor $450,000 + variable manufacturing overhead $270,000. (b) Variable costs = 60% of sales ($1,200,000 $2,000,000) or $.30 per bottle ($.50 X 60%). Total fixed costs = $500,000. 1. $.50X = $.30X + $500,000 $.20X = $500,000 X = 2,500,000 units (breakeven) 2,500,000 X $.50 = $1,250,000
2.
(c) Contribution margin ratio = ($.50 $.30) $.50 = 40% Margin of safety ratio (d) Required sales X= = ($2,000,000 $1,250,000) $2,000,000 = 37.5%
$500,000 + $390,000 = $2,225,000 .40
18-32
PROBLEM 18-3B
(a) Sales were $1,500,000 and variable expenses were $1,050,000, which means contribution margin was $450,000 and CM ratio was 30%. Fixed expenses were $840,000. Therefore, the breakeven point in dollars is:
$840,000 = $2,800,000 .30

(b) 1. The effect of this alternative is to increase the selling price per unit to $35 ($25 X 140%). Total sales become $2,100,000 (60,000 X $35). Thus, the contribution margin ratio changes to 50% ($1,050,000 $2,100,000). The new breakeven point is:
$840,000 = $1,680,000 .50

2. The effects of this alternative are to change total fixed costs to $670,000 ($840,000 $170,000) and to change the contribution margin to .26 [($1,500,000 $1,050,000 $60,000*) $1,500,000]. The new breakeven point is:
$670,000 = $2,576,923 .26

*($1,500,000 X .04) 3. The effects of this alternative are: (1) variable and fixed cost of goods sold become $675,000 each, (2) total variable costs become $795,000 ($675,000 + $65,000 + $55,000), and (3) total fixed costs are $1,095,000 ($675,000 + $355,000 + $65,000). The new breakeven point is: X = ($795,000 $1,500,000)X + $1,095,000 X = .53X + $1,095,000 .47X = $1,095,000 X = $2,329,787 (rounded) Alternative 1 is the recommended course of action using breakeven analysis because it has the lowest breakeven point.
18-33
PROBLEM 18-4B
(a) Current breakeven point: $30X = $15X + $210,000 (where X = pairs of shoes) $15X = $210,000 X = 14,000 pairs of shoes New breakeven point: $28X = $15X + ($210,000 + $24,000) $13X = $234,000 X = 18,000 pairs of shoes
(b) Current margin of safety percentage =
(16,000 X $30) (14,000 X $30) (16,000 X $30) 3
= 12.5% New margin of safety percentage =
(20,000 X $28) (18,000 X $28) (20,000 X $28) 2
= 10%
(c)
PAYLESS SHOE STORE CVP Income Statement

Current Sales (16,000 X $30) Variable expenses (16,000 X $15) Contribution margin Fixed expenses Net income $480,000 240,000 240,000 210,000 $ 30,000 New $560,000 300,000 260,000 234,000 $ 26,000 (20,000 X $28) (20,000 X $15)
No, the changes should not be made because net income will be lower than the net income currently earned. In addition, the breakeven point would be higher by 4,000 units and the margin of safety percentage would decrease from 12.5% to 10%.
18-34
PROBLEM 18-5B
(a) (1) Net sales Variable costs Direct materials Direct labor Manufacturing overhead ($480,000 X .20) Selling expenses ($400,000 X .30) Administrative expenses ($500,000 X .30) Total variable costs Contribution margin Sales Variable costs Direct materials Direct labor Manufacturing overhead Selling expenses Administrative expenses Total variable costs Contribution margin Current Year $2,000,000 X 1.2 Current Year $2,000,000
600,000 340,000 96,000 120,000 150,000 1,306,000 $ 694,000 Projected Year $2,400,000
600,000 340,000 96,000 120,000 150,000 1,306,000 $ 694,000
X 1.2 X 1.2 X 1.2 X 1.2 X 1.2 X 1.2 X 1.2
720,000 408,000 115,200 144,000 180,000 1,567,200 $ 832,800 Projected Year $ 384,000 280,000 350,000 $1,014,000
(2) Current Fixed Costs Year Manufacturing overhead ($480,000 X .80) $ 384,000 Selling expenses ($400,000 X .70) 280,000 Administrative expenses ($500,000 X .70) 350,000 $1,014,000 Total fixed costs
18-35
PROBLEM 18-5B (Continued) (b) Unit selling price = $2,000,000 100,000 = $20.00 Unit variable cost = $1,306,000 100,000 = $13.06 Unit contribution margin = $20.00 $13.06 = $6.94 Contribution margin ratio = $6.94 $20.00 = .347
Break-even point in units = Fixed costs Unit contribution margin 146,110* units = $1,014,000 $6.94 *Rounded Break-even point in dollars = Fixed costs Contribution margin ratio $2,922,190* = $1,014,000 .347 *Rounded (c) Sales dollars required for = (Fixed costs + Target net income) Contribution margin ratio target net income $4,000,000 = ($1,014,000 + $374,000) .347 Margin of safety = (Expected sales Break-even sales) Expected sales ratio 27% = ($4,000,000 $2,922,190) 4,000,000
(d)
(e) (1) Net sales Variable costs Direct materials Direct labor ($340,000 $140,000) Manufacturing overhead ($480,000 X .10) Selling expenses ($400,000 X .80) Administrative expenses ($500,000 X .30) Total variable costs Contribution margin $2,000,000
600,000 200,000 48,000 320,000 150,000 1,318,000 $ 682,000
18-36
PROBLEM 18-5B (Continued) (2) Contribution margin ratio = $682,000 $2,000,000 = .341 (3) Break-even point in dollars = $862,000 .341 = $2,527,859 (rounded) Fixed costs Manufacturing overhead ($480,000 X .90) Selling expenses ($400,000 X .20) Administrative expenses ($500,000 X .70) Total fixed costs
$432,000 80,000 350,000 $862,000
The break-even point in dollars declined from $2,922,190 to $2,527,859. This means that overall the companys risk has declined because it doesnt have to generate as much in sales. The two changes actually had opposing effects on the break-even point. By changing to a more commission based approach to compensate its sales staff the company reduced its fixed costs, and therefore reduced its break-even point. In contrast, the purchase of the new equipment increased the companys fixed costs (by increasing its equipment depreciation) and reduced its variable direct labor cost, both of which would increase the break-even point.
18-37
PROBLEM 18-6B
(a) 1.
Let variable selling and administrative expenses = VSA Sales Variable cost of goods sold VSA = Contribution Margin $1,900,000 ($600,000 + $700,000 + $200,000 + VSA) = $150,000 VSA = $250,000 Let fixed manufacturing overhead = FMO Sales Variable cost of goods sold FMO = Gross profit $1,900,000 ($600,000 + $700,000 + $200,000 + FMO) = $300,000 FMO = $100,000 Let fixed selling and administrative expenses = FSA Contribution margin ratio = $150,000 $1,900,000 = 7.90% Contribution margin at break-even = $2,200,000 X 7.90% = $173,800 At break-even, Contribution margin = Fixed costs (FSA + FMO) $173,800 = FSA + $100,000 FSA = $73,800
2.
3.
(b) Incremental sales = $1,900,000 X 20% = $380,000 Incremental contribution margin = $380,000 X 7.90% = $30,020 The maximum increased advertising expenditure would be equal to the incremental contribution margin earned on the increased sales, which is $30,020. The other fixed costs are irrelevant to this decision, because they would be incurred whether or not the advertising expenditure is increased.
18-38
BYP 18-1
DECISION MAKING ACROSS THE ORGANIZATION
(a)
(1) Capital-Intensive $2,508,000 502,000 $3,010,000 $30.00 $5.00 6.00 3.00 2.00 (2) Labor-Intensive $1,538,000 502,000 $2,040,000 $30.00 $5.50 8.00 4.50 2.00 Fixed manufacturing costs Incremental selling expenses Total fixed costs Selling price Variable costs Direct materials Direct labor Variable overhead Selling expenses Contribution margin Total fixed costs (1) Fixed manufacturing costs Incremental selling expenses Total fixed costs Selling price Variable costs Direct materials Direct labor Variable overhead Selling expenses Contribution margin Total fixed costs (1) Contribution margin per unit (2) Break-even in units (1) (2)
16.00 $14.00 $3,010,000 $14.00 215,000
20.00 $10.00 $2,040,000 $10.00 204,000
Contribution margin per unit (2) Break-even in units (1) (2)
(b) Martinez Company would be indifferent between the two manufacturing methods at the volume (X) where total costs are equal. $16X + $3,010,000 = $20X + $2,040,000 $4X = $970,000 X = 242,500 units (c) Martinez should employ the capital-intensive manufacturing method if annual sales are expected to exceed 242,500 units and the labor-intensive manufacturing method if annual sales are not expected to exceed 242,500 units. The labor-intensive method is more profitable for sales up to 242,500 units because the fixed costs are lower. The capital-intensive method is more profitable for sales above 242,500 units because its contribution margin is higher.
18-39
BYP 18-2
MANAGERIAL ANALYSIS
(a) The variable costs per unit are: Cost of goods sold ($600,000a 200,000)........................ Selling expenses ($140,000b 200,000) ........................... Administrative expenses ($40,000c 200,000)............... Total..................................................................................... Fixed Costs are: Cost of goods sold ($800,000 X .25).................................. Selling expenses ($280,000 X .50)...................................... Administrative expenses ($160.000 X .75).......................
a
$3.00 .70 .20 $3.90 $200,000 140,000 120,000 $460,000
($800,000 X .75)
($280,000 X .50)
($160,000 X .25)
The break-even points are: X = ($3.90 $6.00*) X + $460,000 X = .65X + $460,000 .35X = $460,000 X = $1,314,286 (rounded) $6.00X = $3.90X + $460,000 $2.10X = $460,000 X = 219,048 units (rounded) *($1,200,000/200,000) (b) Variable unit cost of goods sold = $3.25 ($600,000 200,000 = $3.00; $3.00 + $.25) Sales volume = 260,000 units (200,000 X 130%) Total sales = 260,000 X $6.25 = $1,625,000 Net income computation: Sales.................................................................. Variable expenses Cost of goods sold (260,000 X $3.25).............................. Selling expenses (260,000 X $.70) ................................ Administrative expenses (260,000 X $.20) ............................... Total variable expenses............ Contribution margin.....................................
18-40
$1,625,000
$845,000 182,000 52,000 1,079,000 546,000
BYP 18-2 (Continued) Fixed expenses Cost of goods sold ............................. Selling expenses ................................. Administrative expenses .................. Total fixed expenses ................. Net income...................................................... X = ($1,079,000 $1,625,000)X + $460,000 X = .66X + $460,000 .34X = $460,000 X = $1,352,941 (rounded) Profits and the break-even point would both increase. (c) Sales [320,000 (1) X ($6.00 $.30)] .................. Variable expenses Cost of goods sold (320,000 X $3.00) ...................................... Selling expenses (320,000 X $.79) .......... Administrative expenses (320,000 X $.20) ....................................... Total variable expenses .................... Contribution margin ............................................. Fixed expenses Cost of goods sold ...................................... Selling expenses ($140,000 + $35,000)................................ Administrative expenses ........................... Total fixed expenses .......................... Net income............................................................... (1) Sales volume = 200,000 X 160% = 320,000 X = ($1,276,800 $1,824,000)X + $495,000 X = .70X + $495,000 .30X = $495,000 X = $1,650,000 Profits and the break-even point would both increase. (d) Sallys plan should be accepted. It produces a higher net income and a lower break-even point than Terrys plan. $1,824,000 $200,000 140,000 120,000 460,000 $ 86,000
$960,000 252,800 64,000 1,276,800 547,200 $200,000 175,000 120,000 495,000 $ 52,200
18-41
BYP 18-3
REAL-WORLD FOCUS
(a) Sweeteners and packaging are a variable cost to Coca-Cola because their use is directly proportional to the amount of product produced. If the unit cost of a variable cost item increases, the contribution margin will decline. This will lead to a decline in net income unless the company can increase its selling price, increase the number of units it sells, or reduce other costs. (b) This description makes the marketing expenditures sound like they are a variable cost, since it suggests that they vary with the amount of units sold. However, unlike variable costs, the relationship of marketing costs is not directly proportional to sales, since other factors also influence units sold. Thus, it is not a pure variable cost. However, it is also not a fixed cost, in that there usually is a relationship between marketing expenditures and sales. For CVP purposes, it might best be handled as a mixed cost, having both a fixed and variable component. (c) The first measure, gallon shipments of concentrates and syrups, is the activity index, since it best reflects the companys production and sales activity at the wholesale level, its primary line of business. The second measure, unit cases of finished product, indicates the amount of activity by Cokes primary customers, the bottlers. Coke also keeps track of this since it provides information about what is happening at the retail level.
18-42
BYP 18-4
MANAGERIAL ACCOUNTING ON THE WEB
(a) The description of the production process is as follows: The production of hard candy begins with the blending, cooking, and kneading of ingredients. Workers add flavoring and coloring when the candy is kneaded. The candy is then pressed out and a roll of thick chocolate is placed in the middle of the candy. Workers then roll each end of the product over the middle to form a pillow shape. The roll is stretched by hand at the chicken bone machine so that the width of the roll is the width of the average chicken bone, a difficult procedure. Next, the elongated roll is fed into the cutting machine. The end result is a candy which tastes of sweet cinnamon and has a luscious surprise of chocolate in the middle. (b) The following costs might be identified as variable: labor (stretching chicken bones, feeding into cutting machine), materials (flavoring, coloring, chocolate). The following costs might be identified as fixed: depreciation of machinery, indirect labor, and utilities.
18-43
BYP 18-5
COMMUNICATION ACTIVITY
To: From: Subject:
My Roommate Your Roommate Cost-Volume-Profit Questions
In response to your request for help, I provide you the following: (a) The mathematical formula for break-even sales is: Break-even Sales = Variable Costs + Fixed Costs Break-even sales in dollars is found by expressing variable costs as a percentage of unit selling price. For example, if the percentage is 70%, the break-even formula becomes X = .70X + Fixed Costs. The answer will be in sales dollars. Break-even sales in units is found by using unit selling price and unit variable costs in the formula. For example, if the selling price is $300 and variable costs are $210, the break-even formula becomes $300X = $210X + Fixed Costs. The answer will be in sales units. (b) The formulas for contribution margin per unit and contribution margin ratio differ as shown below: Unit Selling Price Unit Variable Costs = Contribution Margin per Unit Contribution Margin per Unit Unit Selling Price = Contribution Margin Ratio You can see that CM per Unit is used in computing the CM ratio. (c) When contribution margin is used to determine break-even sales, total fixed costs are divided by either the contribution margin ratio or contribution margin per unit. Using the CM ratio results in determining the break-even point in dollars. Using CM per unit results in determining the break-even point in units.
18-44
BYP 18-5 (Continued) The formula for determining break-even sales in dollars is: Fixed Costs Contribution Margin Ratio = Break-even Sales in Dollars The formula for determining break-even sales in units is: Fixed Costs Contribution Margin per Unit = Break-even Sales in Units I hope this memo answers your questions.
18-45
BYP 18-6
ETHICS CASE
(a) The stakeholders in this situation are: Jimmy Hester, accountant of Advanced Company. The dislocated personnel of Advanced. The senior management who made the decision. (b) Jimmy is hiding an error and is knowingly deceiving the companys management with inaccurate data. (c) Jimmys alternatives are: Keep quiet. Confess his mistake to management. The students recommendations should recognize the practical aspects of the situation but they should be idealistic and ethical. If the students cant be totally ethical when really nothing is at stake, how can they expect to be ethical under real-world pressures?
18-46
BYP 18-7
ALL ABOUT YOU ACTIVITY
(a)
The variable gasoline cost of going one mile in the hybrid car would be $0.075 ($3.00/40). The variable gasoline cost of going one mile in the traditional car would be $0.10 ($3.00/30). The savings per mile of driving the hybrid vehicle would be $0.025 ($0.10 $0.075). In order to break even on your investment you would need to drive 120,000 miles. This is determined by dividing the additional fixed cost of $3,000 by the contribution margin per mile of $0.025. There are many other factors that you would want to consider in your analysis. For example, do the vehicles differ in their expected repair bills, insurance costs, licensing fees, or ultimate resale value? Also, some states and some employers offer rebates for the purchase of hybrid vehicles. In addition, your decision might be influenced by nonfinancial factors, such as a desire to reduce emissions.
(b)
(c)
(d)
18-47

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CHAPTER 18

8, 9, 10, 11, 12, 13, 17

1A, 2A, 3A, 4A, 5A, 6A

1B, 2B, 3B, 4B, 5B, 6B

8, 9, 10, 11, 12, 13, 14, 16, 17 14, 15, 17

1A, 2A, 3A, 4A, 5A

1B, 2B, 3B, 4B, 5B

2A, 4A, 5A, 6A

2B, 4B, 5B, 6B

Copyright 2011 John Wiley & Sons, Inc.

Kimmel, Accounting, 4/e, Solutions Manual

(For Instructor Use Only)

ASSIGNMENT CHARACTERISTICS TABLE

Copyright 2011 John Wiley & Sons, Inc.

Kimmel, Accounting, 4/e, Solutions Manual

(For Instructor Use Only)

Distinguish between variable and E18-4 fixed costs.

Explain the significance of the relevant range.

BLOOMS TAXONOMY TABLE

Copyright 2011 John Wiley & Sons, Inc.

Explain the concept of mixed costs.

List the five components of cost-volume-profit analysis.

Indicate what contribution margin is and how it can be expressed.

Kimmel, Accounting, 4/e, Solutions Manual

Identify the three ways to determine the break-even point.

(For Instructor Use Only)

Broadening Your Perspective

Managerial Analysis Ethics Case All About You

Copyright 2011 John Wiley & Sons, Inc.

Kimmel, Accounting, 4/e, Solutions Manual

(For Instructor Use Only)

The sales volume to achieve net income of $60,000 is as follows:

$180,000 + $60,000 .30

= $800,000 RENFRO COMPANY CVP Income Statement

$900,000 $350,000 140,000 490,000 $410,000

Copyright 2011 John Wiley & Sons, Inc.

Kimmel, Accounting, 4/e, Solutions Manual

(For Instructor Use Only)

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 18-2

Copyright 2011 John Wiley & Sons, Inc.

Kimmel, Accounting, 4/e, Solutions Manual

(For Instructor Use Only)

BRIEF EXERCISE 18-3

$80,000 Total Cost Line 60,000 COST

Variable Cost Element

20,000 Fixed Cost Element 0 500 1,000 1,500 2,000 2,500

Direct Labor Hours

BRIEF EXERCISE 18-4 High Low Difference $1,400 1,000

$15,000 $13,600 = 8,500 7,500 =

The mixed cost is $3,100 plus $1.40 per mile.

Copyright 2011 John Wiley & Sons, Inc.

Kimmel, Accounting, 4/e, Solutions Manual

(For Instructor Use Only)

BRIEF EXERCISE 18-5 High Low Difference $33,000 22,000

$65,000 $32,000 = 40,000 18,000 = $33,000 22,000

= $1.50 per unit. Activity Level High Low

$65,000 60,000 000,000 $ 5,000

Copyright 2011 John Wiley & Sons, Inc.

Kimmel, Accounting, 4/e, Solutions Manual

(For Instructor Use Only)

Copyright 2011 John Wiley & Sons, Inc.