This action might not be possible to undo. Are you sure you want to continue?

Welcome to Scribd! Start your free trial and access books, documents and more.Find out more

3

**Fundamentals of Cost-Volume-Proﬁt Analysis Orientation
**

P A R T

1

LEARNING OBJECTIVES Preparing and Organizing Yourself After reading this chapter, you should be able to: for Success in College

L.O.1 Use cost-volume-proﬁt (CVP) analysis to analyze decisions. L.O.2 Understand the effect of cost structure on decisions. L.O.3 Use Microsoft Excel to perform CVP analysis. L.O.4 Incorporate taxes, multiple products, and alternative cost structures into

the CVP analysis.

**L.O.5 Understand the assumptions and limitations of CVP analysis.
**

C H A P T E R S I N P A R T O N E

1 2

Making Yourself Successful in College Approaching College Reading and Developing a College-Level Vocabulary Approaching College Assignments: Reading Textbooks and Following Directions

3

✓ Related Resources See pages 000 to 000 of the Annotated Instructor’s Edition for general suggestions related to the chapters in Part One.

1

cor50782_ch01_001-072.indd 1

10/5/09 11:09:2

P A R T

I opened U-Develop because I love photography and I wanted to own my own business. I now get to spend most of my day working with employees and customers making sure that the photos they take are the best they can be. It also gives me a chance to encourage younger people who have an interest in photography, because I work with many of the school groups and after-school clubs here in town. That’s the fun part of the job. But I also have to think about the ﬁnancial side of the business. I need a systematic way to understand the relation between my decisions and my proﬁts. I’ve

Orientation

read that managers can calculate the price they need to charge to break even (see the In Action item on CVP analysis and airlines). I should be able to apply the same analysis to my business.

1

Preparing and Organizing Yourself for Success in College

Jamaal Kidd was discussing the photo-ﬁnishing store that he owns and operates. Starting out ﬁve years ago with a small storefront in the mall offering only photo developing, he has expanded the business and moved to a larger store downtown, where he now offers a wide range of products and services, some made in his own workshop.

Our theme in this book is that the cost accounting system serves managers by providing them with information that supports good decision making. In this chapter and the next, we develop two common tools that managers can use to analyze situations and make decisions that will increase the value of the ﬁrm. We begin in this chapter by developing the relations among the costs, volumes, and proﬁts of the ﬁrm. In the next chapter, we use these relations to make pricing and production decisions that increase proﬁt.

C H A P T E R S

I N

cost-volume-proﬁt (CVP) analysis Study of the relations among revenue, cost, and volume and their effect on proﬁt.

P A R T O N E

1

Cost-Volume-Proﬁt Analysis Making Yourself Successful in College

Managers are concerned about the impact of their decisions on proﬁt. The decisions they L.O. 1 make are about volume, pricing, or incurring a cost. Therefore, managers require an un2 Approaching College Reading and Use cost-volumederstanding of the relations among revenues, costs, volume, and proﬁt. The cost accountDeveloping a College-Levelprofit (CVP) analysis Vocabulary ing department supplies the data and analysis, called cost-volume-proﬁt (CVP) analysis, to analyze decisions. that support these managers.

3

Approaching College Assignments: Reading Textbooks and Following Directions

**Cost-Volume-Proﬁt Analysis and Airline Pricing
**

Cost-volume-proﬁt analysis helps managers evaluate the impact of alternative product pricing strategies on proﬁts. It can also be useful for evaluating competitors’ pricing strategies and efforts to grow market share, as in the following examples: Aloha Airlines CEO David Banmiller and C. Thomas Nulty, senior vice president for marketing and sales, explain that their airline must charge $50 per seat to break even when planes are 62 percent full. Hawaiian Airlines, Aloha Airlines and go! are each losing money when they sell interisland tickets below $50, according to a study commissioned by Aloha Airlines. “Why would somebody come in and charge $19, and $29, and $39 when their costs were substantially higher? Why would somebody do it?” said Banmiller.

cor50782_ch01_001-072.indd 1

In Action

The Sabre study showed that when planes are 62 percent full, Aloha’s costs are $50 per seat, Hawaiian’s are $55, and go!’s are $67.

✓ Related Resources However, managers at the parent company of go! (Mesa See pages 000 their Airlines) disputed the estimates with a CVP analysis of to 000 of the Annotated Instructor’s own: Edition for general suggesJonathan Ornstein, Mesa’s chief executive ofﬁcer, to the chapters tions related said yesterday that Aloha’s cost estimates are wayOne. when off in Part it comes to his airline. He said go!’s expenses per passenger are about $40 when the planes are 80 percent full. 1

Note: Aloha Airlines is no longer in business. Source: Rick Daysog, “Below-Cost Fares Puzzle Aloha Airlines CEO,” Honolulu Advertiser, December 21, 2006.

10/5/09 11:09:2

81

82

Part II

Cost Analysis and Estimation

Proﬁt Equation

proﬁt equation Operating proﬁt equals total revenue less total costs.

P A R T

The key relation for CVP analysis is the proﬁt equation. Every organization’s ﬁnancial operations can be stated as a simple relation among total revenues (TR), total costs (TC), and operating proﬁt: TR TC Orientation go by different names (For not-for-proﬁt and government organizations, the “proﬁt” may Proﬁt such as “surplus” or “contribution to fund,” but the analysis is the same.) Both total revenues and total costs are likely to be affected by changes in the amount of output.1 We rewrite the proﬁt equation to explicitly include volume, allowing us to analyze the relations among volume, costs, and proﬁt. Total revenue (TRand Organizing price per Preparing ) equals average selling Yourself unit (P) times the units of output (X): Total revenue TR Price PX Operating proﬁt Total revenues Total costs

1

for Success in College Units of output produced and sold

In our proﬁt equation, total costs (TC) may be divided into a ﬁxed component that does not vary with changes in output levels and a variable component that does vary. The ﬁxed component is made up of total ﬁxed costs (F) per period; the variable component is the product of the average variable cost per unit (V) multiplied by the quantity of output (X). Therefore, the cost function is Total costs TC (Variable costs per unit VX F Units of output) Fixed costs

H A P T R S P A R T Substituting the expanded expressions in the proﬁtCequationE yieldsI aN form more O N E useful for analyzing decisions:

Proﬁt

**Making Yourself Total1revenue Total costs Successful in College
**

TR TC VX 2 F Approaching College Reading and Developing a College-Level Vocabulary

TC Therefore,

**Proﬁt 3PX Approaching College Assignments: (VX F) Collecting terms gives Proﬁt (Price (P
**

unit contribution margin Difference between revenues per unit (price) and variable cost per unit. total contribution margin Difference between revenues and total variable costs.

**Reading Textbooks and Following Directions
**

Variable costs) F Units of output Fixed costs V)X

We deﬁned contribution margin in Chapter 2 as the difference between the sales price and the variable cost per unit. We will refer to this as the unit contribution margin to distinguish it from the difference between the total revenues and total variable cost,Related Resources ✓ the total contribution margin. In other words, the total contribution margin is the unit con- 000 to 000 See pages tribution margin multiplied by the number of units (Price Variable costs) Units Annotated Instructor’s of the of output, or (P V)X. It is the amount that units sold contribute toward (1) covering ﬁxed general suggesEdition for costs and (2) providing operating proﬁts. Sometimes we use the contribution margin,related to the chapters tions in total, as in the preceding equation. Other times, we use the contribution margin per Part One. in unit, which is Price P

1

Variable cost per unit V

1

cor50782_ch01_001-072.indd inventory 1

We adopt the simplifying assumption that production volume equals sales volume so that changes in can be ignored in this chapter.

10/5/09 11:09:2

. . .380 1 10/5/09 11:09:2 . . . . .800 operating proﬁt? Although we could use the income statement and guess at the answer to 1 Making Yourself Successful in College these questions. U-DEVELOP Income Statement March Sales (12. .36 The ﬁxed costs to operate the store for March. .30College in Other costs (sales and support). . . . .1.880 1. . . . . Thus. . F is the sum of total ﬁxed manufacturing costs and ﬁxed marketing and administrative costs for the period. and ﬁxed costs $1. . . Using the proﬁCollege Reading and 2 Approaching t equation. . . V is the sum of variable manufacturing costs per unit and variable marketing and administrative costs per unit. . . were: Proﬁt Contribution margin (P ($.Chapter 3 Fundamentals of Cost-Volume-Profit Analysis Recall from Chapter 2 that an important distinction for decision making is whether costs are ﬁxed or variable. . . . . a typical month. . . Given the data.500. The average variable cost of each print was $. . variable cost per unit $. . .indd 1 E Developing a College-Level Vocabulary Fixed costs V )X $. . . . . . . price $. . . That is. In March. . . .500. . . . . .000 $. .500 3 Exhibit ✓ Related Resources 3. . . .1 See pages 000 Income Statement to 000 of the Annotated Instructor’s Edition for general suggestions related to the chapters in Part One. Less Variable costs of goods sold (12.06 Average variable cost per print. developing prints. . . . . . . P Aare concerned about cost we R T behavior. . .60. . . U-Develop processed 12. . .60) . . cor50782_ch01_001-072. . . . . Jamaal might want to know how many units (prints) he needs to sell in order to achieve a speciﬁed proﬁt. . . . U-Develop processed 12. Contribution margin . which classiﬁes costs as either manufacturing or administrative.000 prints Reading Textbooks and Following Directions $1. . . contribution margin per unit $. . . . . . . . as shown in Exhibit 3. . . . $. . .000 $. . . . . .60. . . .200 $3. computed as follows: Preparing and Organizing Yourself Cost of processing (materials and labor) . . . . . . . As a manager. . . . . not the ﬁnancial accounting treatment. . .600 720 4. . . He charged an average price of $. . . To simplify the equation. . . . . . . . . we use the term “Proﬁt” in the equation to mean the same thing as “Operating Proﬁt” on income statements. . . . $7. .60 $1. . . . . . . . .1. . . . . . .000 prints at $.30) . . . therefore. . . the results for March. . .320 $2. . .24). . Less ﬁxed costs . Operating proﬁt . . . . . . . . . . . . . . . . when the weather will improve and people take vacations. Assume.36 (therefore. . . .36) F Approaching College Assignments: 12. and X refers to the number of units produced and sold during the period. for decision making. . . . . . . . . . .000 prints. . . . . . . . Recall that in March. .06) . . . . . . The operating proﬁt can be determined from the company’s income statement for the month. . . . .36. Variable selling costs (12. 1 83 CVP Example Orientation When Jamaal ﬁrst opened U-Develop. he offered one service only. . the manager asks two questions: What volumeS is I N P A R T O N C H A P T E R required to break even (earn zero proﬁts)? What volume is required to make an $1. . . . . for Success $. . . . . . . . .500 $1. it is easier to set up an equation that summarizes the cost-volume-proﬁt relation. . that Jamaal is hoping for sales to improve in July. .000 prints. . . were $1. . for example. . . .380 which is equal to the operating proﬁt shown on the income statement in Exhibit 3.

40 (or 40%) Using the contribution margin ratio. cor50782_ch01_001-072. The contribution margin ratio is the contribution margin as a percentage of sales revenue.250 prints) C H A P T E R S Orientation F _______ 6. Managers might want to know the break-even volume expressed either in units or in sales dollars. we ﬁrst deﬁne a new term. We start with the answer to the ﬁrst question. contribution margin ratio.250 prints.36 6. for 2 Approaching as follows: U-Develop.24 ____ Reading Textbooks and Following Directions $. 1 F Break-Even Volume in Units We can use the proﬁt equation to ﬁnd the break-even point expressed in units: Proﬁt If Proﬁt 0 (P V )X (P V ) Preparing and Organizing Yourself Fixed costs for _____________________ Break-even volume (in units) Success in College Unit contribution margin 0. break-even point Volume level at which proﬁts equal zero.60 . which we call ﬁnding a break-even volume.indd The term (P 1 10/5/09 11:09:2 . if we are dealing with only one product. then X $1. its operating proﬁt is Proﬁt TR PX ($. 1 The modiﬁed formula for dollars multiplies both sides of the equation by P: F P PX ______ P V Since multiplying the numerator by P is the same as dividing the denominator by P. the formula to ﬁnd the break-even volume follows:2 Break-even volume sales dollars Fixed costs _____________________ Contribution margin ratio 2 We can derive the break-even point for sales dollars from the original formula for units: F X ______ P V ✓ Related Resources See pages 000 to 000 of the Annotated Instructor’s Edition for general suggestions related to the chapters in Part One.24 6. If the company makes many products. it is often much easier to think of volume in terms of sales dollars. it’s easier to work with units as the measure of volume. we obtain: F PX _________ (P V ) P V)/P is the contribution margin ratio. the contribution margin ratio can be computed College Reading and Contribution margin ratio Developing a College-Level Vocabulary Unit contribution margin _____________________ 3 Sales price per unit Approaching College Assignments: $.500 I N P A R T O N E contribution margin ratio Contribution margin as a percentage of sales revenue.250 prints) $1.500 $ . Break-Even Volume in Sales Dollars 1 To Makingbreak-evenSuccessfulterms of sales ﬁnd the Yourself volume in in College dollars.60 $0 TC VX F ($. For example. if U-Develop processes 6.250 prints To show this is correct.84 Part II Cost Analysis and Estimation Finding Break-Even and Target Volumes We can use the proﬁt equation to P A R T answer Jamaal’s questions about volumes needed to break even or achieve a target proﬁt by developing the formulas discussed here.

24 13. Break-Even Volume Break-even volume (units) Break-even volume (sales dollars) Target Volume Target volume (units) Target volume (sales dollars) cor50782_ch01_001-072. We getand Following Directions at $. Exhibit 3.750 prints U-Develop must sell 13. the break-even volume expressed in sales dollars is Break-even sales dollars .500 ______ P A R T 1 85 Note that $3.2 Fixed costs ____________________ Unit contribution margin Fixed costs ____________________ Contribution margin ratio Summary ofpages 000 to 000 See BreakEven and Target Volume of the Annotated Instructor’s Formulas Edition for general suggestions related to the chapters in Part One. we use the proﬁt equation with the target proﬁt speciﬁed. we ﬁnd the volume that provides an operating proﬁt of for Success in College Target volume (units) $1.800 ______________ For U-Develop the target volume expressed in sales dollars is Developing a College-Level Vocabulary Target volume (sales dollars) 3 .250 translates into 13.800 ______________ Target volume (sales dollars) Fixed costs Target proﬁt ______________________ Contribution margin ratio 2 Approaching College Reading and $1. Each additional print sold increases operating proﬁts by $.250 prints generates revenue of $3.800.60 Textbooks the same target volume whether expressed in units (13.24. Orientation Target Volume in Units To ﬁnd the target volume. The formula to ﬁnd the target volume follows: 1 Making Yourself Successful in College E Fixed costs Target proﬁt ________________________ Preparing Contribution margin per unit $1.500 $1.750 of sales dollars translates into 6.750 $1.Chapter 3 Fundamentals of Cost-Volume-Profit Analysis For U-Develop.750 prints generates revenue of $8.40 Approaching College Assignments: Note that sales dollars of $8.250).750).500 $1.750 prints) or dollars (sales of 13.750 prints per month to achieve the target proﬁt of $1. Fixed costs Target proﬁt ______________________ Unit contribution margin Fixed costs Target proﬁt ______________________ Contribution margin ratio 1 10/5/09 11:09:2 .indd 1 Exhibit ✓ Related Resources 3. We get the same result whether expressed in units (6. C H P E R S Target Volume in Sales Dollars To ﬁnd the target volume in sales dollars.40 $3.800 as follows: Target volume Fixed costs Target proﬁt ________________________ Contribution margin per unit $.250 prints) or dollars (sales of 6.60 each.250 prints at a price of $.750 printsReadingeach.A weT use the I N P A R T O N contribution margin ratio instead of the contribution margin per unit.2 summarizes the four formulas for finding break-even and target volumes. The formula to ﬁnd the target volume in units is and Organizing Yourself Using the data from U-Develop.

. Such a graph is a helpful aid in presenting cost-volume-proﬁt relationships. .000 $3. . .000 $5. .000 60. d.250 prints is the break-even volume. . Fixed marketing and administrative costs . . Break-even number in units. Sales. Monthly operating proﬁt when sales total $360. . P (for example.86 Part II Cost Analysis and Estimation Exhibit 3. . . . . . .000 $2. Total variable costs . . . Number of units sold that would produce an operating proﬁt of 20 percent of sales dollars.820 ( [12. 6. . .000 35. . . . . . .000 90 55 5 10/5/09 11:09:2 . The intercept of the total cost line is the ﬁxed cost for the period. Number of units sold in March. . . . .000 $7.3 CVP Graph—U-Develop $8. . and the slope College-Level Vocabulary . . . . Unit variable marketing cost . . . . For example. . where the TR and TC lines intersect).000 $.000 See pages 000 to 000 (as here). of the Annotated Instructor’s b.indd 1 $360. . . . . . Sales dollars required to earn an operating proﬁt of $20. .000 $4. . . . The following information for Jennifer’s Framing Supply is given for March: Compute the following: ✓ Related Resources a. . .200 $5.000. . . . . . Self-Study Question 1. . Volumes lower than break even result in an College Assignments:TR 3 Approaching operating loss because TC. . . . The solution to this question is at the end of the chapter on page 109.000 $. .000 TC Total cost $1. . . .000 240. . .000 Volume per period (X ) Graphic Presentation Exhibit 3. . . . . Unit price. . . .000 12. . .000 $0 0 2.60 X 6. . . .000 $7.200. . . . We plotAvolume N E on H P T E R S I N P R T O the horizontal axis (number of prints sold per month or sales dollars. . Costs $6. . . . . We plot dollars on the vertical axis (revenue dollars or cost dollars. . . FDeveloping a is the variable cost per unit.000 Revenues. The break-even point is the volume at which TR TC (that is. . Total ﬁxed costs . . . . . . f. . The total revenue (TR) line relates total revenue to volume (for example.000 25.3 presents the cost-volume-proﬁt (CVP) relations for U-Develop in a graph.000 $1. . . Fixed manufacturing costs . . . . .60 per print for U-Develop). . . . . . Unit variable manufacturing cost .820 Orientation Preparing and Organizing Yourself for Success in College Total revenue TR 4.000. . V . . . .000 10. . . . the total cost 2 Approaching College Reading and for a volume of 12. . $. volumes higher than break even result in an operating proﬁt because TR TC. Number of units sold that would produce related to the chapters an tions operating proﬁt of $120. . in Part One. . . if U-Develop sells 1 Making Yourself Successful in College 12. .36 X P A R T 1 Break even TR TC 8. . Edition for general suggesc. its total revenue would be $7. . for example). . cor50782_ch01_001-072. . . . For Reading Textbooks and Following Directions U-Develop. . according to the graph). . . . . . . . . . . . . .36] $1. .CforAexample). . .000 prints in a month. . . . The slope of TR is the price per unit. . . . . . . .000 prints is $5.500). . The total cost (TC) line shows the total cost for each volume. 1 e.500 $.

Proﬁt-Volume Model 1 87 Instead of considering revenues and costs separately. A graphic comparison of proﬁt-volume and CVP relationships is shown in Exhibit 3.000 Volume 7.000 Developing College-Level Vocabulary 3 Profit-Volume Relation Approaching College Assignments: $1. Preparing and Organizing Yourself Exhibit 3. For example.500 6.500a 12. 2 Understand the effect of cost structure on decisions.500 $.36 X C H A P T E R S I N P A R T O N E 1 $0 Making Yourself Successful in College Approaching College Reading and 0 1.Chapter 3 Fundamentals of Cost-Volume-Profit Analysis The amount of operating proﬁt or loss can be read from the graph by measuring the P A R T vertical distance between TR and TC.4 for Success in College Comparison of CVP Cost-Volume-Profit Relation Graph and Proﬁt-Volume Graph—U-Develop Total revenue TR $. L.500 Total costs ✓ Related Resources See pages 000 to 000 of the Annotated Instructor’s Edition for general suggestions related to the chapters in Part One. Note that the slope of the proﬁt-volume line equals the unit contribution margin.200 $5.500 3. Orientation proﬁt-volume analysis Version of CVP analysis using a single proﬁt line. we can analyze the relation between proﬁt and volume directly.500 12. which equals ﬁxed costs.500 3. 1 $1.O. The cost and revenue lines are collapsed into a single proﬁt line.000 7.500 6. The vertical axis shows the amount of operating proﬁt or loss.4.600 Volume cor50782_ch01_001-072.60 X $8.000 4.000 10.indd 1 10/5/09 11:09:2 .500 2 9. This approach to CVP analysis is called proﬁt-volume analysis. The intercept equals the loss at zero volume.820).000 $600 Operating loss Profit Total contribution margin $.000 10.000 TC $2.000 Dollars $4. the vertical distance between TR and TC when X 12.400 Reading Textbooks and Following Directions $400 Dollars 0 1.500 Operating profit 9.000 4.24X $1.000 indicates Proﬁt $1.380 ( $7.000 Total cost $1.000 $6.

.000 units) Amount $1. . . the higher the break-even point. Fixed costs . . Grocery stores (right) have lower ﬁxed costs and low operating leverage. Cost structures differ widely among industries and among ﬁrms within an industry. proﬁt increases at a high rate. The utility is capital intensive.000 _________ $ 250. . . .000 _________ $ 200. . An organization’s cost structure has a signiﬁcant effect on the sensitivity of its proﬁts to changes in volume.000. . Exhibit 3. In contrast. the operating leverage of American Airlines is higher than that of Jet Blue.000. Newer carriers.000.000 750. Operating proﬁt . An organization’s cost structure is the proportion of ﬁxed and variable costs to total costs. . Variable costs . . pension. Therefore.5 Comparison of Cost Structures Sales . . Lo-Lev Company (with relatively high variable costs) and Hi-Lev Company (with relatively high ﬁxed costs). .334 units $0.000 _________ $ 750. operating leverage Extent to which an organization’s cost structure is made up of ﬁxed costs. Exhibit 3. . . . consists of so-called legacy carriers. and other costs and which operate using a hub and spoke system. however. . The airline industry in the United States.000 units) of the Annotated Instructor’s Edition for general suggesAmount Percentage tions related to the chapters in $1.000. 1 Orientation C H A P T E R S I N P A R T O N E 1 2 Making Yourself Successful in College Approaching College Reading and Developing a College-Level Vocabulary Approaching College Assignments: Reading Textbooks and Following Directions 3 Different industries have different cost structures. Operating leverage can vary within an industry as Preparing and Organizing Yourself well as between industries. . The higher the ﬁrm’s ﬁxed costs. . grocery retailers such as Albertsons or Safeway have a cost structure with a higher proportion of variable costs. . . 250. . such as American Airlines and Continental Airlines. Operating leverage is high in ﬁrms with a high proportion of ﬁxed costs and a low proportion of variable costs and results in a high contribution margin per unit.000 100 Part One. Electric utilities (left) have high ﬁxed costs and high operating leverage. for example. have lower labor costs and operate out of lower cost and less-congested airports.000 550. Once the break-even point has been reached. Lo-Lev Company (1. Contribution margin .000 units Contribution margin per unit $0. . Operating leverage describes the extent to which an organization’s cost structure is made up of ﬁxed costs. which for Success in College have high ﬁxed labor.5 demonstrates the primary differences between two companies.000 _________ $ 200. . which results in a cost structure with high ﬁxed costs. Electric utilities such as Southern California Edison or Public Service of New Mexico have a large investment in equipment.indd 1 Break-even point . . the grocery store is labor intensive. 200. . . .88 Part II Cost Analysis and Estimation Use of CVP to Analyze the Effect P A R T of Different Cost Structures cost structure Proportion of an organization’s ﬁxed and variable costs to its total costs. .000 _________ _________ Percentage 100 75 25 5 20 ✓ Related Resources See pages 000 to 000 Hi-Lev Company (1.000 _________ _________ 733. such as Southwest Airlines and Jet Blue Airlines.75 25 75 55 20 1 cor50782_ch01_001-072.000 50.25 10/5/09 11:09:2 .

In The excess of projected or a sense. if sales decline.000 ($.000 prints and the break-even volume is 6.a College-Level Vocabulary Margin of Safety 3 Approaching College Assignments: The margin of safety is the excess of projected (or actual) salesReading break-even sales Following Directions over the Textbooks and margin of safety level. safety formula is Sales volume Break-even sales volume Margin of safety If U-Develop sells 8. Crandall said. then its margin of safety is Sales Breakeven 8. If U-Develop sells 8.250 1.750 prints per month before it incurs a loss. In practice. that is. 10/5/09 11:09:2 . the fall in Hi-Lev’s proﬁts is much greater than the fall in Lo-Lev’s proﬁts.250. Hi-Lev Company’s cost structure is dominated by ﬁxed costs with a higher contribution margin of .000). Suppose that both companies experience a 10 percent increase in sales. This tells managers the margin between current sales and the break-even point.’ Mr.75 $100. ‘If everybody is growing to keep their costs down. February 8. cor50782_ch01_001-072.25. so the emphasis is on increasing volume.750 8. 2003).000 ($. Lo-Lev Company’s proﬁt increases by $25. each additional unit (seat-mile) sold provides a large contribution to proﬁt. in a business with such slim proﬁt margins. In the case of ﬁrms with low operating leverage. better rents from landlords and better advertising deals from media outlets” (Washington Post.000 6. In general. such as airlines. Preparing and Organizing Yourself for Success in College S Note that although these ﬁrms have the same sales revenue and operating proﬁt. the proﬁt margins are small. bigger companies gain important competitive advantage by being able to negotiate better terms and prices from suppliers.Chapter 3 Fundamentals of Cost-Volume-Profit Analysis Effect of Cost Structure on Operating P A R T and Investing Decisions Different cost structures lead to different decisions that ﬁrms make concerning operations and investments. ‘So long as there’s lots of capacity. In the case of ﬁrms with high operating leverage. Lo-Lev Company’s cost structure is dominated by variable costs with a lower contribution margin ratio of . a relatively large amount. The margin of even volume.000). Every dollar of sales contributes $. the former chief executive of American Airlines.S.000 prints and its break-even volume is 6.25 $100. and Hi-Lev Company’s proﬁt in1 Making Yourself Successful in College creases by $75.25 toward ﬁxed costs and proﬁt. and Albertson’s.000). such as grocery chains. they have different cost structures. Of course. 2004).75 C H A P T E R S I N P A R T O N E toward ﬁxed costs and proﬁt. margin of safety 1 percentage The excess of projected or actual sales over the breakeven volume expressed as a percentage of the break-even volume.250 prints.75. before U-Develop ﬁnds itself operating at a loss. The excess of the projected or actual sales volume expressed as a percentage of the break-even volume is the margin of safety percentage. Consider the following two statements: 1. This means that volume can fall by 22 percent. said that airlines added planes because growth spreads ﬁxed costs over more passenger miles. the margin of safety also may be expressed in sales dollars or as a percent of current sales. Robert L. so ﬁrms do what they can to improve those margins—even small savings translate to large improvements in proﬁts. “Ahold now has about $23 billion in sales among its six U.indd 1 ✓ Related Resources See pages 000 to 000 of the Annotated Instructor’s Edition for general suggestions related to the chapters in Part One. “Many experts say the airlines throw planes on a route to grab market share from rivals. December 9. Every dollar of sales contributes $. Orientation Crandall. companies with lower 2 market demands than Reading and ﬁxed costs have the ability to be more ﬂexible to changes in Approaching Collegedo Developing companies with higher ﬁxed costs and are better able to survive tough times. the margin of safety percentage is 22 percent ( 1. The logic of consolidation is that. 1 89 In Action 2. supermarket chains—large but uncomfortably behind giants such as Wal-Mart. actual sales over the breakthe amount by which sales can fall before the company is in the loss area. all other things held constant. margin of safety indicates the risk of losing money that a company faces. Kroger. people have an incentive to cut prices’” (The New York Times.750 prints Sales volume could drop by 1. then there’s constantly a great deal of capacity in the market.

In the left side screenshot of Exhibit 3. 3. Click “OK” and the program will ﬁnd the break-even volume as shown in the right side screenshot of Exhibit 3. variable cost per unit. so it is important to work examples and do problems by hand at ﬁrst.indd 1 10/5/09 11:09:2 .60 $ Approaching College Reading and 0.6 Screenshot of Spreadsheet Program for CVP Analysis— U-Develop 1 2 3 4 5 6 7 8 9 A U-Develop Price Variable cost Fixed cost Profit Volume 1 2 B C Making Yourself Successful in College $ 0. and total ﬁxed costs) for U-Develop are entered. the target proﬁt is zero because we are looking for the break-even point). a spreadsheet program such as Microsoft Excel® is ideally suited to doing CVP routinely. “Given that I expect to sell 5.36 $ 1.000 volume in cell B8 in Exhibit 3. The proﬁt equation (or formula) is shown in the formula bar of the spreadsheet.N E Exhibit 3.66).7.60 $ 0. The basic data (price per unit. With the spreadsheet open. we could ask.36 $ Developing a College-Level Vocabulary 1. enter the target proﬁt (in this example. Target value: Current value: 0 $- ? OK Cancel Step Pause X ✓ Related Resources See pages 000 to 000 of the Annotated Instructor’s Edition for general suggestions related to the chapters in Part One. Then select “Goal Seek” from the drop-down box.500 $ (300) 5. In the “To value:” edit ﬁeld.7 Screenshot of Spreadsheet Analysis Tool—Goal Seek 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 A U-Develop Price Variable cost Fixed cost Profit Volume Goal Seek Set cell: To value: By changing cell: OK B C 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 A U-Develop Price Variable cost Fixed cost Profit Volume $ 0. Once the data are entered. (The 5.7. what price do I need to charge to break even?” In this case. 4.60 $ 0. In the “By changing cell:” edit ﬁeld. any number will sufﬁce. However. In the “Set cell:” edit ﬁeld. 2. choose the “Data” tab and select “What-If Analysis” from Preparing and Organizing Yourself the ribbon.500 $ – 6. for Success in College The formula in cell B7 is: ((B3-B4)*B8)-B5. Exhibit 3. enter the cell address of the volume variable ($B$8). 1 cor50782_ch01_001-072.90 Part II Cost Analysis and Estimation CVP Analysis with Spreadsheets L.) 5. It is important to be able to do CVP analysis and understand the relations. we C H and R S N P A R T O would change Step 4 above to enter the cell for Price (B3) A P TﬁEnd the Ianswer ($0. so-called what-if analyses.000 prints. 3 P A R T Use Microsoft Excel to perform CVP analysis. enter the cell address for the target proﬁt calculation (B7).O.250 ? B7 0 $B$8 Cancel X Goal Seek Status Goal Seeking with Cell B7 found a solution.36 $ 1.000 $ 0.000 Approaching 3 College Assignments: Reading Textbooks and Following Directions B C D Exhibit 3. Although this spreadsheet is extremely simple. an analysis tool such as Goal Seek can be used to ﬁnd the volume associated with a given desired proﬁt level.500 $ (300) 5. it can easily be edited to analyze alternative scenarios.6 is only a placeholder. For example. the problem is set up as follows: 1 Orientation 1.6 shows a Microsoft Excel worksheet for U-Develop.

Income Taxes Assuming that operating proﬁts before taxes and taxable Preparing and Organizing income are the same. .36 __ __ $. Finally.60.800. That is.60 . . . .indd 10/5/09 11:09:2 . to determine the volume required to earn a target after-tax income. Target volume (units) Fixed costs [Target proﬁt (1 t)] ______________________________ Unit contribution margin Notice that taxes affect the analysis by changing the target proﬁt.O. We assume the tax rate t . . there is an inﬁnite number of combinations of the two services that would1 achieve a given level of proﬁt. . Making some simplifying assumptions. Recall that P $. 1 91 Orientation Incorporate taxes.25]). .Chapter 3 Fundamentals of Cost-Volume-Profit Analysis P A R T Extensions of the CVP Model L. For example. . .56 _____ $ . .500 $2. After a short time. .400 ( $1. multiple products. Now. . monthly ﬁxed costs totaled $1. managers often cor50782_ch01_001-072.44 _____ _____ ✓ Related Resources See pages 000 to 000 of the Annotated Instructor’s Edition for general suggestions related to the chapters in Part One. you ﬁrst determine the required before-tax operating income ( target after-tax income [1 tax rate]) and then solve for the target volume using the required before-tax income as before. Rearranging. . . suppose that the owner of U-Develop wants to ﬁnd the number ofEprints I N P A R T O N C H A P T R S required to generate after-tax operating proﬁts of $1. step ﬁxed costs) by incorporating these complications in the proﬁt equation. . and F $1. . .24 16. To simplify matters.400:College Reading and 2 Approaching Target volume (units) E Developing Fixed costs [Target proﬁt (1 t)] ______________________________ Unit contribution margin $1. .400 ______________ $. $. the contribution margin per unit $. enlargements of photos.250 prints a College-Level Vocabulary 3 Approaching College Assignments: Reading Textbooks and Following Directions Multiproduct CVP Analysis When U-Develop started. Without some assumptions. we can incorporate more complicated cost structures (for example.800 [1 . and alternative cost structures into the CVP analysis. V $. a second service. was offered. The prices and costs of the two follow: Prints Selling price. . which is $2. . .820. .25. To ﬁnd the target volume.36. . . For example. we can extend the analysis to ﬁrms that make multiple products. .24 __ __ __ __ Enlargements $1. . . . Variable cost . . print processing. U-Develop has a 25 percent tax rate. it provided only one service. income taxes may be incorporated into the basic model as follows: Yourself for Success in College (1 t) After-tax proﬁt [(P V)X F] where t is the tax rate. Contribution margin. We illustrate these extensions here. 1 Making Yourself Successful in College that is. 4 The basic CVP model that we have developed can be easily extended to answer other questions or modiﬁed to incorporate complications. we can use the formula to determine the volume required to earn a target proﬁt of $2.24. we can use the model to determine the ﬁxed costs required to achieve a certain proﬁt for a given volume. . We can incorporate the effects of income taxes by modifying the proﬁt equation to include taxes.500. .00 . ﬁrst determine the required before-tax income. . 1 When these two services were offered. we can ﬁnd the target volume as follows.

When Reading Textbooksaand Following Directions a company assumes constant product mix. . . totaling 6. managers deﬁne a package or bundle of products in the typical product mix and then compute the breakeven or target volume for the package. .300 ( . . is required to break even. the contribution margin from this for Success in College package is 9 1 $.000) prints and 700 ( . . Enlargements .90 7. .000 units of service where X refers to the break-even number. . .000) enlargements to break even. 1 10/5/09 11:09:2 .300 prints and 700 enlargements.44 _____ $2.90 $.820 $. that is.10 7. nine will be prints and Preparing and Organizing Yourself one will be an enlargement. . of every ten “units” of service sold. .26 The multiple product breakeven for U-Develop can be determined from the break-even ✓ Related Resources formula: X $1. Prints . a ﬁxed product mix or weighted-average contribution margin. For U-Develop. divide the ﬁxed costs by the weighted-average contribution margin percent.indd (which is $. . . . . .26 in our example) divided by the weighted-average revenue.820 Contribution margin C H A P T E R S I N P A R T O N E $2. .92 Part II Cost Analysis and Estimation assume a particular product mix and compute break-even P A T or target volumesRusing either of two methods.10 $. 1 Fixed Product Mix Using the ﬁxed product mix method. See pages 000 to 000 of the Annotated Instructor’s Edition for general suggestions related to the chapters that Uin Part One.26 7. 1 Find Breakeven in Sales Dollars To ﬁnd the breakeven in sales dollars.44) $. The weighted-average contribution margin percent is the ratio of the weighted-average contribution margin cor50782_ch01_001-072. . Deﬁning X as a package of nine prints and one enlargement. . . . The problem can be College Assignments: average contribution margin per unit. . For example. . . the contribution margin is the weighted-average contribution margin of all of its products.60 _____ _____ Orientation Managers compute the break-even or target volume of a bundle or package of products.16 . . . which we continue to assume is 90 percent 3 Approaching solved by using a weightedprints and 10 percent enlargements. The product mix assumption means Develop must sell 6. both of which give the same result.60 700 packages 1 Making Yourself Successful in College where X refers to the break-even number of packages. .44 $2.24) (. . . suppose that the owner of U-Develop is willing to assume that the prints and enlargements will sell in a 9:1 ratio. .24 $.2 Approaching College Reading and Developing a College-Level Vocabulary Weighted-Average Contribution Margin The weighted-average contribution margin also requires an assumed product mix. Contribution margin . Now the break-even point is computed as follows X Fixed costs $1. . This means that the sale of 700 packages of nine prints and one enlargement per package. . the weighted-average contribution margin per unit can be computed by multiplying each product’s proportion by its contribution margin per unit (.

that the ﬁxed costs of $1. We have separated costs into ﬁxed and variable and we have assumed that the variable cost per unit is the same for all levels of volume. our monthly ﬁxed costs and Following Directions Reading Textbooks will be (at least) $1. including semivariable costs and step costs.36) 6. for example.250 which is less than 10.000 units.500.500 $480). renting monthly for $480. adding another $480 for an additional machine. they are not inherent limitations to the method of CVP analysis itself. U-Develop can break even at a volume of 8. At this level of ﬁxed costs. But 6. 1 10/5/09 11:09:2 .250 prints.) for Success in College Alternative Cost Structures The cost structures we have considered so far have been relatively simple. If we had found that the new break-even point was greater than 10.00) for enlargements 1 93 Now.500 E Developing $480) ($480)a College-Level Vocabulary which is less than breakeven. we are going to to Approaching College Assignments: have to rent the additional machine. L.000 prints.000 prints. Therefore.10 $1.000 prints.250 ($1.64 (.60) for prints $.980 ______ $ 0. Suppose.980 ( $1. We illustrate how more complicated cost structures can be analyzed by assuming that the ﬁxed costs of U-Develop include the rental of equipment for photo developing and that the capacity of these machines is limited. that is. the for Making Yourself Successful in College break-even point is 6.000 prints 3 break even.60 per unit and enlargements sell for $1.250 prints.250 prints. the weighted-average revenue can be found as follows: (. the break-even point is Break-even volume Fixed costs _____________________ Unit contribution margin $1. we would have repeated the analysis.64 7.625% The break-even sales amount in dollars is: $1.820 ﬁxed costs $4.26 weighted-average contribution margin 40.Chapter 3 Fundamentals of Cost-Volume-Profit Analysis To ﬁnd the weighted-average revenue. If we are going to have to sell more than 5.1) are sufﬁcient for monthly volumes less H A P orEequal I N P A R T O N C than T R S to 5.24 8.480 Orientation Yourself $. R T sell for $. we deﬁned other cost behavior patterns. CVP analysis relies on certain assumptions and these assumptions might limit the applicability of the results for decision making. Therefore.250 prints cannot be developed without the additional machine.90 $. is required. Therefore.indd 1 Understand the assumptions and limitations of CVP analysis.64 weighted-average revenue . At a volume of 6. For every additional 5. It is important to understand.500 (from Exhibit 3. another machine.O. In Chapter 2.40625 weighted-average contribution margin and Organizing Preparing percent $. U-Develop’s proﬁt will be 2 Approaching College Reading and Proﬁt ($0.00 per unit.60 $0. Now what is the break-even volume for U-Develop? We know from our analysis earlier in the chapter that 1 a ﬁxed cost of $1. the weighted-average contribution margin percent is found as follows: $. 5 Assumptions and Limitations of CVP Analysis As with all methods of analysis.480 (You can verify that $4. to break even. ✓ Related Resources See pages 000 to 000 of the Annotated Instructor’s Edition for general suggestions related to the chapters in Part One. multiply the proportion of sales (90 percent P A Prints prints and 10 percent enlargements) by the sales prices per unit. however. that the limitations are due to the assumptions that the cost analyst makes. cor50782_ch01_001-072.000 prints.

for Success in College 1 Orientation Self-Study Questions 2. HDC is subject to a tax rate of 35 percent on its income. and supplies) are $7 per day. volumes. The price and cost characteristics for each are as follows (one unit is a tent or RV space rented for one day): Price per Unit Tent space . maintenance. Assuming the mix of tent and Yourself Successful as the current 1 Making RV spaces is the same in College mix. CVP analysis is just what I need.indd for cost analysis. these assumptions are simplifying assumptions that are made by the analyst. In addition. If a “unit” is one space rented for one day. hence.000 per year. how many units does HDC have to rent annually to earn $48. if the decisions are sensitive to the assumptions made (for example. The variable costs (including cleaning. . . If we know that unit prices are lower for higher volumes. proﬁt. But for quick answers for rouSee pages 000 to 000 tine decisions. however. $ 6 15 Variable Cost per Unit $3 7 I N Units Rented per Year 6. . .000 annually. . The lesson from this is that CVP analysis is a tool that the manager can use to help with decisions.750 after taxes? Suppose HDC rents spaces for both RVs and tent camping. . the manPreparing and Organizing Yourself ager should be cautious about depending on CVP analysis without considering alternative assumptions. As we saw in the previous section.94 Part II Cost Analysis and Estimation For example. RV space . The more important the decision. 2 Approaching College Reading and 3 Approaching College Assignments: Reading Textbooks and Following Directions The Debrief Jamaal Kidd considered the spreadsheet he developed for his business and reﬂected on how it will help him as a manager: The cost-volume-profit analysis I learned in this chapter gives me a simple and intuitive approach to understanding how my decisions affect my proﬁts. . I know that there are limitations to the use of CVP analysis and that for many decisions. I will want to develop ✓ Related Resources more detailed analyses. The result will be a more complicated relation among costs. High Desert Campgrounds (HDC) rents spaces for recreational vehicles (RVs) by the day. of the Annotated Instructor’s Edition for general suggestions related to the chapters in Part One. But with analysis tools such as Microsoft Excel we can model the more complicated relations and ﬁnd the break-even point (or points) if they exist. how many tent spaces and how many RV spaces must be rented annually for HDC to break even? The solutions to these questions are at the end of the chapter on Developing a College-Level Vocabulary page 109. we can incorporate that relation into the CVP analysis. The ﬁxed costs of HDC are $60. and proﬁts than we have worked with here and the breakeven and target volume formulas will not be as simple as those we have derived. many people point to the assumptions of constant unit variable cost and P as R T constant unit prices for all levels of volumeA important limitations of CVP analysis. the more the manager will want to ensure that the assumptions made are applicable. HDC charges $15 per day for a space.000 P A R T O N E C H A P T E R S 3.000 9. 1 1 10/5/09 11:09:2 . The ﬁxed costs of HDC are $60. Summary The cost analysis approach to decision making is used when the decisions affect costs and revenues and. that prices do not depend on volume). In this chapter we considered the cost-volume-proﬁt (CVP) analysis framework cor50782_ch01_001-072.

O. C H A P T E L. the Goal Seek function of Excel is designed to ﬁnd values of variables such as volume that set other variables (for example. the higher the degree of the proﬁt’s sensitivity to volume.. For example. about managing a company. CVP analysis examines the impact of prices. and volume on proﬁts and a conceptual tool. Understand the assumptions and limitations of CVP analysis. Developing a College-Level Vocabulary L. such as step ﬁxedCollege Reading and 2 Approaching costs. an assumption about product mix allows the application of CVP analysis by treating the multiple products as if they are a “basket” of goods. and proﬁts can be analyzed.O. 3-3. and alternative cost structures into the CVPR S I N P A R T O N E analysis. An organization’s cost structure is the proportion of ﬁxed and variable costs to total costs. 89 margin of safety percentage. volume. a small proportion of variable costs. selling price or amount of output). L. can be analyzed by considering costs at different volumes. multiple products. 84 contribution margin ratio.Chapter 3 Fundamentals of Cost-Volume-Profit Analysis The following summarizes key ideas tied to the chapter’s learning objectives. costs. The cost analyst must understand which assumptions are most important for the decision being made and Assignments: 3 Approaching College consider how sensitive the decision is to the assumptions before relying on CVP Reading Textbooks and Following Directions analysis alone to make a decision. 88 proﬁt equation. 82 unit contribution margin.inddﬁnancial statements? 3-1.O. More complicated relations among costs. 84 cost structure. Use Microsoft Excel to perform CVP analysis. as summarized in the proﬁt equation Proﬁt where P V X F Average unit selling price Average unit variable costs Quantity of output Total ﬁxed costs PX (VX F) P A R T 1 95 Orientation Preparing and Organizing Yourself for Success in College Management can use CVP analysis to plan future projects and to help in determining a project’s feasibility.O. What are the components of total costs in the proﬁt equation? How does the total contribution margin differ from the gross margin that is often shown on companies’ 1 cor50782_ch01_001-072. Use cost-volume-proﬁt (CVP) analysis to analyze decisions. All analysis methods require assumptions that limit the applicability of the results. The higher the ﬁrm’s leverage. which is after income taxes. costs. or way of thinking. and volume on operating proﬁts. the target proﬁt. 81 margin of safety. 88 cost-volume-proﬁt (CVP) analysis. proﬁt) equal to a selected target value (such as zero). 82 ✓ Related Resources See pages 000 to 000 of the Annotated Instructor’s Edition for general suggestions related to the chapters in Part One. 5. With multiple products. L. By altering different variables within the equation (e. 1. 89 operating leverage. managers are able to perform a what-if analysis (often referred to as sensitivity analysis). variable costs. has to be converted to 1 Making Yourself Successful in College a target proﬁt before income taxes. 2. 4. Understand the effect of cost structure on decisions. 3-2. 82 proﬁt-volume analysis. More complicated cost structures. With income taxes. Operating leverage is high in ﬁrms with a high proportion of ﬁxed costs. 3. L. and ﬁxed costs. CVP analysis is both a management tool for determining the impact of selling prices. Review Questions Write out the proﬁt equation and describe each term. and the resulting high contribution margin per unit. 1 10/5/09 11:09:2 . It helps management focus on the objective of obtaining the best possible combination of prices.O. Incorporate taxes. Key Terms break-even point. A spreadsheet program such as Microsoft Excel can be used to perform most CVP analyses. 87 total contribution margin.g. volumes.

How do income taxes affect the break-even equation? Why? Why is it common to assume a ﬁxed sales mix before ﬁnding the break-even volume with multiple products? What are some important assumptions commonly made in CVP analysis. 3-14.) 3-15. Why might the operating proﬁt calculated by CVP analysis differ from the net income reported in ﬁnancial statements for external reporting? Why does the accountant use a linear representation of cost and revenue behavior in CVP analysis? How is this justiﬁed? The typical cost-volume-proﬁt graph assumes that proﬁts increase continually as volume increases.” Do you agree with this any Making Yourself Successful in College statement? Why or why not? Consider a class in a business school where volume is measured by the number of students 2 leverage is high or low? Why? in the class.” Comment.” Does this mean that they are not ﬁxed over the long run? Why or why not? What is operating leverage? Why is knowledge of a ﬁrm’s operating leverage important to its managers? What is the margin of safety? Why is this important for managers to know? Write out the equation for the target volume (in units) proﬁt equation when the income tax rate is t. 3-13. 1) accounting 3-19. 3-18. f. “I am going to work for a hospital. 3-5. there is no reason to learn CVP analysis. The total revenue line. The break-even point. which is a not-for-proﬁt organization. The ﬁxed costs area. Variable cost per unit. h. 3-10. The loss area (range of volumes leading to loss). The total variable costs area. c. I will not be able to apply 1 CVP analysis in my work. How do they P A R T differ? Fixed costs are often deﬁned as “ﬁxed over the short run.O. a news report on msn. 3-16. Therefore. Do these assumptions impose serious limitations on the analysis? Why or why not? 1 Orientation Preparing and Organizing Yourself for Success in College Critical Analysis and Discussion Questions 3-12. e. The proﬁt area (range of volumes leading to proﬁt).” What important assumptions andAssignments: Reading (The load factor Following Directions considered when using this piece of information? Textbooks and is the percentage of available seats on a ﬂight that are occupied. 3-6.96 Part II Cost Analysis and Estimation 3-4. 3-8. g. Because there are no proﬁts. Would you say the operating Approaching College Reading and Developing College-Level Vocabulary On January 1. 1 10/5/09 11:09:2 . b. cor50782_ch01_001-072. What are some of the factors that might prevent the increasing proﬁts that are indicated when linear CVP analysis is employed? “The assumptions of CVP analysis are so simplisticC that noTﬁErm S I N make R T O N E H A P R would P A a decision based on CVP alone.com includedathe following sentence: “A report put out by brokerage house CLSA about Jet Airways said that the fall in ATF [fuel] prices has brought down the load factors (ﬂight occupancy) required for the airline to break even 3 Approaching College limitations should be from 78 percent to 63 percent. 3-9. 3-17. d. Compare cost-volume-proﬁt (CVP) analysis with proﬁt-volume analysis.indd 1 ✓ Related Resources See pages 000 to 000 of the Annotated Instructor’s Edition for general suggestions related to the chapters in Part One. Proﬁt Equation Components Identify each of the following proﬁt equation components on the graph that follows: a. 3-11. 3-7. 2009. Exercises (L. The total cost line.

. . . Total variable costs . . . . . . . . . . . . 1) in Part One. cor50782_ch01_001-072. Basic Decision Analysis Using CVP Anu’s Amusement Center has collected the following data for operations for the year: Total revenues . . . . . . . . .Chapter 3 Fundamentals of Cost-Volume-Profit Analysis $ P A R T 1 97 Orientation Preparing and Organizing Yourself for Success in College 0 Volume (L.O. . . . .000 50. .750 $450. . $ 1 2 Making Yourself Successful in College Line d Approaching College Reading and c Developing a College-Level Vocabulary Area e g b Area f 3 Approaching College Assignments: Reading Textbooks and Following Directions a Volume 3-21. . . Total tickets sold . .indd 1 ✓ Related Resources See pages 000 to 000 of the Annotated Instructor’s Edition for general suggestions related to the chapters (L. . 1) C H A P T E R S I N P A R T O N E 3-20.000 S 1 10/5/09 11:09:2 . . . . . . . . . Proﬁt Equation Components Identify the letter of each proﬁt equation component on the graph that follows. . . . $800. . . . . . Total ﬁxed costs. . . .000 $218. . . . . . . . .O. . .

O. . Assume that the projected number of units of the Annotated Instructor’s sold for the year is 7.000. spouse. b. . or other loved one. . Edition for general sugges- ✓ Related Resources Required tions related to the chapters in Part One.000 for the year assuming a contribution margin ratio of 40 percent. 1) 3-22.000 per month 3 Approaching College Assignments: Following Directions Required a. . once it is successful. for Success margin ratio of c.O. Reading Textbooks and . Find the break-even point in sales dollars with a contributionin College25 percent. Find the break-even point in sales dollars with a contribution margin ratio of 40 percent. .. Mark ﬁnds ways to credibly misstate the estimated ﬁxed costs of producing DNA-diamonds below those that any objective person would estimate. and variable costs per unit are 10 percent higher than projected. What is the average contribution margin per ticket? d. . DNA-diamond is a piece of jewelry that contains the DNA of a boy or girl friend. What is the average variable cost per ticket? c. . 20. (L. . .. $ 18 each Variable costs . will beneﬁt the shareholders and employees of the company. What is the impact on operating proﬁt if variable costs per unit decrease by 10 percent? Increase by 20 percent? d. . (L. .O. . What is the impact on operating proﬁt if the sales price decreases by 10 percent? Increases by 20 percent? 1 c. Working with a friend in the company’s ﬁnance department. . 1) 3-23. . . . Find the sales dollars required to generate a proﬁt of $200.98 Part II Cost Analysis and Estimation Required P A a. Required Preparing and Organizing Yourself a. 1) 3-24. . . . . . is considering the introduction of a new calculator with the following price and cost characteristics: Sales price . What number must Cambridge sell to make an operating proﬁt of $16. and (d) independently of each other. What number must Cambridge sell per month to break even? b. 1 2 Making Yourself Successful in College Approaching College Reading and Required Are Mark’s actions ethical? Explain.indd 1 10/5/09 11:09:2 . . DNA-diamond. What is the break-even point? e. Inc. What will the operating proﬁt be? b. 10 each Fixed costs . she will close it down. 1) 3-25. Mark knows that if the product is successful (and he is C H A P that R S I be). CVP Analysis—Ethical Issues Mark Ting desperately wants his proposed new product. Inc.O. . .000 in ﬁxed costs. What is the average selling price for a ticket? R T b.750 in operating proﬁts.000 for the month? (L. Pthen top mancertain T E it will N A R T O N E agement will not ﬁnd out about the understatement of ﬁxed costs.. What number of tickets must be sold for Anu’s Amusements to make a $43. What impact will these cost changes have on operating proﬁt for the year? Will proﬁt go up? Down? By how much? cor50782_ch01_001-072. . in Exercise 3-24. . .. . . Basic Decision Analysis Using CVP Developing a College-Level Vocabulary Cambridge. then the break-even point will be reduced to a level that top management ﬁnds acceptable. Anu has decided that unless the operation can earn at least $43.750 operating proﬁt for the year on ticket sales? 1 Orientation (L. Basic Decision Analysis Using CVP See pages 000 to 000 Refer to the data for Cambridge. Top management will not approve this product in view of its high break-even point. to be accepted by top management. Basic CVP Analysis The manager of Kima’s Food Mart estimates operating costs for the year will include $900. Mark knows that if he can reduce the ﬁxed costs in his proposal. . . Consider requirements (b). a. . (c). Mark believes that this product. Suppose that ﬁxed costs for the year are 10 percent lower than projected. . .

Inc. Required a. The cost structure of a competitor. What is the impact on operating proﬁt if the sales price decreases by 10 percent? Increases by 20 percent? c. . Basic Decision Analysis Using CVP (L. Inc. One-Mart. What is the impact on operating proﬁt if variable costs per unit decrease by 10 percent? Increase by 20 percent? d. . . Fixed costs . Variable costs . Analysis of Cost Structure (L. What is the margin cor50782_ch01_001-072. . . Required a. Assume that the company plans to sell Organizing Yourself units per month. Every dollar of sales contributes 30 cents toward ﬁxed costs and proﬁt. Analysis of Cost Structure (L. drinks. Rainbow Tours’s owner believes that 175 people a month will sign up for the walking tour.80 and ﬁxed costs of $280. . .O. is dominated by ﬁxed costs with a higher contribution margin ratio of . and (d) independently of each other. What number must Balance sell per month to break even? b.000.000. $ 1.000. .. . . . .O. By how much would each company’s proﬁts increase? 3 Approaching College Assignments: Reading Textbooks and Following Directions 3-29. b.000 for the month.O. . What will be the operating proﬁt? b. Both companies have sales of $600.000 per month 1 99 (L. . 1. Every dollar of sales contributes 80 cents toward ﬁxed costs and proﬁt.30 and ﬁxed costs of $30. Every dollar of sales contributes 25 cents toward ﬁxed costs and proﬁt.80 and ﬁxed costs of $400. and variable costs per unit are 10 percent higher than projected. is dominated by ﬁxed costs with a higher con1 of sales contributes Successful in College tribution margin ratio of . The monthly ﬁxed costs for Rainbow Tours are $3. . Basic Decision Analysis Using CVP P with T Balance. 2) in Part One. and maps. 1) Preparing and 700.000? Orientation 3-27. E 2 Approaching College Reading and Required Developing a College-Level Vocabulary a. Both companies have sales of $500. Compare the two companies’ cost structures using the format shown in Exhibit 3.000 per month. 2) Foxx Company’s cost structure is dominated by variable costs with a contribution margin ratio of . .O.25 and ﬁxed costs of $100. b. .000.O.600. Rainbow charges $40 per person for the tour and incurs $16 in variable costs for labor. . .5.000 Refer to the data for Balance. How many tours must Rainbow sell every month to break even? b. Inc. . Compare the two companies’ cost structures using the format shown in Exhibit 3. What impact will these cost changes have on operating proﬁt for the year? Will proﬁt go up? Down? By how much? 3-28. . Every dollar Making Yourself80 cents toward ﬁxed costs and proﬁt. .00 per unit 0. is considering the introduction of a new energy snackA R the following price and cost characteristics: Sales price . . (c). By how much would each company’s proﬁts increase? 3-30. for Success in College Required a. Beyonce. What number must Balance sell per month to make an operating proﬁt of $100. in Exercise 3-26.5.20 per unit 400. Suppose that both companies experience a 15 percent increase in sales volume. CVP and Margin of Safety Rainbow Tours gives walking tours of Springﬁeld.Chapter 3 Fundamentals of Cost-Volume-Profit Analysis 3-26. . .. . 2) The Dollar Store’s cost structure is dominated by variable costs with a contribution A P T E R S I N P A R T O N C H margin ratio of .indd 1 of safety in terms of the number of people signing up for the tour? ✓ Related Resources See pages 000 to 000 of the Annotated Instructor’s Edition for general suggestions related to the chapters (L. 1) Required a.. . Suppose that both companies experience a 20 percent increase in sales volume. . The cost structure of a competitor. Consider requirements (b). S 1 10/5/09 11:09:2 . Suppose that ﬁxed costs for the year are 10 percent lower than projected.

70 1. . .000 after taxes? C H A P T E R S I N P A R T O N E (L. . .000.O. Fixed costs . . 4) 3-34.50 $ 2. . . . If the product sales mix were to change to four chicken tacos for each ﬁsh taco. . . . Multiproduct CVP Analysis Mission Foods produces two ﬂavors of tacos..000 per month Crest is subject to an income tax rate of 40 percent. . . Textbooks and Following Directions Required How many cups of regular coffee and lattes must Rio sell every month to break even? (L. $ 80 per radio $ 32 per radio $360. . . . $1... . $3. . Inc. .000 per month? (L. . Required a. . .O. . . . . . Variable costs . . What number must Cambridge sell to break even? b. .000 Fish $ 4. Using Microsoft Excel to Perform CVP Analysis P A R Refer to the data for Cambridge. . Multiproduct CVP Analysis Rio Coffee Shoppe sells two coffee drinks. . 3) 3-31. 3) 3-32. . c. the manager at Rio knows that the Reading store sells 60 percent regular coffee and 40 percent lattes.50 200. . . . . . Inc. Based on experience. . .000 per month? (L. . .. . 1 Orientation Required Using the Goal Seek function in Microsoft Excel. . What is the anticipated level of proﬁts for the expected sales volumes? b.00 $1. . The radios have the following price and cost characteristics: Sales price . Assuming that the product mix would be 40 percent chicken and 60 percent ﬁsh at the breakeven point. . a.30 The monthly ﬁxed costs at Rio are $6.. . Inc. in Exercise 3-24. . . . Developing a College-Level Vocabulary . . .50 2 Variable costs (per cup) . 1 Required The total ﬁxed costs for the company are $117. Using Microsoft Excel to Perform CVP Analysis Refer to the data for Balance. . What number must Balance. . . a regular coffee and a latte. . T Required Using the Goal Seek function in Microsoft Excel. . with the following characteristics: Chicken Selling price per taco .50 $2.indd 1 10/5/09 11:09:2 . a. .. compute the break-even volume. . sell to break even? b. 4) 3-33. sell to make an operating proﬁOrganizing Yourself Preparing and t of $8. How many receivers must Crest sell to earn a monthly operating proﬁt of $90. . what would be the new break-even volume? cor50782_ch01_001-072. The two drinks have the 1 Making Yourself Successful in College following prices and cost characteristics: Regular Coffee Latte Approaching College Reading and Sales price (per cup) . . . Expected sales (tacos). . . What number must Balance. Variable cost per taco. . . .O. . . How many receivers must Crest sell every month to break even? b.100 Part II Cost Analysis and Estimation (L.. . . . . 4) 3-35. What number must Cambridge sell to make an operating proﬁt of $6. . .O. CVP with Income Taxes for Success in College Crest Industries sells a single model of satellite radio receivers for use in the home.000 3 Approaching College Assignments: ✓ Related Resources See pages 000 to 000 of the Annotated Instructor’s Edition for general suggestions related to the chapters in Part One. a. Inc. . .O. . chicken and ﬁsh.25 300. in Exercise 3-26. .720.

. . . . . . Scholes is concerned about the possible effects of inﬂation on its operations.000 units) Direct material .000. . assuming that the maximum price increase is implemented. and administrative . . . . .000. . If the volume of sales were to remain at 80. . assuming that the maximum price increase is implemented. . It is expected that to accomplish this objective. . 50 percent are from labor and 25 percent are from materials. Total . proﬁts must increase by 6 percent during the year. . The company wishes to maintain the same level of proﬁt in real dollar terms. . It is expected that to accomplish this objective.000 150. . . 2 Approaching College Reading and Required Developing a College-Level Vocabulary a. .400. . what price increase would be required to attain the 6 percent increase in proﬁts? 1 101 accounting Problems Orientation 3-37. . Presently. . and ﬁxed costs amount to $700. . cor50782_ch01_001-072. Presently. . .000 270. . the company sells 60.000 units for $30 per unit.000 $945. $300. Production engineers have advised management that they expect unit labor costs to rise by 15 percent and unit materials costs to rise by 10 percent in the coming C H A P T E R S year. Of the $15 variable costs. . Reading Textbooks and Following Directions c. . . . . . . Variable overhead costs are expected to increase by 20 percent.000 units for $60 per unit. It is also expected that ﬁxed costs will rise by 5 percent as a result of increased taxes 1 Making Yourself Successful in College and other miscellaneous ﬁxed charges.000 units. . . assuming that the maximum price increase is implemented.000 (L. .000 units. .I N P A R T O N E able overhead costs are expected to increase by 20 percent.000 units. and ﬁxed costs amount to $1. b. Production engineers have advised management that they expect unit labor costs to rise by 15 percent and unit materials costs to rise by 10 percent in the coming year. . . . . . . The company wishes to maintain the same level of proﬁt in real dollar terms. . . Compute Durant’s unit selling price that will yield a proﬁt of $300. . . . Compute the volume in units and the dollar sales level necessary to maintain the present proﬁt level. .Chapter 3 Fundamentals of Cost-Volume-Profit Analysis P A R T 3-36. The variable production costs are $30. c. . The variable production costs are $15. . what price change would be required to attain the 6 percent increase in proﬁts? 3-38. CVP Analysis and Price Changes (L. . and Ofﬁce Max. assuming that the maximum price increase is implemented.000 225. . . Direct labor. . Costco. . 1 Required a.indd 1 10/5/09 11:09:2 . . . .O. . Compute the volume of sales and the dollar sales level necessary to provide the 6 percent increase in proﬁts. 1) ✓ Related Resources See pages 000 to 000 of the Annotated Instructor’s Edition for general suggestions related to the chapters in Part One. given sales of 150. . . .O. . . . Compute the volume in units and the dollar sales level necessary to maintain the present proﬁt level. . . . . . general.000 units (produced and sold): Total Annual Costs (150. . . 1) Argentina Partners is concerned about the possible effects of inﬂation on its operations. . . . . . Compute the volume of sales and the dollar sales level necessary to provide the 6 percent 3 Approaching College Assignments: increase in proﬁts. . . 1) Scholes Systems supplies a particular type of ofﬁce chair to large retailers such as Target. CVP Analysis and Price Changes (L. . . . Of the $30 variable costs. .O.000. It is also expected that ﬁxed costs will rise by 5 percent as a result of increased taxes and other miscellaneous ﬁxed charges. . . . . . 50 percent are from labor and 25 percent are from materials. . b. CVP Analysis—Missing Data Durant Manufacturers has performed extensive studies on its costs and production and estimates the following annual costs based on 150. . . proﬁts must increase by 6 percent during the year. . Sales prices cannot increase more than 10 percent. . Sales prices cannot increase more than 10 percent. . . . the company sells 80. . . . Selling. Preparing and Organizing Yourself Required for Success in College a. Vari. . . . . If the volume of sales were to remain at 60. . . . . . Manufacturing overhead .

000 8. .000. . . . sales price) decreased by 10 percent? Increased by 20 percent? Approaching College Assignments: 3. . How many students will enable Alameda Tile to makeYourself Successful in College year? c. . The county government provides Suburban with a ﬂat subsidy of $250. . 3 Lanes . . $ 400 per student 240 per student 80. . What will be the operating proﬁt (for 800 students)? a College-Level Vocabulary 2. .001–8. two.001–10.000 riders this year. 1) 3-39.000 Total Fixed Costs $33. What is the break-even point for Suburban? Preparing and Organizing b. Calculate the break-even point(s). assuming P A R T variable costs per unit are 60 percent of the selling price per unit and ﬁxed costs are $420. . supplies. . . Compute Durant’s dollar sales that will yield a projected 20 percent proﬁt on sales. .O. . .O.O. 10/5/09 11:09:2 .102 Part II Cost Analysis and Estimation b. . . 1) S (L. Orientation Required a. . or three lanes? cor50782_ch01_001-072. . . . What would be the operating proﬁt if the tuition per student (that is. . Sam has three choices: Monthly Volume Range (Number of Meals) 1 Lane .000 per year C H A P T E R S I N P A R T O N E for Success in College Required a. . . which might also increase the demand for their products. . . 4) 3-41. . Suppose that ﬁxed costs for the year are 10 percent lower than projected. . . and so on) . . Suburban expects 75. Fixed costs (advertising. .” Suburban charges $1. How many units must Durant sell to generate the revenues (dollar sales) determined in requirement (b)? 1 (L. . b. . c. Management believes that a selling price of $8 per unit is reasonable given current market conditions. . CVP Analysis with Subsidies Suburban Bus Lines operates as a not-for-proﬁt organization providing local transit service. If Sam can sell all the meals he can serve. . CVP Analysis—Sensitivity Analysis (spreadsheet recommended) Alameda Tile sells products to many people remodeling their homes and thinks that they could proﬁtably offer courses on tile installation.000 for the b. . .500 See pages 000 to 000 of the Annotated Instructor’s Edition for general suggestions related to the chapters in Part One.indd 1 Support your answer. . . it refers to an excess of revenues over costs as a “surplus” and an excess of costs over revenues as a “deﬁcit.50. . . . . .00 per ride. 0–5. .000 annually.000 39. . The variable costs of a ride are $1. 2 Lanes . Assume that the projected enrollment for the year is 800 students for each of the following 2 Approaching College Reading and (considered independently): Developing 1. salaries. Sam can increase lunch volume by opening and stafﬁng ✓ Related Resources additional check-out lanes. .000 5. . . . . .000 annually. What would be the operating proﬁt3if variable costs per student decreased by 10 percent? Reading Textbooks and Following Directions Increased by 20 percent? 4.000 52. . The price of $10 and the variable cost of $4 per meal remain constant regardless of volume. The ﬁxed costs of Suburban are $200. . 1 Required a. and so on) . . The basic installation course has the following (tentative) price and cost characteristics: Tuition . What enrollment will enable Alameda Tile to break even? 1 Making an operating proﬁt of $40. . . . . What would be the operating proﬁt for the year? (L. . . As a not-for-proﬁt. whereas variable costs per student are 10 percent higher than projected. Variable costs (tiles. . should he operate at one. Will it operate at a surplus or deﬁcit? Yourself 3-40. Extensions of the CVP Model—Semiﬁxed (Step) Costs Sam’s Sushi serves only a ﬁxed-price lunch.

. . . $ 20 Fixed cost per ﬂight . This route has the following prices and costs: Approaching College Assignments: 3 Selling price per passenger per ﬂight. . . . . . .050 per ﬂight after taxes? 3-45. . $2. . (0–2. . . Fixed cost per year . . .000 per year after taxes on the 2 Approaching College Reading and juice? 3-44. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . or three shifts per day. . . . . . . . How many passengers per ﬂight must Frightproof have to earn $1. Cesar’s Bottlers can increase volume by opening and stafﬁng additional shifts. . 2 Shifts . Extensions of the CVP Model—Taxes (L. . two. should it operate at one. . . . How many cases must Odd Wallow Drinks sell to earn $1. . . 30% Developing a College-Level Vocabulary Reading Textbooks and Following Directions S Required a. . . . 4) Frightproof Commuter Airlines is considering adding a new ﬂight to its current schedule from Metro to Hicksville. . . If Cesar’s Bottlers can sell all the units it can produce. . . . . This line of juices has the following prices and costs: Selling price per case (24 bottles) of juice . . Compute Frightproof’s break-even point in number of passengers per ﬂight. . . . . . Compute Odd Wallow Drinks’s break-even point in units per year. .000) (2.000 ✓ Related Resources See pages 000 to 000 of the Annotated Instructor’s Edition for general suggestions related to the chapters in Part One. . . . . .112. . . Variable cost per unit . . . . $ 130 70 420.601–5. . $8. . . . . . . . . . . 3-43.Chapter 3 Fundamentals of Cost-Volume-Profit Analysis 3-42. .O. . . . . . . . Extensions of the CVP Model—Taxes Odd Wallow Drinks is considering adding a new line of fruit juices to its merchandise products. Each shift is eight hours long. . . . .000 Income tax rate . In view of this capacity limitation. . . . . .400 Income tax rate . . . .indd 1 10/5/09 11:09:2 . . . $ 24 Fixed costs per year associated with this product . can Frightproof carry enough passengers to break even? Can the company carry enough passengers to earn $1.872.90 per case remain constant regardless of volume. . . . . two shifts. . . .170 1 103 (L. . . . . . b. . . 40% (L. $ 80 Variable cost per passenger per ﬂight . . . The product’s price and cost characteristics are: Selling price per unit . The sales price of $2 per case bottled and the variable cost of $0. (L.000) $1. Calculate the break-even point(s). . . . . . . . . .740 5. . . . . 4) Orientation Preparing and Organizing Yourself Required for Success in College a. b. . 4) 1 cor50782_ch01_001-072. .001–3. . . . or three shifts? Support your answer. . . . . .O. . . Extensions of the CVP Model—Semiﬁxed (Step) Costs P A R T Cesar’s Bottlers bottles soft drinks in a factory that can operate either one shift. . . . . . . . .O. . .050 per ﬂight after taxes? c. . 3 Shifts . . . . . . .600) (3. . . $ 50 Variable cost per case (24 bottles) of juice . . . Each aircraft has the capacity for 70 passengers per ﬂight. . .O. . . . Extensions of the CVP Model—Taxes Lomas Electronics manufactures a portable testing device for use in oil exploration. . . 4) C H A P T E R S I N P A R T O N E Required 1 Making Yourself Successful in College a. . .980 3. . . . The company has the following three choices: Daily Volume Range Total Fixed Costs (Number of Cases Bottled) per Day 1 Shift . . b. . . The factory is closed on weekends. . .

The bags have the following characteristics: mhhe. .000 after tax. . .00 45. .000. . . . . T . . . what is the maximum amount the ﬁrm can spend on advertis. C . . . Variable cost per bag .000 radios). . . . what is the sales level in dollars required to equal the Year 1 after-tax operating proﬁt? ✓ Related Resources f.200. . . . . . .000 Eagle has an income tax rate of 35 percent. . . Compute the break-even point in units for the game.000 (or 28.O. . Administrative . . . However. . . . . . . . . . . . .000 in proﬁts after taxes.000 units) . Total ﬁxed costs (annual) . . . .1.000 units. Selling. . . .000 for advertising in Year 2. . . The variable costs associated with each game (for materials. . . . . . . . 4) tions related to the chapters 3-48. . . .000 units annually inA R toTearn $117. . . . . . . . with all other costs remaining constant. . . and the Executive. . . . . . . . . . . . . the company’s accountant. a Preparing and Organizing Yourself sophisticated satellite radio. .000 Executive $100 $40 12. . . . . . . What will be the after-tax operating proﬁt for Year 2 if the ﬁrm spends the additional $300. b. . . . . . . . What is Lomas Electronics’s tax rate? (L. . . . . . . . . . . 4) 3-46. . . . . . 2 Approaching College Reading and Developing a College-Level Vocabulary Ms.00 165. Year 1 (25. Selling price (per unit) . . . . Variable overhead (per unit) . . . . . . .000 I N P 800. . . . . . . . . 1 Orientation (L. .00 20. . . . . . Ms. Ms. . $ 100. What is the projected after-tax operating proﬁt for Year 1? 3 Approaching College Assignments: b. . . . . . . . .000 per year. . . . . . . .000 to 000 See pages ing to earn an after-tax operating proﬁt of $750. .indd 1 10/5/09 11:09:2 The total ﬁxed costs per year for the company are $819. .000 1 cor50782_ch01_001-072. compute the required unit sales level.H.500.000. . . . . and packaging) amount to $7. Mr. . . . . . . . . . Inc.000 for advertising? e. .000? d.000 300. . . . . . . Luray the following data for the current year. . Eagle has experienced a steady growth in sales for the past ﬁve years. Year 1: Variable costs: Direct labor (per unit) . . . Eagle’s CEO.00 400. . . To prepare for the campaign. Luray.com/lanen3e Programmer Selling price per bag . . . Assuming that the tax rate is 40 percent and the desired proﬁt level is $120.O. Expected sales revenues. . . .. . . .104 Part II Cost Analysis and Estimation Required P order The company must sell 10. . . . . . . . . .000 for advertising in Year 2. . . Total variable costs (per unit) . Extensions of the CVP Model—Taxes Action Games has developed a new computer game that it plans to sell for $32. . produces two models of traveling cases for laptop computers: the Programmer in Part One. . . . What will be the break-even point in sales dollars for Year 2 if the ﬁrm spends the additional $300. . believes that to maintain the company’s present growth will for Success in College require an aggressive advertising campaign next year. Fixed costs (annual): Manufacturing. . . . . . . . . The ﬁxed costs associated with the game amount to $75. Direct materials (per unit) . . What is the break-even point in units for Year 1? Reading Textbooks and Following Directions c. $70 $30 8. . Required a. Extensions of the CVP Model—Multiple Products On-the-Go. . . . . . . . . . Luray has set the sales target for Year 2 at a level of $11. Extensions of the CVP Analysis—Taxes Eagle Company makes the MusicFinder. At a sales level of 28. . . .000? of the Annotated Instructor’s (CMA adapted) Edition for general sugges- (L. shipping. Yourself Making . has prepared and presented to Ms. Luray believes that to attain the sales target (28. . Bednarik. Required a. . A . . Expected sales (bags) per year .P. . .000 radios) will require additional selling expenses of $300.000A $ $ E R S R T O N E $ 1. . . .000 $400. . . . 4) 3-47. . . . . . . . .O.00 Successful in College $10. If the ﬁrm spends the additional $300.

. Assuming that the product mix is the same at the break-even point. . . Variable cost per tax return (including wage paid to tax preparer) . The variable cost of a basic saddle is $600 and that of a custom saddle is $750.500. .000 each and custom saddles sell for $1. . . .690.O. 4) Sell Block prepares three types of simple tax returns: individual. $200 $180 60. . . 60. Inc. .000 Reading Textbooks and Following Directions The total ﬁxed costs per year for the company are $3. compute the break-even point. Variable cost per unit .000 $2. Extensions of the CVP Model—Multiple Products Sundial. Expected tax returns prepared per year . . .000 The total ﬁxed costs per year for the company are $1.Chapter 3 Fundamentals of Cost-Volume-Profit Analysis Required P A R a. c. 4) ✓ Related Resources See pages 000 to 000 of the Annotated Instructor’s Edition for general suggestions related to the chapters in Part One. .104. Required a. Expected units sold per year . . . Extensions of the CVP Model—Multiple Products (L. compute the break-even point. Required How many basic saddles and how many custom saddles are sold at the break-even level? In other cor50782_ch01_001-072. . . c. Now what is the breakeven volume for Sell Block? 3-51. . . The sunglasses have the following characteristics: 1 105 Orientation NZ (L. and (small) corpora1 Making Yourself Successful in College tions.000 Preparing and Organizing Yourself $80 $80 $30 $40 for Success in College 40.. for every ten tax returns prepared. what would be the new break-even volume for Sundial. compute the break-even point. . If the product sales mix were to change to nine Programmer-style bags for each Executivestyle bag. The break-even point at the current sales mix is 500 total units. . Inc. what would be the new break-even volume for On-the-Go? 3-49. Suppose the product sales mix changes so that. partnerships. six are for individuals.? 3-50. . Extensions of CVP Analysis—Multiple Products (ﬁnding missing data) Clovis Supply sells two models of saddles to retail outﬁtters—basic and custom. . . .000. . . . Assuming that the product mix is the same at the break-even point. . . 4) AU Selling price per unit . and three are for corporations. Annual ﬁxed costs at Clovis are $280.500. Basic saddles sell for $1. Assuming that the product mix is the same at the break-even point. What is the anticipated level of proﬁts for the expected sales volumes? b.indd 1 words. c. . .000 16.O.000. .000 3 $900 Approaching $1. .000 2 Approaching College Reading and Partnerships Corporations Developing a College-Level Vocabulary $1. . . Required a. one is for a partnership. If the product sales mix were to change to four pairs of AU sunglasses for each pair of NZ sunglasses. 1 10/5/09 11:09:2 .800 Assignments: College 4. What is the anticipated level of proﬁts for the expected sales volumes? b.O. produces two models of sunglasses: AU and NZ. What is the anticipated level of proﬁts for the expected sales volumes? T b. . The tax returns have the following characteristics: C H A P T E R S I N P A R T O N E S Individuals Price charged per tax return . what is the assumed sales mix? (L.

. . A “vital” 3 Approaching College Assignments: test is the laboratory’s code for a high-proﬁle case. 35 percent Variety 2.O. . . . for Success in College Required a. A retest is given if there is concern about the results of the ﬁrst test.950 after taxes assuming the same sales mix? (L. . Organizing Yourself Preparing and and 25 percent Variety 3. . . .800 1 100 50 Successful in College Variable costs include the labor costs of 2 medical technicians at the lab.200 1 mhhe. Suppose the company is subject to a 35 percent tax rate on income. . . Variety 2 . . $3 5 10 – Variable Cost per Case $2 3 6 – Fixed Cost per Month – – – $46. . . Here are its prices and costs: Price per Unit Basic . . . . . . Limitless Labs is subject to a 40 percent tax rate. A basic “unit” is a routine drug test administered. Vital . Required a. Given the above information. .52. . . would this change be a good idea? cor50782_ch01_001-072. Inc. how much will Limitless Labs earn each year after taxes? b. .000 per year include building and equipment costs and the College-Level Vocabulary Developing a costs of administration. . . Assuming the above sales mix is the same at the break-even point. . . . What would be the company’s break-even revenues per year if the number of in Part One. . . .53. . . . Variable Cost per Unit Units Sold per Year E R S850 N I P A R T O N E C H $ 500 $ 120 A P T 800 400 4. . . Variety 3 .. .000 per year after taxes assuming the above of the Annotated Instructor’s sales mix? Edition for general suggesd. . at what sales revenue does Resources ✓ Related Limitless Labs break even? See pages 000 to 000 c. . 4) The sales mix (in cases) is 40 percent Variety 1. . . . . the 1 company would increase fixed costs to $420. 4) S 3. . What would be the effect of this change in product mix on Limitless Labs’s earnings after taxes per year? If the laboratory’s managers seek to maximize the company’s after-tax earnings. At what sales revenue will the company earn $180. At what sales revenue per month will the company earn $40. retests increased to 400 per year and the number of vital tests increased to 200 per year. .O. . . . Extensions of the CVP Basic Model—Multiple Products and Taxes P A R T Assume that Ocean King Products sells three varieties of canned seafood with the following prices and costs: Selling Price per Case Variety 1 . . particularly if the test indicates that the athlete has taken drugs that are on the banned drug list. . Fixed costs of the Approaching College Reading and $390. . . . . At what sales revenue per month does the company break even? b. Extensions of the CVP Model—Multiple Products and Taxes Assume that Limitless Labs. . Retests are not done by the laboratory that performed the basic test. . . . . This might be a test of a famous athlete and/ Reading Textbooks and Following Directions or a test that might be challenged in court. Entire ﬁrm.com/lanen3e Orientation (L. Limitless Labs is considering becoming more specialized in retests and vitaltions related to the chapters cases. while the number of basic tests dropped to 100 per year? With this change in product mix.106 Part II Cost Analysis and Estimation 3. . . Retest . offers three basic drug-testing services for professional athletes. . The laboratory does extra work and uses expensive expert technicians to ensure the accuracy of vital drug tests.000 Making Yourself 2.indd 1 10/5/09 11:09:2 . .000 per year.

. . . . . . . . . . . . . . . . . . . . . . and the costs of and Organizing Painless Dental Clinics is subject to a 30 percent tax rate on income. . . . . . at what sales revenue will the company earn $140. . . ..000 Preparing administration. . . is considering becoming more specialized in cleaningsTand ﬁll.. Inc. . . . . . . . . . . the number of ﬁllings increased to 1. . . . . Fixed costs of $400.54. . .212 ✓ Related Resources See pages 000 to 000 of the Annotated Instructor’s Edition for general suggestions related to the chapters in Part One.000 per year. .O. . . . . . . . . . . . . . . . $ 120 400 1.I N P A R T O N ings. . . .000 per year. . After months of research. . while the number of 1 Making Yourself Successful in College cappings dropped to zero? With this change in product mix. Gross margin . 4) Orientation S Yourself Variable costs include the labor costs of the dental hygienists and dentists.430 $ 302.642 1. . . A ﬁlling “unit” is the work done to ﬁll one or more cavities in one session. . . per year include building and equipment costs. Filling . .000 900 100 1 107 (L. . . Given the above information.g. . What would be the effect of this change in product mix on the clinic’s earnings after taxes per year? If the clinic’s managers seek to maximize the clinic’s 2 Approaching College Reading and after-tax earnings. .indd 1 $ 781. . . . . Inc. . . . Here are its prices and costs: Price per Unit Cleaning . . . . . the owners created a ﬁnancial model that showed the following projections for the ﬁrst year of operations: Sales Beer sales . . . . . . Operating proﬁt . how much will Painless Dental Clinics. Assuming the above sales mix is the same at the break-even point. . putting crowns on two teeth counts as two units). . .150 97. . then the clinic counts one unit per tooth (e. . . . . . California. . . . . . . . earn each year after taxes? b. . .125. . What would be the company’s revenues per year if the number of cleanings increased to 12. . . . . . . . A capping “unit” is the work done to put a crown on one tooth. . .000 525. . . . . . would this change be a good idea? E Developing a College-Level Vocabulary Approaching College Assignments: Reading Textbooks and Following Directions (L. Financial Modeling Three entrepreneurs were looking to start a new brewpub near Sacramento. . Both segments are typically in the same building. . . . .953.. . 1 10/5/09 11:09:2 . A cleaning “unit” is a routine teeth cleaning that takes aboutfor Success in College 45 minutes. .. . .427. . . . . . . If more than one tooth is crowned in a session. cor50782_ch01_001-072.650 $1. . . Assuming the above sales mix. 5) 3 Integrative Case 3-55. . . . . . . . .358 $1.000 per year. . . . . . . . 4. . . Inc. . . . . . . . . . Painless Dental Clinics. . . . offers three basic dental services. . . . marketing costs. . . Brewpubs provide two products to customers—food from the restaurant segment and freshly brewed beer from the beer production segment. . 2. . Capping . . . . Less cost of sales . . . . .000 per year after taxes? C H A P E R S d.074. . . .200 1. . called Roseville Brewing Company (RBC). . Inc.200 Variable Cost per Unit $ 80 300 500 Units Sold per Year 9. . break even? c. . . . 1. . . . . . . . . . . 3. . . Other sales . Required a.. the company would increase its ﬁxed costs to $450. . . Total sales . . . . . . . . at what sales revenue does Painless Dental Clinics. . which allows customers to see the beer-brewing process. . . Less marketing and administrative expenses . .Chapter 3 Fundamentals of Cost-Volume-Profit Analysis 3. . Extensions of the CVP Model—Multiple Products and Taxes P A R T Assume that Painless Dental Clinics. .O. . Food sales.

. . . . . . . .108 Part II Cost Analysis and Estimation In the process of pursuing capital through private investors and ﬁnancial institutions. . . . . . . . . . . . . . .060 I N P A R T O N E Total variable costs . . . . . 2009) 10/5/09 11:09:2 . . . . . . . . . . 1. . . . . chef. . . . . . . . $1. . . . . . . If you were deciding whether to invest in RBC. . $1.000 Depreciation . . . . .Resources ✓ Related tions listed in the case? See pages 000 to 000 b. .. . . . . . . . . . . . . . . . . . $ 117. . . . . . . . . . .. . . . . . . 24. . . . . 30. . and therefore product mix assumptions are critical to proﬁt projections. .650 Total sales . . . . . . .590 T E R S Other: credit card. . . . .indd 1 1 What is the break-even point in sales dollars for RBC? What is the margin of safety for RBC? Why can’t RBC ﬁnd the break-even point in units? What sales dollars would be required to achieve an operating proﬁt of $200. . . . . . . . . . . . . . . . . . . . . . . . . Why is the question “How much does a pint of beer cost to produce?” difﬁcult to answer? e. . . . . . . . . $ 140. .530 Utilities (3% of sales) . . . . . . . . . . . . . . 488. . . . . . . .. $ 781. . . . . . . . . . . . . . . . . .000? What assumptions are made in this calculation? (© Kurt Heisinger. . . . . . . . . . . . . . . . . . .000 2 Approaching College Reading and Advertising . $ 822. . . .000 Required a. d. . . . . . 97. . . . . . . . . . . . . . . . . misc. . The following represents a sample of the more common questions asked: • • • • • • What is the break-even point? What sales dollars will be required to make $200.212 for Success in College Reading Textbooks and Following Directions 132. . . . . After further research. . . 1. . . .Developing a College-Level Vocabulary . .074. . . . . . $ 520. . . . . . . . .000 Debt service (interest on debt) .000 Maintenance . . . . . . . 375.000? $500. . . . . . . . . . . cor50782_ch01_001-072. . . . . . . 19. . . . . .. . . . . . . 32. .130. . . . . . . . . . .200 Food sales (55% of total sales) . . . . . . . . . . .788 Contribution margin . . .000 $ 302..180 Food (35% of food sales) . . . . . .. .3 . . . . . . . . . . . . .000 Property taxes .250 Supplies (1% of sales) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . menus.150 Other sales (5% of total sales) . . . . . . . . . . . 94. . . . .) What happens to operating proﬁt if the product mix shifts? How will changes in price affect operating proﬁt? How much does a pint of beer cost to produce? 1 Orientation It became clear to the owners of RBC that the initial ﬁnancial model was not adequate for answering these types of questions. What were potential investors and ﬁnancial institutions concerned with when asking the ques. . . . . .. how would you quickly check the reasonable.000 Other: cleaning. . . Edition for general suggesc. . . .225 Wages of employees (25% of sales) .000 Variable Costs Beer (15% of beer sales) . . . . . .953 Other (33% of other sales) . . Perform sensitivity analysis by answering the following questions. . . . . . . . . . Operating proﬁt. . . . . . . . . . .. . . . . . . . . . 40. . . . . 2. 3. . . . . . . . . . .. RBC created another ﬁnancial model that Preparing and provided the following information for the ﬁrst year of operations: Organizing Yourself Sales Beer sales (40% of total sales) . . (2% of sales) . . . . . . . . . 58. .. . . . . . . . Total ﬁxed costs . . . . . . . . . . . . . . . . . . . . . . .000? Is the product mix reasonable? (Beer tends to have a higher contribution margin ratio than food. . Why was the ﬁrst ﬁnancial model prepared by RBC inappropriate for answering most of the of the Annotated Instructor’s questions asked by investors and bankers? Be speciﬁc.to the chapters tions related ness of RBC’s projected operating proﬁt? in Part One. . . . . . . . .953. . . 40. . . . . . .000? To make $500. . . . . . .. . . . 20. . . .000 Insurance and accounting . brewer .212 1 Making Yourself Successful in College Fixed Costs Salaries: manager. . . . . . . . . RBC was P A R T approached with several questions. . . . . misc. .Approaching College Assignments: . 4. . C H A P 39. . . . . .

Chapter 3 Fundamentals of Cost-Volume-Profit Analysis Solutions to Self-Study Questions 1.333 (rounded) Contribution margin ratio PX F Target proﬁt _____________________ Contribution margin ratio ($60.333 $240.000 units 2 Approaching College Reading and 2.000 $135.000 $8X X X Developing a College-Level Vocabulary [(P V )X F](1 t) [($15 $7)X $60.000) RV spaces.000 $6 10.000 $60.000 units c. cor50782_ch01_001-072.000 $30 $90 . Based on the current mix of tent spaces and RV spaces. Break-even point: P V $60.35) ($8X $60. Number of units sold to produce an operating proﬁt of 20 percent of sales C PX VX F 20%PX 1 Making Yourself Successful in College $90X $60X (20%)($90)X $60. 1 At the current sales mix.000) $30 Preparing and Organizing Yourself for Success in College 6.000 F Target proﬁt _______________ $120.65) $75.000 ($90 $60 $18)X $60.000 RV spaces (60% of 10.000 e.000 units).000 15.000 15.000 $8 16.875 units 3.65) 3 Approaching College Assignments: $8X $60.000 P A R T $60.000 $60.000) tent spaces and 60% ( 9.750 ($48. After-tax proﬁts $48.000 1 109 b.000 $12 5.indd 1 10/5/09 11:09:2 .750 .000 units) and 6.000 Orientation $30 2.000 V $120.000 ($90 X F ______ $55 $5) $60.000 $90 4. Target volume in sales dollars: Proﬁt $20.000 units ✓ Related Resources See pages 000 to 000 of the Annotated Instructor’s Edition for general suggestions related to the chapters in Part One.000 F $240.40 ($6 $3) . a.000 X $60. the sales mix at HDC is 40% ( 6. Number of units sold in March X $360.000)(.000 Reading Textbooks and Following Directions $8X $135. Target volume in units: Proﬁt X P ($60. this would be 4.000 units H A P T E R S I N P A R T O N E f.000 units d.000](1 . Operating proﬁt: Proﬁt PX VX $360.000 tent spaces (40% of 10. The weighted-average contribution margin for HDC is: .000 $20.750 $48.60 ($15 $7) $6 The multiple-product break-even point can be determined by the break-even formula: X Fixed costs Weighted-average contribution margin per unit $60.000) .

- Project Cost Management
- Chapter 6 - Fundamentals of Product and Service Costing
- 6 Reasons for Support
- ch 8
- trading_setup_ebook
- ch11
- A u t u m n 2 0 0 9
- Chap 008
- Volatility
- Chapter 5 - Cost Estimation
- cost volume profit analysis
- Teaching Suggestions
- Cost Chapter 8
- Strategic Accounts Management
- Acoutning Ch 8
- 1967_Cootner
- Cost Accounting Solution
- Apunte Finanzas
- Chapter 1 Cost Accounting
- risk management
- Chapter 2--Working With The
- RWJ Chapter 11
- cvp analysis
- Kemna-Vorst
- Chapter 7 - Cost-Volume-Profit Analysis
- 03-Measuring Returns and Risk _ 2014
- Cost Behaviour Lecture 3
- 1-s2.0-S0165188913002212-main
- Chapter 10
- The5-0Pattern

Are you sure?

This action might not be possible to undo. Are you sure you want to continue?

We've moved you to where you read on your other device.

Get the full title to continue

Get the full title to continue listening from where you left off, or restart the preview.

scribd