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Cost-Volume-Profit Analysis and Decision Makino


Zaldec Company, a wholesaler of jeans, had the following income statement. Sales (40,000 pairs at $35) Cost of sales
$ 1,400,000


Gross margin Selling expenses Admi nistrative expenses lncome


600,000 540,000 60,000

190,000 $

Mr. Zaldec informs you that the only variable costs are cost of sales and $2 per-unit selling costs. All admlnistrative expenses are fixed. ln planning for the coming year, Mr. Zaldec expects his selling price to remain constant, with unit volume increasing bV 20Y". He also forecasts the following changes in costs and is concerned about how

they will affect profitability. Variable costs: Cost of goods sold Selling costs
Fixed costs: Selling costs

up $1.50 per unit up $b.10 per unit

Adrninistrative costs Required:

up $40,000 up $30,000


2. 3.

Prepare an income statement for the coming year using the contribution margin format and assuming that all forecasts are met. Determine the number of units that Zaldec will have to sell in the coming year to earn the same profit as the current year. Mr. Zaldec is disturbed at the results of requirements 1 and 2. He asks you how much he must raise his selling price to earn $60,000 selling 48,000 units.

1-r, Bas!c
income taxes


Cornell Company is introducing an inkjet printer that will sell for $120. Unit variable manufacturing cost is $72, and Cornell pays a 10% sales commission. Fixed costs for the printer are $250,000 per year. The tax rate is 40%.



1. 2.

3. ,/' ,/./ --Z-4 Allen Cosmetics makes two facial creams, Allergy-free Basic follows.
sales mix (Appendix 2l
Price per

Determine the profit after taxes that Cornell would eam selling 12,000 printers. Determine the number of units that Cornell has to sell to earn an after-tax profit of $120,000. Determine the price that Cornell has to charg to earn a $180,000 pre-tax profit selling 11,000 units. and Cleansaway. Data are as

Variable cost per

$24 6



$18 I

Monthly fixed costs are $180,000.

Jecision Making

Profit Planning








it tt

1,400,000 800,000 --; 600,000 i




2. . 3.


'the coming Year, ,olume

ts and $2 Per-unit

increasing serned about how

sales mix in dollars is 60% for Allergy-free and 407o for Cleansaway, what " weighted-average contribution margin percentage?.What dollar sales are is the needed to earri a profit of 960,000 per month? At that level, how. many units of each product, and total units, will the company sell? lf the sales mix is 50% for each product in units, what is the weighted-average unit contribution margin? What unit sales are needed to earn $60,009 per month? Why is this number of units different from the answer you found ih requirement 1? What are total dollar sales and why is this figure different frorr your answer to requirement 1? Suppose that the eornpany is operating at the level of sales that you calculated in requirement 1,'earning a $60,000 monthly profit. The sales manager betieves that it is possible to persuade customers to switch to Cleansaway from Allergyfree by increasing advertising expenses. He thinks that $8,fi)0 additional monthly

advertising would change the mix

Cleansaway. Total dollar sales the campaign have on profit?

0 per unit 3 per unit

to 4}yo for Allergy-fiee and 60% for will not change, only the rnix. What effect would



Blue-Room Products sells three types of simulated,brass soap dishes, Necessary Frill, and Luxury. Detailed selling price and cost data for the products are as follows.


contribution margin {Appendix 2l

Selling price Variable cost


50% of selling price


$20 12

rtribution margin
e coming year to

Fixed.costs for these products are $286,000


He asks You how 100 units. 20. Unit variable


2. 3.

n. Fixed costs for

2,000 printers. n after-tax Profit


00 pre-tax Profit

lf the company has a choice of selling one more unit of any one of its products, which product should it choose? lf the company could, sell $1,000 more of any one of its products, which product should it choose? Assume that the sales dollar volume of the company is distributed 40% from Necessaiy, 20o/o trom Frill, and 407o from Luxury. (a) What is the weighted-average contribution margin percentage? (b) What is the break-even point for the company in sales dollars? (c) At the break-even point, how many units of Luxury are sold? Assume, instead, that th company's sales in units are 40o/o tor Necessary 20% for Frill, and 40Y" for Luxury. (a) What is the weighted-average unit contribution margin? (b) What is the break-even point in units? (c) At the break-even point, how many units of Luxury are sold?


Data are as





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Travelco sells one of its products, a piece of soft-sided luggage, for 960. Variable cost per unit is $34, and monthly fixed costs are $60,000. A combination of changes in the

way Travelco produces and selli this product could reduce per-unit variable cost to $28 but increase monthly fixed costs to $104,000.