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C-V-P Homework Problems

1) The controller of Queens Company prepared the following projected income


statement:

Sales (5,000 units @ $15) $75,000


Less: Variable costs 60,000

Contribution margin $15,000


Less: Fixed costs 10,350

Operating income $ 4,650

Required:

1. Calculate the breakeven number of units.


15x – 12x - $10,350 = 0
x = $3,450

2. Prepare an income statement at breakeven.


Sales ($15 x $3,450) = $51,750
(less) Variable costs ($12 * $3,450) = ($41,400)
Contribution Margin = $10,350
(less) Fixed costs = ($10,350)
Income = $0

3. How many units must Queens sell to earn operating income equal to
$9,900?
X = (FC + Income) / (CM/ U) [we use CM/ U here because we are finding
units)
X = ($10,350 + $9,900) / ($3)
Where CM / U = $15,000 / $5,000 = $3
$6,750 units

4. What is the contribution margin per unit? What is the CM ratio?


CM margin = $15,000 / $5,000 = $3
CM ratio = $15,000 / $75,000 = 20%

5. What is the variable cost ratio?


Variable cost ratio = VC / S or $60,000 / $75,000 = 80%

6. Calculate the breakeven revenue.


$3,450 x $15 = $51,750

7. How much revenue must Queens make to earn operating income of


$9,900?
FC + Income / CM / S (we use CM / S here because we are dealing with
revenue)
X = $10,350 + $9,900 / ($15,000 / $75,000 or 0.2)
X = $10,125

8. How many units must Queens sell to earn operating income equal to 15%
of revenue?
0.15 (15x) = 15x – 12x - $10,350
x = $13,800 units

2) Pratt Company produces and sells disposable foil baking pans to retailers for
$2.45 per pan. The variable costs per pan are as follows:

DM $0.27
DL 0.58
Variable overhead 0.63
Selling 0.17

Fixed manufacturing costs total $131,650 per year. Administrative costs (all fixed) total
$18,350.

Required:

1.Compute the number of pans that must be sold for Pratt to break even.
X = FC + 0 / (CM / u)
X = $150,000 / (0.8) -> $2.45 - $1.65 = $0.80
$187,500 units

2.How many pans must be sold for Pratt to earn a before-tax profit of $12,600?
X = FC + income / (CM / U)
X = $150,000 + $12,600 / (0.8) = 203,250 units

3.What is the unit variable cost? What is the unit variable manufacturing cost?
Which is used in c-v-p (cost volume profit) analysis and why?

4.Assuming a tax rate of 40%, how many pans must be sold to earn an after-tax
profit of $25,200?
x = FC + [ATNI / 1 – T] / (CM / U)
x = $150,000 + [25,200 / 0.6] / (0.8) = 240,000 pans
3/ The Queens Company had revenues of $930,000 last year with total variable costs of
$399,900 and fixed costs of $307,800.

Required:
1. What are the CM and VC ratios?
CM ratio = $930,000 (sales) - $399,900 (VC) = $530,100
$530,100 / $930,000 = 0.57

VC = 1 – 0.57 = 0.43
Or $399,900 / $930,000 = 0.43

2. What is the breakeven point in sales revenue?


Break even = x = (FC = 0) / CM/S
X = (307,800) / 0.57
X = $540,000

3. What was the margin of safety last year?


$930,000 - $540,000 = $390,000
and margin of safety ratio = $390,000 / $930,000 = 0.42

4. Queens Co. is considering starting a multimedia advertising campaign that is


supposed to increase sales by $7,500 per year. The campaign will cost $5,000.
Is the advertising campaign a good idea? Explain.

If advertising causes sales to increase by $7,500, volume will have increased and
not sales p/u.
This means V/C increases.

Original I/S
Sales = $930,000
VC = ($399,900)
CM = $530,100
FC = (307,800)
Income = $222,300

Proposed I/S with advertising


Sales = $937,500
VC = (937,500 x 0.43) = ($403,125)
CM = $534,375
FC = ($312,800)
Income = $221,575

Bad idea since income has decreased.