BREAK EVEN or COST-VOLUME-PROFIT ANALYSIS

Q.1
Wolver Company plans to market a new product. Based on its Market studies, wolver estimates that it
can sell 5,500 units during the first year. The Sales price will be $2 per unit. Variable cost is estimated to
be 40%of the sale price. Fixed cost is estimated to be $6000.

Required: compute the break even points in dollars and in units.

Q.2
Last year sales of Jupiter Company were $7,640,000. Fixed expenses were $2,451,000 and variable
expense totaled $4,736,800.

Required: compute (1) the contribution margin (2) the contribution margin ratio, and (3) breakeven
point in dollars.

Q.3
The normal capacity of monster Company is 18,000 units and the per unit sale price is$2.50. Relevant
costs are,
Variable per unit Fixed

Material…………………………….… $ 0.70
Labor……………………………….……0.60
Factory overhead………………………..0.175 $2,000
Marketing expenses………………….….0.20 2,290

Required: Compute (1) the break sales in dollars, (2) the break even sales in units, (3) the sales dollars
to produce a profit of $8,250.

Q.4
Kenton Company produces only one product. Normal capacity is 20,000 units per year, and the unit sale
price is $5. Relevant costs are,
Variable per unit Fixed
Materials………………………… $1.00
Direct labor …………………….. 1.20
Factory overheads…………………0.50 $ 15,000
Marketing expenses………………. 0.30 5000
Administrative expenses…………. 6000

Required: Compute (1) the break-even point in units of product, (2) the break-even in dollars of sales,
(3) the number of Units of product that must be produced and sold to achieve a profit of $10,000, and (4)
the sales revenue required to achieve a profit of $10,000.
Q.5 Marvel Corporation plans-sales of $2,000,000 for the coming period for which top management
expects will result in profit of $200.000. The break-even point has been determined to be $1,500,000 of
sales.
Required: Compute the margin of safety and the margin of safety ratio.

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Q.6 A month's operations of Surefire Company show fixed expense of $9,300 an M/S ratio of 25%,
and a C/M ratio of 62%.
Required: Compute break- even sales (2) actual sales, and (3) profit for the month.
Q.7 Operations of Gilley Company for the year disclosed a M/s ratio of 20% and a c/m ratio of
60%. Fixed cost amounted to $30,000.
Required: Compute (1) break-even sales, (2) the amount of profit, and (3) the contribution
margin.

Q.8: Semiconductor Company is planning to produce and sell 100,000 units of Chip A at $4 a unit and
200,000 Units chip B at $3 a unit. Variable costs are 70% of sales for chip A and 80% of sale for chip B.
Required: total planned operating profit is $140,000. What must the total fixed cost be?

Q.9 The income for one of Mack Company products shows

. Sales (100 units at $100 a Unit)……………………$10,000

Cost of goods sold:
Direct labor………………… $1,500
Direct materials used………. 1,400
Variable factory overhead…. 1,000
Fixed factory overhead……. 990
Total cost of goods sold…………………..…. 4890
_________
Gross profit……………………………… $ 5,110
Marketing expenses:
Variable……………… 1,000
Fixed………………… 1,000
Administration expenses:
Variable……………... 500
Fixed………………... 1,000
Total Marketing and
Administrative expenses……………………...……. 3500
_________
Operating income……………………..….. $1,610
_________
Required: Compute (1) the break-even point in units, (2) the operating income if sales increase
by 25% and (3) the break-even point in dollars if fixed factory overhead increases by $690.

Q.10: Gamma Company manufactures two products, K and M; K sells for $20 and M for $15. Variable
costs per unit are $12 and $10 for K and M respectively. Total fixed cost is $372,000. The
management has targeted profit for the coming period at $93,000. Two units, of K are expected
to sell for every three units of M sold during the period.

Required: Compute (1) the break-even point in units of product and in sales dollars and (2) the
level of sales in Units of product and dollars necessary to achieve Pumas profit goal.

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Q.11 Kimberly Company has decided to introduce a new product. The new product can be
manufactured by either a capital-intensive method or a labor- intensive method. The
manufacturing method will not affect the quality of the product. The estimated unit
manufacturing costs by the two methods follow:
Capital Labor
Intensive Intensive

Material…………………………..…. $5.00 $5.60

Direct labor......................................... 6.00 7.20
Variable factory overhead………….. 3.00 4.80

Directly traceable incremental fixed factory overhead is expected to be $2,440,000 if the capital-
Intensive method is chosen and $1,320,000 if the labor-intensive method is chosen; Kimberly’s
market research department has recommended an introductory unit sales price of $30. Regardless
of the manufacturing method chosen, the incremental fixed marketing expenses are estimated to
be $500,000 per year plus a variable marketing expense of $2 for each unit sold.
Required:
1. Calculate the estimated break-even point for the new product in annual units of sales, if
Kimberly Company use the:
(a) Capital-intensive manufacturing method.
(b) Labor-intensive manufacturing method.

2. Determine the annual unit sales volume at which Kimberly Company would be indifferent
between the two manufacturing methods.

Q.12 Wolver-ton Company manufactures and sells a single product, for which price and cost data are
as follows and tax rate is 40%.
Sales price per unit………………………………………………………………………... $25.00
Variable costs per unit:
Raw materials................................…….… $11.00
Direct labor…………………………….… 5.00
Factory overhead…………………….…... 2.50
Marketing and administrative...................... 1.50
______
Total variable cost per unit................ ....…… $20.00
______
Annual fixed costs:
Factory overhead…………………………………………....$192,000
Marketing and administrative ……………….…..… … 278,000
$470,000
Required:
1. Compute the break-even point in units.
2. Determine the units to sell in order to earn $180,000 after income tax.
3. Compute the break-even point in units if direct labor cost increases 6%.
4. If Wolver ton’s direct labor cost does increase 6%, determine the per unit sales price to
maintain the same contribution margin ratio.

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Q.13
In 2017, Chesterton Inc. produced and sold 100,000 units of its product at a price of $2.75. The
company can increase capacity to produce 125,000 units by increasing fixed cost $5,900 per year. The
company receives an order for 20,000 unbranded units to be sold at $2.45 each. With the added volume
plus other economies, the plant manager estimates that materials, labor, and variable factory overhead
each can be reduced $0.115 per unit for all the output. Non-manufacturing expenses will be unaffected
by the added 20,000-unit order. The president of the company wishes to see a projected gross profit
statement for next year, assuming that the new order is accepted during first month of 2018, that there
are no other changes in sales volume, and that the economies can be affected.
Data for 2016 are as follows:
Sales……………………………………….. $275,000
Cost of goods sold:
Materials..............................……… $80,000
Labor……………………………... 62,000
Variable factory overhead……..…. 45,000
Fixed factory overhead………..…. 25,600

Cost of goods sold…………………………. 212,600

Gross profit ………………………………... $ 62,400

Required:
1. Compute the break-even sales, contribution margin, and C/M ratio, based on 2017 data and
disregarding non-manufacturing costs.
2. Prepare a projected 2018 statement of gross profit.
3. Compute the break-even sales, contribution margin, and C/M ratio, based on projected 2018
data and disregarding non-manufacturing cost.

Q.14 Sony Bicycle shop sells Special bicycles. The shop owner has divided sales into two categories, as
follows:

Product Type Sales Price Invoice Cost Sales Commission

High-quality $500 $275 $25
Medium-quality 300 135 15

Forty percent of the shop’s sales are high quality bikes. The shop’s annual fixed expenses are
$255,000.

Required: (assume the constant sales mix)

1. Compute the unit contribution margin for each product type.

2. What is the shop’s sales mix?
3. Compute the weighted-average unit contribution margin.
4. What is the shop’s break-even sales volume in dollars?
5. How many bicycles of each type must be sold to earn a target net income of $51,000?

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Q.15
Disking Company is a retailer for video disks. The projected net income for the current year is
$200,000 based on a sales volume of 200,000 video disks. Disking has been selling the disks for
$16 each. The variable costs consist of the $10 unit price of the disks and a handling cost of $2
per disk. Disking annual fixed costs are $600,000.
Management is planning for the coming year, when it expects that the unit purchase price of the
video disks will increase by 30 percent.

Required:
1. Calculate Disking Company’s break-even point for the current year in number of video disks.
2. What will be company’s net income for the current year if there is 10 percent increase in
projected sales volume?
3. What volume of sales in dollars must Disking Company achieve in the coming year to
maintain the same net income as projected for the current year if the unit selling price
remains at $16?
4. In order to cover a 30 percent increase in the disk’s purchase price for the coming year and
still maintain the current contribution margin ratio, what selling price per disk must Disking
Company establish for the coming year?

Q.16 The Seismometer Company is an all-equity financed firm. It earns monthly, after taxes,
$24,000 on Sales of $880,000. The tax rate of the company is 40 percent. The company’s
only product, “The Desktop Seismometer”, sells for $200, of which $150 is variable cost.

a. What is company’s monthly fixed operating cost?

b. What is the monthly operating break-even point in units? In dollars?
c. Compute the degree of operating leverage (DOL) on the following possible monthly
sales levels: 4,800 units, 5,200 units, 5,600 units, and 6,000 units.

Q.17 Gibson Gearing Company has a DOL of 5 at its current production and sales level of 4,000 units.
The resulting operating income (EBT) figure is $8,000. If sales are expected to increase by 10
percent from the current 4,000-unit sale position, what is Company’s new DOL figure & what
would be resulting EBT?

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Solution of Question: 15
1. Break-even point in units:

$600,000
BEQ =
$4
= 150,000 units

2. New projected sales volume = 200,000  110%

= 220,000 units
Net income = (220,000)($16 – $12) – $600,000

= (220,000)($4) – $600,000

= $880,000 – $600,000 = $280,000

3. Target net income = $200,000 (from original problem data)

New disk purchase price = $10  130% = $13

Volume of sales dollars required:

Volume of sales dollars required fixed expenses + target net profit

=
contribution-margin ratio
$600,000 + $200,000 $800,000
= =
$16 − $13 − $2 .0625
$16
= $12,800,000
Problem 8-34 (Continued)
$16 − $10 − $2 P− $13 − $2
=
$16 P
P− $15
.25 =
P
.25P = P − $15
$15 = .75 P
P = $15/.75
P = $20
Check: New contribution-margin ratio is:

$20−$15
=.25
$20