Contribution Margin Practice Solutions

1. – 6.
Deere John Corp currently sells toy Tractors for $200 and incurs variable costs of $150 a tractor and
total fixed costs of $8,000. Currently, it sells exactly the number of units to break even.
At the end of the current year, Deere John Corp learns that for the next year it has an opportunity to
automate its production process: this choice means that the following three things will all happen
simultaneously:
A.) Add additional fixed costs of $12,000;
B.) Decrease current variable costs by $110 per unit; and
C.) Decrease sales by 20% from its current level

1. What is Deere John’s current Unit Contribution Margin? __________

200-150=50

2. What is Deere John’s current Break Even Volume in tractors? _________

8,000/50=160…this is also the number they currently are selling

What are Deere John’s expected total Fixed and Unit Variable Costs if it makes the automating
choice?

3. Fixed ___________ 4. Unit Variable________

8k+12k=20k 150-110=40 (total var costs $40 times 128 (160 less 20%) tractors = $5,120

5. What is Deere John’s expected Breakeven Revenue if it makes the automating choice?

$_________________
$20,000 / (200-40) = 125 tractors times $200 = $25,000

6. What is Deere John’s expected profit if it makes the automating choice? $___________
$160 UCM times 128 tractors (160 tractors less 20%) less fixed costs of $20,000 = $480

7.

Assume University T-Shirt Shop has a selling price of $25 and unit variable cost of $10 for its long-
sleeve cotton shirts. Fixed costs total $1,000. University believes increasing its price to $27 will not
cause a reduction in the number of shirts it will sell. If University's sales volume for the month is
300 shirts, how will net profit be affected by the change in selling price?

$_______________
300 shirts time $2 (27-25) = $600

8. ABC Corporation’s contribution margin is currently positive. If both their selling price per unit and
Handout7.1
 unit variable cost increase by 5% and fixed cost remain the same, which CVP relation is correct?
Contribution Margin per Break Even in Units Overall Profit
Unit
A.) Decrease Increase Decrease
B.) Increase Decrease Decrease
C.) Increase Increase Increase
D.) Increase Decrease Increase
E.) None of the above
9. The break-even point in sales for Rice Company is $360,000 and the company's contribution margin
ratio is 30%.
If Rice Company desires pretax profit of $84,000, total revenue would have to total

A. $108,000
B. $444,000
C. $480,000.
D. $560,000.
E. $640,000.
If B/Even in Revenue = Fixed Costs / Contribution Margin Ratio
$360,000= Fixed Costs/30%
Solving Fixed Costs must be $108,000

Now we can solve… ($108,000+ $84,000)/.3% = $640,000

10. The Bruggs & Strutton Company manufactures an engine for carpet cleaners called the "Snooper."
Budgeted cost and revenue data for the "Snooper" are given below, based on sales of 40,000 units.
Sales $1,600,000
Less: Cost of goods sold 1,120,000
Gross margin $ 480,000
Less: SG & A expenses 100,000
Net income $ 380,000
Cost of goods sold consists of $800,000 of variable costs and $320,000 of fixed costs. SG&A
expenses consist of $40,000 of variable costs and $60,000 of fixed costs.
CM = Sales – VC = 1,600,000 - (800,000 + 40,000) = 760,000/40,000(units) = 19 CM per unit
Price per unit = 1,600,000/40,000 = 40
Required
A. Calculate the break-even point in units and sales dollars.
BE in units = (FC) 320,000 + 60,000/(CM) 19 = 20,000
BE in sales = 20,000 x 40 = 800,000 or CM % = 19/40 = .475
BE in units using CM % = 380,000/.475 = 800,000

Handout7.1
11. Limon Inc. is a mail-order candy company. They offer two types of executive gift baskets:
Premium(P) and Average(A). The Premium has a selling price of $200 and unit variable cost of
$100. The Average only sells for $100 and has unit variable cost of $50. In the current year they
sold 2,400 total gift baskets of which 600 were Premiums. Fixed costs for this same period totaled
$75,000. This is a product mix weighted average CM problem.

Required: At the current mix, how many Premium baskets must be sold to breakeven? How many
Average baskets?
P CM = 100 A CM = 50 Sales mix = .25 P and .75 AP wgt. Avg CMs = P .25 x 100 = 25 and
A = .75 x 50 = 37.5 Combined wgt, avg. = 25 + 37.50 = 62.50 for total wgt. Avg. CM then divide
into FC = 75, 000/62.5 = 1200 toatal units split back into P’s (25%) and A’s (75%) = 300 and 900 at
BE.

Dr. Barton MD - CVP Example

1A. Determine Net Income (profit) given the following: Dr. Barton sees 500 patients per
month. Her clinic has a max capacity of 525 patients per month. Her practice has
monthly fixed costs of $38,000 (mainly rent and employee salaries). She estimates that
variable costs per patient are $5 each (mainly supplies). On average she is reimbursed
$100 per patient (some higher / some lower / some zero).

Sales

Variable costs
1B. Each new
patient will increase her profit by __95.00 (100-5)_______?

What is this called__UCM (Unit Contribution Margin)________________________?

1C. What is the clinic’s contribution margin ratio__95% (95/100)_________?

1D. What is the clinic’s break-even in # of patients___400__38,000/95__________?

1E. How many patients per month are needed for Dr. Barton to make $12,350 per

month (before tax) ____530___________? (38,000+12,350)/95

Handout7.1
1F. Dr. Barton is contemplating a major change to her medical practice (offering a new
and more complex procedure). This change would NOT impact the number of patients or
variable costs per patient. Her fixed costs would increase to $60,000 but on average
her reimbursements would increase to $150 (for all 500 patients). Based only on profit
should she make this change?

Sales

Variable costs
YES

1G. What is the new Break-Even_______414____________? 60,000/(150-5)

Handout7.1