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Chapter 4 Worksheet
The purpose of these worksheets is to focus your attention on the most important concepts from
Chapter 4. Once you have completed these worksheets retain them for use as study notes for quizzes,
tests, and exams.

To optimize your learning, watch the videos and complete the worksheets. Then, read through the
chapter and add to these worksheets any additional information or examples that you feel will help you
master the concepts. Because you have already been introduced to the concepts through the videos
your reading of the chapter will be quick and you will naturally focus on those things which are
different!

Video 1: Chapter 4, LO1, V01 – GAAP Income Statement vs.

Contribution Margin Income Statement

1. What is cost-volume-profit (CVP for short) analysis?

- powerful tool which helps managers make decisions
- used to determine sales volume needed to cover costs/ produce a profit
- managements preference for income statement presentation is a contribution margin income
statement
- helps management prepare/respond to economic changes
à analyze effects of change in operating income due to changes in:
- number of units sold
- unit selling price
- Unit variable cost
- total fixed costs
- sales mix

2. What assumptions underlie each CVP analysis?

- behavior of costs and revenues is linear
- Costs can be classified as variable/fixed
- changes in volume are the only factor that affects costs
- inventory- all units produced are sold
- when multiple products are sold the sales mix between the products remains constant

Cvp analysis is only a prediction, educated guess, help for planning but it is not perfect/accurate

3. In the video, the following cost information is available for XD2, a product sold by David Inc.
Units sold 2,000
Unit selling price per product $1,100
Variable costs per product
Direct materials $400

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Direct labour $200

Sales commission $30
Administrative expenses $100
Total unit variable costs $730
Monthly fixed costs
Manufacturing overhead $86,000
Sales costs $21,500
Administrative costs $322,500
Total monthly fixed costs $430,000

Using the above information, prepare a GAAP income statement.

- to find the total sales revenue= units sold X per unit selling price X variable cost per product
Variable costs:
- dm= 400 x 2000= 800,000
- dl= 200 x 2000= 400,000
Administrative expense= 200,000
Monthly fixed costs= no calc required

David Inc.
GAAP income statement
Month ended November 30, 20x6

Sales revenue 2,200,000

Cost of goods sold
Direct materials. 800,000
Direct labour. 400,000
Manufacturing overhead 86,000 (total cogs= 1,286,000)
Gross profit
(sales revenue- total cogs= 914,000)
Operating expenses
Sales commission 60,000
Administrative exp. 200,000
Sales costs 21,500
Administtive costs. 322,500. (Total operating expenses= 604,000)
Operating income 310,000 (gross profit- operating expenses)

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4. Calculate the gross margin per unit.

The gross profit= sales revenue – total cogs = 914,000

5. Calculate the gross margin percentage.

The gross margin percentage= gross profit/sales revenue x 100%= 914,000/ 2,200,000 x 100= 42%

6. Using the same information for David Inc., prepare a contribution margin income statement,
also called a CVP income statement.
David Inc.
contribution margin (CVP) income statement
Month ended November 30, 20x6

Sales revenue 2,200,000

Variable costs
Direct materials 800,000
Direct labour. 400,000
Sales commission. 60,000
Administrative exp. 200,000. 1,460,000 (total vc)
Contribution margin 740,000 (sales revenue – total vc)

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Fixed costs
Manufacturing overhead. 86,000
Sales costs 21,500
Administrative costs 322,500 430,000 (total fixed costs)

Operating income 310,000 (contribution margin- total fixed costs)

- no separation of product and period costs

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7. Calculate the contribution margin per unit.

740,000 (sales revenue – total vc)

8. Calculate the variable cost ratio and the contribution margin ratio.
Contribution margin ratio = contribution margin/ sales revenue x 100%
= 740,000/ 2,200000 x 100% = 34%

34% of every dollar will contribute to covering fixed costs and profit
Variable cost ratio= administrative expense/ sales revenue x 100% = 1460,000/2200000 x 100% = 66%

Or:
Contribution margin ratio= per unit contribution margin/ unit selling price per product x 100% =
370/1100 x 100%= 34%
Variable cost ratio= total unit variable cost/ unit selling price per product x 100% = 730/1100 x 100%=
66%
Must = 100%

If contribution marginratio= 28%, sales revenue = 100% and variable cost ratio will be 72%

9. How can the variable cost ratio and the contribution margin ratio be used?
- used to measure a company's profitability and efficiency
Variable cost ratio= This ratio provides an indication of the proportion of each sales dollar that is
spent on variable costs. If the variable cost ratio is high, it means that a large proportion of each sales
dollar is spent on variable costs, leaving less available to cover fixed costs and generate a profit.

Contribution margin ratio= the proportion of each sales dollar that contributes to covering fixed costs
and generating a profit. A high contribution margin ratio indicates that a large proportion of each
sales dollar is available to cover fixed costs and generate a profit.

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Video 2: Chapter 4, LO1, V02 – Calculate The Break-even Point in Units

and Sales Dollars

1. What is break-even analysis?

2. How can the break-even point be calculated?

3. In the video, the following cost information is available for David Inc.

Units sold 2,000

Unit selling price per product $1,100
Variable costs per product
Direct materials $400
Direct labour $200
Sales commission $30
Administrative expenses $100
Total unit variable costs $730
Monthly fixed costs
Manufacturing overhead $86,000
Sales costs $21,500
$322,50
Administrative costs 0
$430,00
Total monthly fixed costs 0

Calculate the break-even point in sales dollars using a mathematical equation.

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4. Calculate the break-even point for David Inc. in units using contribution margin.

5. Calculate the break-even point for David Inc. in sales dollars using the contribution margin ratio.

Video 3: Chapter 4, LO2, V01 and V02 – CVP and Target Income Before
Taxes and After Taxes

1. What is “target income before taxes”?

2. Using the mathematical equation method, determine the number of units that must be sold to
earn David Inc. a before tax income of $120,000.

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3. Using the contribution margin technique, determine the sales required to earn a before tax
income of $120,000.

4. What is “target income after taxes”?

5. Using the mathematical equation method, determine the number of units that must be sold to
earn David Inc. an after-tax income of $90,000.

6. Using the contribution margin technique, determine the sales required to earn an after-tax
income of $90,000.

Video 4: Chapter 4, LO2, V02 – CVP and Target Income as a Percentage

of Sales

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1. What is “target income as a percentage of sales”?

2. If you use the mathematical equation method, what is the formula to calculate the number of
units required to earn a target income as a percentage of sales?

3. Using the mathematical equation method, determine the number of units that must be sold to
earn David Inc. a target income of 12% of sales.

4. If you use the shortcut, unit contribution margin approach, what is the formula to calculate the
number of units required to earn a target income as a percentage of sales?

5. Using the contribution margin technique, determine the number of units that must be sold to
earn a target income of 12% of sales.

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Video 5: Chapter 4, LO3, V01 – Prepare a Cost-Volume-Profit (CVP)

Graph

1. Draw and label a cost-volume-profit graph for David Inc.

2. If variable costs per unit increased, what would happen to the break-even point and why?

3. If the selling price per unit decreased, what would happen to the break-even point and why?

4. If fixed costs increased, what would happen to the break-even unit and why?

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Video 6: Chapter 4, LO4, V01 – CVP and Multiple-product Analysis

1. Why is CVP analysis important when a company sells more than one product?

2. What is the formula to calculate the break-even point for a multi-product environment?

3. Assume that David Inc. sells XD2 but they also sell an additional product, LB4. This product has a
selling price of $550 and variable costs per unit of $330. David Inc. sells 500 units of LB4 per
month. When production of LB4 is included, total monthly fixed costs are $615,400. For step 1,
how is the sales mix determined? Determine the sales mix for David Inc.

4. For step 2, produce the chart which calculates the package contribution margin for David Inc.

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5. For step 3, apply the results of Step 1 and Step 2 to calculate the break-even point for the
packages.

6. For step 4, use the formula to calculate the number of units that must be sold for each product:
XD2 and LB4.

Video 7: Chapter 4, LO5, V01 – CVP Analysis, Changing Business

Environment

1. How can CVP analysis be used to respond to change?

2. Assume that David Inc. is considering offering a 10% discount on the sales price of their product.
What effect will a 10% discount on the sales price have on the break-even point for this
product?

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3. Assume that David Inc. would like production to become more efficient. They plan to install new
equipment which will increase the fixed manufacturing costs by 30%; however, they feel that
the new equipment will decrease direct labour costs by 40%. Should they install the new
equipment?

4. Assume that the supplier for David Inc. is increasing their prices and, as a consequence, direct
material costs will increase by $25. In order to maintain the same selling price, management
plans to cut fixed manufacturing overhead costs by $38,000. Will the number of units sold have
to increase in order for the company to maintain their current income before income taxes of
$310,000?

Video 8: Chapter 4, LO5, V02 – Margin of Safety in Units and Sales

Dollars, Explained

1. What is the margin of safety, and what is the formula to calculate the margin of safety?

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2. Calculate the margin of safety for David Inc. in units.

3. Calculate the margin of safety for David Inc. in sales dollars.

4. What is the margin of safety ratio, and how is it calculated?

Video 9: Chapter 4, LO5, V03 – Degree of Operating Leverage,

Explained

1. What is the degree of operating leverage?

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2. Explain risk and it’s connection to the degree of operating leverage.

3. How is the degree of operating leverage calculated?

4. Using David Inc.’s contribution margin income statement, calculate the degree of operating
leverage.

5. How is the percentage change in operating income calculated? Calculate the percentage change
in operating income for David Inc. if sales revenue increased by 15%.

6. How much income, in dollars, would David Inc. earn if their sales revenue increased by 15%? Be
sure to provide the formula you used to calculate this!

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7. Calculate the percentage change in operating income for David Inc. if sales revenue decreased
by 10%.

8. How much income, in dollars, would David Inc. earn if their sales revenue decreased by 10%?

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