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Chapter 21

Cost-Volume-
Profit Analysis

Demonstration Problems

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E21-31
For its top managers, Global Travel formats its income statement as follows:

Global Travel
Income Statement
For the Month Ended March 31, 2016
Sales Revenue $ 318,500
Variable Costs 111,475
Contribution Margin 207,025
Fixed Costs 175,000
Operating Income $ 32,025

Jackson’s relevant range is between sales of $250,000 and $360,000.


Requirements
1. Calculate the contribution margin ratio.
2. Prepare two contribution margin income statements: one at the $250,000
sales level and one at the $360,000 sales level. (Hint: The proportion of
each sales dollar that goes toward variable costs is constant within the
relevant range.)
© 2016 Pearson Education, Inc. 21-2
E21-31
Requirement 1: Calculate the contribution margin ratio.

Contribution margin ratio =

© 2016 Pearson Education, Inc. 21-3


E21-31
Requirement 1: Calculate the contribution margin ratio.

Contribution margin
Contribution margin ratio =
Net sales revenue

© 2016 Pearson Education, Inc. 21-4


E21-31
Requirement 1: Calculate the contribution margin ratio.

Contribution margin
Contribution margin ratio =
Net sales revenue

$207,025
=
$318,500

© 2016 Pearson Education, Inc. 21-5


E21-31
Requirement 1: Calculate the contribution margin ratio.

Contribution margin
Contribution margin ratio =
Net sales revenue

$207,025
=
$318,500

= 65%

© 2016 Pearson Education, Inc. 21-6


E21-31

Requirement 2: Prepare two contribution margin income statements: one at


the $250,000 sales level and one at the $360,000 sales level. (Hint: The
proportion of each sales dollar that goes toward variable costs is constant
within the relevant range.)

Global Travel
Income Statement

© 2016 Pearson Education, Inc. 21-7


E21-31

Requirement 2: Prepare two contribution margin income statements: one at


the $250,000 sales level and one at the $360,000 sales level. (Hint: The
proportion of each sales dollar that goes toward variable costs is constant
within the relevant range.)

Global Travel
Income Statement
Sales Revenue $ 250,000

© 2016 Pearson Education, Inc. 21-8


E21-31

Requirement 2: Prepare two contribution margin income statements: one at


the $250,000 sales level and one at the $360,000 sales level. (Hint: The
proportion of each sales dollar that goes toward variable costs is constant
within the relevant range.)

Global Travel
Income Statement
Sales Revenue $ 250,000
Variable Costs (35% of sales) 87,500

If the contribution margin ratio is 65% (that is, contribution margin is 65% of
sales), then variable costs must be 35% of sales.

© 2016 Pearson Education, Inc. 21-9


E21-31

Requirement 2: Prepare two contribution margin income statements: one at


the $250,000 sales level and one at the $360,000 sales level. (Hint: The
proportion of each sales dollar that goes toward variable costs is constant
within the relevant range.)

Global Travel
Income Statement
Sales Revenue $ 250,000
Variable Costs (35% of sales) 87,500
Contribution Margin 162,500

If the contribution margin ratio is 65% (that is, contribution margin is 65% of
sales), then variable costs must be 35% of sales.

© 2016 Pearson Education, Inc. 21-10


E21-31

Requirement 2: Prepare two contribution margin income statements: one at


the $250,000 sales level and one at the $360,000 sales level. (Hint: The
proportion of each sales dollar that goes toward variable costs is constant
within the relevant range.)

Global Travel
Income Statement
Sales Revenue $ 250,000
Variable Costs (35% of sales) 87,500
Contribution Margin 162,500
Fixed Costs 175,000

If the contribution margin ratio is 65% (that is, contribution margin is 65% of
sales), then variable costs must be 35% of sales.

© 2016 Pearson Education, Inc. 21-11


E21-31

Requirement 2: Prepare two contribution margin income statements: one at


the $250,000 sales level and one at the $360,000 sales level. (Hint: The
proportion of each sales dollar that goes toward variable costs is constant
within the relevant range.)

Global Travel
Income Statement
Sales Revenue $ 250,000
Variable Costs (35% of sales) 87,500
Contribution Margin 162,500
Fixed Costs 175,000
Operating Income (Loss) $ (12,500)

If the contribution margin ratio is 65% (that is, contribution margin is 65% of
sales), then variable costs must be 35% of sales.

© 2016 Pearson Education, Inc. 21-12


E21-31

Requirement 2: Prepare two contribution margin income statements: one at


the $250,000 sales level and one at the $360,000 sales level. (Hint: The
proportion of each sales dollar that goes toward variable costs is constant
within the relevant range.)

Global Travel
Income Statement
Sales Revenue $ 360,000

If the contribution margin ratio is 65% (that is, contribution margin is 65% of
sales), then variable costs must be 35% of sales.

© 2016 Pearson Education, Inc. 21-13


E21-31

Requirement 2: Prepare two contribution margin income statements: one at


the $250,000 sales level and one at the $360,000 sales level. (Hint: The
proportion of each sales dollar that goes toward variable costs is constant
within the relevant range.)

Global Travel
Income Statement
Sales Revenue $ 360,000
Variable Costs (35% of sales) 126,000

If the contribution margin ratio is 65% (that is, contribution margin is 65% of
sales), then variable costs must be 35% of sales.

© 2016 Pearson Education, Inc. 21-14


E21-31

Requirement 2: Prepare two contribution margin income statements: one at


the $250,000 sales level and one at the $360,000 sales level. (Hint: The
proportion of each sales dollar that goes toward variable costs is constant
within the relevant range.)

Global Travel
Income Statement
Sales Revenue $ 360,000
Variable Costs (35% of sales) 126,000
Contribution Margin 234,000

If the contribution margin ratio is 65% (that is, contribution margin is 65% of
sales), then variable costs must be 35% of sales.

© 2016 Pearson Education, Inc. 21-15


E21-31

Requirement 2: Prepare two contribution margin income statements: one at


the $250,000 sales level and one at the $360,000 sales level. (Hint: The
proportion of each sales dollar that goes toward variable costs is constant
within the relevant range.)

Global Travel
Income Statement
Sales Revenue $ 360,000
Variable Costs (35% of sales) 126,000
Contribution Margin 234,000
Fixed Costs 175,000

If the contribution margin ratio is 65% (that is, contribution margin is 65% of
sales), then variable costs must be 35% of sales.

© 2016 Pearson Education, Inc. 21-16


E21-31

Requirement 2: Prepare two contribution margin income statements: one at


the $250,000 sales level and one at the $360,000 sales level. (Hint: The
proportion of each sales dollar that goes toward variable costs is constant
within the relevant range.)

Global Travel
Income Statement
Sales Revenue $ 360,000
Variable Costs (35% of sales) 126,000
Contribution Margin 234,000
Fixed Costs 175,000
Operating Income (Loss) $ 59,000

If the contribution margin ratio is 65% (that is, contribution margin is 65% of
sales), then variable costs must be 35% of sales.

© 2016 Pearson Education, Inc. 21-17


E21-38

Ricky's Repair Shop has a monthly target profit of


$17,000. Variable costs are 60% of sales, and monthly
fixed costs are $8,000.

Requirements
1. Compute the monthly margin of safety in dollars if the
shop achieves its income goal.
2. Express Ricky's margin of safety as a percentage of
target sales.

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Requirement 1: Compute the monthly margin of safety in dollars if


the company achieves its income goal.

Required sales in dollars for break-even =

© 2016 Pearson Education, Inc. 21-19


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Requirement 1: Compute the monthly margin of safety in dollars if


the company achieves its income goal.

Fixed costs + Target profit


Required sales in dollars for break-even =
Contribution margin ratio

© 2016 Pearson Education, Inc. 21-20


E21-38

Requirement 1: Compute the monthly margin of safety in dollars if


the company achieves its income goal.

Fixed costs + Target profit


Required sales in dollars for break-even =
Contribution margin ratio

If variable costs are 60% of sales, then the contribution margin ratio
must be 40% of sales.

© 2016 Pearson Education, Inc. 21-21


E21-38

Requirement 1: Compute the monthly margin of safety in dollars if


the company achieves its income goal.

Fixed costs + Target profit


Required sales in dollars for break-even =
Contribution margin ratio

$8,000 + $0
=
40%

If variable costs are 60% of sales, then the contribution margin ratio
must be 40% of sales.

© 2016 Pearson Education, Inc. 21-22


E21-38

Requirement 1: Compute the monthly margin of safety in dollars if


the company achieves its income goal.

Fixed costs + Target profit


Required sales in dollars for break-even =
Contribution margin ratio

$8,000 + $0
=
40%

= $20,000

If variable costs are 60% of sales, then the contribution margin ratio
must be 40% of sales.

© 2016 Pearson Education, Inc. 21-23


E21-38

Requirement 1: Compute the monthly margin of safety in dollars if


the company achieves its income goal.

Fixed costs + Target profit


Required sales in dollars for target profit =
Contribution margin ratio

If variable costs are 60% of sales, then the contribution margin ratio
must be 40% of sales.

© 2016 Pearson Education, Inc. 21-24


E21-38

Requirement 1: Compute the monthly margin of safety in dollars if


the company achieves its income goal.

Fixed costs + Target profit


Required sales in dollars for target profit =
Contribution margin ratio

$8,000 + $17,000
=
40%

If variable costs are 60% of sales, then the contribution margin ratio
must be 40% of sales.

© 2016 Pearson Education, Inc. 21-25


E21-38

Requirement 1: Compute the monthly margin of safety in dollars if


the company achieves its income goal.

Fixed costs + Target profit


Required sales in dollars for target profit =
Contribution margin ratio

$8,000 + $17,000
=
40%

= $62,500

If variable costs are 60% of sales, then the contribution margin ratio
must be 40% of sales.

© 2016 Pearson Education, Inc. 21-26


E21-38

Requirement 1: Compute the monthly margin of safety in dollars if


the company achieves its income goal.

Margin of safety in dollars =

© 2016 Pearson Education, Inc. 21-27


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Requirement 1: Compute the monthly margin of safety in dollars if


the company achieves its income goal.

Margin of safety in dollars = Expected sales – Break-even sales

© 2016 Pearson Education, Inc. 21-28


E21-38

Requirement 1: Compute the monthly margin of safety in dollars if


the company achieves its income goal.

Margin of safety in dollars = Expected sales – Break-even sales

= $62,500 – $20,000

© 2016 Pearson Education, Inc. 21-29


E21-38

Requirement 1: Compute the monthly margin of safety in dollars if


the company achieves its income goal.

Margin of safety in dollars = Expected sales – Break-even sales

= $62,500 – $20,000

= $42,500

© 2016 Pearson Education, Inc. 21-30


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Requirement 2: Express Ricky's margin of safety as a percentage of


target sales.

Margin of safety ratio =

© 2016 Pearson Education, Inc. 21-31


E21-38

Requirement 2: Express Ricky's margin of safety as a percentage of


target sales.

Margin of safety in dollars


Margin of safety ratio =
Expected sales in dollars

© 2016 Pearson Education, Inc. 21-32


E21-38

Requirement 2: Express Ricky's margin of safety as a percentage of


target sales.

Margin of safety in dollars


Margin of safety ratio =
Expected sales in dollars

$42,500
=
$62,500

© 2016 Pearson Education, Inc. 21-33


E21-38

Requirement 2: Express Ricky's margin of safety as a percentage of


target sales.

Margin of safety in dollars


Margin of safety ratio =
Expected sales in dollars

$42,500
=
$62,500

= 68%

© 2016 Pearson Education, Inc. 21-34


End of Chapter 21

© 2016 Pearson Education, Inc. 21-35