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# Chapter 21

Cost-Volume-
Profit Analysis

Demonstration Problems

## © 2016 Pearson Education, Inc. 21-1

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.

## © 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%

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

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

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

E21-38

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

the company achieves its income goal.

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

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.

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.

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.

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.

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.

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.

E21-38

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

the company achieves its income goal.

E21-38

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

the company achieves its income goal.

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

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

E21-38

target sales.

E21-38

target sales.

## Margin of safety in dollars

Margin of safety ratio =
Expected sales in dollars

E21-38

target sales.

## Margin of safety in dollars

Margin of safety ratio =
Expected sales in dollars

\$42,500
=
\$62,500

E21-38

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