ch06 - CVP Analysis Additional Issues

Managerial Accounting
8th Edition
Weygandt Kimmel Kieso
Chapter 6
Cost-Volume-Profit
Analysis: Additional Issues
Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont College
Chapter Outline
Learning Objectives
LO 1 Apply basic CVP concepts.
LO 2 Explain the term sales mix and its effects on break-
even sales.
LO 3 Determine sales mix when a company has limited
resources.
LO 4 Indicate how operating leverage affects
profitability.
Copyright ©2017 John Wiley & Son, Inc. 2

Basic CVP Concepts
CVP analysis:
Study of the effects of changes in costs and volume
on a company’s profit.
Important to profit planning.
Critical in management decisions such as:
 determining product mix,
 maximizing use of production facilities,
 setting selling prices.
LO 1 Copyright ©2017 John Wiley & Son, Inc. 3
Basic CVP Concepts
Basic Concepts
Management often wants the information reported
in a special format income statement.
CVP income statement is for internal use only:
 Costs and expenses classified as fixed or
variable.
 Reports contribution margin as a total amount
and on a per unit basis.

Basic CVP Concepts ILLUSTRATION 6.1
Basic CVP income statement
Basic Concepts

ILLUSTRATION 6.2
Detailed CVP income
statement

Break-Even Analysis
Vargo Electronic’s CVP income statement (Ill. 6.2)
shows that total contribution margin is $320,000, and
the company’s contribution margin per unit is $200.
Contribution margin can also be expressed as the
contribution margin ratio which is 40% ($200 ÷
$500). Unit
Contribution Break-Even
Fixed Costs ÷ Margin = Point in Units
$200,000 ÷ $200 = 1,000 units

ILLUSTRATION 6.3
Break-even point in units

Break-Even Analysis
Vargo Electronic’s CVP income statement (Ill. 6.2)
shows that total contribution margin is $320,000, and
the company’s contribution margin per unit is $200.
Contribution margin can also be expressed as the
contribution margin ratio which is 40% ($200 ÷
$500).
Contribution Break-Even Point
Fixed Costs ÷ Margin Ratio = in Dollars
$200,000 ÷ .40 = $500,000

ILLUSTRATION 6.4
Break-even point in dollars

Target Net Income
Once a company achieves break-even sales, a sales
goal can be set that will result in a target net income .
Illustration: Assuming Vargo’s target net income is
$250,000, compute required sales in units to achieve
target net income : Unit
(Fixed Costs + Target Contribution Sales in
÷ =
Net Income) Margin Units
($200,000 + $250,000) ÷ $200 = 2,250 units

ILLUSTRATION 6.5
Target net income in units

Target Net Income
Once a company achieves break-even sales, a sales
goal can be set that will result in a target net income .
Illustration: The contribution margin ratio is used to
compute required sales in dollars.
(Fixed Costs + Target Contribution Sales in
÷ =
Net Income) Margin Ratio Dollars
($200,000 + $250,000) ÷ .40 = $1,125,000

ILLUSTRATION 6.6
Target net income in dollars

Margin of Safety
a. tells us how far sales can drop before the company
will operate at a loss.
b. can be expressed in dollars or as a ratio.
Illustration: Assume Vargo’s sales are $800,000:
Margin of
Actual (Expected) Break-Even Safety in
- =
Sales Sales Dollars
$800,000 - $500,000 = $300,000

ILLUSTRATION 6.7
Margin of safety in dollars

Margin of Safety
a. tells us how far sales can drop before the company
will operate at a loss.
b. can be expressed in dollars or as a ratio.
Illustration: Vargo’s sales could drop by $300,000, or
37.5%, before the company would operate at a loss
Actual
Margin of Safety (Expected) Margin of
÷ =
in Dollars Sales Safety Ratio
$300,000 ÷ $800,000 = 37.5%

ILLUSTRATION 6.8
Margin of safety ratio
CVP and Changes in the Business
Environment
Illustration: Original cell phone sales and cost data for
Vargo Electronics is as shown.
Unit selling price $500
Unit variable cost $300
Total fixed costs $200,000
Break-even sales $500,000 or 1,000 units

Environment
Case I: A competitor is offering a 10% discount on
the selling price of its cell phones. What effect will a
10% discount on selling price ($500 x 10% = $50) have
on the breakeven point?
Unit Contribution Break-Even
÷ =
Fixed Costs Margin Sales
$200,000 ÷ $150 = 1,333 units
($450 - $300) (rounded)
ILLUSTRATION 6.10
Computation of break-even sales in units

Environment
Case II: Management invests in new equipment that
will lower the amount of direct labor required to
make cell phones. They estimate that total fixed costs
will increase 30% and variable cost per unit will
decrease 30%. What effect will the new equipment
ILLUSTRATION 6.11
have on the sales volume required to break even?
Unit Contribution Break-Even
÷ =
Fixed Costs Margin Sales
$260,000 ÷ ($500 - $210) = 897 units
(rounded)

Environment
Case III: Vargo’s principal supplier of raw materials
has just announced a price increase. The higher cost
is expected to increase the variable cost of cell
phones by $25 per unit. Management plans a cost-
cutting program that will save $17,500 in fixed costs
per month. Vargo is currently realizing monthly net
income of $80,000 on sales of 1,400 cell phones.
What increase in units sold will be needed to
maintain the same level of net income?
Environment
Variable cost per unit increases to $325 ($300 + $25).
Fixed costs are reduced to $182,500 ($200,000 - $17,500).
Contribution margin per unit becomes $175 ($500 - $325).
Unit
(Fixed Cost + Target Contribution
Net Income) ÷ Margin = Sales in Units
($182,500 + $80,000) ÷ $175 = 1,500

ILLUSTRATION 6.12
Computation of required sales
Basic CVP Concepts
Croc Catchers calculates its contribution margin
to be less than zero. Which statement is true?
a. Its fixed costs are less than the variable
cost per unit.
b. Its profits are greater than its total costs.
c. The company should sell more units.
d. Its selling price is less than its variable
costs.
DO IT! 1 CVP Analysis
Krisanne Company reports the following for June.
Total Per Unit
Sales (5,000 units) $300,000 $60
Variable costs 180,000 36
Contribution margin 120,000 $24
Fixed expenses 100,000
Net income $ 20,000
To increase net income, management is considering reducing the
selling price by 10%, with no changes to unit variable costs or fixed
costs. Management is confident that this change will increase unit
sales by 25%.
Using the contribution margin technique, compute the break-even
point in units and dollars and margin of safety in dollars assuming
no changes to sales price or costs.
Solution
a. Assuming no changes to sales price or costs:
Break-even point in units = 4,167 units (rounded) ($100,000 ÷ $24)
Break-even point in sales dollars = $250,000 ($100,000 ÷ .40a)
Margin of safety in dollars = $50,000 ($300,000 − $250,000)
a
$24 ÷ $60

Using the contribution margin technique, compute the break-even
point in units and dollars and margin of safety in dollars assuming
changes to sales price and volume as described.
Break-even point in units = 5,556 units (round) ($100,000 ÷ $18a)
Break-even point in sales dollars = $300,000 ($100,000 ÷ 0,33b)
Margin of safety in dollars = $37,500 ($337,500c − $300,000)
a: 18 =(60-10%x60)-36 = 54-36=$18
b: 18 ÷ 54 = 33,33%
c: (5,000+ 25%x5,000) x 54 = 6,250x54= $337,500

Sales Mix and Break-Even Sales
a. Sales mix is the relative percentage in which a
company sells its products.
b. If a company’s unit sales are 80% printers and 20%
computers, its sales mix is 80% to 20%.
c. Sales mix is important because different products
often have very different contribution margins.

Break-Even Sales in Units
Companies can compute break-even sales for a mix of
two or more products by determining the weighted-
average unit contribution margin of all the products.
Illustration: Vargo Electronics sells not only cell
phones but high-definition TVs. Vargo sells its
products in the following amounts: 1,500 cell phones
and 500Cell
TVs.Phones TVs
1,500 units ÷ 2,000 units = 500 units ÷ 2,000 units =
75% 25%

Additional information related to Vargo Electronics.
Cell Phones TVs
1,500 units ÷ 2,000 units = 500 units ÷ 2,000 units =
75% 25%
Unit Data Cell Phones TVs

Selling price $500 $1,000
Variable costs 300 500
Contribution margin $200 $500
Sales mix—units 75% 25%
Fixed costs = $275,000

First, determine weighted-average contribution
margin.
Unit Data Cell Phones TVs
Selling price $500 $1,000
Variable costs 300 500
Contribution margin $200 $500
Sales mix—units 75% 25%
Fixed costs = $275,000
ILLUSTRATION 6.15

Second, use the weighted-average unit contribution
margin to compute the break-even point in units.
ILLUSTRATION 6.15
Break-Even
Weighted-Average Unit Point in
Fixed Cost ÷ Contribution Margin = Units
$275,000 ÷ $275 = 1,000 units

ILLUSTRATION 6.16
Break-even point in units Copyright ©2017 John Wiley & Son, Inc. 26
LO 2
With break-even point of 1,000 units, Vargo must sell:
 750 cell phones (1,000 units x 75%)
 250 TVs (1,000 units x 25%)
• At this level, the total contribution margin will equal
the fixed costs of $275,000.
ILLUSTRATION 6.17

Break-Even Sales in Dollars
Works well if company has many products.
Calculates break-even point in terms of sales dollars for
 divisions or
 product lines,
 not individual products.

Kale Garden Supply Company has two divisions.
ILLUSTRATION 6.18
Cost-volume-profit data for
Kale Garden Supply
ILLUSTRATION 6.19
Contribution margin ratio

First, determine weighted-average contribution
margin.
ILLUSTRATION 6.20
Second,
Weighted-Average Break-even
calculate Fixed Cost ÷ Contribution = Point in
break-even Margin Ratio Dollars
point in $300,000 ÷ .32 = $937,500

dollars.
ILLUSTRATION 6.20
With break-even sales of $937,500 and a sales mix
of 20% to 80%, Kale must sell:
 $187,500 from the Indoor Plant division
 $750,000 from the Outdoor Plant division
If sales mix becomes 50% to 50%, the weighted
average contribution margin ratio changes to
35%, resulting in a lower break-even point of
$857,143.

Question
Net income will be:
a. Greater if more higher-contribution margin units are
sold than lower-contribution margin units.
b. Greater if more lower-contribution margin units are
sold than higher-contribution margin units.
c. Equal as long as total sales remain equal, regardless
of which products are sold.
d. Unaffected by changes in the mix of products sold.
DO IT! 2 Sales Mix Break Even
Manzeck Bicycles International produces and sells three different
types of mountain bikes. Information regarding the three models is
shown below.
Pro Intermediate Standard Total
Units sold 5,000 10,000 25,000 40,000
Selling price $800 $500 $350
Variable costs $500 $300 $250
The company’s total fixed costs are $7,500,000.
(a) Determine the sales mix as a function of units sold for the three
products.

(a) Determine the sales mix as a function of units sold for the three
products.
Units sold 5,000 10,000 25,000 40,000
Solution
Pro = 5,000/40,000 = 12.5%
Intermediate = 10,000/40,000 = 25%
Standard = 25,000/40,000 = 62.5%

(b) Determine the weighted-average unit contribution margin.
Units sold 5,000 10,000 25,000 40,000
Solution
[.125 × ($800 − $500)] +
[.25 × ($500 − $300)] +
[.625 × ($350 − $250)] = $150

(c) Determine the total number of units that the company must sell
to break even.
Units sold 5,000 10,000 25,000 40,000
Solution
$7,500,000 ÷ $150 = 50,000 units

(d) Determine the number of units of each model that the
company must sell to break even.
Units sold 5,000 10,000 25,000 40,000
Solution
Pro: 50,000 units × 12.5% = 6,250 units
Intermediate: 50,000 units × 25% = 12,500 units
Standard: 50,000 units × 62.5% = 31,250 units
50,000 units
Sales Mix with Limited Resources
All companies have limited resources whether it be floor
space, raw materials, direct labor hours, etc.
Management must decide which products to sell to
maximize net income.
Illustration: Vargo manufactures cell phones and TVs.
Machine capacity is limited to 3,600 hours per month.
Cell Phones
ILLUSTRATION 6.22
TVs
Unit contribution margin $200 $500
Machine hours required per unit .2 .625
Copyright ©2017 John Wiley & Son, Inc.
LO 3 38
Calculate the contribution margin per unit of limited
resource.
Cell Phones
ILLUSTRATION 6.23
TVs
Unit contribution margin $200 $500
Machine hours required per unit .2 .625
Contribution margin per unit of
Limited resource [(a) ÷ (b)] $1,000 $800
Management should produce more cell phones if
demand exists or increase machine capacity.
LO 3 39
If Vargo is able to increase machine capacity from 3,600
hours to 4,200 hours, the additional 600 hours could be
used to produce either the cell phones or TVs.
Illustration 6-24
Cell phones TVs

Machine hours (a) 600 600
Contribution margin per unit of $1,000 $800
limited resource (b)
Contribution margin (a) x (b) $600,000 $480,000
To maximize net income, all 600 hours should be used to

produce and sell cell phones.
40
Theory of constraints
Approach used to identify and manage constraints so as
to achieve company goals.
Company must continually
 identify its constraints and
 find ways to reduce or eliminate them, where
appropriate.

LO 3 41
Question
If the contribution margin per unit is $15 and it
takes 3.0 machine hours to produce the unit, the
contribution margin per unit of limited resource is:
a. $25.
b. $5.
c. $4.
d. No correct answer is given.
LO 3 42
DO IT! 3 Sales Mix with Limited
Resources
Carolina Corporation manufactures and sells three
different types of high-quality sealed ball bearings for
mountain bike wheels. The bearings vary in terms of
their quality specifications—primarily with respect to
their smoothness and roundness. They are referred to
as Fine, Extra-Fine, and Super-Fine bearings. Machine
time is limited. More machine time is required to
manufacture the Extra-Fine and Super-Fine bearings.

DO IT! 3 Sales Mix with Limited
Resources
Additional information is provided below.
Extra Super
Fine Fine Fine
Selling price $6.00 $10.00 $16.00
Variable costs and expenses 4.00 6.50 11.00
Contribution margin $2.00 $3.50 $5.00
Machine hours required 0.02 0.04 0.08

DO IT! 3 Sales Mix Limited Resources
Extra Super
Fine Fine Fine
Selling price $6.00 $10.00 $16.00
Variable costs and expenses 4.00 6.50 11.00
Contribution margin $2.00 $3.50 $5.00
Machine hours required 0.02 0.04 0.08
What is the contribution margin per unit of limited
resource for each type of bearing?

Operating Leverage and Profitability
Cost Structure is the relative proportion of fixed
versus variable costs that a company incurs.
May have a significant effect on profitability
Company must carefully choose its cost structure.

Vargo Electronics and one of its competitors, New Wave
Company. Both make cell phones. Vargo uses a traditional,
labor-intensive manufacturing process. New Wave has
invested in a completely automated system. The factory
employees are involved only in setting up, adjusting, and
maintaining the machinery. ILLUSTRATION 6.25
Vargo New Wave

Sales $800,000 $800,000
Variable costs 480,000 160,000
Contribution margin 320,000 640,000
Fixed costs 200,000 520,000
Net income $120,000 $120,000
Vargo New Wave
Sales $800,000 $800,000
Variable costs 480,000 160,000
Contribution margin 320,000 640,000
Fixed costs 200,000 520,000
Net income $120,000 $120,000
ILLUSTRATION 6.26 Contribution Contribution

÷ Sales =
Margin Margin Ratio
Vargo $320,000 ÷ $800,000 = 40%
New Wave $640,000 ÷ $800,000 = 80%

Contribution Contribution
÷ Sales =
Margin Margin Ratio
Vargo $320,000 ÷ $800,000 = 40%
New Wave $640,000 ÷ $800,000 = 80%
New Wave contributes 80 cents to net income for each dollar of

increased sales while Vargo only contributes 40 cents.
New Wave’s cost structure which relies on fixed costs is more
sensitive to changes in sales.

Effect on Break-Even Point ILLUSTRATION 6.27
Break-even
Fixed Contribution Point in
÷ =
Costs Margin Ratio Dollars
Vargo $200,000 ÷ .40 = $500,000
New Wave $520,000 ÷ .80 = $650,000
New Wave needs to generate $150,000 more in sales than Vargo

to break-even.
Because of the greater break-even sales required, New Wave is a
riskier company than Vargo.

Effect on Margin of Safety ILLUSTRATION 6.28
Computation of margin of
safety ratio for two companies
The difference in ratios reflects the difference in risk between

New Wave and Vargo.
Vargo can sustain a 38% decline in sales before operating at a loss
versus only a 19% decline for New Wave.

Operating Leverage
Extent that net income reacts to a given change in
sales.
Higher fixed costs relative to variable costs cause a
company to have higher operating leverage.
When sales revenues are increasing, high operating
leverage means that profits will increase rapidly.
When sales revenues are declining, too much
operating leverage can have devastating
consequences.
Degree of Operating Leverage
Provides a measure of a company’s earnings volatility.
Computed by dividing total contribution margin by net
income.
Degree of
Contribution Operating
÷ Net Income =
Margin Leverage
Vargo $320,000 ÷ $120,000 = 2.67
New Wave $640,000 ÷ $120,000 = 5.33
ILLUSTRATION 6.29

Operating Leverage
Question
The degree of operating leverage:
a. Can be computed by dividing total
contribution margin by net income.
b. Provides a measure of the company’s
earnings volatility.
c. Affects a company’s break-even point.
d. All of the above.
LO 4 54
DO IT! 4 Operating Leverage
Rexfield Corp., a company specializing in crime scene
investigations, is contemplating an investment in
automated mass-spectrometers. Its current process
relies on a high number of lab technicians. The new
equipment would employ a computerized expert
system. The company’s CEO has requested a
comparison of the old technology versus the new
technology. The accounting department has prepared
the following CVP income statements for use in your
analysis.
DO IT! 4 Operating Leverage
Old New
Sales $2,000,000 $2,000,000
Variable costs 1,400,000 600,000
Contribution margin 600,000 1,400,000
Fixed costs 400,000 1,200,000
Net income $200,000 $200,000
Compute the degree of operating leverage.

Degree of
Contribution Operating
÷ Net Income =
Margin Leverage
Old $600,000 ÷ $200,000 = 3.00
New $1,400,000 ÷ $200,000 = 7.00
Appendix 6A: Absorption Costing vs.
Variable Costing
Under variable costing, product costs consist of:
Direct Materials
Direct Labor
Variable Manufacturing Overhead
Difference between absorption and variable costing is:
Absorption Costing Variable Costing
Fixed
Product Cost Manufacturing Period Cost
Overhead
ILLUSTRATION 6A.1

Absorption Costing vs. Variable Costing
The difference between absorption and variable
costing:
Under both costing methods, selling and
administrative expenses are treated as period
costs.
Companies may not use variable costing for external
financial reports because GAAP requires that
fixed manufacturing overhead be treated as a
product cost.

Absorption vs. Variable Costing (1 of 2)
Illustration: Premium Products Corporation manufactures a
sealant, called Fix-It, for car windshields. Relevant data for Fix-It
in January 2020, the first month of production is shown.
Selling price $20 per unit.
Units Produced 30,000; sold 20,000; beginning
inventory zero.
Variable unit costs Manufacturing $9 (direct materials $5,
direct labor $3, and variable overhead $1).
Selling and administrative expenses $2.
Fixed costs Manufacturing overhead $120,000.Selling and
administrative expenses $15,000.
ILLUSTRATION 6.A2
Absorption vs. Variable Costing (2 of 2)
Per unit manufacturing cost under each approach. ILLUSTRATION 6A.3
Type of Cost Absorption Variable

Direct materials $5 $5
Direct labor 3 3
Variable manufacturing overhead 1 1
Fixed manufacturing overhead
($120,000 ÷ 30,000 units produced) 4 0
Manufacturing cost per unit $13 $9
Manufacturing cost per unit is $4 ($13 -$9) higher for absorption

costing because fixed manufacturing costs are treated as product
costs.
Absorption Costing Example
ILLUSTRATION 6A.4

Variable Costing Example ILLUSTRATION 6A.5

Absorption Costing vs. Variable Costing
Question
Fixed manufacturing overhead costs are
recognized as:
a. Period costs under absorption costing.
b. Product costs under absorption costing.
c. Product costs under variable costing.
d. Part of ending inventory costs under both
absorption and variable costing.
LO 5 63
Decision-Making Concerns
Generally accepted accounting principles require that
absorption costing be used for the costing of
inventory for external reporting purposes.
Net income measured under GAAP (absorption costing)
is often used internally to
 evaluate performance,
 justify cost reductions, or
 evaluate new projects.

Decision-Making Concerns
Net income calculated using GAAP does not highlight
differences between variable and fixed costs and
may lead to poor business decisions.
Some companies use variable costing for internal
reporting purposes.

Advantages of Variable Costing
1. Net income computed under variable costing is
unaffected by changes in production levels.
2. Variable costing readily supports cost-volume-profit
analysis.
3. Net income computed under variable costing is closely
tied to changes in sales levels and therefore provides a
more realistic assessment of a company’s success or
failure.
4. The presentation of fixed and variable cost components
on the variable costing income statement makes it
easier to identify these costs.

DO IT! 5 Variable Costing (1 of 3)
Franklin Company produces and sells tennis balls. The following
costs are available for the year ended December 31, 2020. The
company has no beginning inventory. In 2020, 8,000,000 units were
produced, but only 7,500,000 units were sold. The unit selling price
was $0.50 per ball. Costs and expenses were as follows.
Variable costs per unit
Direct materials $0.10
Direct labor 0.05
Variable manufacturing overhead 0.08
Variable selling and administrative expenses
0.02
Annual fixed costs and expenses
Manufacturing overhead $500,000
LO 5
Selling and administrative expenses 100,000
Variable costs per unit
Direct materials $0.10
Direct labor 0.05
Variable selling and administrative expenses
0.02
Annual fixed costs and expenses
Manufacturing overhead $500,000
Selling and administrative expenses 100,000
a. Compute the cost of one unit using variable costing.
Direct materials $0.10 $0.23
Direct labor 0.05
LO 5
b. Prepare a 2020 income statement using variable costing.

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Managerial Accounting

Copyright ©2017 John Wiley & Son, Inc. 2

LO 1 Copyright ©2017 John Wiley & Son, Inc. 4

LO 1 Copyright ©2017 John Wiley & Son, Inc. 5

LO 1 Copyright ©2017 John Wiley & Son, Inc. 6

$200,000 ÷ $200 = 1,000 units

LO 1 Copyright ©2017 John Wiley & Son, Inc. 7

$200,000 ÷ .40 = $500,000

LO 1 Copyright ©2017 John Wiley & Son, Inc. 8

($200,000 + $250,000) ÷ $200 = 2,250 units

LO 1 Copyright ©2017 John Wiley & Son, Inc. 9

($200,000 + $250,000) ÷ .40 = $1,125,000

LO 1 Copyright ©2017 John Wiley & Son, Inc. 10

$800,000 - $500,000 = $300,000

LO 1 Copyright ©2017 John Wiley & Son, Inc. 11

$300,000 ÷ $800,000 = 37.5%

LO 1 Copyright ©2017 John Wiley & Son, Inc. 13

LO 1 Copyright ©2017 John Wiley & Son, Inc. 14

LO 1 Copyright ©2017 John Wiley & Son, Inc. 15

($182,500 + $80,000) ÷ $175 = 1,500

LO 1 Copyright ©2017 John Wiley & Son, Inc. 20

LO 1 Copyright ©2017 John Wiley & Son, Inc. 21

LO 2 Copyright ©2017 John Wiley & Son, Inc. 22

LO 2 Copyright ©2017 John Wiley & Son, Inc. 23

Unit Data Cell Phones TVs

LO 2 Copyright ©2017 John Wiley & Son, Inc. 24

LO 2 Copyright ©2017 John Wiley & Son, Inc. 25

$275,000 ÷ $275 = 1,000 units

LO 2 Copyright ©2017 John Wiley & Son, Inc. 27

LO 2 Copyright ©2017 John Wiley & Son, Inc. 28

LO 2 Copyright ©2017 John Wiley & Son, Inc. 29

point in $300,000 ÷ .32 = $937,500

LO 2 Copyright ©2017 John Wiley & Son, Inc. 31

LO 2 Copyright ©2017 John Wiley & Son, Inc. 33

LO 2 Copyright ©2017 John Wiley & Son, Inc. 34

LO 2 Copyright ©2017 John Wiley & Son, Inc. 35

LO 2 Copyright ©2017 John Wiley & Son, Inc. 36

Cell phones TVs

To maximize net income, all 600 hours should be used to

Copyright ©2017 John Wiley & Son, Inc.

LO 3 Copyright ©2017 John Wiley & Son, Inc. 43

LO 3 Copyright ©2017 John Wiley & Son, Inc. 44

LO 3 Copyright ©2017 John Wiley & Son, Inc. 45

LO 4 Copyright ©2017 John Wiley & Son, Inc. 46

Vargo New Wave

ILLUSTRATION 6.26 Contribution Contribution

LO 4 Copyright ©2017 John Wiley & Son, Inc. 48

New Wave contributes 80 cents to net income for each dollar of

LO 4 Copyright ©2017 John Wiley & Son, Inc. 49

New Wave needs to generate $150,000 more in sales than Vargo

LO 4 Copyright ©2017 John Wiley & Son, Inc. 50

The difference in ratios reflects the difference in risk between

LO 4 Copyright ©2017 John Wiley & Son, Inc. 51

LO 4 Copyright ©2017 John Wiley & Son, Inc. 53

Compute the degree of operating leverage.

LO 5 Copyright ©2017 John Wiley & Son, Inc. 57

LO 5 Copyright ©2017 John Wiley & Son, Inc. 58

Type of Cost Absorption Variable

Manufacturing cost per unit is $4 ($13 -$9) higher for absorption

LO 5 Copyright ©2017 John Wiley & Son, Inc. 61

LO 5 Copyright ©2017 John Wiley & Son, Inc. 62

LO 5 Copyright ©2017 John Wiley & Son, Inc. 64

LO 5 Copyright ©2017 John Wiley & Son, Inc. 65