COST VOLUME P

Problem 1
Wheeler Corporation’s most recent income statement follows: TOTAL
Sales $ 208,000
Variab 144000
Contr 64000
Fixed 56000
Net o 8000
Required:

Prepare a new contribution format income statement under

each of the following conditions (consider each case
independently):

1. The sales volume increases by 50 units. 8050 UNITS

2. The sales volume declines by 50 units. 7950 UNITS
3. The sales volume is 7,000 units. 7000 UNITS

Contribution Income Statement

Case 1 Total $
SALES $ 209,300
VARIA 144900
CONTR$ 64,400
FIXED 56000
NET O $ 8,400

Contribution Income Statement

Case 2 Total $
SALES $ 206,700
VARIA 143100
CONTR$ 63,600
FIXED 56000
NET O $ 7,600
 Contribution Income Statement
Case 3 Total $
SALES $ 182,000
VARIA 126000
CONTR$ 56,000
FIXED 56000
NET O $ -
COST VOLUME PROFIT RELATIONSHIPS

per unit
$26
18
8
NO CHANGE

Per unit cost

$26 w1
18 8000+50=8050
$8

Per unit cost w2

$26 8000-50=7950
18
$8
Per unit cost
$26
18
$8
Contribution margin=fixed expense=breakeven Point
 Problem 2
Last month when Harrison Creations, Inc., sold 40,000 units, total sales were
$300,000, total variable expenses were $240,000, and total fixed expenses
were $45,000.
Required:
1. What is the company’s contribution margin (CM) ratio?
2. Estimate the change in the company’s net operating income if it were to
increase its total sales by $1,500.

1
Contribution Margin Ratio= (𝑪𝒐𝒏𝒕𝒓𝒊𝒃𝒖𝒕𝒊𝒐𝒏 𝑴𝒂𝒓𝒈𝒊𝒏)/𝑺𝒂𝒍𝒆𝒔

Contribution Margin Ratio=0.2

Contribution Margin Ratio= 20%

The change in net operating income from an increase in total sales of $1,500 can b
estimated by using the CM ratio as follows:
2
Change in total sale
* CM Ratio
Estimated change in net operating income is
 SALES
VARIABLE EXPENSES
CONTRIBUION MARGI

CMR

sales of $1,500 can be

ws:

$1,500
20%
$300
$ 300,000
$ 240,000
$ 60,000

0.2
 Problem 3
Per Unit of Sales
Data for Herron Corporation are shown below:
Selling$75
price
Variable45expenses
Contribution
30 margin

Fixed expenses are $75,000 per month and the company is selling 3,000 units per month.
Required:

1. The marketing manager argues that an $8,000 increase in the monthly advertising budget
would increase monthly sales by $15,000. Should the advertising budget be increased.

2. Refer to the original data. Management is considering using higher-quality components th

would increase the variable cost by $3 per unit. The marketing manager believes the higher-
quality product would increase sales by 15% per month. Should the higher-quality componen
be use.

q3 q3
1

Current

Sales(3000 units)

Sales (3000 units) $225,000

Variable expenses 135000
Contribution margin 90,000
Fixed expenses 75000
Net operating PROFIT/LOSS 15,000
 Present(3000 units)
2 Total $
Sales 225000
Variable Expense 135000
Contribution Margin 90000
Fixed expense 75000
Net operating profit 15000
 Percent
100%
60%
40%

000 units per month.

thly advertising budget

get be increased.

r-quality components that

ger believes the higher-
higher-quality components

Sales With
Additional
Advertising
Budget( 3200
units) Difference SALE 225000 SALE 240000
units UNITS
$240,000 $15,000 3000 3200
144000 9000
96,000 6,000
83000 8000
13,000 ($2,000)
Present(3000 units) Expected(3450)
Per unit cost Total Per unit cost Difference units
$75 258750 75 33750 3000
45 165600 48 30600 450
30 93150 27 3150 3450
75000 0
18150 3150
3450
 Problem 4
Maxson Products distributes a single product, a woven basket whose selling
price is $8 and whose variable cost is $6 per unit. The company’s monthly fixed
expense is $5,500.

Required:
1. Solve for the company’s break-even point in unit sales using the equation
method.
2. Solve for the company’s break-even point in sales dollars using the equation
method and the CM ratio.
3. Solve for the company’s break-even point in unit sales using the contribution
margin method.
4. Solve for the company’s break-even point in sales dollars using the
contribution margin method and the CM ratio.

1 The equation method yields the break-even point in unit sales, Q, as follows:

Sales=
$8Q=6Q+5500+0
$8Q-6Q=5500+0
2Q=5500
Q=

2 The equation method can be used to compute the break-even point in s

Sales=
 X=0.75X+5500+0
X-0.75X=5500
X(1-0.75)=5500
0.25X=5500
X=

3 The contribution margin method for the break-even point in unit sales:
(𝒇𝒊𝒙𝒆𝒅 𝒆𝒙𝒑𝒆𝒏𝒔𝒆)/(𝒖𝒏𝒊𝒕 𝒄𝒐𝒏𝒕𝒓𝒊𝒃𝒖𝒕𝒊𝒐𝒏 𝒎𝒂𝒓𝒈𝒊𝒏)
Breakeven in units=

Breakeven in units=

4 The contribution margin method for the break-even point in dollar sale
(𝒇𝒊𝒙𝒆𝒅 𝒆𝒙𝒑𝒆𝒏𝒔𝒆)/(𝒄𝒐𝒏𝒕𝒓𝒊𝒃𝒖𝒕𝒊𝒐𝒏 𝒎𝒂
Breakeven in point in total sales dollar=

Breakeven in point in dollar sales=

Q, as follows:

Variable expenses + Fixed expenses + Profits

2750 BASKETS

k-even point in sales dollars, X, as follows:

Variable expenses + Fixed expenses + Profits

Percent
Per Unit of Sales
Sales price $8 100% 1
Variable expenses $6 75% 0.75
 Contribution margin $2 25% 0.25

Variable expenses + Fixed expenses + Profits

$22,000

int in unit sales:

5500/2=2750 BASKETS

int in dollar sales:

𝒐𝒏𝒕𝒓𝒊𝒃𝒖𝒕𝒊𝒐𝒏 𝒎𝒂𝒓𝒈𝒊𝒏 𝒓𝒂𝒕𝒊𝒐)

5500/0.25
Problem 8
Pringle Company distributes a single product. The
company’s sales and expenses for a recent month
follow: Total Per Unit
Sales
$600,000 $40
Variable
420000
expenses 28
Contribution
180000 margin $12
Fixed150000
expenses
Net$30,000
operating income
Required:

1. What is the monthly break-even point in units sold and in sales dollars?
2. Without resorting to computations, what is the total contribution margin at the
break-even point?

3. How many units would have to be sold each month to earn a target profi t of
$18,000? Use the contribution margin method. Verify your answer by preparing a
contribution format income statement at the target level of sales.

4. Refer to the original data. Compute the company’s margin of safety in both dollar
and percentage terms.
5. What is the company’s CM ratio? If monthly sales increase by $80,000 and there is
no change in fi xed expenses, by how much would you expect monthly net operating
income to increase?
 Problem 9

Fill in the missing amounts in each of the eight case situations below. Each case is independent of the others. (Hint: One
missing amounts would be to prepare a contribution format income statement for each case, enter the known data, and
the missing items.) a. Assume that only one product is being sold in each of the four following cas

Contribution
variable Margin per
unit sold sales expenses unit
1 9000 $270,000 $162,000 ?
2? $350,000 ? $15
3 20000 ? $280,000 $6
4 5000 $160,000 ? ?

b. Assume that more than one product is being sold in each of the four following case situations:

Average
contribution
variable margiun(perce Fixed
sales expense nt) Expense

1 $450,000 ? 40% ?
2 $200,000 $130,000 ? $60,000
3? ? 80% $470,000
4 $300,000 $90,000 ? ?

B. CASE 1 TOTAL %
UNITS
SALES
VARIABLE EXPENSES
CONTRIBUTION MARGIN
 FIXED EXPENSES
NOI

B. CASE 2 TOTAL %
UNITS
SALES
VARIABLE EXPENSES
CONTRIBUTION MARGIN
FIXED EXPENSES
NOI
 h case is independent of the others. (Hint: One way to fi nd the
ement for each case, enter the known data, and then compute
ct is being sold in each of the four following case situations:

Net operating
Fixed expenses income A. CASE 1
90000 ? UNITS
$170,000 $40,000 SALES
? $35,000 VARIABLE EXPENSES
$82,000 ($12,000) CONTRIBUTION MARGIN
FIXED EXPENSES

n each of the four following case situations: NOI

Net operating Income

$65,000 A. CASE 2
? UNITS
$90,000 SALES
($15,000) VARIABLE EXPENSES
CONTRIBUTION MARGIN
FIXED EXPENSES
NOI

B. CASE 3 TOTAL %
UNITS
SALES
VARIABLE EXPENSES
CONTRIBUTION MARGIN
 FIXED EXPENSES
NOI

B. CASE 4 TOTAL %
UNITS
SALES
VARIABLE EXPENSES
CONTRIBUTION MARGIN
FIXED EXPENSES
NOI
 PER
TOTAL UNIT A. CASE 3 TOTAL PER UNIT
UNITS
SALES
VARIABLE EXPENSES
CONTRIBUTION MARGIN
FIXED EXPENSES

NOI

PER
TOTAL UNIT A. CASE 3 TOTAL PER UNIT
UNITS
SALES
VARIABLE EXPENSES
CONTRIBUTION MARGIN
FIXED EXPENSES
NOI