➢ Exercise 5-14: Corveau Company expects to sell 400,000 units of its product next year,

which would generate total sales of $34 million. Management predicts that pretax net
income for next year will be $2,500,000 and that the contribution margin per unit will
be $50.
(1) Use this information to compute next year’s total expected
(a) variable costs and
(b) fixed costs
(2) Prepare a CVP chart from this information.

Answer 5-14:

Sales revenue $ 34.000.000

Variable costs ?
Contribution margin $ 50 x 400.000 = $ 20.000.000
Fixed costs ?
Pretax net income $ 2.500.000
(1)
Contribution margin = Sales revenue - variable costs
=> Variable costs = 34.000.000 - 20.000.000 = 14.000.000

Pretax net income = Contribution margin - Fixed costs

=> Fixed costs = 20.000.000 - 2.500.000 = 17.500.000
(2)
➢ Exercise 5-15: Modern Home sells windows and doors in the ratio of 9:1
(windows:doors). The selling price of each window is $90 and of each door is $250. The
variable cost of a window is $60 and of a door is $220. Fixed costs are $450,000. Use
this information to determine the (1) selling price per composite unit, (2) variable costs
per composite unit, (3) break-even point in composite units, and (4) number of units of
each product that will be sold at the break-even point.

Answer 5-15:

9 units of windows $90 per unit $810

1 unit of doors $250 per unit $250
(1) Selling price of per composite unit $1.060

9 units of windows $60 per unit $540

1 unit of doors $220 per unit $220
(2) Variable costs of a composite unit $760

¿ costs
(3) Break-even point in composite units =
Contribution margin per composite unit
450.000
= = 1.500 composite units
1060−760
 (4) Quantity of Window = 1.500 x 9 = 13.500 units
Quantity of Door = 1.500 x 1 = 1.500 units

➢ Exercise 5-16: Refer to the information from Exercise 5-15. Use the information to
determine the (1) weighted-average contribution margin, (2) break-even point in units,
and (3) number of units of each product that will be sold at the break-even point.

Answer 5-16:
Unit contribution Percentage of sales mix (1) Weighted-average unit
margin contribution margin

Window $90 - $60 = $30 9 $30 x 90% = $27

x 100% = 90%
10

Door $250 - $220 = $30 1 $30 x 10% = $3

x 100% = 10%
10

$30

¿ costs
(2) break-even point in units =
Weighted−average contribution margin
450.000
= = 15.000 units
30
9
(3) Break even quantity (Window) = x 15.000 = 13.500 units
10
1
Break even quantity (Door) = x 15.000 = 1.500 units
10

➢ Exercise 5-17: Precision Tax Service offers tax and consulting services to individuals
and small businesses. Data for fees and costs of three types of tax returns follow.
Precision provides services in the ratio of 5:3:2 (easy, moderate, business). Fixed costs
total $18,000 for the tax season. Use this information to determine the (1) selling price
per composite unit, (2) variable costs per composite unit, (3) break-even point in
composite units, and (4) number of units of each product that will be sold at the break-
even point.
 Answer 5-17:

5 Easy $50 $250

3 Moderate $125 $375
2 Business $275 $275
(1) Selling price of a composite unit $1.175

5 Easy $30 $150

3 Moderate $75 $225
2 Business $100 $200
(2) Variable costs of a composite unit $575

¿ costs
(3) Break-even point in composite units =
Contribution margin per composite unit
18.000
= = 30 composite units
1175−575
(4) Quantity of Easy = 5 x 30 = 150 units
Quantity of Moderate = 3 x 30 = 90 units
Quantity of Business = 2 x 30 = 60 units

➢ Exercise 5-18: Refer to the information from Exercise 5-17. Use the information to
determine the (1) weighted average contribution margin, (2) break-even point in units,
and (3) number of units of each product that will be sold at the break-even point.

Answer 5-18:
 Unit contribution Percentage of sales mix (1) Weighted unit
margin contribution margin

Easy $50 - $30 = $20 5 $20 x 50% = $10

x 100% = 50%
10

Moderate $125 - $75 = $50 3 $50 x 30% = $15

x 100% = 30%
10

Business $275 - $100 = $175 2 $175 x 20% = $35

x 100% = 20%
10

$60

¿ costs
(2) break-even point in units =
Weighted−average contribution margin
18.000
= = 300 units
60
5
(3) Easy = x 300 = 150 units
10
3
Moderate = x 300 = 90 units
10
2
Business = x 300 = 60 units
10

➢ Exercise 5-19:
Company A is a manufacturer with current sales of $1,500,000 and a 60% contribution
margin. Its fixed costs equal $650,000.
Company B is a consulting firm with current service revenues of $1,500,000 and a 25%
contribution margin. Its fixed costs equal $125,000.
Compute the degree of operating leverage (DOL) for each company. Identify which
company benefits more from a 20% increase in sales and explain why.

Answer 5-19:
Company A Company B
Sales $1.500.000 100% $1.500.000 100%
Variable costs 600.000 40% 1.125.000 75%
Contribution margin 900.000 60% 375.000 25%
Fixed costs 650.000 125.000
Pretax income $250.000 $250.000
 Total contribution margin(¿ dollar )
Degree of operating leverage (DOL) =
Pretax income

900.000
=> DOL of company A = = 3.6
250.000
375.000
=> DOL of company B = = 1.5
250.000

Company A Company B
Sales $1.800.000 100% $1.800.000 100%
Variable costs 720.000 40% 1.350.000 75%
Contribution margin 1.080.000 60% 450.000 25%
Fixed costs 650.000 125.000
Pretax income $430.000 $325.000

--> Company A benefits more from a 20% increase in sales. Because the pretax income of
company A is higher than company B’s

Other method:
When there is a 20% increase in sales:
- An increase in pretax income of company A is: 3.6 x 20% = 0.72
=> The new pretax income of company A is: 250.000 + 0.72 x 250.000 = $430.000

- An increase in pretax income of company B is: 1.5 x 20% = 0.3

=> The new pretax income of company B is: 250.000 + 0.3 x 250.000 = $325.000