End of Chapter “A” Chapter 3: Cost-Volume-Profit Analysis Problems (Long Questions)

Exercise 3A-2

Gemini Tire Company has provided you with the following information:
Selling price per unit $40.00
Variable expenses per unit $24.00
Total fixed expenses per year $160,000
Unit sales 15,000

a. Prepare a contribution income statement for 20XX.

b. Prepare a new contribution income statement for 20XX, under each of the following conditions:
1. Selling price increases by 10%, fixed expenses increase by $20,000 and the number of units
sold decreases by 8%.
2. Selling price decreases by 5%, fixed expenses increase by $10,000 and the number of units
sold increases 10%.
3. Variable expenses decrease by $2.00 per unit, selling price decreases by 5% and the number
of units sold increases 6%.

Exercise 3A-3

Peter recently opened a small boutique and is currently selling a single product. The information related
to his business is given below:
Selling price per unit $30
Variable expenses per unit $20
Total fixed expenses per year $100,000
a. Calculate the following:
1. Number of units Peter needs to sell per year to break-even.
2. Number of units Peter needs to sell to earn a profit of $25,000 per year.
b. Prepare a graph from zero level of activity up to 20,000 units. Identify the following on the graph:
1. Total fixed expenses line
2. Total expenses line
3. Total revenue line
4. Break-even point
5. Loss area
6. Profit area
(307/LO 3.1,2/medium)
 End of Chapter “A” Chapter 3: Cost-Volume-Profit Analysis Problems (Long Questions)

Exercise 3A-6

The following table describes key data about product DQ47:

Selling price $5.00
Variable cost per unit $2.50
Fixed costs $400
Income tax rate 20%

a. Determine the break-even point in units.

b. Complete the following chart:

At sales quantities of
500 750
Operating income
Net income
Margin of safety in units
Margin of safety percentage (1 decimal place)
Degree of operating leverage (2 decimal places)
Operating income if sales increase 20%
Operating income if sales decrease 20%

c. Note your observations about the degree of leverage and margin of safety at 500 and 750 units.

Exercise 3A-7

Pooch Pets is a new entrant in the toy stuffed animal market. A partially completed contribution income
statement for its sales mix of Alpha Dog and Beta Dog is presented below:

Alpha Dog Beta Dog Company Total

Qty Per Unit Total $ % Qty Per Unit Total $ % Total $ %

Selling price 900 75.00 2,250 50.00 100.0
Variable costs -39.50 -30.00
Contribution
margin
Fixed costs -50,000
Operating income

Complete the following:

a. Complete contribution margin income statement for this sales mix based on the example on page
28.
b. Determine the contribution margin percentage for the sales mix as well as the contribution margin
percentage for each of the items individually.
End of Chapter “A” Chapter 3: Cost-Volume-Profit Analysis Problems (Long Questions)

c. Determine the sales mix percentage for each item.

d. Determine the break-even sales in total and per item in both revenue and units.
e. The current mix sells in a 2:5 ratio. If this were to change in the future, which product would you
prefer to increase in its portion of the sales mix and why?

Problem 3A-3
Amanda Johnson has recently opened a ladies’ handbags Shop in Millwoods Town Centre. Her store
specializes in fashionable ladies’ handbags. In time, she hopes to open more stores in trendy malls of
Edmonton. As a first step, she has prepared the following analysis for her new store:
Selling price per handbag $ 120.00
Purchase price per handbag $ 55.00
Sales commission per handbag $5.00
Rent per year $ 40,000
Salaries per year $160,000
Advertising expense per year $20,000
Depreciation Furniture & fixture per year $20,000
Sales (units) 5,000
a. Prepare an income statement in contribution format at the current sales level of 5,000 units.
Show data on a total, per unit, and percentage basis.
b. How many handbags (Units) must be sold each year to break-even?
c. Calculate the break-even point in sales dollars.
d. Compute the sales in units and dollars required to achieve an operating income of $90,000.
e. Compute the margin of safety in dollars, in units and percentage at 5,000-unit sales level.
f. Compute the company's degree of operating leverage (DOL) at 5,000-unit sales level.
g. Use the degree of operating leverage to estimate the impact on operating income of a 4%
decrease in sales. Calculate the percentage and dollar change in operating income.

Problem 3A-4

Delmar Incorporated uses a common facility and processes to produce a standard desk lamp and night-
table lamp. The desk lamp sells for $50 and has variable costs of $27/unit. The night-table lamp sells for
$35 and has variable costs of $23/unit. Expected annual sales are 5,000 units for the desk lamp and
12,000 units for the night-table lamp. Fixed costs covering both processes are $180,000/year.

a. Prepare a contribution margin income statement for this sales mix.

b. Determine the contribution margin percentage for the sales mix as well as the contribution margin
percentage for each of the items individually.
c. Determine the sales mix percentage for each item.
d. Determine the break-even sales in total and per item in both revenue and units.
e. The current mix sells in a 5:12 ratio. If this were to change in the future, which product would you
prefer to increase in its portion of the sales mix and why?
End of Chapter “A” Chapter 3: Cost-Volume-Profit Analysis Problems (Long Questions)

Problem 3A-7
Find out the missing information in each of the following independent cases.
Case Total Total Total Selling Unit Total Operating Units
Sales Variable Contribution price contribution fixed income sold
expenses margin per unit margin expenses (loss)
1 $420,000 $252,000 $21.00 $42,000
2 $42.00 $230,000 $(28,400) 7,200
3 $415,800 $188,100 $31.50 $200,000
4 $152,640 $270,300 $21.25 $60,300