ANSWERS TO REVIEW QUESTIONS
8-1 a. In the contribution-margin approach, the break-even point in units is calculated using the following formula: Break-even point = fixed expenses unit contribution margin
b. In the equation approach, the following profit equation is used: sales volume ⎞ ⎛ unit variable sales volume ⎞ ⎛ unit fixed ⎜ ⎟ −⎜ ⎟ − ⎜ sales price × ⎟ ⎜ expense × ⎟ expenses = 0 in units ⎠ ⎝ in units ⎠ ⎝
This equation is solved for the sales volume in units. c. In the graphical approach, sales revenue and total expenses are graphed. The break-even point occurs at the intersection of the total revenue and total expense lines. 8-2 The term unit contribution margin refers to the contribution that each unit of sales makes toward covering fixed expenses and earning a profit. The unit contribution margin is defined as the sales price minus the unit variable expense. In addition to the break-even point, a CVP graph shows the impact on total expenses, total revenue, and profit when sales volume changes. The graph shows the sales volume required to earn a particular target net profit. The firm's profit and loss areas are also indicated on a CVP graph. The safety margin is the amount by which budgeted sales revenue exceeds breakeven sales revenue. An increase in the fixed expenses of any enterprise will increase its break-even point. In a travel agency, more clients must be served before the fixed expenses are covered by the agency's service fees. A decrease in the variable expense per pound of oysters results in an increase in the contribution margin per pound. This will reduce the company's break-even sales volume. © 2005 The McGraw-Hill Companies, Inc.
McGraw-Hill/Irwin Managerial Accounting, 6/e
The president is correct. A price increase results in a higher unit contribution margin. An increase in the unit contribution margin causes the break-even point to decline. The...