Accounting
Chapter 3: Cost-Volume-Profit Analysis
95
Chapter 3
Cost-Volume-Profit Analysis
SOLUTIONS
LEARNING OBJECTIVES
Chapter 3 addresses the following learning objectives:
LO1
LO2
LO3
LO4
LO5
LO6
Explain the concepts of cost-volume-profit (CVP) analysis in decision making
Apply CVP calculations for a single product
Apply CVP calculations multiple products
Describe the assumptions and limitations that mangers consider when using CVP analysis
Assess operational risk using margin of safety and operating leverage
Analyze the difference between contribution margin and gross margin
These learning objectives (LO1 through LO6) are cross-referenced in the textbook to individual exercises and problems.
© 2012 John Wiley and Sons Canada, Ltd.
96
Cost Management
QUESTIONS
3.1
A mixed cost function includes both fixed and variable costs. If there are fixed costs in the cost function, then total costs will increase at a smaller rate than the increase in total sales volume. If there are variable costs in the cost function, then total costs will increase with total sales volume. When there is a combination of fixed and variable costs, a 10% volume increase will increase total costs by less than 10% because only the increase in variable cost is proportionate to volume; the fixed cost does not change with volume.
3.2
Theweighted average contribution margin per unit is calculated only when performing
CVP analysis for multiple products. There are two ways to calculate it:
(1) Calculate the total contribution of all products by subtracting total variable costs from total revenues. Then calculate the weighted average contribution margin per unit by dividing the total contribution margin by the total number of units (the sum of units for all products).
(2) Calculate the sales mix for each product by dividing the number of units sold for that product by the total number of units sold for all products. Calculate the contribution
95
Chapter 3
Cost-Volume-Profit Analysis
SOLUTIONS
LEARNING OBJECTIVES
Chapter 3 addresses the following learning objectives:
LO1
LO2
LO3
LO4
LO5
LO6
Explain the concepts of cost-volume-profit (CVP) analysis in decision making
Apply CVP calculations for a single product
Apply CVP calculations multiple products
Describe the assumptions and limitations that mangers consider when using CVP analysis
Assess operational risk using margin of safety and operating leverage
Analyze the difference between contribution margin and gross margin
These learning objectives (LO1 through LO6) are cross-referenced in the textbook to individual exercises and problems.
© 2012 John Wiley and Sons Canada, Ltd.
96
Cost Management
QUESTIONS
3.1
A mixed cost function includes both fixed and variable costs. If there are fixed costs in the cost function, then total costs will increase at a smaller rate than the increase in total sales volume. If there are variable costs in the cost function, then total costs will increase with total sales volume. When there is a combination of fixed and variable costs, a 10% volume increase will increase total costs by less than 10% because only the increase in variable cost is proportionate to volume; the fixed cost does not change with volume.
3.2
Theweighted average contribution margin per unit is calculated only when performing
CVP analysis for multiple products. There are two ways to calculate it:
(1) Calculate the total contribution of all products by subtracting total variable costs from total revenues. Then calculate the weighted average contribution margin per unit by dividing the total contribution margin by the total number of units (the sum of units for all products).
(2) Calculate the sales mix for each product by dividing the number of units sold for that product by the total number of units sold for all products. Calculate the contribution