Pages: 15 (2607 words) Published: June 18, 2013
CHAPTER 3
COST-VOLUME-PROFIT ANALYSIS

NOTATION USED IN CHAPTER 3 SOLUTIONS

SP: Selling price
VCU: Variable cost per unit
CMU: Contribution margin per unit
FC: Fixed costs
TOI: Target operating income

3-16(10 min.)CVP computations.

| | |Variable |Fixed |Total |Operating |Contribution |Contribution | | |Revenues |Costs |Costs |Costs |Income |Margin |Margin % | |a. |\$2,000 |\$ 500 |\$300 |\$ 800 |\$1,200 |\$1,500 |75.0% | |b. |2,000 |1,500 |300 |1,800 |200 |500 |25.0% | |c. |1,000 |700 |300 |1,000 |0 |300 |30.0% | |d. |1,500 |900 |300 |1,200 |300 |600 |40.0% |

3-17(10–15 min.)CVP computations.

1a.Sales (\$68 per unit × 410,000 units)\$27,880,000
Variable costs (\$60 per unit × 410,000 units) 24,600,000
Contribution margin\$ 3,280,000

1b.Contribution margin (from above)\$3,280,000
Fixed costs 1,640,000
Operating income\$1,640,000

2a.Sales (from above)\$27,880,000
Variable costs (\$54 per unit × 410,000 units) 22,140,000
Contribution margin\$ 5,740,000

2b.Contribution margin\$5,740,000
Fixed costs 5,330,000
Operating income\$ 410,000

3. Operating income is expected to decrease by \$1,230,000 (\$1,640,000 − \$410,000) if Ms. Schoenen’s proposal is accepted.
The management would consider other factors before making the final decision. It is likely that product quality would improve as a result of using state of the art equipment. Due to increased automation, probably many workers will have to be laid off. Garrett’s management will have to consider the impact of such an action on employee morale. In addition, the proposal increases the company’s fixed costs dramatically. This will increase the company’s operating leverage and risk.

3-18 (35–40 min.)CVP analysis, changing revenues and costs.

1a.SP= 6% × \$1,500 = \$90 per ticket
VCU= \$43 per ticket
CMU= \$90 – \$43 = \$47 per ticket
FC= \$23,500 a month

Q= [pic] = [pic]

= 500 tickets

1b.Q= [pic] = [pic]

= [pic]

= 862 tickets (rounded up)

2a.SP= \$90 per ticket
VCU= \$40 per ticket
CMU= \$90 – \$40 = \$50 per ticket
FC= \$23,500 a month

Q= [pic] = [pic]

= 470 tickets

2b.Q= [pic] = [pic]

= [pic]
= 810 tickets

3a.SP= \$60 per ticket
VCU = \$40 per ticket
CMU= \$60 – \$40 = \$20 per ticket
FC= \$23,500 a month

Q= [pic] = [pic]
= 1,175 tickets

3b.Q= [pic] = [pic]

= [pic]

= 2,025 tickets

The reduced commission sizably increases the breakeven point and the number of tickets required to yield a target operating income of \$17,000:

6%
CommissionFixed
(Requirement 2)Commission of \$60

Breakeven point4701,175

Attain OI of \$10,0008102,025

4a.The \$5 delivery fee can be treated as either an extra source of revenue (as done below) or as a cost offset. Either approach increases CMU \$5:

SP= \$65 (\$60 + \$5) per ticket
VCU= \$40 per ticket
CMU= \$65 – \$40 = \$25 per ticket
FC= \$23,500 a month

Q= [pic] = [pic]

= 940 tickets

4b.Q= [pic] = [pic]

= [pic]

= 1,620 tickets

The \$5 delivery fee results in a higher contribution margin which reduces both the breakeven point and the tickets sold to attain operating income of \$17,000.

3-21(10 min.)CVP analysis, income taxes.

1.Monthly fixed costs = \$48,200 + \$68,000 + \$13,000 =\$129,200
Contribution margin per unit = \$27,000 –...