COST-VOLUME-PROFIT ANALYSIS:
A MANAGERIAL PLANNING TOOL
QUESTIONS FOR WRITING AND DISCUSSION
1. CVP analysis allows managers to focus on
selling prices, volume, costs, profits, and
sales mix. Many different what if questions
can be asked to assess the effect on profits
of changes in key variables.
2. The units-sold approach defines sales volume in terms of units of product and gives
answers in these same terms. The salesrevenue approach defines sales volume in
terms of revenues and provides answers in
these same terms.
3. Break-even point is the level of sales activity
where total revenues equal total costs, or
where zero profits are earned.
4. At the break-even point, all fixed costs are
covered. Above the break-even point, only
variable costs need to be covered. Thus,
contribution margin per unit is profit per unit,
provided that the unit selling price is greater
than the unit variable cost (which it must be
for break-even to be achieved).
5. Profit = $7.00 5,000 = $35,000
12.
13.
A change in sales mix will change the contribution margin of the package (defined by
the sales mix) and, thus, will change the
units needed to break even.
14.
15.
16.
17.
Packages of products, based on the expected sales mix, are defined as a single
product. Selling price and cost information
for this package can then be used to carry
out CVP analysis.
11.
347
18.
driver). JIT means that CVP analysis approaches the standard analysis with fixed
and unit-level costs only.
348
EXERCISES
111
1.
Direct materials
Direct labor
Variable overhead
Variable selling expenses
Variable cost per unit
$3.90
1.40
2.10
1.00
$ 8.40
2.
Price
Variable cost per unit
Contribution margin per unit
3.
4.
5.
6.
$14.00
8.40
$5.60
349
112
1.
Price
Less:
Direct materials
Direct labor
Variable overhead
Variable selling expenses
Contribution margin per unit
$12.00
$1.90
2.85
1.25
2.00
8.00
$4.00
2.
3.
4.
113
1.
2.
3.
$100,000
62,500
$ 37,500
37,500
$
0
350
114
1.
2.
3.
4.
115
1.
2.
3.
351
116
1.
2.
3.
117
1.
2.
3.
4.
5.
352
118
1.
Sales mix is 2:1 (Twice as many videos are sold as equipment sets.)
2.
Product
Videos
Equipment sets
Total
Price
$12
15
Variable
Cost
$4
6
CM
$8
9
Sales
Mix
2
1
= Total CM
$16
9
$25
Switzer Company
Income Statement
For Last Year
Sales ...........................................................................................
Less: Variable costs .................................................................
Contribution margin..................................................................
Less: Fixed costs ......................................................................
Operating income ................................................................
$ 195,000
70,000
$ 125,000
70,000
$ 55,000
353
119
1.
Sales mix is 2:1:4 (Twice as many videos will be sold as equipment sets, and
four times as many yoga mats will be sold as equipment sets.)
2.
Product
Videos
Equipment sets
Yoga mats
Total
Price
$12
15
18
Variable
Cost
$4
6
13
CM
$8
9
5
Sales
Mix
2
1
4
= Total CM
$16
9
20
$45
Switzer Company
Income Statement
For the Coming Year
Sales ...........................................................................................
Less: Variable costs .................................................................
Contribution margin..................................................................
Less: Fixed costs ......................................................................
Operating income ................................................................
$555,000
330,000
$225,000
118,350
$106,650
1110
1.
2.
3.
354
1111
1.
$35,000
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
$0
0
500
1,000
1,500
2,000
2,500
3,000
3,500
Units Sold
Break-even point = 2,500 units; + line is total revenue and x line is total costs.
355
1111 Continued
2.
$40,000
$35,000
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
$0
0
500
1,000
1,500
2,000
Units Sold
356
2,500
3,000
3,500
4,000
1111 Continued
b. Unit variable cost increases to $7:
$50,000
$40,000
$30,000
$20,000
$10,000
$0
0
500
1,000
1,500
2,000
2,500
Units Sold
357
3,000
3,500
4,000
1111 Continued
c. Unit selling price increases to $12:
$50,000
$40,000
$30,000
$20,000
$10,000
$0
0
500
1,000
1,500
2,000
2,500
Units Sold
358
3,000
3,500
4,000
1111 Continued
d.
$70,000
$60,000
$50,000
$40,000
$30,000
$20,000
$10,000
$0
0
1,000
2,000
3,000
4,000
5,000
Units Sold
359
6,000
7,000
8,000
1111 Continued
3.
Original data:
$10,000
$0
0
500
1,000
1,500
2,000
-$10,000
360
2,500
3,000
3,500
4,000
1111 Continued
a. Fixed costs increase by $5,000:
$15,000
$0
0
500
1,000
1,500
2,000
-$15,000
361
2,500
3,000
3,500
4,000
1111 Continued
b. Unit variable cost increases to $7:
$10,000
$0
0
500
1,000
1,500
2,000
-$10,000
362
2,500
3,000
3,500
4,000
1111 Continued
c. Unit selling price increases to $12:
$10,000
$0
0
500
1,000
1,500
2,000
-$10,000
363
2,500
3,000
3,500
4,000
1111 Concluded
d. Both fixed costs and unit variable cost increase:
$15,000
$0
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
-$15,000
364
1112
1.
Darius: $100,000/$50,000 = 2
Xerxes: $300,000/$50,000 = 6
2.
Darius
X = $50,000/(1 0.80)
X = $50,000/0.20
X = $250,000
Xerxes
X = $250,000/(1 0.40)
X = $250,000/0.60
X = $416,667
Xerxes must sell more than Darius to break even because it must cover
$200,000 more in fixed costs (it is more highly leveraged).
3.
1113
1.
2.
3.
4.
365
1114
1.
2.
3.
4.
1115
1.
Income
0
0
$570,000
P
2.
3.
366
1116
1.
2.
3.
4.
5.
$ 196,000
147,000
$ 49,000
44,800
$ 4,200
367
1117
1.
2.
3.
4.
5.
368
$ 238,333
95,333
$ 143,000
63,000
$ 80,000
24,000
$ 56,000
1118
1.
3.
4.
369
1118 Concluded
5.
The break-even point will increase because more units will need to be sold to
cover the additional fixed expenses.
Break-even units = $345,200/$4.10 = 84,195 units
Revenue = $547,268
370
PROBLEMS
1119
1.
Operating income
(0.20)Revenue
(0.20)Revenue
(0.40)Revenue
Revenue
Sales ................................................................................
Variable expenses ($60,000 0.40) ..............................
Contribution margin.......................................................
Fixed expenses ..............................................................
Operating income .....................................................
$ 60,000
24,000
$ 36,000
24,000
$ 12,000
$68,570
27,428
$41,142
24,000
$17,142
Note: Some may prefer to round up to 6,858 units. If this is done, the operating income will be slightly different due to rounding.
371
1119 Concluded
3.
1120
1.
2.
3.
4.
5.
Let X = Units
0.10($50)X = $50.00X $28.80X $816,412
$5X = $21.20X $816,412
$16.20X = $816,412
X = 50,396 units
6.
372
1121
1.
2.
3.
4.
5.
6.
373
$ 120,000
40,000
$ 80,000
1122
1.
Sales mix:
Squares: $300,000/$30 = 10,000 units
Circles: $2,500,000/$50 = 50,000 units
Product
Squares
Circles
Package
P
$30
50
V*
$10
10
PV
$20
40
Sales
Mix
1
5
Total
CM
$ 20
200
$220
*$100,000/10,000 = $10
$500,000/50,000 = $10
Break-even packages = $1,628,000/$220 = 7,400 packages
Break-even squares = 7,400 1 = 7,400
Break-even circles = 7,400 5 = 37,000
2.
3.
New mix:
Product
Squares
Circles
Package
P
$30
50
V
$10
10
PV
$20
40
Sales
Mix
3
5
374
Total
CM
$ 60
200
$260
1122 Concluded
4.
$ 300,000
(200,000)
$ 100,000
45,000
$ 55,000
Price*
$25
20
Variable
Cost
=
$12
9
*$500,000/20,000 = $25
$2,000,000/100,000 = $20
X = ($1,080,000 + $145,000)/$68
X = $1,225,000/$68
X = 18,015 packages
18,015 scientific calculators (1 18,015)
90,075 business calculators (5 18,015)
2.
375
CM
$13
11
Units in
Mix
1
5
Package
CM
$13
55
$68
1124
1.
Currently:
Sales (830,000 $0.36)
Variable expenses
Contribution margin
Fixed expenses
Operating income
$ 298,800
224,100
$ 74,700
54,000
$ 20,700
3.
$91,000
74,700
$16,300
376
1125
1.
2.
3.
Operating income
0.08R/(1 0.34)
0.1212R
0.4588R
R
4.
$840,600 110% =
$353,052 110% =
6.
$ 487,548
506,330
$ 18,782
377
1126
1.
2.
Product
Grade I
Grade II
Package
P
$3,400
1,600
V
$2,686
1,328
PV
$714
272
Mix
3
7
Total CM
$2,142
1,904
$4,046
PV
$956
392
Mix
3
7
Total CM
$2,868
2,744
$5,612
$ 95,000
95,000
35,000
$ 225,000
$225,000/$4,046 = 56 packages
Grade I: 3 56 = 168; Grade II: 7 56 = 392
3.
Product
Grade I
Grade II
Package
Package CM
Package CM
$21,400X
X
P
$3,400
1,600
V
$2,444
1,208
= 3($3,400) + 7($1,600)
= $21,400
= $1,600,000 $600,000
= 47 packages remaining
$73,602
44,000
$29,602
378
1126 Concluded
The new break-even point is a revised break-even for 2004. Total fixed costs
must be reduced by the contribution margin already earned (through the first
five months) to obtain the units that must be sold for the last seven months.
These units are then be added to those sold during the first five months:
CM earned = $600,000 (83* $2,686) (195* $1,328) = $118,102
*224 141 = 83; 524 329 = 195
X = ($225,000 + $44,000 $118,102)/$5,612 = 27 packages
In the first five months, 28 packages were sold (83/3 or 195/7). Thus, the revised break-even point is 55 packages (27 + 28)in units, 165 of Grade I and
385 of Grade II.
4.
Product
Grade I
Grade II
Package
P
$3,400
1,600
V
$2,686
1,328
PV
$714
272
Mix
1
1
Total CM
$714
272
$986
$66,198
40,833
$25,365
X = F/(P V)
= $295,000/$986
= 299 packages (or 299 of each cabinet)
The break-even point for 2006 is computed as follows:
X = ($295,000 $118,102)/$986
= $176,898/$986
= 179 packages (179 of each)
To this, add the units already sold, yielding the revised break-even point:
Grade I:
83 + 179 = 262
Grade II: 195 + 179 = 374
379
1127
1.
R = F/(1 VR)
= $150,000/(1/3)
= $450,000
2.
P
$30.00
20.00
V*
$20.00
13.33
PV
$10.00
6.67
Mix
1
1
Total CM
$10.00
6.67
$16.67
X = F/(P V)
= $150,000/$16.67
= 8,999 packages
Floor lamps: 1 8,999 = 8,999
Desk lamps: 1 8,999 = 8,999
Note: packages have been rounded up to ensure attainment of breakeven.
3.
Operating leverage
= CM/Operating income
= $200,000/$50,000
= 4.0
380
1128
1.
2.
3.
Sales
Variable costs (0.45 $1,218,000)
Contribution margin
Fixed costs
Operating income
$ 1,218,000
548,100
$ 669,900
550,000
$ 119,900
381
1129
1.
The annual break-even point in units at the Peoria plant is 73,500 units and at
the Moline plant, 47,200 units, calculated as follows:
Unit contribution calculation:
Selling price
Less variable costs:
Manufacturing
Commission
G&A
Unit contribution
Peoria
$150.00
Moline
$150.00
(72.00)
(7.50)
(6.50)
$ 64.00
(88.00)
(7.50)
(6.50)
$ 48.00
The operating income that would result from the divisional production managers plan to produce 96,000 units at each plant is $3,628,800. The normal
capacity at the Peoria plant is 96,000 units (400 240); however, the normal
capacity at the Moline plant is 76,800 units (320 240). Therefore, 19,200 units
(96,000 76,800) will be manufactured at Moline at a reduced contribution
margin of $40 per unit ($48 $8).
Contribution per plant:
Peoria (96,000 $64)
Moline (76,800 $48)
Moline (19,200 $40)
Total contribution
Less: Fixed costs
Operating income
$ 6,144,000
3,686,400
768,000
$ 10,598,400
6,969,600
$ 3,628,800
382
1129 Concluded
3.
If this plan is followed, 120,000 units will be produced at the Peoria plant and
72,000 units at the Moline plant.
Contribution per plant:
Peoria (96,000 $64)
Peoria (24,000 $61)
Moline (72,000 $48)
Total contribution
Less: Fixed costs
Operating income
$ 6,144,000
1,464,000
3,456,000
$ 11,064,000
6,969,600
$ 4,094,400
383
1130
1.
$11,700/$26,000 = 45%
Current fixed costs (in thousands):
Fixed cost of goods sold
Fixed advertising expenses
Fixed administrative expenses
Fixed interest expenses
Total
c
Fixed cost of hiring (in thousands):
Salespeople (8 $80)
Travel and entertainment
Manager/secretary
Additional advertising
Total
b
$2,870
750
1,850
650
$6,120
$ 640
600
150
500
$1,890
2.
3.
The general assumptions underlying break-even analysis that limit its usefulness include the following: all costs can be divided into fixed and variable
elements; variable costs vary proportionally to volume; and selling prices remain unchanged.
384
I
X($30 $10) $100,000
$20X $100,000
$100,000
X
= X(P V) F
= X($30 $6) $200,000
= $24X $200,000
= $4X
= 25,000
The manual process is more profitable if sales are less than 25,000 cases; the
automated process is more profitable at a level greater than 25,000 cases. It is
important for the manager to have a sales forecast to help in deciding which
process should be chosen.
3.
The divisional manager has the right to decide which process is better. Danna is morally obligated to report the correct information to her superior. By altering the sales forecast, she unfairly and unethically influenced the decisionmaking process. Managers do have a moral obligation to assess the impact of
their decisions on employees, and to be fair and honest with employees.
However, Dannas behavior is not justified by the fact that it helped a number
of employees retain their employment. First, she had no right to make the decision. She does have the right to voice her concerns about the impact of automation on employee well-being. In so doing, perhaps the divisional manager would come to the same conclusion even though the automated system
appears to be more profitable. Second, the choice to select the manual system may not be the best for the employees anyway. The divisional manager
may have more information, making the selection of the automated system
the best alternative for all concerned, provided the sales volume justifies its
selection. For example, the divisional manager may have plans to retrain and
relocate the displaced workers in better jobs within the company. Third, her
motivation for altering the forecast seems more driven by her friendship for
Jerry Johnson than any legitimate concerns for the layoff of other employees.
Danna should examine her reasoning carefully to assess the real reasons for
her behavior. Perhaps in so doing, the conflict of interest that underlies her
decision will become apparent.
385
1131 Concluded
4. Some standards that seem applicable are III-1 (conflict of interest), III-2 (refrain from engaging in any conduct that would prejudice carrying out duties
ethically), and IV-1 (communicate information fairly and objectively).
1132
1.
Dream
Petrushka
Nutcracker
Sleeping Beauty
Bugaku
Type of Seat
B
3,024
3,024
15,120
6,048
3,024
30,240
A
570
570
2,280
1,140
570
5,130
C
3,690
3,690
19,680
7,380
3,690
38,130
Dream
Petrushka
Nutcracker
Sleeping Beauty
Bugaku
A
$19,950
19,950
79,800
39,900
19,950
B
$ 75,600
75,600
378,000
151,200
75,600
386
C
$ 55,350
55,350
295,200
110,700
55,350
Total
$150,900
150,900
753,000
301,800
150,900
1132 Continued
Segmented variable-costing income statement:
Sales
Variable costs
Contribution margin
Direct fixed costs
Segment margin
Sales
Variable costs
Contribution margin
Direct fixed costs
Segment margin
Common fixed costs
Operating (loss)
2.
Dream
$ 150,900
42,500
$ 108,400
275,500
$(167,100)
Petrushka
$150,900
42,500
$108,400
145,500
$ (37,100)
Nutcracker
$753,000
170,000
$583,000
70,500
$512,500
Sleeping Beauty
$ 301,800
85,000
$ 216,800
345,000
$(128,200)
Bugaku
$ 150,900
42,500
$ 108,400
155,500
$ (47,100)
Total
$ 1,507,500
382,500
$ 1,125,000
992,000
$ 133,000
401,000
$ (268,000)
Dream
Petrushka
Nutcracker
Sleeping Beauty
Bugaku
$108,400/5 = $21,680
$108,400/5 = $21,680
$583,000/20 = $29,150
$216,800/10 = $21,680
$108,400/5 = $21,680
Dream
Petrushka
Nutcracker
Sleeping Beauty
Bugaku
$275,500/$21,680 =
$145,500/$21,680 =
$70,500/$29,150 =
$345,000/$21,680 =
$155,500/$21,680 =
387
13
7
3
16
8
1132 Continued
3.
4.
$113,520
41,500
$ 72,020
388
1132 Concluded
5.
$ 133,000
72,020
60,000
$ 265,020
401,000
$ (135,980)
No, the company will not break even. This is a very thorny problem faced by
ballet companies around the world. The standard response is to offer as
many performances of The Nutcracker as possible. That action has already
been taken here. Other actions that may help include possible increases in
prices of the seats (particularly the A seats), offering additional performances
of some of the other ballets, cutting administrative costs (they seem somewhat high), and offering a less expensive ballet (direct costs of Sleeping
Beauty are quite high).
RESEARCH ASSIGNMENT
1133
Answers will vary.
389
390