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AIM 2302

CVP PROBLEMS
1. CVP computations. Fill in the blanks for each of the following independent cases
Variable
Case Revenues Costs
a.
$______
$500
b.
2,000
______
c.
1,000
700
d.
1,500
______

Fixed
Costs
$_______
300
______
300

Total
Costs
$ 800
________
1,000
_______

Operating
Income
$1,200
200
_______
_______

Contribution
Margin
Percentage
_______
_________
_________
40%

2. CVP computations. Patel Manufacturing sold 180,000 units of its product for $25 per
unit in 2003. Variable cost per unit is $20 and total fixed costs are $800,000.
Required:
a.) Calculate contribution margin and operating income.
b.) Patels current manufacturing process is labor intensive. Patels production
manager has proposed investing in a new machine, which will increase total fixed
costs to $2,500,000 and decrease variable costs to $10 per unit. Patel expects to
maintain the same sales volume and selling price next year. If they purchase the
machine, what will contribution margin and operating income be?
c.) Should Patel invest in the new machine? Explain.
3. CVP analysis, changing revenues and costs. Sunshine Travel Agency specializes in
flights between Toronto and Jamaica. It books passengers on Canadian Air. Sunshines
fixed costs are $22,000 per month. Canadian Air charges passengers $1,000 per roundtrip ticket.
Required:
Calculate the number of tickets Sunshine must sell each month to (1) break even and (2)
make a target operating income of $10,000 per month in each of the following
independent cases:
a. Sunshines variable costs are $35 per tickets. Canadian Air pays Sunshine 8%
commission on ticket price.
b. Sunshines variable costs are $29 per ticket. Canadian Air pays Sunshine 8%
commission on ticket price.
c. Sunshines variable costs are $29 per ticket. Canadian Air pays $48 fixed
commission per ticket to Sunshine.
d. Sunshines variable costs are $29 per ticket. It receives $48 commission per
ticket from Canadian Air. It charges its customers a delivery fee of $5 per ticket.

4. CVP exercises. The Super Donut owns and operates six doughnut outlets in and
around Kansas City. You are given the following corporate budget data for next year.
Revenues
Fixed costs
Variable costs

$10,000,000
1,700,000
8,200,000

Variable costs change with respect to the number of doughnuts sold.


Compute the budgeted operating income for each of the following deviations from the
original budget data. (Consider each case independently)
a.
b.
c.
d.
e.
f.
g.
h.

A 10% increase in contribution margin, holding revenues constant


A 10% decrease in contribution margin, holding revenues constant
A 5% increase in fixed costs
A 5% decrease in fixed costs
An 8% increase in units sold
An 8% decrease in units sold
A 10% increase in fixed costs and a 10% increase in units sold
A 5% increase in fixed costs and a 5% decrease in variable costs

5. CVP exercises. The Doral Company manufactures and sells pens. Currently,
5,000,000 units are sold per year at $0.50 per unit. Fixed costs are $900,000 per year.
Variable costs are $0.30 per unit. Consider each case separately:
1a. What is the present operating income for a year?
1b. What is the present breakeven point in revenues?
Compute the new operating income for each of the following changes:
2. A $0.04 per unit increase in variable costs
3. A 10% increase in fixed costs and a 10% increase in units sold
4. A 20% decrease in fixed costs, a 20% decrease in selling price, a 10%
decrease in variable cost per units, and a 40% increase in units sold.
Compute the new breakeven point in units for each of the following changes:
5. A 10% increase in fixed costs
6. A 10% increase in selling price and a $20,000 increase in fixed costs

6. Athletic scholarships, CVP analysis. Midwest University has an annual budget of


$5,000,000 for athletic scholarships. Each athletic scholarship is for $20,000 per year.
Fixed operating costs of the athletic scholarship program are $600,000, and variable
operating costs are $2,000 per scholarship offered.
a. Determine the number of athletic scholarships Midwest University can offer
each year.
b. Suppose the total budget for next year is reduced by 22%. Fixed costs are to
remain the same. Calculate the number of athletic scholarships that Midwest
can offer next year.
c. As in requirement 2, assume a budget reduction of 22% and the same fixed
costs. If Midwest wanted to offer the same number of athletic scholarships as
it did in requirement 1, calculate the amount that will be paid to each student
who receives a scholarship.
7. CVP analysis, service firm. Wildlife Escapes generates average revenue of $4,000
per person on its five-day package tours to wildlife parks in Kenya. The variable costs
per person are:
Airfare
$1,500
Hotel accommodations
1,000
Meals
300
Ground transportation
600
Park tickets and other costs
200
Total
$3,600
Annual fixed costs total $480,000.
a. Calculate the number of package tours that must be sold to break even.
b. Calculate the revenue needed to earn a target operating income of $100,000
c. If fixed costs increase by $24,000, what decrease in variable costs must be
achieved to maintain the breakeven point calculated in requirement 1?
8. CVP, target income, service firm. Teddy Bear Daycare provides daycare for children
Mondays through Fridays.
Monthly variable costs per child:
Lunch and snacks
Educational supplies
Other supplies
Total
Monthly fixed costs are comprised of:
Rent
Utilities
Insurance
Salaries
Miscellaneous
Total

$100
75
25
$200
$2,000
300
300
2,500
500
$5,600

Teddy Bear charges each parent $600 per child.


a. Calculate the breakeven point.
b. Teddy Bears target operating income is $10,400 per months. Compute the
number of children that must be enrolled to achieve the target operating income.
c. Teddy Bear lost its lease and had to move to another building. Monthly rent for
the new building is $4,000. How much should Teddy Bear increase fees per child
to meet the target operating income of $10,400 per month, assuming the same
number of children as in Requirement b.?
9. CVP analysis. Galaxy Disks projected operating income for 2003 is $200,000, based
on a sales volume of 200,000 units. Galaxy sells disks for $16 each. Variable costs
consist of the $10 purchase price and a $2 shipping and handling cost. Galaxys annual
fixed costs are $600,000.
a. Calculate Galaxys breakeven point in units
b. Calculate the companys operating income in 2003 if there is a 10%
increase in projected unit sales.
c. For 2004, management expects that the unit purchase price of the disks
will increase by 30%. Calculate the sales revenue Galaxy must generate
in 2004 to maintain the current years operating income if the selling price
remains unchanged.
10. Breakeven analysis for a hospital. Mariposa Medical Institute operates a 100-bed
hospital and offers a number of specialized medical services. The hospital charges $100
per patient day. Based on past cost data, Mariposa has estimated its flexible costs at
$45.70 per patient day. Capacity-related costs are $91,000 per month. The hospitals
administrator has estimated that the hospital will average 2,300 patient days per month.
How much will the hospital need to charge per patient day to break even at this level of
activity?
11. Suppose the fixed expenses of a travel agency increase. What will happen to its
break-even point, measured in number of clients served? Why?
12. Chesapeake Oyster Company has been able to decrease its variable expenses per
pound of oysters harvested. How will this affect the firms break-even sales volume?
13. What will happen to a companys break-even point if the sales price and unit variable
cost of its only product increase by the same dollar amount?