Chapter 3

3.19
CVP exercise

Origin
al
1
2
3
4
5
6
7
8

Revenues
$10,400,00
0
$10,400,00
0
$10,400,00
0
$10,400,00
0
$10,400,00
0
$11,128,00
0
$9,672,000
$11,544,00
0
$10,400,00
0

Variable
Costs
$7,900,000

Contribution
Margin
$2,500,000

$7,625,000

$2,775,000

$8,175,000

$2,225,000

$7,900,000

$2,500,000

$7,900,000

$2,500,000

$8,453,000

$2,675,000

$7,347,000

$2,325,000

$8,769,000
$7,584,000

$2,775,000
$2,816,000

Budgeted
Fixed
Operating
Costs
Income
$2,100,
000
$400,000
$2,100,
000
$675,000
$2,100,
000
$125,000
$2,184,
000
$316,000
$2,016,
000
$484,000
$2,100,
000
$575,000
$2,100,
000
$225,000
$2,331,
000
$444,000
$2,184,
000
$632,000

9. The number 2 yield the highest budgeted operating income because it has
lowest variable cost while the revenue stays constant.

3.38

1. Contribution Margin per Unit (CMU) = (Selling Price Variable cost per unit)
=$60 - $40 = $20
-

Breakeven unit = Fix Cost / CMU = $180,000 / $20 = 9,000 unit

Breakeven revenue = breakeven unit * Selling Price = 9,000 * $60 =
$540,000
2. We know that 8000 units are sold therefore

$480,00
0
$320,00
Total variable costs = 8000*40
0
$160,00
Contribution margin
0
$180,00
Fixed costs
0
Operating income
(loss)
$20,000
3. If sales commissions are discontinued and fixed salaries are raised by a total
of $15,500
Revenue = 8000 units * $60

Selling Price
Cost of Shoes
Sales
commission
Variable cost per unit
Salary increased by
$15,500
Total Fix Cost

$60
$37
$0
$37
$115,5
00
$195,5
00

Do the same procedure at question 1 we have

- CMU = SP VCU = 60 37 = $23
- Breakeven Unit = FC/ CMU = $195,000 / $23= 8,478 units
- Breakeven Revenues = Breakeven unit * Selling Price = 8,478 * $60 = $508,000
4.
Selling Price
Cost of Shoes
Manager commission
Sales
commission
Variable cost per unit
Total Fix Cost

$60
$37
$2
$3
$42
$180,0
00

The same procedure we have followings

CMU = $60 - $42 = $18
5.

Breakeven unit = FC / CMU = 180,000 / 18 = 10,000 units

Breakeven Revenues = 10,000 units * Selling Price = 10,000 *60 = $600,000

Breakeven point in units = = 9,000 units

Store manager receives commission of $2 on (12000-9000= 3000 units). CMU
beyond breakeven point of 3000 units = $18 ($60 $40 $2) per unit.
Operating income = 3000 units * $18 CMU = $54,000
3.39
1.
When sales volume is above 10,000 pairs, the higher-fixed-salaries plan results in
lower costs and higher operating incomes than the salary-plus-commission plan.
Therefore, with an expected volume of 10,000 pairs, the higher-fixed-salaries-only
plan should be chosen. But it is likely that sales volume itself is determined by the
nature of the compensation plan. The salary-plus-commission plan provides a
greater motivation to the salespeople because compensation plan often define the
sale volume. Therefore, the salary-plus-commission plan should be chosen to
generate a higher volume of sales than the fixed-salary plan.
2.
Let N = Target number of units
CMU = $23
- For the salary-only plan,
$60N $37N $195,500 (from requirement 3 question 39) = $69,000
Hence N = (69,000+195500)/23 = 11,500 units
- For the salary-plus-commission plan,
$60N $37N $180,000 = $ 69,000
$23N = $249,000
N= $249,000 / 23 = 10,826
M 10,826 units
The decision regarding the salary plan depends heavily on predictions of demand.
For instance, the salary plan offers the same operating income at 58,000 units as
the commission plan offers at 58,667 units.
3.

Revenues 9,500 units $60) + (1,500 pairs $50)

Cost of shoes, 11,000 units $37
Commissions = Revenues 5% = $645,000 0.05
Contribution margin = Revenue variable cost
Fixed costs
Operating income
3.46
1.

$645,000
407,000
32,250
205,750
195,500
$ 10,250

Total units of standard: 187,500 units

Total units of deluxe: 62,500 units
Hence the ratio between both type of unit is: 187,500/62,500 = 3
Therefore, CM of the mixed plan sale = 3*$10 + 1* $20 = $50
Breakeven point in sale mixed plan = $2,250,000/ $50 = 45,000 bundles

Breakeven point in sale mixed plan

Standard Carrier: 45,500 bundle * 3 units per bundle = 135,000 units
Deluxe Carrier: 45,000 * 1 unit per bundle = 45,000 units

Total breakeven units: 135,000 + 45,000 = 180,000 units

2.
a.
CMU for Standard = $28 $18 = $10; CMU for Deluxe= $50 $30 = $20
If only Standard carriers were sold, the breakeven point would be:
$2,250,000 / $10 = 225,000 units.
b.
If only Deluxe carriers were sold, the breakeven point would be:
$2,250,000 $20 = 112,500 units
3.
200,000 units of standard
50,000 units of deluxe
So operating income = CM of standard + CM of deluxe
= 200,000($10) + 50,000($20) $2,250,000
= $2,000,000 + $1,000,000 $2,250,000
= $750,000
The ratio between standard and deluxe unit sold = 200,000/50,000= 4
Do the same procedure at requirement 1 we have followings:
Contribution margin of the bundle = 4 *$10 + 1 * $20 = $40 + $20 = $60
Breakeven point in bundles = $2, 250, 000 / $60 = 37,500 bundles
Breakeven point in units is:
Standard carrier: 37,500 bundles 4 units per bundle
150,000 units
Deluxe carrier: 37,500 bundles 1 units per bundle
37,500 units
Total number of units to breakeven
87,500 units
The major lesson of this problem is that changes in the sales mix change breakeven
points and operating incomes

3.47
1.
Ticket sales ($24 *525 attendees)
Variable cost of dinner ($12 *525
attendees)
Variable invitations and paperwork ($1 * 525)
Contribution margin
Fixed cost of dinner
Fixed cost of invitations and
paperwork
Operating profit (loss)
-

$12,600
$6,30
0
525

$6,825
$5,775

$9,00
0
$1,97
5

$10,975
($5,200)

$6,300/525 attendees = $12/attendee (variable cost of dinner for each

attendee)
$525/525 attendees = $1/attendee (variable invitations and paperwork for
each attendee)

2.
Ticket sales ($24*1,050
attendees)
Variable cost of dinner ($12* 1,050
attendees)
Variable invitations and paperwork ($1 *
1,050)

$25,2
00
$12,6
00
1,050

Contribution margin
Fixed cost of dinner
Fixed cost of invitations and
paperwork
Operating profit (loss)

$9,00
0
$1,97
5

$13,6
50
$11,5
50
$10,9
75
$575