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Solutions to Exercises

3-1.

(15 min.)

Profit EquationComponents.

b. Total revenue line

g. The profit area


f. The break-even

d. Slope = Variable cost per unit


a. Total cost line
c. The variable cost area

h. The loss area


h. Loss volume

g. Profit volume
e. The fixed costs area

3-2.

(15 min.)

Profit EquationsComponents.

a. Total fixed costs (loss at zero volume)


b. Break-even point
c. Slope = contribution margin per unit
d. Profit line
e. Profit area
f. Net loss area
g. Zero profit line

3-3.

(20 min.)

Basic Decision Analysis Using CVP: Anus Amusement Center

a. $800,000 50,000 tickets = $16.00 per ticket


b. $450,000 50,000 tickets = $9.00 per ticket
c. ($16.00 $9.00) = $7.00 per ticket
d. Profit = ($16.00 $9.00)X $218,750
Let Profit = 0
0 = ($16.00 $9.00)X $218,750
$218,750
$7.00
X = 31,250 tickets

X=

e. Let Profit = $43,750


$43,750 = ($16.00 $9.00)X $218,750
$218,750 + $43,750
$7.00
X = 37,500 tickets

X=

3-4.

(20 min.)

Basic CVP Analysis: Kimas Food Mart

a. Break even point is sales dollars = Fixed costs Contribution margin ratio
= $900,000 0.40 = $2,250,000
b. Break even point is sales dollars = Fixed costs Contribution margin ratio
= $900,000 0.25 = $3,600,000
c. Sales dollars required = (Fixed costs + Desired profit) Contribution margin ratio
= ($900,000 + $200,000) 0.40 = $2,750,000

3-5.

(25 min.) CVP AnalysisEthical Issues: Mark Ting

This problem is based on the experience of the authors at several companies.


The problem in this example, which is common, is that the guidelines the company has
established (for example, a high break-even point) lead to projects that would be
valuable in some way, but cannot meet the standard established by the company.
Mark believes, perhaps honestly, that the new product is valuable for the company.
However, the approach he has taken to support the product is unethical.
Mark should persuade the management of the company that the break-even
requirement is inappropriate.
3-6.

(25 min.) CVP AnalysisPlanning and Decision Making: Cambridge, Inc.

a.
Profit = (P V)X F
$0 = ($18 $10)X $20,000
$8X = $20,000
$20,000
$8
X = 2,500 units

X=

b.
Profit = (P V)X F
$16,000 = ($18 $10)X $20,000
$8X = $36,000
X=
X=

$36,000
$8
4,500 units

3-7.

(30 min.) CVP analysisPlanning and Decision making: Cambridge, Inc.

a.

Profit = ($18 $10) 7,000 $20,000


= $36,000.

b. 10% price decrease. Now P = $16.20


Profit = ($16.20 $10.00) x 7,000 $20,000
= $23,400.

Profit decreases by $12,600

20% price increase. Now P = $21.60


Profit = ($21.60 $10.00) x 7,000 $20,000
= $61,200.

Profit increases by $25,200

c. 10% variable cost decrease. Now V = $9


Profit = ($18 $9) x 7,000 $20,000
= $43,000.

Profit increases by $7,000

20% variable cost increase. Now V = $12


Profit = ($18 $12) x 7,000 $20,000
= $22,000.
d.

Profit decreases by $14,000

Profit = ($18 $11) x 7,000 $18,000


= $31,000.

Profit decreases by $5,000

3-8.

(25 min.)

Basic Decision Analysis Using CVP: Balance, Inc.

a.
Profit = (P V)X F
$0 = ($1.00 $0.20)X $400,000
$0.80X = $400,000
$400,000
$0.80
X = 500,000 units

X=

b.
Profit = (P V)X F
$100,000 = ($1.00 $0.20)X $400,000
$0.80X = $500,000
X=
X=

$500,000
$0.80
625,000 units

3-9.

(30 min.) Basic Decision Analysis Using CVP: Balance, Inc. (continued)

a.

Profit = ($1.00 $0.20) 700,000 $400,000


= $160,000.

b. 10% price decrease. Now P = $0.90


Profit = ($0.90 $0.20) x 700,000 $400,000
= $90,000.

Profit decreases by $70,000

20% price increase. Now P = $1.20


Profit = ($1.20 $0.20) x 700,000 $400,000
= $300,000.

Profit increases by $140,000

c. 10% variable cost decrease. Now V = $0.18


Profit = ($1.00 $0.18) x 700,000 $400,000
= $174,000.

Profit increases by $14,000

20% variable cost increase. Now V = $0.24


Profit = ($1.00 $0.24) x 700,000 $400,000
= $132,000.
d.

Profit decreases by $28,000

Profit = ($1.00 $0.22) x 700,000 $360,000


= $186,000.

Profit increases by $26,000

3-10. (30 min.)

Analysis of Cost Structure: The Dollar Store vs. One Mart

a.

Dollar Store
Amount
Percentage
Sales ..................................$500,000
100%
Variable cost ....................... 350,000
70
Contribution margin ............$150,000
30%
Fixed costs .......................... 30,000
6
Operating profit ...................$120,000
24%

One-Mart
Amount
Percentage
$500,000
100%
100,000
20
$400,000
80%
280,000
56
$120,000
24%

b. Dollar Stores profits increase by $22,500 [= .30 x ($500,000 x .15)] and One Marts
profits increase by $60,000 [= .80 x ($500,000 x .15)].
3-11. (30 min.)

Analysis of Cost Structure: Foxx Company vs. Beyonce, Inc.

a.

Foxx Company
Amount
Percentage
Sales ..................................$600,000
100%
Variable cost ....................... 450,000
75
Contribution margin ............$150,000
25%
Fixed costs .......................... 100,000
17
Operating profit ...................$ 50,000
8%

Beyonce, Inc.
Amount
Percentage
$600,000
100%
120,000
20
$480,000
80%
400,000
67
$80,000
13%

b. Foxx Companys profits increase by $30,000 [= .25 x ($600,000 x .20)] and Beyonce
Incs profits increase by $96,000 [= .80 x ($600,000 x .20)].
3-12. (15 min.)

CVP and Margin of Safety: Rainbow Tours

a.
Profit = (P V)X F
$0 = ($40.00 $16.00)X $3,600
$24.00X = $3,600
X=
X =

$3,600
$24.00
150 tours

b.
Margin of safety

= 175 150
= 25 people (16.7%)

3-13. (20 min.)

Using Microsoft Excel to Perform CVP Analysis: Cambridge, Inc.

a. 2,500 units.
The following two screenshots show the setup and solution.

3-31 (continued)
b. 3,250 units.
The following two screenshots show the setup and solution.

3-14. (20 min.)

Using Microsoft Excel to Perform CVP Analysis: Balance, Inc.

a. 500,000 units.
The following two screenshots show the setup and solution.

3-32 (continued)
b. 510,000 units.
The following two screenshots show the setup and solution.

3-15. (20 min.)

CVP With Income Taxes: Crest Industries.

a.
Profit = (P V)X F
$0 = ($80 $32)X $360,000
$360,000
$48
X =
7,500 units

X=

b. In order to achieve a profit of $90,000 after tax, Crest must earn:


$150,000 = [$90,000 (1.00 0.40)] before taxes.
The number of units to earn $150,000 in operating profits is:
X = ($360,000+ $150,000) ($80 $32)
= 10,625 units
3-16. (20 min.) Multiproduct CVP Analysis: Rio Coffee Shoppe
First, compute the weighted average contribution margin per unit:
= $0.96 = 60% x ($1.50 $0.70) + 40% x ($2.50 $1.30)
The total number of cups of regular coffee and lattes (X) to break even is:
Profit = (P V)X F
$0 = $0.96 X $6,720
X = 7,000 cups
= 4,200 (= 60% x 7,000) cups of coffee and
2,800 (= 40% x 7,000) lattes

3-17. (20 min.) Multiproduct CVP Analysis: Mission Foods


a. Profit = ($3.00 $1.50) x 200,000 + ($4.50 $2.25) x 300,000 $117,000
= $858,000
b. First, compute the weighted average contribution margin per unit:
= $1.95 = 40% x ($3.00 $1.50) + 60% x ($4.50 $2.25)
The total number of chicken and fish and fish tacos (X) to break even is:
Profit = (P V)X F
$0 = $1.95 X $117,000
X = 60,000 tacos
= 24,000 (= 40% x 60,000) chicken tacos and
36,000 (= 60% x 60,000) fish tacos

c. First, compute the weighted average contribution margin per unit:


= $1.65 = 80% x ($3.00 $1.50) + 20% x ($4.50 $2.25)
The total number of chicken and fish and fish tacos (X) to break even is:
Profit = (P V)X F
$0 = $1.65 X $117,000
X = 70,910 tacos (rounding up)
= 56,728 (= 80% x 70,910) chicken tacos and
14,182 (= 20% x 70,910) fish tacos