TBS901 Cost Volume Profit Relationships

TBS801 Break Even Analysis and Leverage

Tutorial Review Questions - Solutions
1- The Sweetheart Company, a producer of specialty cards, has asked you to complete several calculations based
upon the following information:
Selling price per unit
Variable cost per unit
Total fixed costs

$6.60
$5.28
$46,200.00

Required:
a. Compute the break-even point in units.
b. Compute the sales volume necessary to produce a net income of $13,028.40.
c. Compute the total units sold to earn a net income of $18,480.
a. $46,200 / ($6.60 - $5.28) = 35,000 units
b. $13,028.40 / 0.70 = $18,612
$13,028.4 + $46,200 = $59,228.4
$59,228.4/ $1.32 = 44,870 units

44,870 units x $6.60 = $296,142

c. $64,680 / $1.32 = 49,000 units

2- Too Hot To Handle Company produces fireworks and has provided the following information:
Total fixed costs
$100,000
Unit variable costs
$6
Planned unit sales
30,000
The break-even point is 25,000 units.
Required:
a. Compute the selling price per unit.
b. Compute the contribution-margin ratio.
c. Compute the break-even volume in dollars.
d. Compute the margin of safety.
a.
b.
c.
d.

$100,000 / 25,000 = $4 + $6 = $10

$4 / $10 = 0.40
25,000 units x $10 = $250,000
30,000 - 25,000 = 5,000 fireworks

3- The Yetmar Restaurant is open 24 hours per day serving breakfast, lunch, and dinner. Fixed costs $24,000 per
month. Variable costs are estimated at $9.60 per meal. The average total bill is $12 per customer.
Required:
a. Compute the number of meals that must be served if the Family Restaurant wishes to earn a profit of
$6,000.
b. Compute the break-even point in meals.
c. Compute the break-even volume in dollars.
d. Assume that fixed costs increase to $30,000. How many additional meals must be served if the Yetmar
Family Restaurant wishes to earn the same profit?
a.
b.
c.
d.

($24,000 + $6,000) / ($12.00 - $9.60) = 12,500 meals

$24,000 / ($12.00 - $9.60) = 10,000 meals
10,000 meals x $12 per meal = $120,000
($30,000 - $24,000) / ($12.00 - $9.60) = 2,500 meals

4- Cleveland Manufacturing, Inc.s most recent income statement is presented below:

Sales
Cost of goods sold
Gross margin
Other operating expenses
Operating income

$450,000
200,000
250,000
196,000
$54,000

Cleveland Manufacturing, Inc., has determined that $50,000 of cost of goods sold and $166,000 of operating
expenses is fixed.
Required:
a. Compute the contribution margin.
b. Compute the contribution-margin percentage.
c. Compute the break-even volume in sales dollars.
d. Compute the current margin of safety.
a. Fixed costs = $50,000 + $166,000 = $216,000
Variable costs + $150,000 + $30,000 = $180,000
$450,000 - $180,000 = $270,000
b. $270,000 / $450,000 = 60%
c. $216,000 / 60% = $360,000
d. $450,000 - $360,000 = $90,000
5- Drake Company's income statement for the most recent year appears below:
Sales (26,000 units) * 25 per unit
$650,000
Less: Variable expenses 17 per unit
442,000
Contribution margin
8 per unit
208,000
Less: Fixed expenses ....................................... 234,000
Net operating loss ........................................... $ (26,000)
1. The unit contribution margin is: $$ __8___ = 208,000/26,000
2. The break-even point in sales dollars is: $$__731250_ = 234,000/ (8/25)
3. The break-even point in units is: __29250__Units = 234,000 / 8
4. If the Co. desires a net income of $20,000, the number of units needed to be sold is: 31750 Units
(20,000 + 234,000) / 8
5. The sales manager is convinced that a $60,000 expenditure on advertising will increase unit sales by 50%
percent without any other increase in fixed expenses. If the sales manager is correct, the company's net
operating income would increase by: $$__44,000
New selling volume = 39,000 New Fixed cost= 60,000 + 234,000= 294,000
New N.I. = (39,000* 25) (294,000) (39,000 * 17)= 18,000
Old N.I. = 650,000 -442,000 -234,000 =-(26,000)
Change = - 26,000 -18,000 = $44,000

6- Pennsylvania Limestone Co. Produces thin limestone sheets used for cosmetic facing on buildings. The
following income statement represents the operating results for the year just ended. The Co. had sales of
1,800 tons during the year. The manufacturing capacity of the firms facilities is 3,000 tons per year.
Pennsylvania Limestone Company
Income Statement For the year ended December 31, 2002
Sales
$900,000
Variable Costs
Manufacturing
$315,000
Selling costs
$180,000
Total variable costs
($495,000)
Contribution Margin
$405,000
Fixed Costs
Manufacturing
$100,000
Administrative
$40,000
Selling
$107,500
Total fixed costs
($247,500)
Net Income
$157,500
Required
1- Calculate the companys break-even volume in tons for 2002.
2- If the sales volume is estimated to be 2,100 tons in the next year, and if the prices and costs stay at the same
levels and amounts, what is the net income that management can expect for 2002?
3- The Co. has been trying for years to get a foothold in the European market. The Co. has a German customer
that has offered to buy 1,500 tons at $450 per ton. Assume that all of the Co.s costs would be at the same
levels & rates as in 2002. What net income would the Co. earn if it took this order & rejected some business
from regular customers so as not to exceed capacity?
4- The Co. plans to market its product in a new territory. Management estimates that an advertising program
costing $61,500 annually would be needed for the next two or three years. In addition, a $25 per ton sales
commission to the sales force in the new territory, over and above the current commission, would be
required. How many tons would have to be sold in the new territory to maintain the firms current net
income? Assume that sales and costs will continue as in 2002 in the firms established territories.
5- Management is considering replacing its labour-intensive process with an automated production system.
This would result in an increase of $58,500 annually in fixed manufacturing costs. The variable
manufacturing costs would decrease by $25 per ton. Compute the new break-even point.
6- Ignore the facts presented in requirement (5). Assume that management estimates that the selling price
per ton would decline by 10% next year. Variable costs would increase by $40 per ton, what sales volume
in dollars would be required to earn a net income of $94,500 next year?

1.

Unit Sale Price

Unit Variable Cost

$900,000 1,800 = $500

$495,000 1,800 = $275

Unit contribution margin

= Unit sale price unit variable cost

= $500 - $275 = $225

Contribution margin ratio

= Unit contribution margin Selling price

= 225 500 = 45%

Break-even in tons (units)

= Fixed expenses Unit contribution margin

= $247,500 225 = 1,100 tons.

Break-even in dollars

= Fixed expenses Contribution margin ratio

= $247,500 0.45 = $550,000

2.

Net Profit

= Total sales fixed costs variable costs

= (2,100 500) 247,500 (2,100 275)
= $225,000

3.

Net Profit

= Total sales fixed costs variable costs

= {(1,500 500) + (1,500 450)} 247,500 (3,000 275)
= $1,095,000

4.

Total fixed costs

Unit variable cost

= 247,500 + 61,500 = $309,000

= 275 + 25 = $300

Tons need to be sold next year

to maintain the firms current
net income

= (Fixed Costs + Target Profits) unit contribution margin

= (309,000 + 157,500) (500-300) = 2332.5 tons.

5.

6.

Total fixed costs

Unit variable cost

= 247,500 + 58,500 = $306,000

= 275 - 25 = $250

Break-even in tons (units)

= Fixed expenses Unit contribution margin

= $306,000 250 = 1,224 tons.

Unit sale price

Unit variable cost
Contribution margin ratio

= $450
= $275 + $40 = $315
= {($450- $315) $450} = 30%

Dollar sales volume required

to earn net income of $94,500
next year

= (Fixed Costs + Target Profits) contribution margin ratio

= ($247,500 + $94,500) 0.30 = $1,140,000