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2. Cost-Volume-Profit Analysis

Now that we have discussed a companys cost function, learned

how to identify its fixed and variable costs. We will now discuss a

manner in which a company can use that information in order to

make strategic decisions.

its volume levels is very important for strategic planning. When you

are considering undertaking a new project, you will probably ask

yourself, How many units do I have to produce and sell in order to

Break Even? The feasibility of obtaining the level of production

and sales indicated by that answer is very important in deciding

Breaking Even? whether or not to move forward on the project in question.

Similarly, before undertaking a new project, you have to assure yourself that you can

generate sufficient profits in order to meet the profit targets set by your firm. Thus, you

might ask yourself, How many units do I have to sell in order to produce a target

income? You could also ask, If I increase my sales volume by 50%, what will be the

impact on my profits? This area is called Cost-Volume-Profit (CVP) Analysis.

In this discussion we will assume that the following variables have the meanings given

below:

x = Units Produced and Sold

V = Variable Cost Per Unit

F = Total Fixed Costs

Op = Operating Profits (Before Tax Profits)

t = Tax rate

Break-Even Point

Your Sales Revenue is equal to the number of units sold times the price you get for

each unit sold:

Sales Revenue = Px

Assume that you have a linear cost function, and your total costs equal the sum of your

Variable Costs and Fixed Costs:

Total Costs = Vx + F

When you Break Even, your Sales Revenue minus your Total Costs are zero:

Cost-Volume-Profit Analysis Page 2

This is the Operating Income Approach described in your book. If you move your

Total Costs to the other side of the equation, you see that your Sales Revenue equals

your Total Costs when you Break Even:

Now, solve for the number of units produced and sold (x) that satisfies this relationship:

Px = Vx + F

Px - Vx = F

x(P - V) = F

__F__

x = (FORMULA "A")

(P -V)

Formula "A" is the Contribution Margin Approach that is described in your book. You

can see that both approaches are related and produce the same result.

Break-Even Example

offers its customers various products and services related to the

Internet. Bullock is considering selling router packages for its

DSL customers. For this project, Bullock would have the

following costs, revenues and tax rates:

P = $200

V = $120

F = $2,000

Tax Rate (t) = 40%

2,000

x = (200 - 120)

x = 2,000

80

x = 25 units

Sometimes, you see the (P-V) replaced by the term "Contribution Margin Per Unit"

(CMU):

__F__

x = (FORMULA "A")

CMU

Cost-Volume-Profit Analysis Page 3

This makes sense if you think about it. Every time that you sell a unit, you earn the

Contribution Margin per unit. The Contribution Margin per unit is the portion of the

Sales Price that is left after paying the Variable Cost per unit. It is available to pay the

Fixed Costs. If every time you sell a unit you earn $80 to help pay your Fixed Costs of

$2,000, how many units do you need to sell in order to pay off the $2,000 completely?

2,000

x = = 25

80

Taking Formula "A," you can multiply both sides of the equation by P:

_F_

x =

(P-V)

FxP

Px =

(P-V)

Recall what you do when you have a fraction in the denominator of a fraction:

_a_ (a)x(c)

=

b/c b

(a)x(c) _a_

=

b b/c

__F__

Px = (P-V) (FORMULA "B")

P

Cost-Volume-Profit Analysis Page 4

Formula B gives you the Sales Revenue that you need in order to Break Even. The

Denominator [(P-V)/P] is referred to as the Contribution Margin Ratio. It tells you, what

percentage of every dollar of Sales Revenue goes to help pay off the Fixed Costs. You

can see this if you break up the Contribution Margin Ratio:

(P-V)/P

P/P - V/P

1 - V/P

V/P gives you the percentage of the Sales Price that goes to pay off the Variable Costs

(the Variable Cost Ratio or Variable Margin). Thus, one minus the Variable Cost Ratio

gives you the percentage of the Sales Price that is available to help pay the Fixed

Costs.

Ratio (CMR):

__F__

Px = (FORMULA "B")

CMR

Let us continue using the Bullock example. Using Formula B, we can compute the

Break-Even Point in Sales Revenue:

__2,000__

(200 - 120)

Px =

200

Px = 2,000

.40

Px = $5,000

So, what is the big deal? We already knew that Bullock needed to sell 25 units to Break

Even by using Formula A. We also know that each unit sells for $200. We therefore

know that selling the 25 units will produce Sales Revenue of $5,000. Why do we need

a separate formula? We have the two formulas because sometimes you might not have

enough information to use Formula A, but you will have enough information to use

Formula B.

Cost-Volume-Profit Analysis Page 5

It has released the following Variable Costing Income

Statement. This is the only financial information that we have

regarding the Cubas operations:

Less Variable Costs: -30,000 (Vx)

Contribution Margin: $ 70,000 (Px Vx)

Less Fixed Costs: -50,000 (F)

Operating Profit: $ 20,000 (Px - Vx F)

What is the Break-Even point for Cuba? We do not know the number of units that Cuba

sells in a year. We do not know the Price or the Variable Cost per unit. For all we

know, Cuba sells one radio for $100,000 each (or 100,000 radios for $1 each). So, we

cannot use Formula A. Although you do not know the price or the Variable Cost per

unit, you are still able to calculate the Contribution Margin Ratio.

= = =

Sales Revenue Px Px P

Thus, we can use Formula B. The Contribution Margin Ratio is .70 (70,000/100,000),

and the Break-Even Point in Sales Revenue is:

Keep in mind that the reason that Cubas Sales Revenue is lower than it was before is

because Cuba sold fewer units. Cubas price and Variable Cost per unit remained

unchanged. Let's check if Cuba Breaks Even at this Sales Revenue figure:

Less Variable Costs (30%): -21,428.57 -V[.7142857(old unit volume)]

Contribution Margin: $50,000 .7142857 (old Contribution Margin)

Less Fixed Costs: -$50,000

Operating Profit: $0

Cost-Volume-Profit Analysis Page 6

Profit Targets

You can use this same analysis to figure out how many units you need to sell in order to

generate a target before-tax profit (Operating Profits).

Op = Px - Vx - F

If you move the costs to the other side of the equation, you end up with:

Px = Vx + F + Op

If you solve for x, you will see how many units you need to produce and sell in order to

generate your target Operating Profits:

Px = Vx + F + Op

Px - Vx = F + Op

x(P - V) = F + Op

x = (F + Op)

(P - V) Modified Formula A

Or x = (F + Op)

CMU

As was true with Formula B, we can multiply both sides of Modified Formula A by

price to produce the formula that gives the Sales Revenue that is necessary to produce

the target Operating Profits:

x = (F + Op)

(P - V)

Px = (F + Op)P

(P - V)

Px = _(F + Op)_

(P - V) Modified Formula B

P

Or Px = (F + Op)

CMR

Cost-Volume-Profit Analysis Page 7

Assume that Bullock Net Co. has established a target Operating Profits figure of

$40,000. Using Modified Formula A, you can determine the number of units that

Bullock will need to sell in order to generate this target:

(2,000 + 40,000)

x = (200 - 120)

42,000

x = 80

x = 525 units

If you think about it, it makes sense to add the Fixed Costs and the Target Operating

Profits together and then divide by the Contribution Margin. If you make $80 every time

you sell a unit, then you have to sell 25 units to Break Even (2,000/80). After you Break

Even, you make $80 of profits every time that you sell a unit, and you have to sell 500

units in order to generate Operating Profits of $40,000 (40,000/80).

Using Modified Formula B, you can determine the Sales Revenue that Bullock will

need in order to generate Operating Profits of $40,000:

(2,000 + 40,000)

x = (200 - 120)

200

42,000

x = .4

x = $105,000

The Operating Profits to which we have been referring do not include tax expense.

Once you subtract your tax expense from your Operating Profits, you have your Net

Income.

If you want to know how many units that you need to produce and sell in order to

generate a target Net Income (or after-tax profit), just convert the after-tax number into a

before-tax number. You can then substitute the before-tax profit figure in the above

formulas.

Cost-Volume-Profit Analysis Page 8

For example, if you are told that you want to generate a Net Income (after-tax) of

$50,000 and your tax rate is 40%, then you can convert the $50,000 after-tax, Net

Income into the before-tax, Operating Profits that you need in order to produce Net

Income of $50,000:

Op - .4 (Op) = 50,000

.6 (Op) = 50,000

Op = 50,000/ .6

Op = 83,334

Taxes (40%): -33,334

Net Income: $50,000

What if you are given a before tax target income, which is equal to a percentage of

Sales Revenue? Just plug a formula for the target (e.g., .1Px for 10% of Sales

Revenue) into the formula in place of "Op" (instead of a dollar figure). For example,

assume that Bullock Net Co. desires a target Operating Profits that are equal to 10% of

its Sales Revenue:

Px = 2,000 + .1 Px / .40

.4 Px = 2,000 + .1Px

.3 Px = 2,000

Px = 2,000/.3

Px = $6,667

Multiple-Product Analysis

What if you are interested in performing a CVP analysis, but you have more than one

product? You can perform this analysis in the same manner as we described above if

you assume that your sales mix is fixed.

You use the same formulas that are described above, but you substitute a composite

Contribution Margin (for the entire product line) in place of the Contribution Margin for

one product that we used above. When using a version of Formula B, you need to

calculate the Contribution Margin Ratio for all of your products.

Assume that you have a Company that sells two models, Good and Better::

Cost-Volume-Profit Analysis Page 9

Good Better

Price: $60 $80

Variable Costs: 44 56

Units Sold: 1800 600

Variable Costs: (1800 x44=79.2K)+(600x56=33.6K) -112,800

Contribution Margin: 43,200

Fixed Costs: -39,600

Operating Profits: -$8,400

You can also get the Contribution Margin Ratio for the Company by calculating the

individual Contribution Margin Ratios for each product:

Price: $60 $80

Variable Costs: -44 -56

Contribution Margin: $16 $24

Contribution Margin Ratio: 26.67% 30%

What you have to remember, however, is that the product mix (when calculating

Contribution Margin Ratios) is based on relative sales revenue of the product (not the

relative units sold):

Product Sales Revenue: $108K $48K

Total Sales Revenue: 156K 156K

Product Mix: 69.23% 30.77%

.6923(.2667) +..3077(.30)= .18463641 +..09231=.2769461

The difference between the two Contribution Margin Ratios for the Company is

due to rounding.

PX = F/CMR = $39,600/.276923 = $143,000

Cost-Volume-Profit Analysis Page 10

If you use a version of Formula A, you have to come up with composite Contribution

Margin per Unit that represents the entire product line. In constructing the composite

Contribution Margin Per Unit, the sales mix is based on the relative number of UNITS

sold of each product (not the relative dollar sales revenue).

There are two methods that are commonly used to develop the needed composite

variables: (i) Basket (Package) Method, and (ii) Weighted Average Contribution Margin

Method.

Woodys Bananas, Ltd. Competition between Woody and

Carmen has become so fierce on the Banana front that

Woody has been suspected of engaging in guerilla tactics.

(This suspicion could just be based on the CEOs strange

fashion statements.) Unlike Carmen, who specializes in

various banana products, Woody only sells raw fruit.

Woodys main emphasis is Bananas, but it also sells

Oranges. Woody sells 3 Bananas for each Orange that it sells

(The sales mix is 75% Bananas and. 25% Oranges).

Bananas Oranges

Price: $2 $4

Variable Cost per Unit: $1 $2

Contribution Margin per Unit: $1 $2

Common Fixed Costs: $2,000

reflects Woodys sales mix (75%:25%). Assume that

each basket contains 3 Bananas and 1 Orange. What

is the Contribution Margin of that Basket?

CMbasket = 3 CMbanana + 1CMorange

CMbasket = 3 (1) + 1 (2)

CMbasket = 3+2

CMbasket = 5

Cost-Volume-Profit Analysis Page 11

Now, you plug the Contribution Margin for the Basket into the Formula that you wish to

use. The Break-Even point in Baskets is:

Baskets = F/CMbasket

Baskets = 2,000/ 5

Baskets = 400 Baskets

Bananas: There are 3 Bananas in every Basket, so we need to sell 3 x 400 Baskets

= 1200 Bananas in order to Break-Even.

Oranges: There is one Orange in every Basket, so we need to sell 400 Oranges in

order to Break-Even.

With the Weighted Average Contribution Margin Method, we calculate the Weighted

Average Contribution Margin for one unit of fruit, using the given sales mix.

CMwa = .75 (1) + .25 (2)

CMwa = .75 + .5 = $1.25

x = F/CMwa

x = 2,000/ 1.25

x = 1600 units

Since we know that the total units of fruit sold should be 1600, and we know the sales

mix is 75%:25%:

Oranges: .25 (1600) = 400 Oranges

Margin of Safety

The "Margin Of Safety" is the amount of sales (in dollars or units) by which the actual

sales of the company exceeds the Break-Even Point. We know that Bullocks Break-

Even Point is 25 units or $5,000. If Bullock really sells 40 units (Sales Revenue of

$8,000), then its Margin Of Safety is 15 units (40-25) or $3,000 ($8,000 - $5,000).

Operating Leverage

If you take the total Contribution Margin and divide it by the Operating Profits, this gives

you the Operating Leverage (or degree of Operating Leverage).

Cost-Volume-Profit Analysis Page 12

For example, if Bullock Net Co had actual sales of 40 units, its Operating Profits would

be calculated as follows:

Variable Costs: -$4,800 (120x40)

Contribution Margin: $ 3,200

Fixed Costs: -$2,000

Operating Profits: $1,200

= = 2.67

Operating Profits $1,200

The Operating Leverage of 2.67 indicates that if Bullock can increase its sales by 50%,

then its Operating Profits will increase by 2.67 x 50% or 133%. Thus, the Operating

Profits of $1,200 will increase by $1,600 (1.33 x $1,200) to $2,800. This calculation

assumes that the Price, Variable Cost per Unit, and the Fixed Costs do not change.

You are assuming that the increase in sales is caused by a 50% increase in the number

of units sold (x):

OLD NEW

Revenue: $ 8,000 (200x40) $12,000 (200 x 60)

Variable Costs: -$4,800 (120x40) -$7,200 (120 x 60)

Contribution Margin: $ 3,200 $4,800 (80 x 60)

Fixed Costs: -$2,000 -$2,000

Operating Profit: $1,200 $2,800

Questions

E-1. Rider Company sells a single product. The product has a selling price of $40 per

unit and variable expenses of $15 per unit. The company's fixed expenses total

$30,000 per year. The company's break-even point in terms of total dollar sales

is:

A) $100,000.

B) $80,000.

C) $60,000.

D) $48,000.

Cost-Volume-Profit Analysis Page 13

Weiss Corporation produces two models of wood chairs, Colonial and Early

American. The Colonial sells for $60 per chair and the Early American sells for

$80 per chair. Variable expenses for each model are as follows:

Early

Colonial American

Variable production cost per unit ....... $35 $48

Variable selling expense per unit ....... 9 8

Total fixed expenses are $39,600 per month. Expected monthly sales are:

Colonial, 1,800 units; Early American, 600 units.

E-2. The contribution margin per chair for the Colonial model is:

A) $51.

B) $16.

C) $35.

D) $25.

E-3. If the sales mix and sales units are as expected, the break-even in sales dollars

is closest to:

A) $132,000.

B) $148,500.

C) $143,000.

D) $139,764.

Southwest Industries produces a sports glove that sells for $15 per pair. Variable

expenses are $8 per pair and fixed expenses are $35,000 annually.

A) 8,000 pairs.

B) 5,000 pairs.

C) 4,375 pairs.

D) 2.333 pairs.

Cost-Volume-Profit Analysis Page 14

A) 46.7%.

B) 53.3%.

C) 33.3%.

D) 42.9%.

The answer is a.

Fixed Variable

Sales (100,000 units)..................... $1,000,000

Expenses:

Raw materials............................. $300,000

Direct labor ................................ 200,000

Overhead .................................... $100,000 150,000

Selling and administrative.......... 110,000 50,000

Total expenses ............................... $210,000 $700,000 910,000

Net operating income .................... $ 90,000

A) 30,000 units.

B) 91,000 units.

C) 60,000 units.

D) 70,000 units.

E-7. The number of units Bidwell would have to sell to earn a net operating income of

$150,000 is:

A) 100,000 units.

B) 120,000 units.

C) 112,000 units.

D) 145,000 units.

E-8. If fixed expenses increased $31,500, the break-even sales in units would be:

A) 34,500 units.

B) 80,500 units.

C) 69,000 units.

D) 94,500 units.

Cost-Volume-Profit Analysis Page 15

Henning Corporation produces and sells two models of hair dryers, Standard and

Deluxe. The company has provided the following data relating to these two

products:

Standard Deluxe

Selling price ......................................................... $40 $55

Variable production cost ...................................... $10 $16

Variable selling and administrative expense ....... $15 $12

Expected monthly sales in units........................... 600 1,200

E-9. The break-even in sales dollars for the expected sales mix is (rounded):

A) $36,800.

B) $30,000.

C) $28,105.

D) $31,222.

Standard Deluxe

Price: $40 $55

Variable Production Cost: -10 -16

Variable Selling Expense: -15 -12

Contribution Margin: $15 $27

Contribution Margin Ratio: 37.5% 49.09%

E-10. If the expected monthly sales in units were divided equally between the two

models (900 Standard and 900 Deluxe), the break-even level of sales would be:

A) lower than with the expected sales mix.

B) higher than with the expected sales mix.

C) the same as with the expected sales mix.

D) cannot be determined with the available data.

P-1 The controller of Miller Company is preparing data for a conference concerning

certain independent aspects of its operations. Prepare answers to the following

questions for the controller:

1. Total Fixed Costs are $1,440,000 and a unit of product is sold for $12 in

excess of its unit Variable Cost. What is break-even unit sales volume?

2. The company will sell 60,000 units of product each having a unit Variable

Cost of $22 at a price that will enable the product to absorb $600,000 of

Fixed Cost. What minimum unit sales price must be charged to break even?

Cost-Volume-Profit Analysis Page 16

Cost. What minimum Contribution Margin Ratio must be maintained if total

Sales Revenue is to be $3,800,000?

30%, and the break-even dollar sales volume is $640,000. What is the

amount of total Sales Revenue?

5. Total Fixed Costs are $1,000,000, Variable Cost per unit is $30, and unit

sales price is $80. What dollar sales volume will generate a net income of

$84,000 when the income tax rate is 40%?

P-2. Jensen Company has recently leased facilities for the manufacture of a new

product. Based on studies made by its accounting personnel, the following data

are available: Estimated annual sales: 40,000 units

Direct Labor 584,000 14.60

Manufacturing Overhead 376,000 9.40

Administrative Expenses 187,200 4.68

Selling expenses are expected to be 10% of Sales Revenues, and the selling

price is $64 per unit. Ignore income taxes in this problem.

and Administrative Expenses are fixed but that other costs are variable.

2. How many units must be sold to earn an Operating Profit of 10% of sales?

P-3. Kenton Company manufactures and sells the three products below:

Unit Sales 10,000 6,000 4,000

Unit Sales Price $48 $56 $68

Unit Variable Cost $30 $32 $36

Compute the number of each kind of unit necessary to sell in order to break

even, assuming that the sales mix is fixed.

Cost-Volume-Profit Analysis Page 17

P-4. The following information relates to financial projections of Big Co. 2003:

Projected Variable Costs $2.00 per unit

Projected Fixed Costs $50,000 per year

Projected Unit Sales Price $7.00

a. How many units would Big Co. need to sell in 2003 to earn a profit before

taxes of $10,000?

b. How many units must it sell to earn a net income of $12,500?

P-5. Signal Co. manufactures a single product. For 2002, the company had sales of

$90,000, variable costs of $50,000, and fixed costs of $30,000. Signal expects

its cost structure and sales price per unit to remain the same in 2003, however

total sales are expected to jump by 20%. If the 2003 projections are realized,

operating profits in 2003 should exceed operating profits in 2002 by what

percentage?

P-6. Diversified Corp. manufactures and sells two products: X and Y. Fixed Costs are

$9,000. The operating results of the company for 2002 follow:

Product X Product Y

Sales in units 2,000 3,000

Sales price per unit $10 $5

Variable Costs per unit $7 $3

a. How many total units would the company have needed to sell to breakeven in

2002?

b. If the company would have sold a total of 6,000 units in 2002, consistent with

CVP assumptions how many of those units would you expect to be Product

Y?

Cost-Volume-Profit Analysis Page 18

Solutions

Px = F/ (CMR)

Px = $30,000/.625 = $48,000

VC (1800 x44=79.2K)+(600x56=33.6K) -112,800

CM 43,200

Fixed Costs: -39,600

Oper. Profits: -$8,400

You can also get the Contribution Margin Ratio for the Company by calculating

the individual Contribution Margin Ratios for each product:

Price: $60 $80

Variable Costs: -44 -56

Contribution Margin: $16 $24

Contribution Margin Ratio: 26.67% 30%

What you have to remember, however, is that the product mix (when calculating

Contribution Margin Ratios) is based on relative sales revenue of the product (not

the relative units sold):

Product Sales Revenue: $108K $48K

Total Sales Revenue: 156K 156K

Product Mix: 69.23% 30.77%

Cost-Volume-Profit Analysis Page 19

The difference between the two Contribution Margin Ratios for the Company is

due to rounding.

PX = F/CMR = $39,600/.276923 = $143,000

In this question, you had enough information to use Formula A. For example,

using the Weighted Average Method:

X = F/CMU = $39,600/$18 = 2,200 units

Early American Revenue: .25(2,200) = 550 x $80 = 44,000

$143,000

E-5. The answer is a.

$1,000,000 - $700,000 = $300,000

Cost-Volume-Profit Analysis Page 20

Contrib.Marg. $41,400

CMR: 46% ($41.500/$90,000)

X = F/CMU = $13,800/23 = 600

Deluxe: .67(600) = 400 x $55 = 22,000

$30,000

E-10. The answer is b.

If the sales mix was 50%-50%, the weighted average contribution margin would

be smaller, and dividing a smaller number into the same fixed cost would

produce a higher break even point.

X = F/CMU = $13,800/21 = 657 units

P-1.

1.

__F__ $1,440,000

x = = = 120,000 units

(P-V) 12

2.

F + Op

x = (P-V)

$600,000

60,000 = P -22

$600,000

P - 22 = 60,000

P - 22 = 10

P = 32

3.

__F + Op__

Px = _(P-V)_

P

1,200,000 +

$3,800,000 = 320,000

CMR

CMR = 1,200,000 +

Cost-Volume-Profit Analysis Page 21

320,000

$3,800,000

CMR = .4

4. You have two unknowns, Sales Revenue and Fixed Costs. So you just

can't plug in the known variables. You are given the Sales Revenue to

break-even (here we want income as well). If we use the break even

formula, then there is only one unknown (the Fixed Costs).

___F___

Px = (P-V)

P

_F_

$640,000 = .3

640,000 x.3 = F

$192,000 = F

Now that you know the fixed costs, you can plug it into the formula to find the

sales revenue you need in order to generate the target income.

__F + Op__

Px = _(P-V)_

P

192,000 + .1Px

Px = .3

.3 Px = 192,000 +.1Px

.2 Px = 192,000

192,000

Px = .2

Px = $960,000

Cost-Volume-Profit Analysis Page 22

5. Net Income is an after-tax term. First convert the after-tax, Net Income into

a before tax, Operating Profit:

1 - .4 (Op) = $84,000

.6 (Op) = $84,000

$84,000

Op =

.6

Op = $140,000

__F+Op__

Px = (P-V)

P

1,000,000 + 140,000

Px = 80 - 30

80

Px = $1,824,000

P-2

1. Fixed Costs: $376,000 + $187,200 = $563,200

Variable costs include the selling expenses. On one unit, the sales

expenses would be $6.40 (.1 x $64).

F + Op

x = (P-V)

_563,200_

x = 64 -38.40

x = 22,000 units

2.

F + .1Px

x = (P-V)

563,200 + .1(64)x

x = 25.60

25.60x = 563,200 + 6.4x

19.2x = 563,200

Cost-Volume-Profit Analysis Page 23

x = 29,333 units

y d e

Price 48 56 68

Variable 30 32 36

Costs

Contributi 18 24 32

on

Margin:

__F__

x = (P-V)

$339,000

x = 226

x = 1500 Baskets

Standard = 1500 (3) = 4,500

Deluxe = 1500 (2) = 3,000

15,000

Weighted-Average Method:

__F__

x = (P-V)

$339,000

x = 22.6

x = 15,000 Units

Standard = 15,000 (.3) = 4,500

Deluxe = 15,000 (.2) = 3,000

15,000

Cost-Volume-Profit Analysis Page 24

Cost-Volume-Profit Analysis Page 25

P-4 (a)

Px = Vx + F + Op

Px Vx = F+ Op

(P-V)x = F + Op

x = (F + Op)/(P-V)

x = ($60,000)/($5)

x = 12,000

(b)

Op - .2Op = $12,500

.8Op = $12,500

Op = ($12,500)/.8

Op = $15,625

Px = Vx + F + Op

Px Vx = F+ Op

(P-V)x = F + Op

x = (F + Op)/(P-V)

x = ($65,625)/($5)

x = 13,125

Cost-Volume-Profit Analysis Page 26

P-5

Old 20% Increase

Numbers in Sales

Sales (Px) $90,000 $108,000 P*(x *1.2)

V Costs (Vx) -50,000 -60,000 V* (x*1.2)

Contribution Margin $40,000 $48,000 (P-V)(x*1.2)

F Costs (F) -30,000 -30,000 F

Oper. Profits $10,000 $18,000

Operating Leverage:

$40,000/$10,000 = 4

Numbers in Sales

Sales (Px) $90,000 $108,000 P*(x *1.2)

V Costs (Vx) -50,000 -60,000 V* (x*1.2)

CM 40,000 48,000 CMU (x 1.2)

F Costs (F) -30,000 -30,000 F

Oper. Profits $10,000 $18,000

Product Y = 3,000 units / 5,000 total units = 60% of sales

Contribution Margin

CM = P - V

CMProduct X = $10 - $7 = $3

CMProduct Y = $5 - $3 = $2

CM basket = 2($3) + 3($2) = $6 + $6 = $12

Cost-Volume-Profit Analysis Page 27

(a)

Revenue = Costs

Px = Vx + F

Px Vx = F

(P-V)x = F

x = (F)/(P-V)

x = ($9,000)/($2.4)

x = 3,750 total units

Basket Method

Revenue = Costs

Px = Vx + F

Px Vx = F

(P-V)x = F

x = (F)/(P-V)

x = ($9,000)/($12)

x = 750 baskets

Total Units = 750 x 5 = 3750

(b)

Product Y Units = 6,000 x .6 = 3600 units

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