Question 3.

28 a) Contribution Margin per unit

Contribution Margin Ratio

= = = = = =

= Revenue variable Cost = $50 - $30 = $20 per unit (Contribution Margin/Unit ) / Sales $20/$50 0.4
Fixed Cost / Contribution Margin $180,000/$20 9,000 units

b) Breakeven points unit

c) Sales revenue when income = 20% of revenue Sales - Total cost = income Where: sales = price x quantity Income = Sales total cost 20% x (Sales x Quantity) = (Price x Quantity) {(Variable cost x quantity) +Fixed cost)} 20% ($50xQ) = $50xQ {($30xQ)+$180,000} 10Q = 50Q - 30Q - $180,000 10Q = 20Q -$180,000 10Q = 180,000 Q = 18,000 Therefore, put Q back in the equation of income = 20% of revenue Total revenue = Quantity x sales price per unit = 18,000 x $50 = $900,000

Question 3.28 Cont.. d) If the tax rate is 40% Unit sales = {target profit / 1 - Tax rate} + fixed cost Contribution margin per unit = {$120,000/(1-40%)} + $180, $20 =(120,000/0.6 +180,000) / $ 20 = 19,000 units e) Profit = sales-total cost. Incremental profit = Incremental Sales Incremental cost

0 = 50Q 30Q 400,000 20Q = 400,000 Q = 2,000 units

The company needs to increase 2,000 units to justify the expenditure.

Question 3.29 a) CM ratio = ($2,500,000 $1,000,000) / $2,500,000 = 0.6 Profit = CM ratio * Total Sales Fixed Cost Total Sales = ( Profit + Fixed Cost ) / CM ratio = ($600,000 + $180,000) / 0.6 = $1,300,000 = Sum of fixed cost/Contribution Margin ratio = (Sales Variable cost)/ Sales = $2,500,000 $1,000,000 $1,000,000 = 0.60 = Sum of fixed cost/Contribution Margin ratio = $180,000/0.60 = $300,000

b) Breakeven dollar Contribution Margin ratio

Breakeven dollar

Question 3.53 Breakeven point and competitive contribution margin analysis

Cost Category Selling price per ride Variable Cost per ride Contribution margin per ride Fixed cost per year
Pay employee a) Breakeven Point =

Johnson Company RM30 RM24 RM6 RM300,000

Per ride basis Fixed Cost Contribution Margin per unit Johnson Company RM300,000 RM6 50,000

Smith Company RM30 RM15 RM15 RM1,500,000

Fixed Salaries

Breakeven Point no of rides

Smith Company RM1,500,000 RM15 100,000

Breakeven Point no of rides

Question 3.53 Cont.. (b) Income Statement at Breakeven points Profit Profit Johnson Company RM6Q - RM300,000 = = Contribution Margin - Fixed Cost (CM per unit x Quantity) - Fixed Cost Smith Company RM15Q - RM1,5000,000

Profit

Comparison of profit and cost structure between Johnson and Smith

Johnson Proft and Cost Structure

5,500,000 4,500,000 3,500,000 2,500,000 1,500,000 500,000 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000 Profit Variable Cost Fixed Cost Total Cost

Breakeven Point

Sales

150,000

100,000

110,000

120,000

130,000

140,000

(500,000)

Number of Rides

160,000

Question 3.53 Cont..

Smith Profit and Cost Structure

Profit 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000 0 100,000 110,000 120,000 130,000 140,000 150,000 (1,000,000) (2,000,000) 160,000 Variable Cost

Fixed Cost
Total Cost

Breakeven Point

Sales

Number of Rides

Question 3.53 Cont.. (c) Based on above profit and cost structure, Johnson is more profitable compared against Smith for the following reasons:

1) Johnson having lower fixed cost at RM300K compared to Smith at RM1.5 Mil and most of its cost behavior proportionate directly with number of unit rides like payment to employee. Hence, Johnson able to make quicker profit compared against Smith
2) Johnson breakeven at volume 50,000 rides compared to Smith which take about 100,000 rides. This is due to Johnson having lower losses before reach breakeven at RM1.5 Mil compared against Smith which needs to recover huge losses before it can reach breakeven at RM3 Mil. 3) Smith need to have number of rides more 100,000 before it can start making profit whereas Johnson just need 50,000 number of rides lower compared against Smith to enjoy a profits. Nevertheless, Smith's profit portion is higher than Johnson once all the fixed cost had been fully recovered

Question 3.53 Cont.. (d) Smith cost structure is more riskier compared to Johnson since it's having huge fixed cost of RM1.5 Mil which takes higher number of rides or probably longer period before it able to breakeven or even to start making profits. As Johnson cost behavior does not tighten up with high fixed cost, it able to make profit at lower number of rides compared against Smith

THANK YOU