Chapter020 Solutions Manuall 2

CHAPTER 20
COST-VOLUME-PROFIT ANALYSIS
OVERVIEW OF BRIEF EXERCISES, EXERCISES, PROBLEMS, AND CRITICAL
THINKING CASES
Brief
Exercises
B. Ex. 20.1
B. Ex. 20.2
B. Ex. 20.3
Topic
Cost behavior patterns
Cost classifications
Using a cost formula
B. Ex. 20.4
B. Ex. 20.5
B. Ex. 20.6
Using a cost formula

Computing required sales volumes
Computing required sales volumes
B. Ex. 20.7
B. Ex. 20.8
B. Ex. 20.9
B. Ex. 20.10
Contribution margins and selling prices

Evaluating marketing strategies
Selecting an activity base
CVP with multiple products
Exercises
20.1
Topic
Accounting terminology
20.2
20.3
20.4
20.5
20.6
20.7
20.8
20.9
High-low method of cost estimation

Determining required sales volumes
Computing break-even points
Solving for missing information
Ethical implications of CVP
Using CVP
Using CVP
Understanding break-even relationships
20.10
20.11
Margin of safety
Applying CVP
20.12
20.13
Solving for missing information

Formulating bid prices using CVP
20.14
20.15
CVP with multiple products

Estimating semivariable costs
Learning
Objectives
20-1
20-1
20-1, 20-9
20-1, 20-4,
20-5, 20-9
20-420-6
20-420-6
20-1, 20-4
20-6
20-7
20-1
20-8
Learning
Objectives
20-1, 20-2,
20-4
20-1, 20-9
20-4, 20-5
20-420-6
20-1, 20-4
20-520-7
20-420-6
20-420-6
20-1, 20-2,
20-420-6
20-4, 20-5
20-1, 20-2,
20-420-6
20-5, 20-6
20-1, 20-4
20-6
20-7, 20-8
20-9
Skills
Analysis
Analysis
Analysis
Analysis
Analysis
Analysis
Analysis
Analysis
Judgment, analysis
Analysis
Skills
Analysis
Analysis
Analysis
Analysis
Analysis
Judgment, communication
Analysis
Analysis
Analysis
Analysis
Analysis
Analysis
Analysis
Analysis
Analysis
Copyright 2015 by McGraw-Hill Education All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
SOLUTIONS TO BRIEF EXERCISES

B. Ex. 20.1
a. Total variable costs increase approximately in proportion to an increase in the

volume of activity.
b. Variable costs per unit remain relatively constant at all levels of activity; this is
the reason that total variable costs vary in proportion to changes in the volume
of activity.
c. Total fixed costs remain relatively constant despite increases in the volume of
activity.
d. Because total fixed costs tend to remain constant as the volume of activity
increases, fixed costs per unit decline with increases in the volume of activity.
e. Semivariable costs include both fixed and variable cost elements. Because of
the variable cost element, total semivariable costs tend to rise as the volume of
activity increases. Due to the fixed element of the semivariable cost, however,
this increase is less than proportionate to the increase in the volume of activity.
f. On a per-unit basis, the fixed elements of a semivariable cost decline as the
volume of activity increases, but the variable elements tend to remain constant.
Thus, semivariable costs per unit decline as the volume of activity rises, but not
as rapidly as if the entire cost were fixed.
B. Ex. 20.2
a. Variable. The cost of goods sold normally rises and falls in almost direct
proportion to changes in net sales. Although fixed manufacturing overhead is a
component of cost of goods sold, it is applied on a per unit basis and, therefore,
acts like a variable cost.
b. As described in this exercise, the salaries to salespeople are semivariable with
respect to net sales. The monthly minimum amount represents a fixed cost that
does not vary with fluctuations in net sales. However, the commissions on sales
transactions represent a variable element of sales salaries that does fluctuate in
approximate proportion to fluctuations in net sales.
B. Ex. 20.2
(continued)
c. Income taxes are not a fixed, variable, or semivariable cost with respect to net
sales. Income taxes may be viewed as a variable cost, but the relevant activity
base is taxable income, not net sales. (Different tax brackets complicate the
analysis of income taxes expense, even given taxable income as the activity base.
Therefore, cost-volume-profit analysis usually focuses upon operating
incomethat is, income before income tax expense and other items that resist
classification as costs that are fixed, variable, or semivariable with respect to net
sales.)
d. Fixed. Property tax expense is known for each period and is not affected by
fluctuations in sales volume.
e. Fixed. Depreciation expense on a sales showroom is independent of the level of
net sales. Fluctuations in net sales have no effect upon the amount of
depreciation applicable during the period to the sales showroom. (Depreciation
can become a variable cost only when it is treated as a product cost, or when
depreciation is computed using the units-of-output method. Neither of these
situations applies to the depreciation on a sales showroom, which is a period
cost.)
f. Fixed. Use of an accelerated method causes depreciation expense to change
from one period to the next, but the expense for each period still remains
fixed with respect to fluctuations in net sales. The key idea is that fluctuations
in net sales have no effect upon the amount of depreciation expense applicable
to the period.
B. Ex. 20.3
a. (1) Estimated cost of responding to 150 emergency calls in one

month:
Fixed element of monthly emergency response cost
cost ..
Variable cost of responding to 150 calls
(150 calls $200 per call)
Estimated total cost of responding to emergency
calls ..
(2) Average cost per call (150 calls per month):
Estimated total cost of responding to 150
emergency calls per month [part a (1) ]
Number of calls
Average cost per call ($45,000 150 calls) .
$ 15,000
30,000
$ 45,000
$ 45,000
150
$
300
The overall cost of responding to emergency calls is semivariablethat

is, it includes both fixed and variable elements. Therefore, when the
volume of emergency calls is unusually low, the average cost of
responding to each call will rise, because the fixed cost elements must be
spread over fewer calls.
B. Ex. 20.3
(continued)
b.
B. Ex. 20.4
a.
Contribution margin ratio 60% (100%, minus variable costs of 40%)
b.
Break-Even Sales Volume
c.
B. Ex. 20.5
a.
Fixed Costs + Target Profit

Contribution Margin Ratio
$6,000 + $0
60%
$10,000
Fixed element of room service costs
Variable element of room service costs ($20,000 40%)
Estimated total room service costs in a month
generating $20,000 room service revenue
$ 6,000
8,000
$ 14,000
If contribution margin ratio is 25%, variable costs must be 75% of sales

Unit sales price = $45 variable costs 75% = $60
Unit Contribution Margin
Unit Sales Price Variable Cost per Unit

$60 (above) - $45 = $15
b.
Sales Volume (in units)
Fixed Costs + Target Operating Income

$800,000 + $400,000
$15
= 80,000 units
c.
Sales Volume (in dollars) =
=
=

$800,000 + $400,000
25%
$4,800,000
[or 80,000 units (part b ) x ($60 unit sales price (part a ) = $4,800,000]
B. Ex. 20.6
a. If variable costs are 60% of sales revenue, the contribution

margin ratio must be (100% - 60%) = 40%
b.
Break-Even Sales Volume =
Fixed Costs
CM ratio
$24,000 =
Fixed Costs
40%
Sales Volume =
c.
; Fixed Costs = $9,600

$9,600 + $36,000
40%
= $ 114,000
B. Ex. 20.7
a. Break-even sales volume ($60 75,000 units)

Contribution margin ratio .
Fixed costs ($4,500,000 30%) .
$ 4,500,000
30%
$ 1,350,000
b. Break-even sales volume ($60 75,000 units)

Less: Fixed costs (part a )
Variable cost at 75,000 units
Variable cost per unit ($3,150,000 75,000 units)
$ 4,500,000
1,350,000
$ 3,150,000
$
42
Alternatively, if the contribution margin ratio is 30%, variable costs must amount
to 70% of the unit sales price. Thus, $60 sales price 70% = $42.
c. Total costs = fixed costs + (variable cost per unit number of units)
= $1,350,000 + ($42 number of units)
B. Ex. 20.8
a.
$6,000
b.
$9,000
($2,400 additional monthly fixed cost, divided by 40%

contribution margin)
[($2,400 additional cost + $1,200 target
operating income) 40%]
B. Ex. 20.9
The following activity bases could be suggested to each of your clients:
Client
Freemans Retail Floral Shop
Susquehanna Trails Bus
Wilson Pump Manufacturers
McCauley & Pratt, Attorneys at Law
B. Ex. 20.10
Possible Activity Bases

Sales dollars
Passenger miles driven
Number of pumps produced
Sales dollars
Machine hours
Direct labor hours
Billable client hours
Number of cases
a.
Contribution
Margin Ratio
60%
Flashlights
Batteries
25%
Average contribution margin ratio
Percentage of
Total Sales
20%
80%
Fixed Costs/Average Contribution Margin Ratio
Average
= Contribution
12%
20%
32%
Break-Even
Sales Revenue
$1,600,000 32% = $5,000,000

b.

Average Contribution Margin Ratio
= Target Revenue
($1,600,000 + $3,000,000) 32% = $14,375,000
SOLUTIONS TO EXERCISES
Break-even point
Fixed costs
Relevant range
Contribution margin
Unit contribution margin
Economies of scale
Semivariable costs
None (This is not a meaningful measurement; variable costs have already been
deducted in arriving at operating income.)
Ex. 20.1
a.
b.
c.
d.
e.
f.
g.
h.
Ex. 20.2
a. (1)
High point
Low point
Changes
Machine
Hours
6,000
2,500
3,500
Manufacturing
Overhead
$320,000
180,000
$140,000
Thus, the estimated variable element of Bursa Mfg. Co.s manufacturing

overhead is $40 per machine hour. [$140,000 change in cost divided by 3,500
unit change in the activity base (machine hours)].
(2) Total manufacturing overhead
at 6,000 machine-hour level .
Variable element of manufacturing overhead at 6,000
machine-hour level (6,000 machine hours
$40 per machine hour) ..
Fixed element of manufacturing overhead ....
b. Estimated manufacturing overhead at activity level
of 4,500 machine hours:
Fixed element [part a (2) ] ..
Variable cost element ($40 per machine hour
4,500 machine hours) ...
Total estimated manufacturing overhead .
c. Estimated manufacturing overhead:
February:
$80,000 + ($40 per MH 3,200 MH) ....
March:
$80,000 + ($40 per MH 4,900 MH) .....
Actual manufacturing overhead .....
Amount over (under) estimated ....
February
$
$ 320,000
240,000
$ 80,000
80,000
180,000
$ 260,000
March
208,000
224,000
(16,000)
$ 276,000
264,000
$ 12,000
Ex. 20.3
a. Unit contribution margin: $90 $38 = $52

b. Sales required to break-even: $650,000 $52 = 12,500 units
c. ($650,000 + $234,000) $52 = 17,000 units
Ex. 20.4
a.
Contribution margin ratio
Relative sales mix
Break-Even in Sales =
Product 1
60%
30%
18%
Product 2
20%
70%
14% = 32%
Fixed Costs
Break-Even in Sales = $96,000 32% = $300,000

b.
Relative sales mix
Break-Even in Sales =
Product 1
60%
20%
12%
Product 2
20%
80%
16% = 28%

Break-Even in Sales = ($96,000 + $16,000) 28% = $400,000

Ex. 20.5
Sales
$200,000
180,000
600,000
Variable
Costs
$120,000
105,000
360,000
Contribution
Margin Ratio
per Unit
$20
15
30
Sales
$900,000
600,000
500,000
Variable
Costs
$720,000
360,000
350,000
Contribution
Margin Ratio
Ratio (%)
20%
40%
30%
a.
(1)
(2)
(3)
b.
(1)
(2)
(3)
Fixed Operating
Costs
Income
$55,000
$25,000
45,000
30,000
150,000
90,000
Fixed Operating
Costs
Income
$85,000
$95,000
165,000
75,000
90,000
60,000
Units
Sold
4,000
5,000
8,000
Ex. 20.6
Ex. 20.7
It is never ethical to lie to ones employees. This type of behavior will only serve
to promote an atmosphere of distrust throughout the company. Rather than
attempting to motivate the sales force by lying about sales quotas, the company
should consider rewarding regional sales managers using commissions and
bonuses.
a. Contribution Margin Ratio
b.
c.
Break-Even Dollar Sales

Volume
Dollar Sales
Volume
Unit Sales Price - Variable Cost per Unit

Unit Sales Price
$30 $6
= 80%
$30
Fixed Costs + $0
$360,000
= $450,000
80%

$360,000 + $440,000
80%
= $1,000,000
d. Sales volume (60,000 units x $30)

Less: Break-even sales volume (per part b )
Margin of safety at 60,000 units
1,800,000
450,000
1,350,000
e. Operating Income = Margin of Safety Contribution Margin Ratio

= $1,350,000 80% = $1,080,000
Ex. 20.8
a.
Projected operating Income without either investment:
($1,200,000 0.25) - $80,000
Ad Campaign
Projected sales revenue
CM ratio
Total contribution margin
minus fixed costs
Operating income
$1,260,000 (1) $
0.25
$
315,000 $
(100,000)
$
215,000 $
220,000
Ordering
System
1,200,000
0.30
360,000
(100,000)
260,000
Thus projected operating income will decrease by $5,000 if the ad campaign is chosen
($215,000 - $220,000), and increase by $40,000 ($260,000 - $220,000) if the ordering system
is chosen.
(1)
($1,200,000 x 1.05)
b.
For the ad campaign to result in an equal increase in operating income, the total
contribution margin produced must equal that of the ordering system ($360,000).
Sales Revenue x 25% = $360,000
Sales Revenue = $1,440,000
Percentage Increase =
$1,440,000 - $1,200,000
$1,200,000
= 20%
Ex. 20.9
a. Contribution margin per unit:

Unit sale price
Less: Variable cost per unit ($50,000 $40,000 units)
Contribution margin per unit
b. Margin of safety at sales of 45,000 units:

Sales revenue ($1.75 $45,000 units)
Less: Sales revenue at break-even point
($1.75 $40,000 units)
Margin of safety
c. Estimated operating loss at sales level of 38,000 units:

Sales revenue ($1.75 38,000 units)
Less: Variable costs ($1.25 38,000 units)
Fixed costs (given)
Operating Income (loss)
d. (1) Unit cost at production level of 40,000 units:
Variable cost per unit
Fixed cost per unit ($20,000 40,000 units)
Total unit cost
(2) Unit cost at production level of 50,000 units:
Variable cost per unit
Fixed cost per unit ($20,000 50,000 units)
Total unit cost
1.75
1.25
0.50
78,750
70,000
8,750
66,500
67,500
(1,000)
47,500
20,000
$
$
1.25
0.50
1.75
1.25
0.40
1.65
Total cost per unit declines at higher production levels because the fixed manufacturing costs
are allocated over a greater number of units.
Ex. 20.10
a.
Contribution Margin
Unit Sales Price - Variable Costs
=
Ratio
Sales Price
=
Break-Even Sales
=
Volume
=
Ex. 20.11
$45 - $27
= 40%
$45
Fixed Costs
$300,000
= $750,000
40%
b. Sale volume at 20,000 units (20,000 $45) .

Less: Break-even sales volume (part a )
Margin of safety sales volume
a. Selling price per unit

Variable manufacturing costs per unit.
Variable selling and administrative costs per unit
Fixed manufacturing costs ..

Fixed selling and administrative costs ..
Total fixed costs ..
Total fixed costs

Divided by contribution margin per unit
Monthly break-even in units
b. Contribution margin ratio (CM SP) ..

Total fixed costs
Target monthly income
c. Total fixed costs

Monthly break-even sales revenue
Current monthly sales level
Monthly break-even sales revenue
Margin of safety
20
(6)
(2)
12
300,000
600,000
900,000
900,000
$12
75,000
60%
$
$
Divided by contribution margin ratio .

Sales revenue required
900,000
750,000
150,000
$
$
$
$
$
900,000
1,200,000
2,100,000
60%
3,500,000
900,000
60%
1,500,000
2,500,000
(1,500,000)
1,000,000
Ex. 20.11
(continued)
Ex. 20.12
d. Anticipated increase in sales revenue .

Estimated increase in operating income .
$
$
100,000
x 60%
60,000
20,000 units x $7 per unit = $140,000 total fixed costs

Fixed Costs Contribution Margin = Break-Even in Units
$140,000 (SP - $26) = 10,000 units
10,000 SP - $260,000 = $140,000
10,000 SP = $400,000
SP = Selling Price = $40 per unit
Ex. 20.13
a. The lowest bid price required to maintain the current

level of operating income equals total variable cost
per unit:
Direct materials ..
Direct labor .
Variable manufacturing overhead ..
Lowest bid price to maintain current income level
9
8
7
24
b. Contribution Margin Ratio (CM%) = Contribution Margin (CM) Selling

Price (SP)
36% = (SP - $9 - $8 - $7 - .04 SP) SP
0.36 SP = 0.96 SP - $24
$24 = 0.60 SP
SP = Bid Price = $40
Ex. 20.14
a.
Unit selling prices
Unit variable costs
Vests
$120
(60)
Skis
$300
(210)
Ropes
$50
(10)
Unit contribution margins

Divided by unit selling prices
$60
120
$90
300
$40
50
Unit contribution margin ratios
50%
30%
80%
Mix %
20%
70%
10%
Average
=
CM
10%
21%
8%
39%
Vests
Skis
Ropes
CM%
50%
30%
80%
Fixed Costs Average Contribution Ratio (CM%) = Break-Even Sales Revenue

$741,000 39% = $1,900,000
b. (Fixed Costs + Operating Income)/CM% = Sales Revenue Required
($741,000 + $234,000) 39% = $2,500,000
c. To maximize operating income, the marketing manager should pursue a strategy
that shifts the sales mix away from the products with the lowest contribution
margin ratios (vests and skis) to the product with the highest contribution
margin ratio (ropes).
($975,000 - $700,000) (19,250 DLH - $12,375 DLH) = $40 per DLH
Ex. 20.15
a.
b. $975,000 = Monthly Fixed Costs ($40 19,250 DLH)

Monthly Fixed Costs = $975,000 - $770,000 = $205,000
Total 3-Month Cost = ($205,000 3 months) ($40 40,000 DLH)
c.
Total 3-Month Cost = $615,000 $1,600,000 = $2,215,000
SOLUTIONS TO PROBLEMS SET A

PROBLEM 20.1A
IONIC CHARGE
25 Minutes, Easy
a. Required contribution margin per unit

Budgeted operating Income
Fixed costs
Total required contribution margin
Number of units to be produced and sold
Required contribution margin per unit
($1,500,000 60,000 units)
$
$
Required sales price per unit:

Required contribution margin per unit
Variable costs and expenses per unit
Total required unit sales price
b.
25
25
50
75
Break-Even Sales Volume (in units) =
700,000
800,000
1,500,000
60,000
Fixed Costs
Contribution Margin per Unit
$800,000
$25
= 32,000 units
c. Margin of safety at 60,000 units:

Sales volume at 60,000 units ($75 60,000 units)
Less: Break-even sales volume ($75 $32,000 units)
Margin of safety
$
$
4,500,000
2,400,000
2,100,000
PROBLEM 20.1A
IONIC CHARGE (concluded)
d. No. With a unit sales price of $60, the break-even sales volume is 80,000 units:
Unit contribution margin = $60 - $50 variable costs = $10
Break-even sales volume (in units) =
$800,000
$10
= 80,000 units
Unless Ionic Charge has the ability to manufacture 80,000 units (or lower fixed and/or
variable costs), setting the unit sales price at $60 will not enable the company to break-even.
Of course, even if it is able to lower its costs, there must be sufficient demand to support a
sales level of 80,000 units, or more.
25 Minutes, Medium
PROBLEM 20.2A
BLASTER CORPORATION
a. Sales price per unit:

Budgeted costs
Add: Budgeted operating income
Budgeted sales revenue
Sales price per pair ($3,150,000 30,000 pairs)
b. (1) Total fixed costs:
Manufacturing overhead ($720,000 75%)
Selling and adminstrative expenses ($600,000 80%)
Total fixed costs
(2) Variable costs and expenses per pair of boots:
Direct materials
Direct labor
Manufacturing overhead ($24 25%)
Selling and administrative expense ($20 20%)
Total variable costs per pair
(3) Contribution margin per pair of boots:
Sales price per pair
Less: Variable costs per pair [from (2) ]
Contribution margin per pair
(4) Number of pairs required to break even:
Fixed costs [from (1) ]
Contribution margin per pair [from (3) ]
Number of pairs required to break even ($1,020,000 $80)
$
$
$
$
$
$
$
$
$
2,250,000
900,000
3,150,000
105
540,000
480,000
1,020,000
21
10
6
4
41
121
41
80
1,020,000
80
12,750
30 Minutes, Medium
PROBLEM 20.3A
STOP-N-SHOP
a.
PROBLEM 20.3A
STOP-N-SHOP (continued)
The following information is used for parts b. and c. of this problem.
Operating data:
Revenue per parking-space hour
Variable costs per parking-space hour
Fixed costs per year:
Supervisors salary
Wages ($300 52 5)
Rent on lot ($7,250 12)
Fixed maintenance and other expenses ($3,000 12)
Total fixed costs
50 cents
5 cents
$ 24,000
78,000
87,000
36,000
$ 225,000
Capacity = 800 spaces 2,500 hours per year = 2,000,000 parking-space hours per year
Revenue at full capacity = 2,000,000 $0.50 = $1,000,000 per year
PROBLEM 20.3A
STOP-N-SHOP (concluded)
b. Contribution margin ratio:

Parking charge per hour
Less: Variable costs per unit
Contribution margin ratio ($0.45 $0.50)
Break-even sales volume:
Fixed costs:
Rent on lot ($7,250 12)
Supervisor's salary
Wages ($300 52 5)
Fixed maintenance and other costs ($3,000 12)
Total annual fixed costs
Contribution margin ratio (above)
Break-even sales volume ($225,000 0.90)
c. (1) New contribution margin ratio per parking-space hour:
Parking charge per hour
Less: Variable costs ($0.05 + $0.15)
New contribution margin ratio ($0.30 $0.50)
New level of fixed costs:
Rent on lot ($7,250 12)
Supervisors salary
Vacation pay ($300 2 5)
Fixed maintenance and other costs ($3,000 12)
Total fixed costs under new arrangement
(2) Required sales revenue to produce desired operating

income:
Total fixed costs under new arrangement (above)
Add: Target profit
Total contribution margin required
New contribution margin ratio (above)
Sales volume ($450,000 0.60)
$
$
$
$
$
$
$
$
$
0.50
0.05
0.45
90%
87,000
24,000
78,000
36,000
225,000
90%
250,000
0.50
0.20
0.30
60%
87,000
24,000
3,000
36,000
150,000
150,000
300,000
450,000
60%
750,000
30 Minutes, Medium
PROBLEM 20.4A
RAINBOW PAINTS
a. Contribution margin ratio:

Unit sales price
Contribution margin per gallon
Contribution margin ratio ($4 10, the unit sales price)
$
$
Break-even sales volume in dollars:

Fixed costs ($3,160 + $3,640 + $1,200)
Contribution margin ratio (above)
Break-even sales volume in dollars ($8,000 0.4)
$
$
Break-even sales volume in gallons:

Break-even sales volume in dollars (above)
Unit sales price
Break-even sales volume in gal. ($20,000 $10 per gal.)
10
6
4
40%
8,000
40%
20,000
20,000
10
2,000
b. On the following page.
c. Projected operating income at various levels:

Contribution margin per gallon ($10 - $6)
Total contribution margin at indicated volume
Less: Fixed costs
Projected monthly operating income
2,200 Gallons
$
4
$
8,800
8,000
$
800
2,600 Gallons
$
$
$
4
10,400
8,000
2,400
PROBLEM 20.4A
RAINBOW PAINTS (concluded)
b.
PROBLEM 20.5A
SIMON TEGUH
40 Minutes, Strong
a.
Unit contribution margin:

Sales price per unit
Less: Variable costs per unit:
Merchandise
Rental commission
c.
Sales volume to produce operating income equal to 30%

return on investment:
Total monthly fixed costs (part a )
Desired operating income ($45,000 30% 1/12)
Total desired contribution margin
Contribution margin per unit (part a )
Sales volume in units ($3,825 $0.45 per unit)
d.
0.30
0.45
$
$
Break-even volume in dollars:

Break-even volume in units (above)
Unit sales price
Break-even volume in dollars (6,000 units $0.75)
See following page.
0.75
0.25
0.05
Break-even volume in units:

Monthly fixed costs:
Depreciation ($36,000 0.20 1/12)
Wages
Other
Total monthly fixed costs
Contribution margin per unit (above)
Break-even volume in units ($2,700 $0.45)
b.
$
$
$
$
$
600
1,500
600
2,700
0.45
6,000
6,000
0.75
4,500
2,700
1,125
3,825
0.45
8,500
Sales volume in dollars (8,500 units $0.75 per unit)
6,375
New monthly fixed costs [$2,700 + (20 $30)]

New contribution margin per unit:
Unit sales price
Less: Variable costs per unit (only merchandise cost)
New break-even volume in units ($3,300 $0.50 per unit)
3,300
0.50
6,600
0.75
0.25
PROBLEM 20.5A
SIMON TEGUH (concluded)
b.
PROBLEM 20.6A
PRECISION SYSTEMS
30 Minutes, Strong
a.
Variable costs per unit before 15% increase in the cost of

direct labor
Increase in cost of direct labor, 15% of $20
Variable costs and expenses per unit
after 15% increase in the cost of direct labor
60
3
63
$
$
105
100
5
100
63
37
Because the contribution margin ratio of 40% is required,

the variable costs of $63 per unit must equal 60%
of sales price after the wage increase.
New sales price, $63 0.60
Sales price before increase
Required increase in sales price per unit
b.
Unit contribution margin:

Sales price per unit
following 15% increase in direct labor cost (part a )
Sales volume required to maintain current operating income:

Sales Volume

$390,000 + $350,000
$37
c.
= 20,000 units
Current
Capacity
(20,000 Units)
Total contribution margin ($37 per unit)

Less: Fixed costs
Operating income at full capacity
$
$
740,000
390,000
350,000
After
Expansion
(25,000 Units)
$
$
925,000
530,000*
395,000
*$390,000 + additional depreciation per year on new

machinery, $140,000 (20% of $700,000).
35 Minutes, Strong
a.
PROBLEM 20.7A
PERCULA FARMS
Raising clownfish will result in the highest

operating income.
Clownfish
Number of salable fish
sale price
Total revenue
Variable costs:
Eggs
Feedings
Water changes
Heating and lighting
Total variable costs
Fixed costs:
Operating income
b.
$
$
$
$
$
100,000
4
400,000
5,500
78,750
35,000
14,000
133,250
266,750
80,000
186,750
Angelfish
$
$
$
$
$
50,000
10
500,000
9,500
150,000
100,000
20,000
279,500
220,500
80,000
140,500
The most important factors in determining operating income are survival rates, and the
costs of feeding and water changes.
c. and d.
Operating income with new filter material:
Clownfish
sale price
Total revenue
Variable costs:
Eggs
Feedings
Water changes
Fixed costs:
Operating income
$
$
$
$
$
120,000
4
480,000
5,500
84,000
35,000
14,000
138,500
341,500
88,000
253,500
Angelfish
$
$
$
$
$
60,000
10
600,000
9,500
160,000
50,000
20,000
239,500
360,500
88,000
272,500
Percula will earn the highest operating income by purchasing the new filter material and
raising angelfish.
PROBLEM 20.7A
PERCULA FARMS (concluded)
c. and d.
Operating income with new heating and lighting
equipment:
sale price
Total revenue
Variable costs:
Eggs
Feedings
Water changes
Fixed costs:
Operating income
Clownfish
105,000
$
4
$
420,000
Angelfish
55,000
$
10
$
550,000
$
$
$
5,500
78,750
35,000
10,500
129,750
290,250
88,000
202,250
$
$
$
9,500
150,000
100,000
15,000
274,500
275,500
88,000
187,500
PROBLEM 20.8A
35 Minutes, Strong
LIFEFIT PRODUCTS
a.
b.
Contribution margins of product lines:

Shoes ($15 contribution margin $50 sales price)
Shorts ($4 contribution margin $5 sales price)
(1)
(2)
(3)
c.
30%
80%
Average contribution margin ratio:

From shoes (30% contribution margin 80% of sales mix)
From shorts (80% contribution margin 20% of sales mix)
Monthly operating income:
Total sales
Total contribution margin ($1,000,000 40%)
Less: Fixed costs and expenses
Operating income
Monthly break-even sales volume (in dollars):
Fixed costs and expenses
Break-even sales volume ($378,000 40%)
24%
16%
40%
$
$
$
$
$
Assuming new sales mix (shoes, 70%; shorts, 30%)

(1)
Average contribution margin ratio:
From shoes (30% contribution margin 70% of sales)
From shorts (80% contribution margin 30% of sales)
(2)
(3)
Monthly operating income:

Total sales
Total contribution margin ($1,000,000 45%)
Less: Fixed costs and expenses
Operating income
Monthly break-even sales volume (in dollars):
Fixed costs and expenses
Break-even sales volume ($378,000 45%)
1,000,000
40%
400,000
378,000
22,000
378,000
40%
945,000
21%
24%
45%
$
$
$
$
$
1,000,000
45%
450,000
378,000
72,000
378,000
45%
840,000
PROBLEM 20.8A
LIFELIFT PRODUCTS (concluded)
d.
In the new sales mix, increased sales of shorts have replaced some sales of shoes. Shorts
have a much higher contribution margin than shoes. Thus, at a given sales volume, selling
shorts instead of shoes provides more contribution margin, contributes more toward
operating income, and lowers the sales volume required to break even.

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CHAPTER 20

Using a cost formula

Contribution margins and selling prices

High-low method of cost estimation

Solving for missing information

CVP with multiple products

SOLUTIONS TO BRIEF EXERCISES

a. Total variable costs increase approximately in proportion to an increase in the

a. (1) Estimated cost of responding to 150 emergency calls in one

The overall cost of responding to emergency calls is semivariablethat

Contribution margin ratio 60% (100%, minus variable costs of 40%)

Break-Even Sales Volume

Fixed Costs + Target Profit

If contribution margin ratio is 25%, variable costs must be 75% of sales

Unit Sales Price Variable Cost per Unit

Sales Volume (in units)

Fixed Costs + Target Operating Income

Sales Volume (in dollars) =

Fixed Costs + Target Operating Income

a. If variable costs are 60% of sales revenue, the contribution

Break-Even Sales Volume =

; Fixed Costs = $9,600

Fixed Costs + Target Operating Income

a. Break-even sales volume ($60 75,000 units)

b. Break-even sales volume ($60 75,000 units)

($2,400 additional monthly fixed cost, divided by 40%

The following activity bases could be suggested to each of your clients:

McCauley & Pratt, Attorneys at Law

Possible Activity Bases

Fixed Costs/Average Contribution Margin Ratio

$1,600,000 32% = $5,000,000

Fixed Costs + Target Operating Income

($1,600,000 + $3,000,000) 32% = $14,375,000

Thus, the estimated variable element of Bursa Mfg. Co.s manufacturing

a. Unit contribution margin: $90 $38 = $52

Break-Even in Sales = $96,000 32% = $300,000

Fixed Costs + Target Operating Income

Break-Even in Sales = ($96,000 + $16,000) 28% = $400,000

a. Contribution Margin Ratio

Break-Even Dollar Sales

Unit Sales Price - Variable Cost per Unit

Fixed Costs + Target Operating Income

d. Sales volume (60,000 units x $30)

e. Operating Income = Margin of Safety Contribution Margin Ratio

a. Contribution margin per unit:

b. Margin of safety at sales of 45,000 units:

c. Estimated operating loss at sales level of 38,000 units:

b. Sale volume at 20,000 units (20,000 $45) .

a. Selling price per unit

Fixed manufacturing costs ..

Total fixed costs

b. Contribution margin ratio (CM SP) ..

c. Total fixed costs

Divided by contribution margin ratio .

d. Anticipated increase in sales revenue .

20,000 units x $7 per unit = $140,000 total fixed costs

a. The lowest bid price required to maintain the current

b. Contribution Margin Ratio (CM%) = Contribution Margin (CM) Selling

Unit contribution margins

Unit contribution margin ratios

Fixed Costs Average Contribution Ratio (CM%) = Break-Even Sales Revenue

($975,000 - $700,000) (19,250 DLH - $12,375 DLH) = $40 per DLH

b. $975,000 = Monthly Fixed Costs ($40 19,250 DLH)