PCB Corporation has fixed costs of $480,000. It has a unit selling price of $6, unit variable cost of $4.

50 and target
net income of $1,500,000. Compute required sales in units to achieve its targeted net income.

1320000 units

contribution margin per unit is $1.50 ($6.00 - $4.50)Required sales in units =

($480,000 + $1,500,000) ÷ $1.50 = 1,320,000

Mozena Corporation manufactures a single product. Monthly production costs incurred in the manufacturing
process are shown below for the production of 3,000 units. The utilities and maintenance costs are mixed
costs. The fixed portions of these costs are $300 and $200, respectively.

Production in Units 3,000

Production Costs

Direct Materials $7,500

Direct labor 15,000
Utilities 1,800
Property taxes 1,000
Indirect labor 4,500
Supervisory salaries 1,800
Maintenance 1,100
Depreciation 2,400

Correct.

Identify the above costs as variable, fixed, or mixed. Put an "X" in the column which applies and the letter
"O" if it does not. (Please put an answer in each field, do not leave any fields blank.)

Fixed Variable Mixed

Direct Materials x
o o
 x
Direct labor
o o

o
Utilities
o x

o
Property taxes
x o

o
Indirect labor
x o

o
Supervisory salaries
x o

o
Maintenance
o x

o
Depreciation
x o
 Correct.

Calculate the expected costs when production is 5,000 units.

$ 51700

$1,000 + $4,500 + $1,800 + $2,400 + $300 +

Fixed costs =
$200

= $10,200

Variable costs to produce 3,000 units = $7,500 + $15,000

= 22,500

Variable cost per unit = $22,500 ÷ 3,000 units

= $7.5 per unit

Variable cost portion of mixed cost = Total cost - Fixed portion

Utilities:

Variable cost to produce 3,000 units = $1,800 - $300

= $1,500

Variable cost per unit = $1,500 ÷ 3,000 units

= $.50 per unit

Maintenance:

Variable cost to produce 3,000 units = $1,100 - $200

= $900

Variable cost per unit = $900 ÷ 3,000 units

 = $.30 per unit

Cost to produce 5,000 units = (Variable costs per unit × 5,000 units) + Fixed cost

= (($7.5 + $.50 + $.30) × 5,000) + $10,200

= $41,500 + $10,200

= $51,700

Grissom Company estimates that variable costs will be 60% of sales, and fixed costs will total $813,600. The
selling price of the product is $8.

Correct.

Compute the break-even point in (1) units and (2) dollars. (Round answers to 0 decimal places, e.g.
205,000.)

Breakeven sales in units

254250 units

Breakeven sales in dollars

$ 2034000
 $8 X = $4.80 X + $813,600

$3.20 X = $813,600

X = 254,250 units

Breakeven sales in dollars:

X = .60 X + $813,600

0.40 X = $813,600

X = $2,034,000

Compute the margin of safety in (1) dollars and (2) as a ratio, assuming actual sales are $3.33 million. (Round
answers to 0 decimal places, e.g. 205,000.)

Margin of safety in dollars

$ 1296000

Margin of safety ratio

39 %

Margin of safety in dollars: $3,330,000 - $2,034,000 = $1,296,000

Margin of safety ratio: $1,296,000 ÷ $3,330,000 = 39%

Poole Corporation has collected the following information after its first year of sales. Net sales were
$1,600,000 on 100,000 units; selling expenses $240,000 (40% variable and 60% fixed); direct materials
$511,000; direct labor $285,000; administrative expenses $280,000 (20% variable and 80% fixed);
manufacturing overhead $360,000 (70% variable and 30% fixed). Top management has asked you to do a
CVP analysis so that it can make plans for the coming year. It has projected that unit sales will increase by
10% next year.

Correct.
 Compute (1) the contribution margin for the current year and the projected year, and (2) the fixed costs for
the current year. (Assume that fixed costs will remain the same in the projected year.)

Contribution margin-Current year

$ 400000

Contribution margin-Projected year

$ 440000

Fixed costs-Current year $ 476000

Current Year

Net sales $1,600,000

Variable costs

Direct materials 511,000

Direct labor 285,000

Manufacturing overhead ($360,000 × .70) 252,000

Selling expenses ($240,000 × ..40) 96,000

Administrative expenses ($280,000 × .20) 56,000

1,200,000
Total variable costs
$400,000
Contribution margin

Current Year Projected Year

Sales $1,600,000 × 1.1 $1,760,000

Variable costs

Direct materials 511,000 × 1.1 562,100

Direct labor 285,000 × 1.1 313,500

Manufacturing overhead 252,000 × 1.1 277,200

Selling expenses 96,000 × 1.1 105,600

 Administrative expenses 56,000 61,600
× 1.1
1,200,000 1,320,000
Total variable costs × 1.1
$400,000 $440,000
Contribution margin × 1.1

Fixed Costs Current Year Projected Year

Manufacturing overhead ($360,000 × .30) $108,000 $108,000

Selling expenses ($240,000 × ..60) 144,000 144,000

Administrative expenses ($280,000 × .80) 224,000 224,000

$476,000 $476,000
Total fixed costs

Compute the break-even point in units and sales dollars for the current year.

Breakeven point (units)

119000 units

Breakeven point (dollars)

$ 1904000

Unit selling price = $1,600,000 ÷ 100,000 = $16

Unit variable cost = $1,200,000 ÷ 100,000 = $12
Unit contribution margin = $16 - $12 = $4
Contribution margin ratio = $4 ÷ $16 = .25

Breakeven points in units = Fixed costs ÷ Unit contribution margin

119,000 units = $476,000 ÷ $4

Breakeven point in dollars = Fixed costs ÷ Contribution margin ratio

$1,904,000 = $476,000 ÷ .25

The company has a target net income of $310,000. What is the required sales in dollars for the company to meet its
target?
$ 3144000

Sales dollars required (Fixed costs + Target net

= ÷ Contribution margin ratio
for target net income income)

$3,144,000 = ($476,000 + $310,000) ÷ .25

If the company meets its target net income number, by what percentage could its sales fall before it is operating at a
loss? That is, what is its margin of safety ratio? (Round answer to 1 decimal place, e.g. 12.5.)

39.4 %

Margin of safety ratio=(Expected sales - Breakeven sales)÷Expected

sales 39.4%=(3,144,000 - $1,904,000)÷$3,144,000
If volume increases, all costs will increase.

True

False

When applying the high-low method, the variable cost element of a mixed cost is calculated before the fixed cost
element.
Tru
e
 Fals
e

Which of the following is not a fixed cost?

Lease charge

Depreciation

Property taxes

Direct materials

Month Miles Total Cost

January 80,000 $ 96,000

February 50,000 80,000

March 70,000 94,000

April 90,000 130,000

In applying the high-low method, what is the fixed cost?

$17,500
 $14,000

$50,000

$36,000

The break-even point is where

total sales equal total variable costs.

contribution margin equals total fixed costs.

total variable costs equal total fixed costs.

total sales equal total fixed costs.

Fixed costs are $1,500,000 and the contribution margin per unit is $150. What is the break-even point?
$10,000,000

3,750 units

10,000 units
 $3,750,000

Sonoma Winery has fixed costs of $10,000 per year. Its warehouse sells wine with variable costs of 80% of its unit
selling price. How much in sales does Sonoma need to break even per year?
$2,000

$12,500

$50,000

$8,000

P18-2A

Utech Company bottles and distributes Livit, a diet soft drink. The beverage is sold for 50 cents per 16-ounce
bottle to retailers, who charge customers 75 cents per bottle. For the year 2010, management estimates the
following revenues and costs.

$1,800,00 Selling expenses-

Net sales $70,000
0 variable

Selling expenses-
Direct materials 430,000 65,000
fixed

Administrative
Direct labor 352,000 20,000
expenses-variable

Administrative
Manufacturing overhead-variable 316,000 60,000
expenses-fixed

Manufacturing overhead-fixed 283,000

 Correct.

Prepare a CVP income statement for 2010 based on management's estimates. (List multiple entries from
largest to smallest amounts, e.g. 10, 5, 1.)

UTECH COMPANY

CVP Income Statement (Estimated)

For the Year Ending December 31, 2010

Net sales $ 1,800,000

Variable expenses
$ 1098000

Cost of goods sold

70,000

Selling expenses
20,000

Administrative expenses

Total variable expenses 1,188,000

Contribution margin
612,000
Fixed expenses
283,000

Cost of goods sold

65,000
Selling expenses
 60,000

Administrative expenses

Total fixed expenses 408,000

Net income $ 204,000

Cost of goods sold = Direct materials $430,000 + direct labor $352,000 +

variable manufacturing overhead $316,000 = $1,098,000.
Compute the break-even point in (1) units and (2) dollars.

Breakeven point in units

2,400,000 units

Breakeven point in dollars $ 1,200,000

Variable costs = 66% of sales ($1,188,000 ÷ $1,800,000) or $.33 per bottle ($.50 × 66%). Total fixed costs =
$408,000

(1) $.50X = $.33X + $408,000

$.17X = $408,000
X = 2,400,000 units
(2) 2,400,000 × $.50 = $1,200,000

Compute the contribution margin ratio and the margin of safety ratio. (Round answers to 0 decimal places, e.g. 30.)

Contribution margin ratio

34 %

Margin of safety ratio

33 %
Contribution margin ratio=($.50 - $.33) ÷ $.50 =34% Margin of safety
ratio=($1,800,000 - $1,200,000) ÷ $1,800,000 =33%
Required sales

$408,000 + $238,000
X = = $1,900,000
.34