Professional Documents
Culture Documents
Given:
Chi Omega Sorority is planning its annual Riverboat Extravaganza. The Extravaganza committee has
assembled the following expected costs for the event:
Variable Costs:
Dinner (per person)
Favors and programs (per person)
Total variable costs per person
$7
3
$10
Fixed costs:
Band
Tickets and Advertising
Riverboat Rental
Floorshow and Strolling Entertainers
Total fixed costs
$1,500
700
4,800
1,000
$8,000
The committee members would like to charge $30 per person for the evening's activities.
Required:
1. Compute the break-even point for the Extravaganza (in terms of the number of persons
that must attend).
Sales = TVC + TFC + Operating Profit
$30(X) = $10(X) + $8,000 + $0
$20(X) = $8,000
X = $8,000 / $20 =
400 People
$30X = ($30)(400) =
2. Assume that only 250 persons attended the Extravaganza last year. If the same number
attend this year, what price per ticket must be charged to breakeven?
Sales = TVC + TFC + Operating Profit
(X)(250) = $10(250) + $8,000 + $0
(X)(250) = $2,500 + $8,000
(250)(X) = $10,500
X = $10,500 / 250
X=
$42 price per ticket
3. Refer to the original data ($30 ticket price per person). Prepare a CVP graph for the
Extravaganza from zero tickets up to 600 tickets sold.
Graph Data:
Persons
Attending
Total
Estimated
Cost
Total
Fixed
Cost
Total
Sales
Values
Total
Variable
Cost
0
100
200
300
400
500
600
$8,000
$9,000
$10,000
$11,000
$12,000
$13,000
$14,000
$8,000
$8,000
$8,000
$8,000
$8,000
$8,000
$8,000
$0
$3,000
$6,000
$9,000
$12,000
$15,000
$18,000
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
CVP Chart
$20,000
$18,000
f(x) = 30x
$16,000
Cost
$14,000
$12,000
$10,000
$8,000
$6,000
$4,000
$2,000
$0
0
100
200
300
400
Persons Attending
$2,000
$0
0
100
200
300
400
Persons Attending
CVP Chart
Column E
Total Cost
Column F
TFC
400
ending
500
600
700
Column F
TFC
400
ending
500
600
700
CVP Chart
$20,000
$18,000
f(x) = 30x
$16,000
Cost
$14,000
$12,000
$10,000
$8,000
$6,000
Column E
Total Cost
Column F
TFC
$4,000
$2,000
$0
0
100
200
300
400
Persons Attending
500
600
700
Exercise 5-11: B/E Analysis; Target Profit; Margin of Safety; C/M Ratio
Given:
Pringle Company distributes a single product. The company's sales and expenses for a recent month were
Total
$600,000
420,000
$180,000
150,000
$30,000
Sales
Variable expenses
Contribution margin
Fixed expenses
Net operating income
Per Unit
$40
$28
$12
Required:
1. What is the monthly break-even point in units sold and in sales dollars?
Sales = TVC + TFC + Operating Profit
$40(X) = $28(X) + $150,000 +0
$12(X) = $150,000
X = $150,000/$12
X = 12,500
12,500 units
$500,000 Sales dollars
2. Without resorting to computations, what is the total contribution margin at the break-even
point?
At the break-even point, the total contribution must be equal to total fixed costs
3. How many units would have to be sold each month to earn a target profit of $18,000?
Verify your answer by preparing a contribution format income statement at the target
level of sales.
Sales = TVC + TFC + Operating Profit
$40(X) = $28(X) + $150,000 + $18,000
$12(X) = $168,000
X = $168,000/$12
X = 14,000
14,000 units
Pringle Company
Contribution Margin Income Statement
For the Month ended _______________
Sales
Variable Expenses
Contribution Margin
Less: Fixed Expenses
Net Income
14,000
$40
28
$12
$560,000
392,000
$168,000
150,000
$18,000
$168,000
4. Refer to the original data. Compute the company's margin of safety in both dollar and
percentage terms.
Margin of safety = Current or budgeted sales level - breakeven.
16.667%
30.0%
30.0%
60%
$45,000
60%
$27,000
4. Assume that the operating results for last year were as follows:
Sales
Variable expenses
Contribution margin
Fixed expenses
Operating income
$360,000
144,000
$216,000
180,000
$36,000
24,000
0.40
0.60
$45,000
15% X 6 =
90%
Variable expenses
Contribution margin
$36,000 Fixed expenses
90% Operating income
$32,400
5. Refer to the original data. Assume that the company sold 28,000 units last year. The sales
manager is convinced that a 10% reduction in the selling price, combined with a $70,000
increase in advertising expenditures, would cause annual sales in units to increase by 50%.
Prepare two contribution format income statements, one showing the results of last year's
operations and one showing what the results of operations would be if these changes were
made. Would you recommend that the company do as the sales manager suggests?
Stratford Company
Contribution Format Income Statements
Last Year and Pro-forma Based on Proposal
Sales
Variable expenses
Contribution margin
Fixed expenses
Operating income
Volume
Per Unit
$15.00
$6.00
$9.00
Q5
Last Year
28,000
$420,000
168,000
$252,000
180,000
$72,000
Volume
Per Unit
$13.50
$6.00
$7.50
Q5
Projected
42,000
$567,000
$252,000
$315,000
250,000
$65,000
Volume
Per Unit
$15.00
$8.00
$7.00
Proof
Q6
Projected
56,000
$840,000
$448,000
$392,000
320,000
$72,000
No, the changes should not be made because the projected OI is lower than last year's OI.
6. Refer to the original data. Assume again that the company sold 28,000 units last year.
The president feels that it would be unwise to change the selling price. Instead, he wants
to increase the sales commission by $2 per unit. He thinks that this move, combined
with some increase in advertising, would cause annual unit sales to double. By how much
could advertising be increased with profits remaining unchanged? Do not prepare an
income statement; use the incremental analysis approach.
Long Way:
Sales = TVC + TFC + OI
Let X = increase in advertising expense
(28,000 X 2)($15) = (28,000 X 2)($6 + $2) + ($180,000 + $X) + $72,000
(56,000)($15) = (56,000)($8) + ($180,000 + $X) + $72,000
$840,000 = $448,000 +$180,000 + X + $72,000
X = $140,000
Incremental Approach:
Estimated New Total Contribution Margin (28,000 X 2 X ($9 - $2))
Original Total Contribution Margin (28,000 X $9.00)
Increase in TCM assuming TFC remain the same
$392,000
252,000
$140,000
140,000
$414,000
$248,400
165,600
$248,400
180,000
$68,400
140,000
$248,400
$32,400
$160,000
200,000
140,000
$500,000
0.32
0.40
0.28
Required:
1. Prepare a contribution format income statement for the month based on actual sales data.
Product
Percentage of total sales
Sales
Variable expenses
Contribution margin
Fixed expenses
Net operating income
Sinks
32%
$160,000
48,000
$112,000
Mirrors
Vanities
40%
28%
100% $200,000
100% $140,000
30% 160,000
80%
77,000
70% $40,000
20% $63,000
2. Compute the break-even point in sales dollars for the month, based on your actual data.
Break-even point in sales dollars = Fixed expenses / CM ratio = $223,600 / .43 = $520,000
3. Considering the fact that the company met its $500,000 sales budget for the month, the president is shocked at
the results shown on your income statement in (1) above. Prepare a brief memo for the president explaining
why both the operating results and the break-even point in sales dollars are different from what was budgeted.
Although the company met its sales budget of $500,000 for the month, the mix of products sold changed significan
that budgeted. This change in sales mix is the reason that the budgeted NOI was not met, and that BE sales incre
As shown by the data in the table below, sales shifted away from Sinks, which provides the greatest CM per dollar
of sales, and shifted strongly toward Mirrors, which provides the least CM per dollar of sales. Consequently, altho
the company met its budgeted level of total sales, these sales provided considerably less CM than we had planned
with a resulting decrease in NOI.
The company's overall CM ratio decreased to 43%, from a planned level of 52%. With less average CM per dollar o
a greater level of sales had to be achieved to provide sufficient CM to cover fixed costs. Hence the rise in BE sale
Product
Sinks
Mirrors
Vanities
Total
Actual
Budgeted
Sales
Sales
$160,000 $240,000
200,000 $100,000
140,000 $160,000
$500,000 $500,000
Actual
Mix
32%
40%
28%
100%
Budgeted Budgeted
Mix
CM%
48%
70%
20%
20%
32%
45%
100%
52%
Actual
CM%
70%
20%
45%
43%
oduct
Vanities
32%
Total
100%
100% $500,000
55% 240,000
45% $260,000
223,600
$36,400
100%
48%
52%
$430,000
oduct
Vanities
28%
Total
100%
100% $500,000
55% 285,000
45% $215,000
223,600
($8,600)
100%
57%
43%
$520,000
43%
Sales
$500,000
$500,000
$500,000
Mix
32%
40%
28%
CM%
70%
20%
45%
TCM
TFC
NOI
TCM
$112,000
$40,000
$63,000
$215,000
223,600
($8,600)