Basic Cost-Volume Profit (CVP) Analysis

Stratford Company distributes a lighweight lawn chair that sells for $15 per unit. V

Required:
Answer the following independent questions:

1. What is the products CM ratio?

2. Use the CM ratio to determine the break-even point in sales dollars.
3. The company estimates that sales will increase by $45,000 during the coming y
4. Assume that the operating results for last year were as follows:
Sales $360,000
Variable Expenses 144,000
Contribution Margin $216,000

Fixed expenses 180,000

Net Operating Income $ 36,000

a. Compute the degree of operating leverage at the current level

b. The president expects sales to increase by 15% next year. By

5. Refer to the original data. Assume that the company sold 28,000 units last

SOLUTION TO PROBLEM NO.:1:

REQUIREMENT NO.:1:

PRODUCT'S CM RATIO:
Selling price per unit $ 15
less:Variable cost per unit $ 6
CONTRIBUTION PER UNIT $ 9
Contribution margin ratio = Contribution

margin per unit/Selling price per unit 60%

REQUIREMENT NO.:2:

Break-even point in total sales dollars=

Fixed expenses/CM ratio

Fixed expenses $ 180,000

CM ratio 60%
Break-even point in total sales dollars $ 300,000
 REQUIREMENT NO.:3:

Increase in sales $ 45,000

less:Variable cost($45,000/$15)*$6 $ 18,000
Increase in net operating income $ 27,000
REQUIREMENT NO.:4:

a Sales $ 360,000
less:Variable expenses $ 144,000
Contribution Margin $ 216,000
Fixed expenses $ 180,000
Net Operating Income $ 36,000
Degree of Operating Leverage=
Contribution Margin/Net Income 6

b Increase in sales @15% $ 54,000

Increase in variable expenses @15% $ 21,600
INCREASE IN NET OPERATING INCOME $ 32,400
REQUIREMENT NO.:5:

INCOME STATEMENT
BASED ON RESULTS OF LAST YEAR OPERATIONS
a Sales in units 28,000
Selling price per unit $ 15
Sales $ 420,000
less:Variable expenses @ $6 per unit $ 168,000
CONTRIBUTION MARGIN $ 252,000
less:Fixed Expenses $ 180,000
NET OPERATING INCOME $ 72,000

b INCOME STATEMENT
BASED ON CHANGES PROPOSED BY THE SALES MANAGER

Sales in units(increase by 50%) 42000

Selling price (reduced by 10%) $ 13.50
Decrease in Unit contribution margin $ 7.50

Expected total contribution margin with

lower selling price: $ 315,000
Present total contribution margin (28,000
units *9) $ 252,000
INCREMENTAL CONTRIBUTION MARGIN $ 63,000
Change in fixed costs:
Less:Incremental advertising expense $ 70,000
Reduction in net income $ (7,000)

COMPARATIVE INCOME STA

PRESENT 28,000 UNITS
TOTAL PER UNIT
Sales $ 420,000 $ 15
less:Variable expenses $ 168,000 $ 6
Contribution margin $ 252,000 $ 9
less:Fixed expenses $ 180,000
Net Income $ 72,000

Based on the comparative income statements it is evident that the suggestion of

the sales reduction of net income by $7,000. S0, the changes should not be made.
ariable costs are $6 per unit, and fixed costs total $180,000 annually.

ear due to increased demand. By how much should net operating income increase?

of sales.
how much should net operating income increase?

year. The sales manager is convinced that a 10% reduction in the selling price, combined with a $70,0
TEMENTS
EXPECTED 42,000 UNITS
TOTAL PER UNIT DIFFERENCE
$ 567,000 $ 13.50 $ 147,000
$ 252,000 $ 6 $ 84,000
$ 315,000 $ 7.50 $ 63,000
$ 250,000 $ 70,000
$ 65,000 $ (7,000)

manager will result in

00 increase in advertising expenditures, would cause annual sales in units to increase by 50%. Prepar
e two contributing format income statements, one showing the results of last years operations an
erations and one showing what the results of operations would be if these changes were made. Would you recommend that the
ecommend that the company do as the sales manager suggests?