CHAPTER 20

COST-VOLUME-PROFIT ANALYSIS
OVERVIEW OF BRIEF EXERCISES, EXERCISES, PROBLEMS, AND CRITICAL
THINKING CASES

Brief Learning
Exercises Topic Objectives Skills
B. Ex. 20.1 Cost behavior patterns 20-1 Analysis
B. Ex. 20.2 Cost classifications 20-1 Analysis
B. Ex. 20.3 Using a cost formula 20-1, 20-9 Analysis
20-1, 20-4,
B. Ex. 20.4 Using a cost formula 20-5, 20-9 Analysis
B. Ex. 20.5 Computing required sales volumes 20-420-6 Analysis
B. Ex. 20.6 Computing required sales volumes 20-420-6 Analysis
20-1, 20-4
B. Ex. 20.7 Contribution margins and selling prices 20-6 Analysis
B. Ex. 20.8 Evaluating marketing strategies 20-7 Analysis
B. Ex. 20.9 Selecting an activity base 20-1 Judgment, analysis
B. Ex. 20.10 CVP with multiple products 20-8 Analysis

Learning
Exercises Topic Objectives Skills
20.1 Accounting terminology 20-1, 20-2, Analysis
20-4
20.2 High-low method of cost estimation 20-1, 20-9 Analysis
20.3 Determining required sales volumes 20-4, 20-5 Analysis
20.4 Computing break-even points 20-420-6 Analysis
20.5 Solving for missing information 20-1, 20-4 Analysis
20.6 Ethical implications of CVP 20-520-7 Judgment, communication
20.7 Using CVP 20-420-6 Analysis
20.8 Using CVP 20-420-6 Analysis
20.9 Understanding break-even relationships 20-1, 20-2, Analysis
20-420-6
20.10 Margin of safety 20-4, 20-5 Analysis
20.11 Applying CVP 20-1, 20-2, Analysis
20-420-6
20.12 Solving for missing information 20-5, 20-6 Analysis
20.13 Formulating bid prices using CVP 20-1, 20-4 Analysis
20-6
20.14 CVP with multiple products 20-7, 20-8 Analysis
20.15 Estimating semivariable costs 20-9 Analysis

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 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.

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B. Ex. 20.2 c. Income taxes are not a fixed, variable, or semivariable cost with respect to net
(continued) 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 .. $ 15,000
Variable cost of responding to 150 calls
(150 calls $200 per call) 30,000
Estimated total cost of responding to emergency
calls .. $ 45,000

(2) Average cost per call (150 calls per month):

Estimated total cost of responding to 150
emergency calls per month [part a (1) ] $ 45,000
Number of calls 150
Average cost per call ($45,000 150 calls) . $ 300

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B. Ex. 20.3 b. The overall cost of responding to emergency calls is semivariablethat
(continued) 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. 20.4 a. Contribution margin ratio 60% (100%, minus variable costs of 40%)

Fixed Costs + Target Profit

b. Break-Even Sales Volume
Contribution Margin Ratio

$6,000 + $0

60%

$10,000
c. Fixed element of room service costs $ 6,000
Variable element of room service costs ($20,000 40%) 8,000
Estimated total room service costs in a month
generating $20,000 room service revenue $ 14,000

B. Ex. 20.5 a. 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

Fixed Costs + Target Operating Income

b. Sales Volume (in units)
Unit Contribution Margin

$800,000 + $400,000
=
$15

= 80,000 units

Fixed Costs + Target Operating Income

c. Sales Volume (in dollars) =
Contribution Margin Ratio

$800,000 + $400,000
=
25%

= $4,800,000

[or 80,000 units (part b ) x ($60 unit sales price (part a ) = $4,800,000]

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B. Ex. 20.6 a. If variable costs are 60% of sales revenue, the contribution
margin ratio must be (100% - 60%) = 40%
Fixed Costs
b. Break-Even Sales Volume =
CM ratio
Fixed Costs
$24,000 = ; Fixed Costs = $9,600
40%
Fixed Costs + Target Operating Income
c. Sales Volume =
Contribution Margin Ratio
$9,600 + $36,000
=
40%
= $ 114,000

B. Ex. 20.7 a. Break-even sales volume ($60 75,000 units) $ 4,500,000

Contribution margin ratio . 30%
Fixed costs ($4,500,000 30%) . $ 1,350,000

b. Break-even sales volume ($60 75,000 units) $ 4,500,000

Less: Fixed costs (part a ) 1,350,000
Variable cost at 75,000 units $ 3,150,000
Variable cost per unit ($3,150,000 75,000 units) $ 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 ($2,400 additional monthly fixed cost, divided by 40%
contribution margin)
b. $9,000 [($2,400 additional cost + $1,200 target
operating income) 40%]

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B. Ex. 20.9 The following activity bases could be suggested to each of your clients:

Client Possible Activity Bases

Freemans Retail Floral Shop Sales dollars
Susquehanna Trails Bus Passenger miles driven
Wilson Pump Manufacturers Number of pumps produced
Sales dollars
Machine hours
Direct labor hours
McCauley & Pratt, Attorneys at Law Billable client hours
Number of cases

B. Ex. 20.10 a. Contribution Percentage of Average

Margin Ratio Total Sales = Contribution
Flashlights 60% 20% 12%
Batteries 25% 80% 20%
Average contribution margin ratio 32%

Break-Even
Fixed Costs/Average Contribution Margin Ratio =
Sales Revenue

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

b. Fixed Costs + Target Operating Income

= Target Revenue
Average Contribution Margin Ratio

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

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 SOLUTIONS TO EXERCISES
Ex. 20.1 a. Break-even point
b. Fixed costs
c. Relevant range
d. Contribution margin
e. Unit contribution margin
f. Economies of scale
g. Semivariable costs
h. None (This is not a meaningful measurement; variable costs have already been
deducted in arriving at operating income.)

Ex. 20.2 a. (1) Machine Manufacturing

Hours Overhead
High point 6,000 $320,000
Low point 2,500 180,000
Changes 3,500 $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 . $ 320,000
Variable element of manufacturing overhead at 6,000
machine-hour level (6,000 machine hours
$40 per machine hour) .. 240,000
Fixed element of manufacturing overhead .... $ 80,000
b. Estimated manufacturing overhead at activity level
of 4,500 machine hours:
Fixed element [part a (2) ] .. $ 80,000
Variable cost element ($40 per machine hour
4,500 machine hours) ... 180,000
Total estimated manufacturing overhead . $ 260,000

c. Estimated manufacturing overhead: February March

February:
$80,000 + ($40 per MH 3,200 MH) .... $ 208,000
March:
$80,000 + ($40 per MH 4,900 MH) ..... $ 276,000
Actual manufacturing overhead ..... 224,000 264,000
Amount over (under) estimated .... $ (16,000) $ 12,000

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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. Product 1 Product 2

Contribution margin ratio 60% 20%
Relative sales mix 30% 70%
18% + 14% = 32%

Fixed Costs
Break-Even in Sales =
Contribution Margin Ratio

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

b. Product 1 Product 2
Contribution margin ratio 60% 20%
Relative sales mix 20% 80%
12% + 16% = 28%

Fixed Costs + Target Operating Income

Break-Even in Sales =
Contribution Margin Ratio

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

Ex. 20.5 a. Contribution

Variable Margin Ratio Fixed Operating Units
Sales Costs per Unit Costs Income Sold
(1) $200,000 $120,000 $20 $55,000 $25,000 4,000
(2) 180,000 105,000 15 45,000 30,000 5,000
(3) 600,000 360,000 30 150,000 90,000 8,000

Contribution
b. Variable Margin Ratio Fixed Operating
Sales Costs Ratio (%) Costs Income
(1) $900,000 $720,000 20% $85,000 $95,000
(2) 600,000 360,000 40% 165,000 75,000
(3) 500,000 350,000 30% 90,000 60,000

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Ex. 20.6 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.

Ex. 20.7 Unit Sales Price - Variable Cost per Unit

a. Contribution Margin Ratio =
Unit Sales Price

$30 $6
= = 80%
$30

Break-Even Dollar Sales Fixed Costs + $0

b. =
Volume Contribution Margin Ratio

$360,000
= = $450,000
80%

Dollar Sales Fixed Costs + Target Operating Income

c. =
Volume Contribution Margin Ratio

$360,000 + $440,000
=
80%

= $1,000,000

d. Sales volume (60,000 units x $30) $ 1,800,000

Less: Break-even sales volume (per part b ) 450,000
Margin of safety at 60,000 units $ 1,350,000

e. Operating Income = Margin of Safety Contribution Margin Ratio

= $1,350,000 80% = $1,080,000

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Ex. 20.8

a.

Projected operating Income without either investment:

($1,200,000 0.25) - $80,000 $ 220,000

Ordering
Ad Campaign System
Projected sales revenue $1,260,000 (1) $ 1,200,000
CM ratio 0.25 0.30
Total contribution margin $ 315,000 $ 360,000
minus fixed costs (100,000) (100,000)
Operating income $ 215,000 $ 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
$1,440,000 - $1,200,000
Percentage Increase = = 20%
$1,200,000

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Ex. 20.9

a. Contribution margin per unit:

Unit sale price $ 1.75
Less: Variable cost per unit ($50,000 $40,000 units) 1.25
Contribution margin per unit $ 0.50

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

Sales revenue ($1.75 $45,000 units) $ 78,750
Less: Sales revenue at break-even point
($1.75 $40,000 units) 70,000
Margin of safety $ 8,750

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

Sales revenue ($1.75 38,000 units) $ 66,500
Less: Variable costs ($1.25 38,000 units) $ 47,500
Fixed costs (given) 20,000 67,500
Operating Income (loss) $ (1,000)

d. (1) Unit cost at production level of 40,000 units:

Variable cost per unit $ 1.25
Fixed cost per unit ($20,000 40,000 units) 0.50
Total unit cost $ 1.75

(2) Unit cost at production level of 50,000 units:

Variable cost per unit $ 1.25
Fixed cost per unit ($20,000 50,000 units) 0.40
Total unit cost $ 1.65

Total cost per unit declines at higher production levels because the fixed manufacturing costs
are allocated over a greater number of units.

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Ex. 20.10 a. Contribution Margin Unit Sales Price - Variable Costs
=
Ratio Sales Price

$45 - $27
= = 40%
$45
Break-Even Sales Fixed Costs
=
Volume Contribution Margin Ratio
$300,000
= = $750,000
40%
b. Sale volume at 20,000 units (20,000 $45) . $ 900,000
Less: Break-even sales volume (part a ) 750,000
Margin of safety sales volume $ 150,000

Ex. 20.11 a. Selling price per unit $ 20

Variable manufacturing costs per unit. (6)
Variable selling and administrative costs per unit (2)
Contribution margin per unit $ 12
Fixed manufacturing costs .. $ 300,000
Fixed selling and administrative costs .. 600,000
Total fixed costs .. $ 900,000

Total fixed costs $ 900,000

Divided by contribution margin per unit $12
Monthly break-even in units 75,000
b. Contribution margin ratio (CM SP) .. 60%

Total fixed costs $ 900,000

Target monthly income 1,200,000
$ 2,100,000
Divided by contribution margin ratio . 60%
Sales revenue required $ 3,500,000
c. Total fixed costs $ 900,000
Contribution margin ratio 60%
Monthly break-even sales revenue $ 1,500,000
Current monthly sales level $ 2,500,000
Monthly break-even sales revenue (1,500,000)
Margin of safety $ 1,000,000

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Ex. 20.11 d. Anticipated increase in sales revenue . $ 100,000
(continued) Contribution margin ratio x 60%
Estimated increase in operating income . $ 60,000

Ex. 20.12 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 .. $ 9
Direct labor . 8
Variable manufacturing overhead .. 7
Lowest bid price to maintain current income level $ 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

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Ex. 20.14 a. Vests Skis Ropes
Unit selling prices $120 $300 $50
Unit variable costs (60) (210) (10)

Unit contribution margins $60 $90 $40

Divided by unit selling prices 120 300 50

Unit contribution margin ratios 50% 30% 80%

Average
CM% x Mix % = CM
Vests 50% 20% 10%
Skis 30% 70% 21%
Ropes 80% 10% 8%
Average contribution margin ratio 39%

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).

Ex. 20.15 ($975,000 - $700,000) (19,250 DLH - $12,375 DLH) = $40 per DLH
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

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 SOLUTIONS TO PROBLEMS SET A

25 Minutes, Easy PROBLEM 20.1A

IONIC CHARGE

a. Required contribution margin per unit

Budgeted operating Income $ 700,000
Fixed costs 800,000
Total required contribution margin $ 1,500,000
Number of units to be produced and sold 60,000
Required contribution margin per unit
($1,500,000 60,000 units) $ 25

Required sales price per unit:

Required contribution margin per unit $ 25
Variable costs and expenses per unit 50
Total required unit sales price $ 75

Fixed Costs
b. Break-Even Sales Volume (in units) =
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) $ 4,500,000
Less: Break-even sales volume ($75 $32,000 units) 2,400,000
Margin of safety $ 2,100,000

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 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

$800,000
Break-even sales volume (in units) =
$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.

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25 Minutes, Medium PROBLEM 20.2A
BLASTER CORPORATION

a. Sales price per unit:

Budgeted costs $ 2,250,000
Add: Budgeted operating income 900,000
Budgeted sales revenue $ 3,150,000
Sales price per pair ($3,150,000 30,000 pairs) $ 105

b. (1) Total fixed costs:

Manufacturing overhead ($720,000 75%) $ 540,000
Selling and adminstrative expenses ($600,000 80%) 480,000
Total fixed costs $ 1,020,000

(2) Variable costs and expenses per pair of boots:

Direct materials $ 21
Direct labor 10
Manufacturing overhead ($24 25%) 6
Selling and administrative expense ($20 20%) 4
Total variable costs per pair $ 41

(3) Contribution margin per pair of boots:

Sales price per pair $ 121
Less: Variable costs per pair [from (2) ] 41
Contribution margin per pair $ 80

(4) Number of pairs required to break even:

Fixed costs [from (1) ] $ 1,020,000
Contribution margin per pair [from (3) ] $ 80
Number of pairs required to break even ($1,020,000 $80) 12,750

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30 Minutes, Medium PROBLEM 20.3A
STOP-N-SHOP
a.

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 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 50 cents
Variable costs per parking-space hour 5 cents
Fixed costs per year:
Supervisors salary $ 24,000
Wages ($300 52 5) 78,000
Rent on lot ($7,250 12) 87,000
Fixed maintenance and other expenses ($3,000 12) 36,000
Total fixed costs $ 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

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 PROBLEM 20.3A
STOP-N-SHOP (concluded)

b. Contribution margin ratio:

Parking charge per hour $ 0.50
Less: Variable costs per unit 0.05
Contribution margin per unit $ 0.45
Contribution margin ratio ($0.45 $0.50) 90%

Break-even sales volume:

Fixed costs:
Rent on lot ($7,250 12) $ 87,000
Supervisor's salary 24,000
Wages ($300 52 5) 78,000
Fixed maintenance and other costs ($3,000 12) 36,000
Total annual fixed costs $ 225,000
Contribution margin ratio (above) 90%
Break-even sales volume ($225,000 0.90) $ 250,000

c. (1) New contribution margin ratio per parking-space hour:

Parking charge per hour $ 0.50
Less: Variable costs ($0.05 + $0.15) 0.20
Contribution margin per unit $ 0.30
New contribution margin ratio ($0.30 $0.50) 60%

New level of fixed costs:

Rent on lot ($7,250 12) $ 87,000
Supervisors salary 24,000
Vacation pay ($300 2 5) 3,000
Fixed maintenance and other costs ($3,000 12) 36,000
Total fixed costs under new arrangement $ 150,000

(2) Required sales revenue to produce desired operating

income:
Total fixed costs under new arrangement (above) $ 150,000
Add: Target profit 300,000
Total contribution margin required $ 450,000
New contribution margin ratio (above) 60%
Sales volume ($450,000 0.60) $ 750,000

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30 Minutes, Medium PROBLEM 20.4A
RAINBOW PAINTS

a. Contribution margin ratio:

Unit sales price $ 10
Less: Variable costs per unit 6
Contribution margin per gallon $ 4
Contribution margin ratio ($4 10, the unit sales price) 40%

Break-even sales volume in dollars:

Fixed costs ($3,160 + $3,640 + $1,200) $ 8,000
Contribution margin ratio (above) 40%
Break-even sales volume in dollars ($8,000 0.4) $ 20,000

Break-even sales volume in gallons:

Break-even sales volume in dollars (above) $ 20,000
Unit sales price 10
Break-even sales volume in gal. ($20,000 $10 per gal.) 2,000

b. On the following page.

c. Projected operating income at various levels:

2,200 Gallons 2,600 Gallons
Contribution margin per gallon ($10 - $6) $ 4 $ 4
Total contribution margin at indicated volume $ 8,800 $ 10,400
Less: Fixed costs 8,000 8,000
Projected monthly operating income $ 800 $ 2,400

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 PROBLEM 20.4A
RAINBOW PAINTS (concluded)
b.

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40 Minutes, Strong PROBLEM 20.5A
SIMON TEGUH

a. Unit contribution margin:

Sales price per unit $ 0.75
Less: Variable costs per unit:
Merchandise $ 0.25
Rental commission 0.05 0.30
Unit contribution margin $ 0.45

Break-even volume in units:

Monthly fixed costs:
Depreciation ($36,000 0.20 1/12) $ 600
Wages 1,500
Other 600
Total monthly fixed costs $ 2,700
Contribution margin per unit (above) $ 0.45
Break-even volume in units ($2,700 $0.45) 6,000

Break-even volume in dollars:

Break-even volume in units (above) 6,000
Unit sales price $ 0.75
Break-even volume in dollars (6,000 units $0.75) $ 4,500

b. See following page.

c. Sales volume to produce operating income equal to 30%

return on investment:
Total monthly fixed costs (part a ) $ 2,700
Desired operating income ($45,000 30% 1/12) 1,125
Total desired contribution margin $ 3,825
Contribution margin per unit (part a ) $ 0.45
Sales volume in units ($3,825 $0.45 per unit) 8,500

Sales volume in dollars (8,500 units $0.75 per unit) $ 6,375

d. New monthly fixed costs [$2,700 + (20 $30)] $ 3,300

New contribution margin per unit:
Unit sales price $ 0.75
Less: Variable costs per unit (only merchandise cost) 0.25 $ 0.50
New break-even volume in units ($3,300 $0.50 per unit) 6,600

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 PROBLEM 20.5A
SIMON TEGUH (concluded)
b.

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30 Minutes, Strong PROBLEM 20.6A
PRECISION SYSTEMS

a. Variable costs per unit before 15% increase in the cost of

direct labor $ 60
Increase in cost of direct labor, 15% of $20 3
Variable costs and expenses per unit
after 15% increase in the cost of direct labor $ 63

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 $ 105

Sales price before increase 100
Required increase in sales price per unit $ 5

b. Unit contribution margin:

Sales price per unit $ 100
Less: Variable costs per unit
following 15% increase in direct labor cost (part a ) 63
Unit contribution margin $ 37

Sales volume required to maintain current operating income:

Fixed Costs + Target Operating Income

Sales Volume
Unit Contribution Margin

$390,000 + $350,000
= 20,000 units
$37

c. Current After
Capacity Expansion
(20,000 Units) (25,000 Units)

Total contribution margin ($37 per unit) $ 740,000 $ 925,000

Less: Fixed costs 390,000 530,000*
Operating income at full capacity $ 350,000 $ 395,000

*$390,000 + additional depreciation per year on new

machinery, $140,000 (20% of $700,000).

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35 Minutes, Strong PROBLEM 20.7A
PERCULA FARMS
a. Raising clownfish will result in the highest
operating income.
Clownfish Angelfish

Number of salable fish 100,000 50,000

sale price $ 4 $ 10
Total revenue $ 400,000 $ 500,000

Variable costs:
Eggs $ 5,500 $ 9,500
Feedings 78,750 150,000
Water changes 35,000 100,000
Heating and lighting 14,000 20,000
Total variable costs $ 133,250 $ 279,500
Total contribution margin $ 266,750 $ 220,500
Fixed costs: 80,000 80,000
Operating income $ 186,750 $ 140,500

b. 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 Angelfish

Number of salable fish 120,000 60,000

sale price $ 4 $ 10
Total revenue $ 480,000 $ 600,000

Variable costs:
Eggs $ 5,500 $ 9,500
Feedings 84,000 160,000
Water changes 35,000 50,000
Heating and lighting 14,000 20,000
Total variable costs $ 138,500 $ 239,500
Total contribution margin $ 341,500 $ 360,500
Fixed costs: 88,000 88,000
Operating income $ 253,500 $ 272,500

Percula will earn the highest operating income by purchasing the new filter material and
raising angelfish.

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McGraw-Hill Education.
 PROBLEM 20.7A
PERCULA FARMS (concluded)
c. and d.
Operating income with new heating and lighting
equipment: Clownfish Angelfish
Number of salable fish 105,000 55,000
sale price $ 4 $ 10
Total revenue $ 420,000 $ 550,000

Variable costs:
Eggs $ 5,500 $ 9,500
Feedings 78,750 150,000
Water changes 35,000 100,000
Heating and lighting 10,500 15,000
Total variable costs $ 129,750 $ 274,500
Total contribution margin $ 290,250 $ 275,500
Fixed costs: 88,000 88,000
Operating income $ 202,250 $ 187,500

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35 Minutes, Strong PROBLEM 20.8A
LIFEFIT PRODUCTS

a. Contribution margins of product lines:

Shoes ($15 contribution margin $50 sales price) 30%
Shorts ($4 contribution margin $5 sales price) 80%

b. (1) Average contribution margin ratio:

From shoes (30% contribution margin 80% of sales mix) 24%
From shorts (80% contribution margin 20% of sales mix) 16%
Average contribution margin ratio 40%

(2) Monthly operating income:

Total sales $ 1,000,000
Average contribution margin ratio 40%
Total contribution margin ($1,000,000 40%) $ 400,000
Less: Fixed costs and expenses 378,000
Operating income $ 22,000

(3) Monthly break-even sales volume (in dollars):

Fixed costs and expenses $ 378,000
Average contribution margin ratio 40%
Break-even sales volume ($378,000 40%) $ 945,000

c. Assuming new sales mix (shoes, 70%; shorts, 30%)

(1) Average contribution margin ratio:
From shoes (30% contribution margin 70% of sales) 21%
From shorts (80% contribution margin 30% of sales) 24%
Average contribution margin ratio 45%

(2) Monthly operating income:

Total sales $ 1,000,000
Average contribution margin ratio 45%
Total contribution margin ($1,000,000 45%) $ 450,000
Less: Fixed costs and expenses 378,000
Operating income $ 72,000

(3) Monthly break-even sales volume (in dollars):

Fixed costs and expenses $ 378,000
Average contribution margin ratio 45%
Break-even sales volume ($378,000 45%) $ 840,000

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McGraw-Hill Education.
 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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McGraw-Hill Education.