Chapter 6

EXERGISE 6€ ComFrte the Level of Sales Required to Attain a Target Profit [LO6-
Lin Corporation has a single pioduct rvhose selling price is $120 and whose valiable cost is $80 per
unit. The company's monthl) fixed expense is $50.000.
Rquired:
I. Using the equation nrethod. solve tbr the unii saies thar are required to earn a target prolir o1'
$lO,mo.
2- Using the contribution margin approach. solve for the dollar sales that lre required to earn a tar-
get profit of $l5.SO.

EXERCISE 5-7 Compute the Margin of Safety .i-l,lj

Motander Corporation is a distritutor of a sun umtrella used at resort hotels. Data .on".rning ,h. n"*,
month's budget appear below:

Selling price $30 per unil

Variable expense. $20 per unit
Fixed expense.
Unit sales

Requbed:
l. Compute the company's margin of safety
.-?r-€ornBute tbe cornpany's margin of safety' us a percentage of its sales.
-\i
'tEXERCISE 6-8 Cith$rte and Use the Degree of Operating Leverage iLOSl
t.Ft gb.fg Comp26y installs lawn sod in home yards. The company's nrost recent lnonthly contribution
tonngylggne statement tbl lows:

Amount Percont of Sal€s

Sales . . $80,000 100%

Variable expenses .. . .. .... 32,000 40v"
Contribution margin . . .. 48,000 : 60'/o
Fixed expenses 38,OOO
Net operaling income. . . $10,000

Requred:
l. Compute the company's degree of operating levera*te.
2. Usin-e the degree of operating leverage. estimate the inrpact on net income of a -5rlr inclease in
sales.
3. Verify your estimate from part (2) above by constructing a new contribution format income state-
I
a.
i\_
,.----m€ot^Ior th€ company a$suming a 57c increase in sales.

iEXERC|SE5.9Q9nputethe8reak.EvenPointforaMu|tiproductcomp3nyiLo9]
Lucido Prod-gct! markets two computer garnes: Claimjumper and Makeover. A contribution l'ormat
ini-ome statdment for.a recent month forthe two games appears below:

Claimiumper Makeover Total

Sales . . $30,000 $70,000 $100,000

l-ess variable expsnses 20,000 50,000 70,000
Conlribution margin . $10,000 $20,000 30,000
Lass fixed expenses 24,000
N6t operating income . $ 6,000

Requked:-

F
l. Compute the overall contribution niargin (CM) ratio for rhe company,
?. Compute the overall break-even point for the company in sales doliars.
l 3- Verify tbc overall break-eve n point for the gompany by constructin-g a contribution format income
statement showing the appropriate levels of sales for the trvo products.
 Cosfvolume-Profi t Relationshios 26!.

EXERCISE 6-tO Break-Even Anatysis; Target profi! Margin of iafety; CM Ratio tLOl, LO3, LOS, LO€, LOTI
€0 per Menlo Company manufactures and sells a single product. The company-'s sales and .*p.n.s., tbilu.ri
quarter follorv:

'ofrr of
Total Fer Unit

Sales . $450,000 $30

Ia lar- Lessvariableexpenses .. : :... 180,000 12
Contribution margin . 270,000 $18
Less fixed expenses 216,000 :
€ next Net operating income . $ s4,000

f*Y;r, is the quarterly break-even poinr iB unirs sold and in sales dollars?
s/ithout r€sorting to computations, ri,hat is the total contribution margin at the break-even point?
?
3. *:[ow many units would quarter
have to be sold each to earn a targer profit of $90,000? Use the
contributioh margin method- Verify your answer by preparing a contribution tbrnrat income stare-
Bnenl at the larget sarles level.
4. .Refer to the original data. Compute the company's margin of saf'etv in borh dollar and percentage
terms.

rution

The comnittee mernbers would like to'charge $.35 per person for the evening's activities.
Required:
| . Compute rhe break-even point for the dinner-dance ( in rerms of rhe number of persons who nrust
aflend).
5e tn
2. Assume that last yer only 30{) persons artended the dinner-dance. If the same number atrend rhis
year. what price per ticket must be charged in order to break even?
ilate-
3. to the original data ($35 ticket prii" p., p..ron). Prepare a CVP graph for the dinner-dance
$qfer
fi-om a zero level of activity up to 60O tickets sold. Number of persons should be placed on rhe
irorizontal {X) axis, and dollars should be placed on the vertical (/J axis.
fmal
EXERCISE &12 Using a Contribution Format tncome Statement ILOI, LO4l
Miller company's nrosr recent contribution formal income statement is shown below:

Total . Per Unii

Sales (20,0OO Units). . $300,000 $1s.oo

VariaHe expenses -. . . . . .
i. - 180,000 9.00
Conlribtrtion ma.gin . . . . . .:. . 120,000 $6.00
Fixedexpenses..... 70,000 :
Nel operating income. $ so,ooo
Required:
Prepare 'r new contribtttion format inconre statemcnr under each of the tbllowing conditions (consider.
each case independently):
f. The sales volume incriascs bv l5c/c.
2. The selling price.decreases Uy Si:Stl per unit. and the sales volume increase sbv 25%.
 C-hapter 6

3. The selling price increases by $l'50 per unit, fixed expenses increase by
$20.000. and the iales
\,:ii"1 volumc decreases by SZc.
+- The selling price inireases by l2vc, variable expenses increase by 60 cents per
unit, and rhe sales
.,:t-=v, Yolumcdecleases bY 107r,.
i EX€RCISE S-13 fdisifng Data; Basic CVp Concepts ii_:,r.l.. ;,;,-:
Fill in th-e-missingiamounts- irl each of the eighicase situations below.
-' othea
, Each case is independent of.the
(g!g:one wav to find the missing im6untr *;i;;; ;;.pill'*n*riuurion
income srare-
ment for each c:rse, enter the known data, and then cornpute ,lr.
,iirii"g it.**.;
a. Assume that onry one product is being sold in each oi the far; i"fi;;g case siruarion.r:

Contribution i'let Operating

Unils ' Variable ' Margin Fixed Income
Sotd: r 'Sales
l
Case .
Expenses ., per Unit r
Expenses iLo;s)
t .._
"... rs,o00 $i80,000 $120,000 ? $50,000 ?
2 . -.-... ? $100,000 ? $to $s2,o0o $8,OOO
3....... 10,000 ? $70,000 $13 ? $12,ooo
4.....-. 6,000 $300,000 ?? $100,000 $(1o,0oo)

b' Assume that rnore than one product is being sold in each
of the four following case situarions:

Average
Contribution Net Operating
r.,'r', : r Variable , Ma€in : ,.:' Fixed ' Inconie l
Case Sales :, Expenses (percant) :' Expenses
1 ....... $500,000 ? 20% ? $7,000
; 2. 9400,000 9260,000 ? $100,000 ?
3....-..
-1 "- "-,1 ? ? 60% $130,000 $20,000
-t
$600,000 $420,000 ? ? $(5,000)
-\
EXERCISE o-r4 !_reet-Eyen profit Analysis
and Target profit -,..{.i.
. -E:{utsj: 5-14 B-fee*€yen ll-cr:, t05, i_*_11
{indon
Elnaonuomqpny rs
Compgn! is the exclusive distributor for an automotive nr .t,., that
auromnr,ro product ih, sells for $40 per uhitand
hls=a"CM-*r6o of 3O%. The company,s fixed expenses are $ 1g0,000 per year.
Required:
l. What are the variable expenses per unit?
2. Using the eguation m€thod:
a. What is the break-even point in units and sales dollars?
b' What sates level in units and in sales dollars is required to eam an annual profit of$60,000?
c' .Assum€ that by using a rnore efficient.shipper, ti,..o.np"ny is able to riduce it, var-iable
exPenses by $4 per unit' what is the compiny's ne* bieai-euen
point in units and sales
dollars?
3. Repeat (2) above using the contribution margin method.

ES.RCISE G15 Operating tbverage t104, LOS]

Magic Realm, Inc-, hai developed a new fanrasy board game. The compady
sold 15,000 games last
year at a selling pricc of $20 per game. Fixcd costs assoclated with
the game rotal $ | g2,00d per year.
and variable cosls are $6 per game- Production of the game is entrusted to printing
a contractor. vari-
able cosls consist mostly.of payments to this contracto-r.
Rewired:
-};;P"*
i' a contribution fotmat inconre statement for rhe game last year
and compure the degree of
operating leverage-
2' Managementisconfidentthatthecompanycansell l8.000gamcsnextyeai(anincreaseof3.000
games, or 209., over last year). Compure;
.t- The expected percentage increase in net operating income for next
).ear.
h' The expected total.dollar net operating incomelor next year.
tDo not prepare an income
slatement; us€ the degree of operating leverage to cofirpute you, unr*.r.j
 CostVolum+Proft Relationships
a6=?

/'exenclsE e-16 lleak-Even and Ta!.get pro6t Analysis ;11--4 Lu; ;-t.:

GG
lre saXes
K: P$S.::l':,11::?:*1-Tlnrnelrpne
'seulfs{EgP/r
of rhe company's produ*s, a small carnp srove,
unit. l'ariable .*p.-ti"r *. $32 per u*ur. uniiJ.i :;;;;.;.;
fre sales stove total $lO8.0Sper rnonth. "*""i."a"iiiii",'J;
Required:
Compute the break-even point in numberof sto,-es and in rotal sares
1'
2' doilars.
If the r"ariabls exPerises p€r stove incteare as a percenrage of the selling price,
ar of the will it result in a
higher cr a lower.break-even poinr? why? (Assume that tie fixed .up"nr"-rL#n "
!9 Stat€-
3' At preseJrt' rhe company is selling 8,Qoo sioves per monrh. The sales ffi;;il.;"
*u"ug"i i, convinced ahat a
109'reduction in the selling price woutd resuir in a 25zc increase
in mJrrhly,"r", oir,nr=*.
Prepare two contrlbution incorne staternents. one under preseni
oper.ating and one as
operations *'ould appear after the ppposed changes. show uottr "onai,ion.,
r$ng statemenLs.
iorai .;J;;;
unit data on your
4- Refer to the data in (3) above. Ho*' ma-ny stoves would have to
. yield a minimum net operaring income of S35,O00 pcr monrh? - I - new
be sold at the
' selling price to

EXERCISE 6- t7 $llultiproduct Break.Evei? Aflalysis i.-rlii..

jsns:
9l:lg1po
Flight
Sporrs Corporation is the distributor in the Ptrilippines of rwo premiurn
Dyrramic and rhe sure shot. Monthty sales and the contiibution *urgin
uct.s follorv:

Product
Flight Dynamiol:
,uri*

S|:|ro
golf balls-rhe
for the two prod-

Shot ,' ',fotal

UH
,

Sa|es........-. Pts0,o00 P250,000 P4Oo,Ooo

CM ntio 80% strt" ?

Fixed expense.s total Pl83'750 per month. (The currency in the philippines
is rhe peso, which is
denoted by P-)
Required:
t ' Prepare a contribution format incorne statement frrr the company
'to as a wholc. carry computations
one decimal place.
7. Compute rhe break-even point for the company based on the cunent sales niir.
3-- If sales in*ease by pioO.Ooo a month, uy how much wourd you ;;;;;;;p.raring income ro
increase? What are your assumptions?

nitand
Problerns
FROALfM 5-tE Baiic CVp Anatysis
i!-Ci, LLaS. iO4, tg5. L,:.tl
Feather Friends' Inc-, distributes a high-qu:rliiy wooden
birdhouse rhat selis for $2o per unit, Variable
ffistn are $8 per unit, and fixed cssts total $ I gb,000 per year.
effe*f
o,oos? &quired:
ariable .A.nswer the lbllowing independent questions:
3 sales t" What is the product's CM ratio?
Usd the CM ratio to determine the break-even poinr in
7"
3"
srles dollirs.
Due to an increasc in demand, the company estimates that
sales will increase by $75,000 during
the next year' By how mlch should net opeiating income increase 1or net loss decrease)
that fixed costs do not change? assuming

es las{ 4- . Assume that the operating results for last year were:
r yea5.
:. Vari- Sales . . $400,000
Variabte expenses 160,000
Contribution margin . 240,000
Jree of, Fixedexpenses . ..... ....... 180,00c

3.0$0
Net operating income. $60,000

a. of operaring leverage ar rhe cunenr level of sales.

b. S:ry1".T._Oegree
r ne presrdent exp€cts
lcome sare-s to increase by 20vc next year. By what percenta8e
should net
operati ng incorne increase?
 ' Cost-Volume-ProntReiationships 267

;!ons entirely ia
le, urhat will be
tt- lVhat is the store's degree of cperating teverage l
ou racommend
lt- Angie is confident that with a more inte*se sules et'turt and rvith a rnore creative advertising
prograrri she can increase s:rles by 5O'6 nexr year, What would be the expected pel'centilge
increlse in net operating incorne? Use the de-tlee of opelating leveta-ee to con'rpr.rte vour
. atns..vtr.
qPilrnal sellin-s
S24 Break-Erec and Target Profit Anabrcis iLO5. LO6l

[EH
each $2 reducl PROHJFM
e expenses aie
The Shirt lvvorks sells a large variety of tee shi*s and sweatshit'ts. Steve Hooper. the owner. is thinkine
rt the $7O sell_
ofexp;inding his sales by hiring local high school students. on a comn:ission basis, to sell sweatshilts
bearing the naine and rnascot of the local high school.
T-:nese sq,eatshirts rrould hale to be ordered frorn the manuf'acluler six weeks in advance. and
rhey could noi be returned because of the unique printing required. The sweatshirts rvould cosr
Mr. l{ooper 58 each with a rninimum order of 75 sweatshirts. Any additional sweatshifts would have
to be *ndered in incrsr-rrents of 75.
the company Since Mr'. F{ooper's plan would not requirc any additicnal tacilities, the only costs associated
mpaay gener- ll'ith tlrc project rvouid be tlre costs of the sweatshlrts and the costs of lhe sales commissions. The sell-
ing pr:lce of thc sweatshifis wculd be $ | 3.5O each. Mr. Hooper would pay the studen(s a conrmission
ice yer deter- of $ I -5O for each shirt .sold.
is this break-
Required:
l. Ttr make the projsct lvorth$'hile. Mr. Hooper would requile a $1.200 profit fbr the lirst thfee
f ;orrronths of the ventrire. What level of sales in units and in dollars would be required to reach this
, LosE --:J -\.
r^'!./ targer net o perat i n,s i ncome? S how .al I com Puta tion s.
pecializes in
ply r&e prin- p.'J Assume that rhe venture is uodertaken and an order is placed for'75 srveatshirts. What would be
Llr. Hooper's trreak-even point in units and in seles dollarsl Show computations and explain the
Ps. As a first. i ; behind your answet
"-7l--finsoning
{'\
LPRO&€['i S25lgales Mix; Sreak{ven fuialysis; Margin of Safety [147, Lo9]
)slgncl Novelti*(i tn..- ol Palau makes two products. Hawaiian Fantasy ancl Tlhitirn Joy. Plesent rev-
enu-d. co'sri-nd salei data for the two pil]dilcts follrlw:

ri, :Iahitian
Ha'/.Ja:ial.

' :r:
Fanlasy,.,,,,, rfoy 1
': .r:
Selling price per unit. $15 $100
Variable expenses per unit. $9 S20
Numbbr ot units sold monlhlv" ?0,000 5,000

present in
Fixed expenses total $;i75.80O per year. The Repuirlic of Palau uses the U.S. dollar as its currency.
ndals sold
Reguried:
md effort. .l - A.ssuming the salss mix given above, do the tbllowing:
!:- Prepare a contribution format income statemeni showing both dollar and percent columns
le- Ir witl tbr each ploduct and.for the company a-s a whole.
;:osition-
tt Cornpule tlte trreak-even point iir doliars fol the company as a *hoie.and the malgin of
r. Should safety in troth dollam atrd per,cent.
emeal) 2. The cornpany has developeci a nelv product to tre called Sanrtian Delight. Assunle that lhe cotn-
dals and p;rny could sell IO.OOO units at $45 each. The valiable expenses would be $36 each. The coru-
pany's fixed expenSes would not change.
a- . Prepare anothe!'contribution folmat income staternent. inclutiing sales of the Sarnoan Delight
(sales of the other two producLs lvould not change;.
&- Compute the conrpany's new bieak-even poirit in dollars and the new margin of sattty in
both dollars anci percent.
ii
;3 The president ofthe company exanrines your tigtrres and says, "Theie's something strange here.
!l Gur fixed costs haven't changed and yau show greater total contribution niargin if rve adrl the
r:erv prodtict, but you also show our break-even poinl going up. With
ii -ureaier contribution margin.
tj t{re break-ever: peint should *so Co'*'n, not up- You've ntade a nristake scmewhele.'l Explain to the
ll
i: president rvhai has happened.

li