Weyg - Man - 8e - Ch06 (Cost-Volume-Profit Analysis - Additional Issues) Accessibility Design

Managerial Accounting
Eighth Edition
Weygandt Kimmel Kieso
Chapter 6
Cost-Volume-Profit Analysis: Additional
Issues
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Chapter Outline
Learning Objectives
LO 1 Apply basic CVP concepts.
LO 2 Explain the term sales mix and its effects on break-
even sales.
LO 3 Determine sales mix when a company has limited
resources.
LO 4 Indicate how operating leverage affects profitability.
Copyright ©2018 John Wiley & Sons, Inc. 2

Basic CVP Concepts
LEARNING OBJECTIVE 1
Apply basic CVP concepts.
CVP analysis:
• Study of the effects of changes in costs and volume on a
company’s profit.
• Important to profit planning.
• Critical in management decisions such as:
o determining product mix,
o maximizing use of production facilities,
o setting selling prices.
LO 1 Copyright ©2018 John Wiley & Sons, Inc. 3

Basic CVP Concepts
Basic Concepts
• Management often wants the information reported in a special format income statement.
• CVP income statement is for internal use only:
o Costs and expenses classified as fixed or variable.
o Reports contribution margin as a total amount and on a per unit basis.

Basic CVP Concepts
Basic CVP income statement

Basic CVP Concepts
Detailed CVP income statement

Break-Even Analysis
Break-even point in units
Vargo Electronic’s CVP income statement (Ill. 6.2) shows

that total contribution margin is $320,000, and the
company’s contribution margin per unit is $200.
Contribution margin can also be expressed as the
contribution margin ratio which is 40% ($200 ÷ $500).
Fixed Costs ÷ Unit Contribution = Break - Even
Margin Point in Units
$200, 000 ÷ $200 = 1, 000 units

Break-Even Analysis
Break-even point in dollars
Vargo Electronic’s CVP income statement (Ill. 6.2) shows
that total contribution margin is $320,000, and the
company’s contribution margin per unit is $200.
Contribution margin can also be expressed as the
contribution margin ratio which is 40% ($200 ÷ $500).
Ratio Point in Dollars
$200, 000 ÷ .40 = $500, 000

Target Net Income
Target net income in units
Once a company achieves break-even sales, a sales goal

can be set that will result in a target net income
Illustration: Assuming Vargo’s target net income is
$250,000, compute required sales in units to achieve target
net income :
(Fixed Costs ÷ Unit Contribution = Sales in Units
+ Target Net Income) Margin
($200, 000 + $250, 000) ÷ $200 = 2, 250 units

Target Net Income
Target net income in dollars
Once a company achieves break-even sales, a sales goal
can be set that will result in a target net income
Illustration: The contribution margin ratio is used to
compute required sales in dollars.
(Fixed Costs ÷ Contribution = Sales in Dollars

+ Target Net Income) Margin Ratio
($200, 000 + $250, 000) ÷ .40 = $1,125, 000

Margin of Safety
Margin of safety in dollars
• tells us how far sales can drop before the company will
operate at a loss.
• can be expressed in dollars or as a ratio.
Illustration: Assume Vargo’s sales are $800,000:
Actual (Expected)  Break - Even = Margin of Safety

Sales Sales in Dollars
$800, 000  $500, 000 = $300, 000

Margin of Safety
Margin of safety ratio
• tells us how far sales can drop before the company will
operate at a loss.
• can be expressed in dollars or as a ratio.
Illustration: Vargo’s sales could drop by $300,000, or
37.5%, before the company would operate at a loss
Margin of Safety ÷ Actual = Margin of Safety

in Dollars (Expected) Sales Ratio
$300, 000 ÷ $800, 000 = 37.5%

CVP and Changes in the Bus. Environment
Illustration: Original cell phone sales and cost data for

Vargo Electronics is as shown.
Unit selling price $500

Unit variable cost $300
Total fixed costs $200,000
Break-even sales $500,000 or 1,000 units

Case I
A competitor is offering a 10% discount on the selling

price of its camcorders. What effect will a 10% discount
on selling price ($500 × 10% = $50) have on the
breakeven point?
Margin Sales
$200, 000 ÷ $150 = 1, 333 units

($450  $300) (rounded)

Case II
Management invests in new equipment that will lower the

amount of direct labor required to make cell phones. They
estimate that total fixed costs will increase 30% and
variable cost per unit will decrease 30%. What effect will
the new equipment have on the sales volume required to
break even?
Margin Sales
$260, 000 ÷ ($500  $210) = 897 units

(rounded)
Case III
Vargo’s principal supplier of raw materials has just

announced a price increase. The higher cost is expected
to increase the variable cost of cell phones by $25 per
unit. Management plans a cost-cutting program that will
save $17,500 in fixed costs per month. Vargo is currently
realizing monthly net income of $80,000 on sales of
1,400 cell phones. What increase in units sold will be
needed to maintain the same level of net income?

Case III continued
Variable cost per unit increases to $325 ($300 + $25).

Fixed costs are reduced to $182,500 ($200,000 − $17,500).
Contribution margin per unit becomes $175 ($500 − $325).
(Fixed Cost + ÷ Unit Contribution = Sales in

Target Net Income) Margin Units
($182, 500 + $80, 000) ÷ $175 = 1, 500

Basic CVP Concepts
Question
Croc Catchers calculates its contribution margin to be less
than zero. Which statement is true?
a. Its fixed costs are less than the variable cost per unit.
b. Its profits are greater than its total costs.
c. The company should sell more units.
d. Its selling price is less than its variable costs.

Basic CVP Concepts
Answer
Croc Catchers calculates its contribution margin to be less
than zero. Which statement is true?
a. Its fixed costs are less than the variable cost per unit.
b. Its profits are greater than its total costs.
c. The company should sell more units.
d. Answer: Its selling price is less than its variable costs.

Do It! 1: CVP Analysis
Krisanne Company reports the following for June.
Total Per Unit
Sales (5,000 units) $300,000 $60
Variable costs 180,000 36
Contribution margin 120,000 $24
Fixed expenses 100,000
Net income $ 20,000
To increase net income, management is considering reducing

the selling price by 10%, with no changes to unit variable
costs or fixed costs. Management is confident that this change
will increase unit sales by 25%.
Solution
Using the contribution margin technique, compute the break-

even point in units and dollars and margin of safety in dollars
assuming no changes to sales price or costs.
Break-even point in units = 4,167 units (rounded) ($100,000 ÷ $24)
Break-even point in sales dollars = $250,000 ($100,000 ÷ .40a )

Margin of safety in dollars = $50,000 ($300,000 − $250,000)
a
$24 ÷ $60

Solution continued
Using the contribution margin technique, compute the
break-even point in units and dollars and margin of safety in
dollars assuming changes to sales price and volume as
described.
Break-even point in units = 5,556 units (round) ($100,000 ÷ $18b )
Break-even point in sales dollars = $300,000 ($100,000 ÷ ($18 ÷ $54c ))
Margin of safety in dollars = $37,500 ($337,500d  $300,000)
b
($60  (.10  $60)  36 = $18)
c
($60  (.10  $60)
d
(5,000 + (.25 × 5,000) = 6,250 units, 6, 250 units × $54 = $337,500)
Sales Mix and Break-Even Sales
Explain the term sales mix and its effects on break-even
sales.
• Sales mix is the relative percentage in which a company
sells its products.
• If a company’s unit sales are 80% printers and 20%
computers, its sales mix is 80% to 20%.
• Sales mix is important because different products often
have very different contribution margins.

Break-Even Sales in Units
Sales mix as a percentage of units sold
Companies can compute break-even sales for a mix of two
or more products by determining the weighted-average
unit contribution margin of all the products.
Illustration: Vargo Electronics sells not only cell phones
but high-definition TVs. Vargo sells its products in the
following amounts: 1,500 cell phones and 500 TVs.
Cell Phones TVs

1,500 units ÷ 2,000 units = 75% 500 units ÷ 2,000 units = 25%

Per unit data-sales mix
Additional information related to Vargo Electronics.
Cell Phones TVs

1,500 units ÷ 2,000 units = 75% 500 units ÷ 2,000 units = 25%
Unit Data Cell Phones TVs

Selling price $500 $1,000
Variable costs 300 500
Contribution margin $200 $ 500
Sales mix—units 75% 25%
Fixed costs = $275,000

Weighted-average unit contribution margin
First, determine weighted-average contribution margin.
Unit Data Cell Phones TVs
Selling price $500 $1,000
Variable costs 300 500
Contribution margin $200 $ 500
Sales mix—units 75% 25%
Fixed costs = $275,000
Cell Phones TVs
(Unit Contribution + (Unit Contribution = Weighted-Average Unit
Margin × Sales Mix Margin × Sales Mix Contribution Margin
Percentage) Percentage)
($200 × .75) + ($500 × .25) = $275

For a given sales mix
First, determine weighted-average contribution margin.
Cell Phones TVs
(Unit Contribution + (Unit Contribution = Weighted-Average Unit
Margin × Sales Mix Margin × Sales Mix Contribution Margin
Percentage) Percentage)
($200 × .75) + ($500 × .25) = $275
Fixed Cost ÷ Weighted - Average Unit = Break - Even

Contribution Margin Point in Units
$275,000 ÷ $275 = 1, 000 Units

Break-even proof – sales units
• With break-even point of 1,000 units, Vargo must sell:
o 750 cell phones (1,000 units × 75%)
o 250 TVs (1,000 units × 25%)
• At this level, the total contribution margin will equal the

fixed costs of $275,000.

Break-Even Sales in Dollars
• Works well if company has many products.
• Calculates break-even point in terms of sales dollars for
o divisions or
o product lines,
o not individual products.

Cost-volume-profit data
Kale Garden Supply Company has two divisions.

Weighted aver. cont. margin and break-even point
Determine weighted-average contribution margin.
Indoor Plant Outdoor Plant
Division Division
(Contribution Margin + (Contribution Margin = Weighted-Average
Ratio × Sales Mix Ratio × Sales Mix Contribution Margin
Percentage) Percentage) Ratio
(.40 × .20) + (.30 × .80) = .32
Calculate break-even point in dollars.

Fixed Cost ÷ Weighted - Average = Break - Even
Contribution Margin Ratio Point in Dollars
$300, 000 ÷ .32 = $937, 500

More information
• With break-even sales of $937,500 and a sales mix of

20% to 80%, Kale must sell:
o $187,500 from the Indoor Plant division
o $750,000 from the Outdoor Plant division
• If sales mix becomes 50% to 50%, the weighted average

contribution margin ratio changes to 35%, resulting in a
lower break-even point of $857,143.

Question
Net income will be:

a. Greater if more higher-contribution margin units are
sold than lower-contribution margin units.
b. Greater is more lower-contribution margin units are
sold than higher-contribution margin units.
c. Equal as song as total sales remain equal, regardless of
which products are sold.
d. Unaffected by changes in the mix of products sold.

Answer
Net income will be:

a. Answer: Greater if more higher-contribution margin
units are sold than lower-contribution margin units.
b. Greater is more lower-contribution margin units are
sold than higher-contribution margin units.
c. Equal as song as total sales remain equal, regardless of
which products are sold.
d. Unaffected by changes in the mix of products sold.

Do It! 2: Sales Mix Break Even
Part (a)
Manzeck Bicycles International produces and sells three
different types of mountain bikes. Information regarding
the three models is shown below.
Pro Intermediate Standard Total
Units sold 5,000 10,000 25,000 40,000
Selling price $800 $500 $350
Variable costs $500 $300 $250
The company’s total fixed costs are $7,500,000.

(a) Determine the sales mix as a function of units sold for
the three products.
Solution for part (a)
(a) Determine the sales mix as a function of units sold for
the three products.
Units sold 5,000 10,000 25,000 40,000
Solution
5,000
Pro = = 12.5%
40,000
10,000
Intermediate = = 25%
40,000
25, 000
Standard = = 62.5%
40, 000
Part (b) with solution
(b) Determine the weighted-average unit contribution
margin.
Units sold 5,000 10,000 25,000 40,000
Solution
[.125 × ($800 - $500)] +

[. 25 × ($500 - $300)] +
[ .625 × ($350 - $250)] = $150
Part (c) with solution
(c) Determine the total number of units that the company
must sell to break even.
Units sold 5,000 10,000 25,000 40,000
Solution
$7,500,000 ÷ $150 = 50,000 units

Part (d) with solution
(d) Determine the number of units of each model that the
company must sell to break even.
Units sold 5,000 10,000 25,000 40,000
Solution
Pro: 50,000 units × 12.5% = 6,250 units

Intermediate: 50,000 units × 25% = 12,500 units
Standard: 50,000 units × 62.5% = 31,250 units
50,000 units

Sales Mix with Limited Resources
Determine sales mix when a company has limited
resources.
• All companies have limited resources whether it be
floor space, raw materials, direct labor hours, etc.
• Management must decide which products to sell to
maximize net income.
Illustration: Vargo manufactures cell phones and TVs.
Machine capacity is limited to 3,600 hours per month.
Cell Phones TVs
Unit contribution margin $200 $500
Machine hours required per unit .2 .625
• Approach used to identify and manage constraints so as
to achieve company goals.
• Company must continually
o identify its constraints and
o find ways to reduce or eliminate them, where appropriate.

Contribution margin per unit of limited resource
Calculate the contribution margin per unit of limited
resource.
Cell Phones TVs
Unit contribution margin $200 $500
Machine hours required per unit .2 .625
Contribution margin per unit of
$1,000 $800
Limited resource [(a) ÷ (b)]
Management should produce more cell phones if demand

exists or increase machine capacity.
Question
If the contribution margin per unit is $15 and it takes 3.0

machine hours to produce the unit, the contribution
margin per unit of limited resource is:
a. $25.
b. $5.
c. $4.
d. No correct answer is given.

Answer
If the contribution margin per unit is $15 and it takes 3.0

machine hours to produce the unit, the contribution
margin per unit of limited resource is:
a. $25.
b. Answer: $5.
c. $4.
d. No correct answer is given.

Do It! 3: Sales Mix with Limited Resources
Carolina Corporation manufactures and sells three

different types of high-quality sealed ball bearings for
mountain bike wheels. The bearings vary in terms of their
quality specifications—primarily with respect to their
smoothness and roundness. They are referred to as Fine,
Extra-Fine, and Super-Fine bearings. Machine time is
limited. More machine time is required to manufacture the
Extra-Fine and Super-Fine bearings.

Additional information
Fine Extra Fine Super Fine

Selling price $6.00 $10.00 $16.00
Variable costs and expenses 4.00 6.50 11.00
Contribution margin $2.00 $3.50 $5.00
Machine hours required 0.02 0.04 0.08

Solution
Selling price $6.00 $10.00 $16.00
Variable costs and expenses 4.00 6.50 11.00
Contribution margin $2.00 $3.50 $5.00
Machine hours required 0.02 0.04 0.08
What is the contribution margin per unit of limited

resource for each type of bearing?
Unit contribution margin $2 $3.5 $5
 $100  $87.50  $62.50
Limited resource consumed per unit .02 .04 .08
Operating Leverage and Profitability
Indicate how operating leverage affects profitability.
Cost Structure is the relative proportion of fixed versus

variable costs that a company incurs.
• May have a significant effect on profitability
• Company must carefully choose its cost structure.

Vargo Electronics and one of its competitors, New Wave Company.

Both make cell phones. Vargo uses a traditional, labor-intensive
manufacturing process. New Wave has invested in a completely
automated system. The factory employees are involved only in
setting up, adjusting, and maintaining the machinery.
New
Vargo
Wave
Sales $800,000 $800,000
Variable costs 480,000 160,000
Contribution margin 320,000 640,000
Fixed costs 200,000 520,000
Net income $120,000 $120,000
CVP income statements for two companies
Vargo New Wave
Sales $800,000 $800,000
Variable costs 480,000 160,000
Contribution margin 320,000 640,000
Fixed costs 200,000 520,000
Net income $120,000 $120,000
Contribution Margin  Sales = Contribution

Margin Ratio
Vargo $320,000  $800, 000  40%
New Wave $640,000  $800, 000  80%
Contribution margin ratio for two companies
Contribution Margin  Sales = Contribution
Margin Ratio
Vargo $320,000  $800, 000  40%
New Wave $640,000  $800, 000  80%
• New Wave contributes 80 cents to net income for each
dollar of increased sales while Vargo only contributes
40 cents.
• New Wave’s cost structure which relies on fixed costs
is more sensitive to changes in sales.
Effect on Break-Even Point
Fixed Costs  Contribution Margin Ratio = Break - even
Point in Dollars
Vargo $200,000  .40  $500, 000
New Wave $520,000  .80  $650, 000
• New Wave needs to generate $150,000 more in sales

than Vargo to break-even.
• Because of the greater break-even sales required, New
Wave is a riskier company than Vargo.

Effect on Margin of Safety
(Actual sales – Break-Even Actual Margin of
÷ =
Sales) Sales Safety Ratio
Vargo
($800,000 − $500,000) ÷ $800,000 = 38%
Electronics
New Wave ($800,000 − $650,000) ÷ $800,000 = 19%
• The difference in ratios reflects the difference in risk

between New Wave and Vargo.
• Vargo can sustain a 38% decline in sales before operating at
a loss versus only a 19% decline for New Wave.

Operating Leverage
• Extent that net income reacts to a given change in sales.
• Higher fixed costs relative to variable costs cause a
company to have higher operating leverage.
• When sales revenues are increasing, high operating
leverage means that profits will increase rapidly.
• When sales revenues are declining, too much operating
leverage can have devastating consequences.

Degree of Operating Leverage
• Provides a measure of a company’s earnings volatility.
• Computed by dividing total contribution margin by net
income.
Contribution Margin  Net Income = Degree of
Operating
Leverage
Vargo $320,000 ÷ $120,000 = 2.67
New Wave $640,000 ÷ $120,000 = 5.33

Operating Leverage
Question
The degree of operating leverage:

a. Can be computed by dividing total contribution margin
by net income.
b. Provides a measure of the company’s earnings
volatility.
c. Affects a company’s break-even point.
d. All of the above.

Operating Leverage
Answer
The degree of operating leverage:

a. Can be computed by dividing total contribution margin
by net income.
b. Provides a measure of the company’s earnings
volatility.
c. Affects a company’s break-even point.
d. Answer: All of the above.

Do It! 4: Operating Leverage
Rexfield Corp., a company specializing in crime scene
investigations, is contemplating an investment in
automated mass-spectrometers. Its current process relies
on a high number of lab technicians. The new equipment
would employ a computerized expert system. The
company’s CEO has requested a comparison of the old
technology versus the new technology. The accounting
department has prepared the following CVP income
statements for use in your analysis.

Do It! 4: Operating Leverage
Solution
Old New
Sales $2,000,000 $2,000,000
Variable costs 1,400,000 600,000
Contribution margin 600,000 1,400,000
Fixed costs 400,000 1,200,000
Net income $200,000 $200,000
Compute the degree of operating leverage.
Contribution Margin  Net Income = Degree of
Operating
Leverage
Old $600,000 ÷ $200,000 = 3.00
New $1,400,000 ÷ $200,000 = 7.00
Absorption Costing versus Variable Costing
Under variable costing, product costs consist of:

• Direct Materials
• Direct Labor
• Variable Manufacturing Overhead
Difference between absorption and variable costing is:

Differences
The difference between absorption and variable costing:
• Under both costing methods, selling and administrative
expenses are treated as period costs.
• Companies may not use variable costing for external
financial reports because GAAP requires that fixed
manufacturing overhead be treated as a product cost.

Absorption versus Variable Costing
Illustration
Premium Products Corporation manufactures a sealant, called Fix-
It, for car windshields. Relevant data for Fix-It in January 2020, the
first month of production is shown.
Selling price $20 per unit.
Units Produced 30,000; sold 20,000; beginning inventory zero.
Variable unit costs Manufacturing $9 (direct materials $5, direct

labor $3, and variable overhead $1).
Selling and administrative expenses $2.
Fixed costs Manufacturing overhead $120,000. Selling and
administrative expenses $15,000.
Absorption versus Variable Costing
Contribution of per unit manufacturing cost
Type of Cost Absorption Variable

Direct materials $5 $5
Direct labor 3 3
Variable manufacturing overhead 1 1
Fixed manufacturing overhead
($120,000 ÷ 30,000 units produced) 4 0
Manufacturing cost per unit $13 $9
Manufacturing cost per unit is $4 ($13 − $9) higher for absorption

costing because fixed manufacturing costs are treated as product
costs.
Absorption Costing Example

Variable Costing Example

Question
Fixed manufacturing overhead costs are recognized as:

a. Period costs under absorption costing.
b. Product costs under absorption costing.
c. Product costs under variable costing.
d. Part of ending inventory costs under both absorption
and variable costing.

Answer
Fixed manufacturing overhead costs are recognized as:

a. Period costs under absorption costing.
b. Answer: Product costs under absorption costing.
c. Product costs under variable costing.
d. Part of ending inventory costs under both absorption
and variable costing.

Decision-Making Concerns
• Generally accepted accounting principles require
that absorption costing be used for the costing of
inventory for external reporting purposes.
• Net income measured under GAAP (absorption costing)
is often used internally to
o evaluate performance,
o justify cost reductions, or
o evaluate new projects.

Decision-Making Concerns
continued
• Net income calculated using GAAP does not highlight

differences between variable and fixed costs and may
lead to poor business decisions.
• Some companies use variable costing for internal
reporting purposes.

Advantages of Variable Costing
1. Net income computed under variable costing is unaffected
by changes in production levels.
2. Variable costing readily supports cost-volume-profit
analysis.
3. Net income computed under variable costing is closely tied
to changes in sales levels and therefore provides a more
realistic assessment of a company’s success or failure.
4. The presentation of fixed and variable cost components on
the variable costing income statement makes it easier to
identify these costs.

Do It! 5: Variable Costing
Franklin Company produces and sells tennis balls. The following
costs are available for the year ended December 31, 2020. The
company has no beginning inventory. In 2020, 8,000,000 units were
produced, but only 7,500,000 units were sold. The unit selling price
was $0.50 per ball. Costs and expenses were as follows.
Variable costs per unit
Direct materials $0.10
Direct labor 0.05
Variable manufacturing overhead 0.08
Variable selling and administrative expenses 0.02
Annual fixed costs and expenses
Manufacturing overhead $500,000
Selling and administrative expenses 100,000

Solution to part a.
Variable costs per unit
Direct materials $0.10
Direct labor 0.05
Variable manufacturing overhead 0.08
Variable selling and administrative expenses 0.02
Annual fixed costs and expenses
Manufacturing overhead $500,000
Selling and administrative expenses 100,000
a. Compute the cost of one unit using variable costing.

Solution to part b.
b. Prepare a 2020 income statement using variable costing.

Copyright
Copyright © 2018 John Wiley & Sons, Inc.
All rights reserved. Reproduction or translation of this work beyond that permitted in
Section 117 of the 1976 United States Act without the express written permission of the
copyright owner is unlawful. Request for further information should be addressed to the
Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up
copies for his/her own use only and not for distribution or resale. The Publisher assumes
no responsibility for errors, omissions, or damages, caused by the use of these programs or
from the use of the information contained herein.
Copyright ©2018 John Wiley & Sons, Inc. 74

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Managerial Accounting

Weygandt Kimmel Kieso

Copyright ©2018 John Wiley & Sons, Inc. 2

Apply basic CVP concepts.

LO 1 Copyright ©2018 John Wiley & Sons, Inc. 3

LO 1 Copyright ©2018 John Wiley & Sons, Inc. 4

LO 1 Copyright ©2018 John Wiley & Sons, Inc. 5

LO 1 Copyright ©2018 John Wiley & Sons, Inc. 6

Vargo Electronic’s CVP income statement (Ill. 6.2) shows

$200, 000 ÷ $200 = 1, 000 units

LO 1 Copyright ©2018 John Wiley & Sons, Inc. 7

$200, 000 ÷ .40 = $500, 000

LO 1 Copyright ©2018 John Wiley & Sons, Inc. 8

Once a company achieves break-even sales, a sales goal

($200, 000 + $250, 000) ÷ $200 = 2, 250 units

LO 1 Copyright ©2018 John Wiley & Sons, Inc. 9

(Fixed Costs ÷ Contribution = Sales in Dollars

($200, 000 + $250, 000) ÷ .40 = $1,125, 000

LO 1 Copyright ©2018 John Wiley & Sons, Inc. 10

Actual (Expected)  Break - Even = Margin of Safety

$800, 000  $500, 000 = $300, 000

LO 1 Copyright ©2018 John Wiley & Sons, Inc. 11

Margin of Safety ÷ Actual = Margin of Safety

$300, 000 ÷ $800, 000 = 37.5%

LO 1 Copyright ©2018 John Wiley & Sons, Inc. 12

Illustration: Original cell phone sales and cost data for

Unit selling price $500

LO 1 Copyright ©2018 John Wiley & Sons, Inc. 13

A competitor is offering a 10% discount on the selling

$200, 000 ÷ $150 = 1, 333 units

LO 1 Copyright ©2018 John Wiley & Sons, Inc. 14

Management invests in new equipment that will lower the

$260, 000 ÷ ($500  $210) = 897 units

Vargo’s principal supplier of raw materials has just

LO 1 Copyright ©2018 John Wiley & Sons, Inc. 16

Variable cost per unit increases to $325 ($300 + $25).

Contribution margin per unit becomes $175 ($500 − $325).

(Fixed Cost + ÷ Unit Contribution = Sales in

LO 1 Copyright ©2018 John Wiley & Sons, Inc. 17

LO 1 Copyright ©2018 John Wiley & Sons, Inc. 18

LO 1 Copyright ©2018 John Wiley & Sons, Inc. 19

To increase net income, management is considering reducing

Using the contribution margin technique, compute the break-

Break-even point in units = 4,167 units (rounded) ($100,000 ÷ $24)

Break-even point in sales dollars = $250,000 ($100,000 ÷ .40a )

LO 1 Copyright ©2018 John Wiley & Sons, Inc. 21

LO 2 Copyright ©2018 John Wiley & Sons, Inc. 23

Cell Phones TVs

LO 2 Copyright ©2018 John Wiley & Sons, Inc. 24

Cell Phones TVs

Unit Data Cell Phones TVs

LO 2 Copyright ©2018 John Wiley & Sons, Inc. 25

LO 2 Copyright ©2018 John Wiley & Sons, Inc. 26

Fixed Cost ÷ Weighted - Average Unit = Break - Even

$275,000 ÷ $275 = 1, 000 Units

• At this level, the total contribution margin will equal the

LO 2 Copyright ©2018 John Wiley & Sons, Inc. 28

LO 2 Copyright ©2018 John Wiley & Sons, Inc. 29

LO 2 Copyright ©2018 John Wiley & Sons, Inc. 30

Calculate break-even point in dollars.

$300, 000 ÷ .32 = $937, 500

• With break-even sales of $937,500 and a sales mix of

• If sales mix becomes 50% to 50%, the weighted average