Bergeron 05Answers self-test PDF

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CHAPTER5 PROFI TPLANNI NG ANDDECI SI ONMAKI NG SOLUTI ONSTOSELFTESTEXERCI SES EXERCI SE5 . 1 : FI XEDANDVARI ABLECOSTS

CompuTech’s statement of income shows the following cost items: purchases (included in cost of sales), sales commissions, salaries (distribution), advertising, travel, salaries (administration), leasing, finance costs, depreciation/amortization, and freight-in (included in cost of sales). Which of these costs are fixed and which are variable?

Purchases (cost of sales) Sales commissions Salaries (distribution) Advertising Travel Salaries (administration) Leasing Finance costs Depreciation/amortization Freight-in (cost of sales)

V V F F F F F F F V

EXERCI SE5 . 2 : THECONTRI BUTI ON MARGI N AND THEPVRATI O

In $ Revenue Variable costs • Purchases • Freight-in • Commissions Total variables costs Contribution margin Fixed costs • Salaries (distribution) • Travel • Advertising • Salaries (administration) • Depreciation/amortization • Leasing • Finance costs Total fixed costs Profit before taxes

420,000 (205,000) (4,000) (3,000) (212,000) 208,000 (60,000) (3,000) (5,000) (38,000) (40,000) (7,000) (14,000)

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(167,000) 41,000

5-2

Chapter 5 Profit Planning and Decision Making

(1) Profit before taxes (excluding other income) is $41,000 (2) Contribution margin is $208,000 (3) PV ratio is .495 ($208,000 ÷ $420,000) EXERCI SE5 . 3 : THEBREAKEVENPOI NT

The Millers are thinking of introducing a new product line in their store. For this exercise, assume the following: • Total fixed costs for the line are estimated at $15,000. • Total number of units they expect to sell are 10,000, based on a market study. • Total variable costs are $20,000. • Unit selling price is $4.50. Based on the information, answer the following questions: Unit selling price Unit variable costs

$4.50 (2.00) ($20,000 ÷ 10,000 units)

Unit contribution margin

$2.50

1. What is the break-even point in units? Fixed costs Contribution margin

$15,000 ---------$2.50

=

6,000 units

=

$27,000

2. What is the break-even point in revenue? Number of 6,000 units × $4.50 3. Should they go ahead with their plan? Yes, they should go ahead with the decision. They expect to sell 10,000 units and the break-even point is 6,000 (60% of the objective). In terms of revenue, the expected revenue based on the study is $45,000 and the revenue break-even is $27,000 (also 60% of the revenue objective).

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Chapter 5 Profit Planning and Decision Making

5-3

EXERCI SE5 . 4 : CASH ANDPROFI TBREAKEVENPOI NTS

The Millers have been approached by a supplier to sell a new product line. Based on the supplier’s estimates, CompuTech could sell as many as 1,500 units. The suggested retail price for each unit is $14.50. The purchase price for each unit is $7.00. The fixed costs for that department is $6,000, which includes $1,000 for depreciation. On the basis of this information, calculate the following: 1. Contribution margin: Revenue Variable costs Contribution margin

$21,750 (10,500) $11,250

(1,500 units × $14.50) (1,500 units × $ 7.00) unit contribution $ 7.50

$11,250 ----------- = $21,750

.517

2. PV ratio: Contribution margin Revenue

3. Revenue break-even by using the PV ratio: Fixed costs PV ratio

$6,000 --------.517

=

$11,605

The break-even point will be achieved at 53.4% ($11,605 ÷ $21,750) of the revenue estimates. 4. Cash break-even point in units and in revenue: in units Cash fixed costs ($6,000 - $1,000) Unit contribution in revenue Cash fixed costs ($6,000 - $1,000) PV ratio

$5,000 -------$7.50

=

667 units

$5,000 -------.517

=

$ 9,671

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5-4

Chapter 5 Profit Planning and Decision Making

5. Profit generated: Statement of Income (in $) Revenue Variable costs Contribution margin Fixed costs Profit

21,750 (10,500) 11,250 (6,000) 5,250

6. Profit break-even point in units and in revenue in units Fixed costs and profit objective ($6,000 + $5,250) $11,250 ----------- = Unit contribution $7.50

1,500 units

in revenue Fixed costs and profit objective ($6,000 + $5,250) $11,250 ---------- = PV ratio .517

$ 21,760

These calculations (with rounding) only confirm the numbers presented on the statement of income. EXERCI SE5 . 5 : SENSI TI VI TY ANALYSI S

Begin with the information in the Self-Test Exercise 5.3. If fixed costs were increased by $5,000 and variable costs and unit selling price remained unchanged, what would be the new PV ratio and breakeven point in units and in revenue? The PV ratio remains unchanged since both unit selling price or revenue and variable costs remained unchanged. The new break-even point in units is 8,000 ($20,000 ÷ $2.50) The new break-even point in revenue is $36,000 (8,000 × $4.50)

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Chapter 5 Profit Planning and Decision Making

5-5

EXERCI SE5 . 6 : COMPANYWI DEBREAKEVENPOI NT

1. Contribution margin and profit before taxes: The contribution margin is $208,000 and the profit before taxes (excluding other income) is $41,000. In $ Revenue

420,000

Variable costs • Purchases (cost of sales) • Freight-in (cost of sales) • Commissions Total variables costs

(205,000) (4,000) (3,000) (212,000)

Contribution margin

208,000

Fixed costs • Salaries (distribution) • Travel • Advertising • Salaries (administration) • Depreciation/amortization • Leasing • Finance costs Total fixed costs

(60,000) (3,000) (5,000) (38,000) (40,000) (7,000) (14,000) 167,000

Profit before taxes (excluding other income)

41,000

2. Revenue break-even point: The revenue break-even point is $337,374. PV ratio

Break-even point

=

$208,000 ----------$420,000

=

.495

=

$167,000 ----------.495

=

$337,374

3. Cash break-even point: Cash break-even point is $252,566.

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5-6

Chapter 5 Profit Planning and Decision Making

Cash fixed costs: Total fixed costs Depreciation/amortization

$167,000 40,000

Total cash fixed costs

$127,000

Cash break-even point

=

$127,000 ----------.495

=

$256,566

EXERCI SE5 . 7 : PRODUCTLI NEANALYSI SUSI NG THEBREAKEVENPOI NT

With the following information, calculate the break-even point in sales dollars for CompuTech’s product lines A, B, and C. • Revenue Product line A $ 45,000 Product line B $ 21,750 Product line C $ 35,000 • Cost of sales for the three product lines is 45%, 50%, and 52% of revenue, respectively. • Fixed costs are estimated at $32,000. Total revenue

$101,750

Variable costs (cost of sales): Product line A (45%) Product line B (50%) Product line C (52%) Total variable costs Contribution margin

$ (20,250) (10,875) (18,200) (49,325) $ 52,425

PV ratio

=

$ 52,425 -----------$101,750

=

.515

Break-even point

=

$32,000 ---------.515

=

$62,136

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