Ch05 - CVP MANUAL PDF

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CVP MANUAL...

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CHAPTER 5 Cost-Volume-Profit ASSIGNMENT CLASSIFICATION TABLE

Learning Objectives

Questions

1.

Explain variable, fixed, and mixed costs and the relevant range.

1, 2, 3, 4, 5, 6

2.

Brief Exercises

Do It!

Exercises

A Problems

1, 2

1

1, 2, 3, 4, 5, 6

1A, 6A

Apply the high-low method to 7, 8 determine the components of mixed costs.

1, 3, 4, 5

2

3, 5,

1A

3.

Prepare a CVP income statement to determine contribution margin.

6, 7

3

7, 8, 9, 10, 11, 1A, 2A, 4A, 12, 13, 17 5A, 6A

4.

Compute the break-even 12, 13, 14 point using three approaches.

8, 9

4, 5

8, 9, 10, 11, 12, 13, 14, 16, 17

1A, 2A, 3A, 4A, 5A

5.

Determine the sales required 15, 16 to earn target net income and determine margin of safety.

10, 11, 12

5

14, 15, 16, 17

2A, 4A, 5A, 6A

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9, 10, 11, 17

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5-1

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

5-2

Description

Difficulty Level

Time Allotted (min.)

1A

Determine variable and fixed costs, compute break-even point, prepare a CVP graph, and determine net income.

Simple

20–30

2A

Prepare a CVP income statement, compute break-even point, contribution margin ratio, margin of safety ratio, and sales for target net income.

Moderate

30–40

3A

Compute break-even point under alternative courses of action.

Simple

20–30

4A

Compute break-even point and margin of safety ratio, and prepare a CVP income statement before and after changes in business environment.

Moderate

20–30

5A

Compute contribution margin, fixed costs, break-even point, sales for target net income, and margin of safety ratio.

Moderate

20–30

6A

Determine contribution margin ratio, break-even point, and margin of safety.

Moderate

20–30

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Learning Objective * 1.

Explain variable, fixed, and mixed costs and the relevant range.

* 2.

Knowledge Comprehension E5-4

Application

Weygandt, Managerial Accounting, 7/e, Solutions Manual

Q5-1 Q5-2 Q5-3 Q5-4 Q5-5

Q5-6 E5-2 BE5-1 E5-5 DI5-1 E5-6 E5-1 E5-2 E5-4

Apply the high-low method to E5-4 determine the components of mixed E5-5 costs.

Q5-7 BE5-1

E5-1

* 3.

Prepare a CVP income statement to E5-7 determine contribution margin.

* 4.

Compute the break-even point using three approaches.

* 5.

Determine the sales required to earn target net income and determine margin of safety.

Synthesis

Evaluation P5-6A

Q5-8 BE5-4 BE5-5

DI5-2 BE5-3 E5-5 E5-3 E5-6 P5-1A

Q5-9 Q5-10

Q5-11 Q5-17 BE5-6 BE5-7 DI5-3 E5-8

E5-9 E5-10 E5-11 E5-12 E5-13 E5-17

BE5-6 P5-1A P5-2A P5-5A

P5-4A P5-6A

Q5-12 Q5-14

Q5-13 BE5-8 BE5-9 DI5-4 DI5-5 E5-8 E5-9

E5-10 E5-11 E5-12 E5-13 E5-14 E5-16 E5-17

E5-16 P5-1A P5-2A P5-5A

P5-3A P5-4A

Q5-15 Q5-16 BE5-10 BE5-11 BE5-12

DI5-5 E5-16 E5-12 P5-2A E5-14 P5-5A E5-15 E5-17

P5-4A P5-6A

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Continuing Problems Broadening Your Perspective

Analysis BE5-2 E5-3 P5-1A

CD5

BYP5-5

BYP5-3

BYP5-1

BYP5-4

BYP5-2 BYP5-6 BYP5-7

BLOOM’S TAXONOMY TABLE

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Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-of-Chapter Exercises and Problems

5-3

ANSWERS TO QUESTIONS 1.

(a) Cost behavior analysis is the study of how specific costs respond to changes in the level of activity within a company. (b) Cost behavior analysis is important to management in planning business operations and in deciding between alternative courses of action.

2.

(a) The activity index identifies the activity that causes changes in the behavior of costs. Once the index is determined, it is possible to classify the behavior of costs in response to changes in activity levels into three categories: variable, fixed, or mixed. (b) Variable costs may be defined in total or on a per-unit basis. Variable costs in total vary directly and proportionately with changes in the activity level. Variable costs per unit remain the same at every level of activity.

3.

Fixed costs remain the same in total regardless of changes in the activity level. In contrast, fixed costs per unit vary inversely with activity. As volume increases, fixed costs per unit decline and vice versa.

4.

(a) The relevant range is the range of activity over which a company expects to operate during the year. (b) Disagree. The behavior of both fixed and variable costs are linear only over a certain range of activity. CVP analysis is based on the assumption that both fixed and variable costs remain linear within the relevant range.

5.

This is true. Most companies operate within the relevant range. Within this range, it is possible to establish a linear (straight-line) relationship for both variable and fixed costs. If a relevant range cannot be established, segregation of costs into fixed and variable becomes extremely difficult.

6.

Apartment rent is fixed because the cost per month remains the same regardless of how much Adam uses the apartment. Rent on a Hertz rental truck is a mixed cost because the cost usually includes a per day charge (a fixed cost) plus an activity charge based on miles driven (a variable cost).

7.

For CVP analysis, mixed costs must be classified into their fixed and variable elements. One approach to the classification of mixed costs is the high-low method.

8.

Variable cost per unit is $1.30, or [($165,000 – $100,000) ÷ (90,000 – 40,000)]. At any level of activity, fixed costs are $48,000 per month [$165,000 – (90,000 X $1.30)].

9.

No. Only two of the basic components of cost-volume-profit (CVP) analysis, unit selling prices and variable cost per unit, relate to unit data. The other components, volume, total fixed costs, and sales mix, are not based on per-unit amounts.

10.

There is no truth in Faye’s statement. Contribution margin is sales less variable costs. It is the revenue that remains to cover fixed costs and to produce income (profit) for the company.

11.

Contribution margin is $14 ($40 – $26). The contribution margin ratio is 35% ($14 ÷ $40).

5-4

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Questions Chapter 5 (Continued) 12.

Disagree. Knowledge of the break-even point is useful to management in deciding whether to introduce new product lines, change sales prices on established products, and enter new market areas.

13.

$26,000 ÷ 25% = $104,000

14.

(a) The break-even point involves the plotting of three lines over the full range of activity: the total revenue line, the total fixed cost line, and the total cost line. The break-even point is determined at the intersection of the total revenue and total cost lines. (b) The break-even point in units is obtained by drawing a vertical line from the break-even point to the horizontal axis. The break-even point in sales dollars is obtained by drawing a horizontal line from the break-even point to the vertical axis.

15.

Margin of safety is the difference between actual or expected sales and sales at the break-even point. 1,250 X $12 = $15,000; $15,000 – $13,200 = $1,800; $1,800 ÷ $15,000 = 12%.

16.

At break-even sales, the contribution margin is equal to the fixed costs. The contribution margin ratio is: $180, 000 $500, 000

= 36%

The sales volume to achieve net income of $90,000 is as follows: $180, 000+$90, 000

= $750,000

. 36 17.

PACE COMPANY CVP Income Statement Sales.................................................................................................. Variable expenses Cost of goods sold ($600,000 X .70).......................................... Operating expenses ($200,000 X .70)........................................ Total variable expenses...................................................... Contribution margin............................................................................

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$900,000 $420,000 140,000 560,000 $340,000

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5-5

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 5-1 Indirect labor is a variable cost because it increases in total directly and proportionately with the change in the activity level. Supervisory salaries is a fixed cost because it remains the same in total regardless of changes in the activity level. Maintenance is a mixed cost because it increases in total but not proportionately with changes in the activity level.

BRIEF EXERCISE 5-2 VARIABLE COST Relevant Range $10,000

$10,000

8,000

8,000

6,000

6,000

4,000

4,000

2,000

2,000

0

20

40

60

80 100

Activity Level

5-6

FIXED COST Relevant Range

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0

20

40

60

80 100

Activity Level

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COST

BRIEF EXERCISE 5-3

$60,000 Total Cost Line 45,000

Variable Cost Element

30,000

15,000 Fixed Cost Element 0

500

1,000

1,500

2,000

2,500

Direct Labor Hours

BRIEF EXERCISE 5-4 High

Low

$15,000 – $13,500 = 8,500 – 7,500 =

Difference $1,500 1,000

$1,500 ÷ 1,000 = $1.50—Variable cost per mile. High Total cost Less: Variable costs 8,500 X $1.50 7,500 X $1.50 Total fixed costs

$15,000

Low $13,500

12,750 $ 2,250

11,250 $ 2,250

The mixed cost is $2,250 plus $1.50 per mile.

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5-7

BRIEF EXERCISE 5-5 High Low Difference $74,500 – $36,000 = $38,500 40,000 – 18,000 = 22,000 $38,500 ÷ 22,000

= $1.75 per unit.

Total cost Less: Variable costs 40,000 X $1.75 18,000 X $1.75 Total fixed costs

Activity Level High Low $74,500 $36,000 70,000 000,000 $ 4,500

31,500 $ 4,500

BRIEF EXERCISE 5-6 1.

(a) (b)

$288 = ($640 – $352) 45% ($288 ÷ $640)

2.

(c) (d)

$207 = ($300 – $93) 31% ($93 ÷ $300)

3.

(e) (f)

$1,300 = ($325 ÷ 25%) $975 ($1,300 – $325)

BRIEF EXERCISE 5-7 RUSSELL INC. CVP Income Statement For the Quarter Ended March 31, 2017 Sales................................................................................... Variable costs ($920,000 + $70,000 + $86,000)................ Contribution margin.......................................................... Fixed costs ($440,000 + $45,000 + $98,000).....................

5-8

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$2,200,000 1,076,000 1,124,000 583,000

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Net income..........................................................................

$ 541,000

BRIEF EXERCISE 5-8 (a)

$520Q – $286Q – $163,800 = $0 $234Q = $163,800 Q = 700 units

(b) Contribution margin per unit $234, or ($520 – $286) X = $163,800 ÷ $234 X = 700 units BRIEF EXERCISE 5-9 Contribution margin ratio = [($300,000 – $180,000) ÷ $300,000] = 40% Required sales in dollars = $110,000 ÷ 40% = $275,000

BRIEF EXERCISE 5-10 If variable costs are 70% of sales, the contribution margin ratio is ($1 – $0.70) ÷ $1 = .30. Required sales in dollars = ($195,000 + $75,000) ÷ .30 = $900,000 BRIEF EXERCISE 5-11 Margin of safety = $1,000,000 – $800,000 = $200,000 Margin of safety ratio = $200,000 ÷ $1,000,000 = 20% BRIEF EXERCISE 5-12 Contribution margin per unit $1.60 is ($6.00 – $4.40) Required sales in units = ($480,000 + $1,500,000) ÷ $1.60 = 1,237,500.

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5-9

SOLUTIONS FOR DO IT! REVIEW EXERCISES DO IT! 5-1 Variable costs: Indirect labor, direct labor, and direct materials. Fixed costs: Property taxes and depreciation. Mixed costs: Utilities and maintenance. DO IT! 5-2 (a)

Variable cost: Fixed cost:

($18,580 – $16,200) ÷ (10,500 – 8,800) = $1.40 per unit $18,580 – ($1.40 X 10,500 units) = $3,880

or $16,200 – ($1.40 X 8,800) = $3,880 (b)

Total cost to produce 9,200 units: $3,880 + ($1.40 X 9,200) = $16,760

DO IT! 5-3 Cedar Grove Industries CVP Income Statement For the Month Ended May 31, 2017 Sales Variable costs Contribution margin Fixed costs Net income

Total $360,000 176,000 184,000 120,000 $ 64,000

Per Unit $45 22 $23

DO IT! 5-4 (a)

The formula is $250Q – $170Q – $160,000 = 0. Therefore, 80Q = $160,000, and the breakeven point in units is 2,000 ($160,000 ÷ $80).

(b)

The contribution margin per unit is $80 ($250 – $170). The formula therefore is $160,000 ÷ $80, and the breakeven point in units is 2,000.

5-10

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5-11

DO IT! 5-5 (a)

CM per unit = Unit selling price – Unit variable costs $12 = $30 – $18 CM ratio = CM per unit/Unit selling price 40% = $12/$30 Break-even point in dollars = Fixed costs ÷ Contribution margin ratio = $220,000 ÷ 40% = $550,000

(b)

Margin of safety

Actual sales – Break-even sales Actual sales $800,000 – $550,000 = $800,000 =

= (c)

5-12

31.25%

Sales – Variable costs – Fixed costs = Net income $30Q – $18Q = $220,000 + $140,000 $12Q = $360,000 Q = 30,000 units 30,000 units X $30 = $900,000 required sales

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SOLUTIONS TO EXERCISES EXERCISE 5-1 (a) The determination as to whether a cost is variable, fixed, or mixed can be made by comparing the cost in total or on a per-unit basis at two different levels of production. Variable Costs Fixed Costs Mixed Costs

Vary in total but remain constant on a per-unit basis. Remain constant in total but vary on a per-unit basis. Contain both a fixed element and a variable element. Vary both in total and on a per-unit basis.

(b) Using these criteria as a guideline, the classification is as follows: Direct materials Direct labor Utilities

Variable Variable Mixed

Rent Maintenance Supervisory salaries

Fixed Mixed Fixed

EXERCISE 5-2 (a)

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5-13

EXERCISE 5-2 (Continued) (b)

The relevant range is 3,000 – 8,000 units of output since a straight-line relationship exists for both direct materials and rent within this range.

(c)

Variable cost per unit Within the relevant range (3,000 – 8,000 units)

= Cost Units = $15,000* 5,000*

=

$3 per unit

*Any costs and units within the relevant range could have been used to calculate the same unit cost of $3. (d) Fixed cost within the relevant range (3,000 – 8,000 units)

5-14

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=

$8,000

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EXERCISE 5-3 (a) Maintenance Costs: $5,500 – $2,700 $2,800 = = $7 variable cost per machine hour 700 – 300 400

Total costs Less: Variable costs 700 X $7 300 X $7 Total fixed costs

700 Machine Hours $5,500

300 Machine Hours $2,700

4,900 $ 600

2,100 $ 600

Thus, maintenance costs are $600 per month plus $7 per machine hour.

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5-15

EXERCISE 5-3 (Continued) $6,000

(b) COSTS

$5,500 $5,000

Total Cost Line

$4,000

$3,000

Variable Cost Element

$2,000

$1,000 $ 600 Fixed Cost Element 0 100 200 300 400 500 600 700 Machine Hours

EXERCISE 5-4 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 5-16

Wood used in the production of furniture. Fuel used in delivery trucks. Straight-line depreciation on factory building. Screws used in the production of furniture. Sales staff salaries. Sales commissions. Property taxes. Insurance on buildings. Hourly wages of furniture craftsmen. Salaries of factory supervisors. Utilities expense. Copyright © 2015 John Wiley & Sons, Inc.

Variable. Variable. Fixed. Variable. Fixed. Variable. Fixed. Fixed. Variable. Fixed. Mixed.

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12. Telephone bill.

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Mixed.

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5-17

EXERCISE 5-5 (a) Maintenance Costs: $4,620 – $2,640 $1,980 = = $.44 variable cost per mac...