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Chapter3Fundamentals of Cost-Volume-Profit AnalysisSolutions to Review Questions3-1.Profit = operating profit, TR = total revenue, TC = total costs, P = average unit selling price, V = average unit variable cost, X = quantity of units, F = total fixed costs for the period.3-2.Total costs = Total var...

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Chapter 03 - Fundamentals of Cost-Volume-Profit Analysis

Chapt er3

Fundament al sofCost Vol umePr ofitAnal ysi s

Sol ut i onst oRevi ew Quest i ons 31. Pr ofit=TR–TC =P X– V X – Fpr Pr ofi t=o pe r at i ng ofit , P –l V ) X – F TR =( =t ot a r e ve nu e, TC P V X F

=t ot alc ost s, =av er ageuni ts el l i ngpr i ce, =av er ageuni tv ar i abl ecost , =quant i t yofuni t s, =t ot alfi x edcost sf ort heper i od.

32. Tot al cost s=Tot alv ar i abl ecost spl ust ot al fix edc ost s. 33. Tot al cont r i but i onmar gi n:Tot als el l i ngpr i ce–Var i abl emanuf act ur i ngcost sexpensed– Var i abl enonmanuf act ur i ngcost sexpensed=Tot al cont r i but i onmar gi n. Gr ossmar gi n:Tot alsel l i ngpr i ce–Var i abl emanuf act ur i ngcost sexpensed–Fi x ed manuf act ur i ngcost sexpensed=Gr ossmar gi n. 34. Pr ofit v ol umeanal ys i spl ot sonl yt hec ont r i but i onmar gi nl i neagai nstv ol ume,whi l ecost v ol umepr ofitanal y si spl ot st ot al r ev enueandt ot alc ost sagai nstv ol ume.Pr ofit v ol ume anal ys i si sas i mpl er ,butl esscompl et e,met hodofpr esent at i on. 35. Cost st hatar e“ fix edi nt heshor tr un”ar eusual l ynotfix edi nt hel ongr un.I nf actf ew,i f any ,cost sar efix edoverav er yl ongt i mehor i z on,becausemanager scanmak edeci si ons t hatchangeafir m’ scostst r uct ur e.

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Chapter 03 - Fundamentals of Cost-Volume-Profit Analysis

36. Oper at i ngl ev er agei st hepr opor t i onoffix edcost si nanor gani z at i on’ scostst r uct ur e.I ti s i mpor t antf ormanager sbecausei tdet er mi neshowani ncr easei nvol umeaffect st he changei npr ofit s. 37. Themar gi nofs af et yi st heex cessofsal esov ert hebr eak ev env ol ume.Manager scan uset hemar gi nofsaf et yt ounder s t andhowf arsal escanf al lbef or et hefi r mi soper at i ng atal oss. 38.

Tar getv ol ume( uni t s ) =

Fi x edc ost s+[ Tar getpr ofit / ( 1t ) ] Uni tcont r i but i onmar gi n

39. I ncomet axesdonotaffectt hebr eak ev enequat i onbecausewi t hz er oi ncome ( br eak ev en) ,t her ear enoi ncomet ax est opay . 310. I ti scommont oass umeafix edsal esmi xwhensol vi ngf orbr eak ev env ol umeswi t h mul t i pl epr oduct sbecauset hecont r i but i onmar gi ndependsont her el at i v equant i t i esof t hei ndi vi dualpr oduct ssol d.I ft hes al esmi xi snotfix ed,t hebr eak ev env ol umei s i ndet er mi nat e. 311. Twocommonass umpt i onsi nCVPanal y si sar et hatuni tpr i cesanduni tv ar i abl ecost sar e const ant .I ti sal socommont oassumet hatfi x edcost sar econst antov err el at i vel yl ar ge v ol umer anges.Al t hought heseass umpt i onsar ecommon,t heyar enotanecessar ypar t ofCVPanal y si s.CVPanal y si scanacceptmanyf or msofpr i ceandcostr el at i onswi t h v ol ume.Howev er ,whenmor egener alr el at i onsar eused,t hecommonbr eak ev en f or mul aswi l l nol ongerhol d.

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Chapter 03 - Fundamentals of Cost-Volume-Profit Analysis

Sol ut i onst oCr i t i calAnal ysi sandDi scussi onQuest i ons 312. Ther emaybeadi ffer encebet weencost susedi ncost v ol umepr ofitanal y si sandcost s expensedi nfinanci alst at ement s.Acommonex ampl ei sfix edmanuf act ur i ngcost s .Cost v ol umepr ofitanal y si sassumesfi x edmanuf act ur i ngcost sar eper i odcost s ,whi l et heyar e t r eat edaspr oductcost sf orfinanci al r epor t i ng.I fpar tofcur r entpr oduct i oni si nv ent or i ed, somefix edmanuf act ur i ngc ost swoul dnotbeexpensedf orfinanci al r epor t i ng.Ont he ot herhand,i fc ur r ents al esi nc l udeal lofc ur r entpr oduct i onpl ussomef r om i nv ent or y ,al l fix edcost sf r om t hi sper i odpl ussomef r om pr evi ousper i odswoul dbeexpensedf or financi alr epor t i ng. 313. Theaccount antmak esuseofal i nearr epr esent at i ont osi mpl i f yt heanal y si sofcost sand r ev enues.Theses i mpl i f y i ngass umpt i onsar egener al l yr easonabl ewi t hi nar el ev ant r angeofact i vi t y .Wi t hi nt hi sr ange,i ti sgener al l ybel i ev edt hatt headdi t i onal cost s r equi r edt oempl oynonl i nearanal y si scannotbej ust i fiedi nt er msoft hebenefit sobt ai ned. Thus,wi t hi nt hi sr ange,t hel i nearmodel i sc ons i der edt he“ best ”i nacost benefitsense. 314. Asv ol umer i ses,i ti sl i k el yt hatpr oductmar k et swi l lbes at ur at ed,l eadi ngt oaneedt ocut pr i cest omai nt ai nori ncr easev ol ume.Thi spr i cecut t i ngwoul dr esul ti nanonl i near r ev enuef unct i onwi t has l opet hatbecomesl essst eep( t houghst i l lpos i t i v e)asv ol ume i ncr eases.Mor eover ,asact i vi t yi nc r easesandappr oachescapaci t yconst r ai nt s,cost s t endt or i semor et hanpr opor t i onat el y .Ov er t i mepr emi umsandshi f tpaydi ffer ent i al s i ncr easet heuni tl aborcost s.Si mi l arc ost smaybei ncur r edi nt er msofex cess mai nt enancecost sf orr unni ngmachi nesbey ondt hei ropt i mal per f or mancel ev el s,hi gher mat er i al scost sf oranyi nputcommodi t yt hati si nshor ts uppl y ,ands i mi l arf act or s .These f act or st endt ocausecost st or i semor et hanpr opor t i onat el ywi t hani ncr easei nact i vi t y . 315. Al t hought heass umpt i onsofCVPanal y si sappearr el at i v el ys i mpl i st i c,CVPanal y si si sa usef ul t oolf orunder st andi ngt her el at i onsamongcost s,v ol umes,andt her esul t i ngpr ofit . Cl ear l y ,t hemor ei mpor t antt hedeci si on,t hemor et i met hatshoul dbespentdev el opi ng goodass umpt i ons.Howev er ,CVPanal y si si susef ulf ordevel opi ngi nt ui t i onaboutt hecost st r uct ur eoft hefir m. 316. Al t hought her ear eno“ pr ofit s ”i nanot f or pr ofitor gani zat i on,t heseor gani zat i onsar est i l l v er yconcer nedaboutt hedi ffer encebet weeni nflows( f r om f ees,gr ant s ,s al es,orot her sour ces)andc ost s.Of t ent het er m“ sur pl us ”wi l lbeusedi npl aceofpr ofitandt he met hodsofCVPanal ys i scanbeappl i edi nt hesamewayt hati ti si naf or pr ofitfi r m. 3-3 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 03 - Fundamentals of Cost-Volume-Profit Analysis

317. Mostbusi nesssc hool shaver el at i v el yhi ghfix edcost swhenv ol umei smeasur edbyt he numberofst udent s.Ex ampl esoft hesecost swoul dbepl ant( bui l di ngsandgr ounds) , f acul t yandst aff,andsuppor t( f orex ampl e,comput err esour ces) .Var i abl ecost sar e r el at i v el yl ow.Ther ef or e,mostbusi nesssc hool swoul dbec har act er i zedbyhi ghoper at i ng l ev er age. 318. Hi gh( orl ow)oper at i ngl ev er agei snotagood( orbad)t hi ng.I ti st her esul tofmanager i al deci si onsaboutt her esour cest obeused( andt hest r uct ur eoft hecost st hatr esul t ) . Ther ef or e,i fi ti sbet t ert ouser esour ces,whi char emor efl exi bl e,i tmi ghtbepr ef er abl et o r ent( l ease) .Asar esul t ,t heoper at i ngl ev er agewoul dbel owert hanasi mi l arbusi ness wher eamanagerdeci dedt hati swasbet t ernott obeart her i sk sofr i si ngr ent s. 319. The“ pr oduct ”or“ ser vi ce”f oranai r l i nec onsi st sofafli ghtbet weent woci t y pai r s( f or ex ampl e,LosAngel est oSanFr anci sc o) .Asyoucani magi ne,t henumberof“ pr oduct s” f oranyai r l i nei sv er yl ar ge.( I nf act ,i ti sev enl ar ger ,i ft i meof dayi sconsi der edt obe anot herpr oduct . )Ai r l i nesof t enflyami xofai r cr af taswel l ,f ur t hercompl i cat i ngt he anal ys i s .Ther ef or e,whenyour eadst at ement ssuchast hi s,beawar et hatt henumber s ar egi venass umi ngac ur r entmi xoffli ght sandai r cr af t .I tdoesnotmeant hati fan i ndi vi dual fli ghthas63% ofs eat sfil l ed,t hefli ghtwi l l br eakev en.

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Chapter 03 - Fundamentals of Cost-Volume-Profit Analysis

Sol ut i onst oExer ci ses 320.( 15mi n. ) Pr ofitEquat i onComponent s.

b. Total revenue line

g. The profit area f. The break-even point

d. Slope = Variable cost per unit a. Total cost line

c. The variable costs area h. The loss area

h. Loss volume

g. Profit volume e. The fixed costs area

321.( 15mi n. ) Pr ofitEquat i onComponent s. a.Tot al fix edcost s( l ossatzer ov ol ume) b.Br eak ev enpoi nt c.Sl ope=cont r i but i onmar gi nperuni t d.Pr ofitl i ne e.Pr ofitar ea f . Netl ossar ea g.Zer opr ofitl i ne

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Chapter 03 - Fundamentals of Cost-Volume-Profit Analysis

322.( 20mi n.   ) Basi cDeci si onAnal ysi sUsi ngCVP:Anu’ sAmusementCent er . a.$1, 600, 000 100, 000t i ck et s=$16. 00pert i ck et b.$900, 000 100, 000t i ck et s=$9. 00pert i ck et c.( $16. 00–$9. 00)=$7. 00pert i ck et d.Pr ofit=( $16. 00–$9. 00) X–$437, 500 LetPr ofit=0 0=( $16. 00–$9. 00) X–$437, 500 $437, 500 $7. 00 X= 62, 500t i ck et s X=

e.LetPr ofit=$43, 750 $43, 750=( $16. 00–$9. 00) X–$437, 500 $437, 500+$43, 750 $7. 00 X= 68, 750t i ck et s

X=

323.( 20mi n.   ) Basi cCVPAnal ysi s:Ki ma’ sFoodMar t . a.Br eak ev enpoi nti ssal esdol l ar s=Fi x edc ost s÷Cont r i but i onmar gi nr at i o =$900, 000 ÷0. 40=$2, 250, 000 b.Br eak ev enpoi nti ssal esdol l ar s=Fi x edc ost s÷Cont r i but i onmar gi nr at i o =$900, 000 ÷0. 25=$3, 600, 000 c.Sal esdol l ar sr equi r ed=( Fi x edcost s+Desi r edpr ofit )÷Cont r i but i onmar gi nr at i o =( $900, 000+$200, 000)÷0. 40=$2, 750, 000

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Chapter 03 - Fundamentals of Cost-Volume-Profit Analysis

324.( 25mi n. )CVPAnal ysi s—Et hi calI ssues:Mar kTi ng. Thi spr obl em i sbasedont heexper i enceoft heaut hor sats ever al compani es. Thepr obl em i nt hi sex ampl e,whi chi scommon,i st hatt hegui del i nest hecompanyhas est abl i shed( f orex ampl e,ahi ghbr eak ev enpoi nt )l eadt opr oj ect st hatwoul dbeval uabl e i ns omeway ,butc annotmeett hest andar dest abl i shedbyt hecompany . Mar kbel i eves,per hapshonest l y ,t hatt henewpr oducti sv al uabl ef ort hec ompany . However ,t heappr oachhehast ak ent osuppor tt hepr oducti sunet hi cal . Mar kshoul dper suadet hemanagementoft hecompanyt hatt hebr eak ev enr equi r ement i si nappr opr i at e. 325.( 55mi n. ) Basi cDeci si onAnal ysi sUsi ngCVP:Cambr i dge,I nc. a. Pr ofit=( P–V) X–F $0 =( $27–$15) X–$30, 000 $12X =$30, 000 $30, 000 $12 = 2, 50 0 uni t s

X= X

b. Pr ofit =( P–V) X–F $18, 000 =( $27–$15) X–$30, 000 $12X =$48, 000 X= X=

$48, 000 $12 4, 000 uni t s

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Chapter 03 - Fundamentals of Cost-Volume-Profit Analysis

326.( 55mi n. ) Basi cDeci si onAnal ysi sUsi ngCVP:Cambr i dge,I nc. a.Pr ofit = ( $27–$15) 7, 000–$30, 000 = $54, 000

b.10% pr i cedecr ease.NowP=$24. 30 Pr ofit=( $24. 30–$15. 00)x7, 000–$30, 000 = $35, 100

Pr ofitdecr easesby$18, 900

20% pr i cei nc r ease.NowP=$32. 40 Pr ofit=( $32. 40–$15. 00)x7, 000–$30, 000 =$91, 800  Pr ofiti ncr easesby$37, 800 c.10% v ar i abl ecostdecr ease.NowV=$13. 50 Pr ofit=( $27–$13. 50)x7, 000–$30, 000 =$64, 500  Pr ofiti ncr easesby$10, 500 20% var i abl ec osti ncr ease.NowV=$18 Pr ofit=( $27–$18)x7, 000–$30, 000 =$33, 000 d.

 Pr ofitdecr easesby$21, 000

Pr ofit=( $27–$16. 50)x7, 000–$27, 000 =$46, 500  Pr ofitdecr easesby$7, 500

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Chapter 03 - Fundamentals of Cost-Volume-Profit Analysis

327. ( 25mi n. ) Basi cDeci si onAnal ysi sUsi ngCVP:Bal ance,I nc. a. Pr ofit=( P–V) X–F $0 =( $1. 00–$0. 20) X–$400, 000 $0. 80X =$400, 000 $400, 000 $0. 80 = 500, 0 uni t s 00

X= X b.

Pr ofit =( P–V) X–F $100, 000 =( $1. 00–$0. 20) X–$400, 000 $0. 80X =$500, 000 X= X=

$500, 000 $0. 80 625, 000 uni t s

328.( 30mi n. )Basi cDeci si onAnal ysi sUsi ngCVP:Bal ance,I nc. a. Pr ofit=( $1. 00–$0. 20) 600, 000–$400, 000 =$80, 000 b.10% pr i cedecr ease.NowP=$0. 90 Pr ofit=( $0. 90–$0. 20)x600, 000–$400, 000 = $20, 000

Pr ofitdecr easesby$60, 000

20% pr i cei nc r ease.NowP=$1. 20 Pr ofit=( $1. 20–$0. 20)x600, 000–$400, 000 =$200, 000  Pr ofiti ncr easesby$120, 000 c.10% v ar i abl ecostdecr ease.NowV=$0. 18

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Chapter 03 - Fundamentals of Cost-Volume-Profit Analysis

Pr ofit=( $1. 00–$0. 18)x600, 000–$400, 000 =$92, 000

 Pr ofiti ncr easesby$12, 000

20% v ar i abl ecosti ncr ease.NowV=$0. 24 Pr ofit=( $1. 00–$0. 24)x600, 000–$400, 000 =$56, 000 d.

 Pr ofitdecr easesby$24, 000

Pr ofit=( $1. 00–$0. 22)x600, 000–$360, 000 =$108, 000  Pr ofiti nc r easesby$28, 000

329. ( 30mi n. )Basi cCVPAnal ysi s:LM Ent er pr i ses. $7peruni t . Us i ngt hepr ofitequat i on: Pr ofit=( P–V)xX–F =( $12–V)x540, 000–$1, 700, 000 V=$3, 780, 000÷540, 000 V=$7peruni t . Us i ngani ncomest at ementf or mat( basedon540, 000uni t s) : Amount Sal es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6, 480, 000 ( a) Var i abl ecost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, 780, 000 Cont r i but i onmar gi n. . . . . . . . . . . . . . . . . . . . . . . . . $2, 700, 000 ( b) Fi x edcost s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 700, 000 Oper at i ngpr ofitbef or et ax es. . . . . . . . . . . . $1, 000, 000

Uni t $12 7 ( c) $5

( a)$12x540, 000uni t s=$6, 480, 000( Sal es )

( b) $1, 000, 000+$1, 700, 000=$2, 700, 000( Cont r i but i onmar gi n) ( c) $6, 480, 000-$2, 700, 000=$3, 780, 000/540, 000uni t s=$7( Uni tv ar i abl ecos t )

330.( 30mi n. )Anal ysi sofCostSt r uct ur e:TheDol l arSt or evs.OneMar t .

a.

Dol l arSt or e

OneMar t

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Chapter 03 - Fundamentals of Cost-Volume-Profit Analysis

Amount Per cent age Sal es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ . 500, 000 100% Var i abl ecost . . . . . . . . . . . . . . . . . . . . . . . . 350, 000 70 Cont r i but i onmar gi n. . . . . . . . . . . $ . 150, 000 30% Fi x edcost s. . . . . . . . . . . . . . . . . . . . . . . . . . .30, 000 6 Oper at i ngpr ofit . . . . . . . . . . . . . . . . . . . $ . 120, 000 24%

Amount Per cent age $500, 000 100% 100, 000 20 $400, 000 80% 280, 000 56 $120, 000 24%

b.Dol l arSt or e’ spr ofit si ncr easeby$22, 500[ =. 30x( $500, 000x. 15) ]andOneMar t ’ s pr ofit si ncr easeby$60, 000[ =. 80x( $500, 000x. 15) ] .

331.( 30mi n. ) Anal ysi sofCostSt r uct ur e:FoxxCompanyvs.Beyonce,I nc. a.

Fox xCompany Amount Per cent age Sal es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ . 600, 000 100% Var i abl ecost . . . . . . . . . . . . . . . . . . . . . . . . 450, 000 75 Cont r i but i onmar gi n. . . . . . . . . . . $ . 150, 000 25% Fi x edcost s. . . . . . . . . . . . . . . . . . . . . . . . . . . 100, 000 17 Oper at i ngpr ofit . . . . . . . . . . . . . . . . . . . $ .50, 000 8%

Bey once,I nc. Amount Per cent age $600, 000 100% 120, 000 20 $480, 000 80% 400, 000 67 $80, 000 13%

b.FoxxCompany’ spr ofit si ncr easeby$30, 000[ =. 25x( $600, 000x. 20) ]andBey once I nc. ’ s pr ofit si ncr easeby$96, 000[ =. 80x( $600, 000x. 20) ] . 332.( 15mi n. ) CVPandMar gi nofSaf et y:Rai nbow Tour s. a. Pr ofit=( P–V) X–F $0 =( $40. 00–$16. 00) X–$3, 600 $24. 00X =$3, 600 $3, 600 $24. 00 = 150 t our s

X= X b.

Mar gi nofs af et y =175– 150 =25peopl e( 16. 7%)

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Chapter 03 - Fundamentals of Cost-Volume-Profit Analysis

333.( 20mi n. ) Usi ngMi cr osof tExcelt oPer f or m CVPAnal ysi s:Cambr i dge,I nc. a.2, 500uni t s . Thef ol l owi ngt wosc r eenshot ss howt hes et upands ol ut i on.

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Chapter 03 - Fundamentals of Cost-Volume-Profit Analysis

333( cont i nued) . b.3, 000uni t s . Thef ol l owi ngt wosc r eenshot ss howt hes et upands ol ut i on.

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Chapter 03 - Fundamentals of Cost-Volume-Profit Analysis

334.( 20mi n. ) Usi ngMi cr osof tExcelt oPer f or m CVPAnal ysi s:Bal ance,I nc. a.500, 000uni t s. Thef ol l owi ngt wosc r eenshot ss howt hes et upands ol ut i on.

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Chapter 03 - Fundamentals of Cost-Volume-Profit Analysis

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