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    CVP Analysis Answer Key Independent Learning

    Uploaded by

    Carla Garcia
    The document contains financial information and calculations for two companies, Aqua Gear and Yard Bird. For Aqua Gear, it calculates break-even points in units and dollars based on contribution margin. It also analyzes the effects of potential changes to pricing and expenses. For Yard Bird, it calculates total sales, costs, contribution margin and break-even point in units for different product types. It also determines the unit levels needed to achieve given earnings targets.

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    CVP Analysis Answer Key Independent Learning

    Uploaded by

    Carla Garcia
    81 views2 pages
    The document contains financial information and calculations for two companies, Aqua Gear and Yard Bird. For Aqua Gear, it calculates break-even points in units and dollars based on contribution margin. It also analyzes the effects of potential changes to pricing and expenses. For Yard Bird, it calculates total sales, costs, contribution margin and break-even point in units for different product types. It also determines the unit levels needed to achieve given earnings targets.

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    The document contains financial information and calculations for two companies, Aqua Gear and Yard Bird. For Aqua Gear, it calculates break-even points in units and dollars based on contribution margin. It also analyzes the effects of potential changes to pricing and expenses. For Yard Bird, it calculates total sales, costs, contribution margin and break-even point in units for different product types. It also determines the unit levels needed to achieve given earnings targets.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    81 views2 pages

    CVP Analysis Answer Key Independent Learning

    Uploaded by

    Carla Garcia
    The document contains financial information and calculations for two companies, Aqua Gear and Yard Bird. For Aqua Gear, it calculates break-even points in units and dollars based on contribution margin. It also analyzes the effects of potential changes to pricing and expenses. For Yard Bird, it calculates total sales, costs, contribution margin and break-even point in units for different product types. It also determines the unit levels needed to achieve given earnings targets.

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    © All Rights Reserved
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    Aqua Gear

    a. Total variable cost = $28 + $12 + $8 = $48


    Contribution margin per unit = $70 $48 = $22 per unit
    Contribution margin ratio = $22 ÷ $70 = 31.4% (rounded)
    Total fixed costs = $10,000 + $24,000 = $34,000
    Break-even point in units = $34,000 ÷ $22 per unit = 1,545 units (rounded)
    Break-even point in dollars = $34,000 ÷ 0.314 = $108,280 (rounded)

    b. ($40,000 + $34,000) ÷ 0.314 = $235,669 (rounded)


    ($235,669 ÷ $70) = 3,367 units (rounded)

    c. Convert after-tax earnings to pre-tax earnings: $40,000 ÷ (1 0.40) = $66,667


    Required sales = ($66,667 + $34,000) ÷ 0.314 = $320,596 (rounded)
    $320,596 ÷ $70 = 4,580 units (rounded)

    d. Convert the after-tax rate of earnings to a pre-tax rate of earnings:


    [20% ÷ (1 0.40)] = 33.33%
    Because the CM% is only 31.4%, no level of sales would generate net income
    equal to, on a pre-tax basis, 33.33% of sales.

    e. Variable cost savings (5,000 × $6.00) $ 30,000


    Additional fixed costs (40,000)
    Decrease in profit $(10,000)
    The company should not buy the new sewing machine.

    f. Existing CM per unit = $22


    CM under proposal = ($70 × 0.90) $48 = $15
    Total CM under proposal (3,000 × 1.30 × $15) $ 58,500
    Existing CM (3,000 × $22) (66,000)
    Change in CM $ (7,500)
    Change in fixed costs (10,000)
    Change in net earnings before taxes $ (17,500)

    No, these two changes should not be made because they would lower pre-tax
    profits by $17,500 relative to existing levels.
    Yard Bird

    a. Total sales price per bag:


    Commercial ($5,600 × 1) $5,600
    Residential ($1,800 × 3) 5,400 $11,000
    Total variable costs per bag:
    Commercial ($3,800 × 1) $3,800
    Residential ($1,000 × 3) 3,000 (6,800)
    Total contribution margin $ 4,200
    Break-even point in units = $8,400,000 ÷ $4,200 = 2,000 bags
    Commercial: 2,000 × 1 = 2,000 mowers
    Residential: 2,000 × 3 = 6,000 mowers

    b. ($8,400,000 + $1,260,000) ÷ $4,200 = 2,300 bags


    Commercial: 2,300 × 1 = 2,300 mowers
    Residential: 2,300 × 3 = 6,900 mowers

    c. Pre-tax equivalent of $1,008,000 after-tax = $1,008,000 ÷ (1 0.40) = $1,680,000


    ($8,400,000 + $1,680,000) ÷ $4,200 = 2,400 bags
    Commercial: 2,400 × 1 = 2,400 mowers
    Residential: 2,400 × 3 = 7,200 mowers

    d. Let X = number of bags that must be sold to produce pre-tax earnings


    equaling 12 percent of sales revenue, then:
    $4,200X $8,400,000 = 0.12($11,000X)
    X = 2,917 bags (rounded)
    Commercial: 2,917 × 1 = 2,917 mowers
    Residential: 2,917 × 3 = 8,751 mowers

    e. Convert the after-tax return to a pre-tax rate of return:


    0.08 ÷ (1 0.40) = 13% (rounded)
    $4,200X $8,400,000 = 0.13($11,000X)
    X = 3,032 bags (rounded)
    Commercial: 3,032 × 1 = 3,032 mowers

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