UNIVERSITY OF TECHNOLOGY

SCHOOL OF BUSINESS ADMINISTRATION

COST – VOLUME – PROFIT TUTORIAL SHEET

Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.

1. If variable costs per unit decrease, sales volume at the break-even point will
a. increase
b. decrease
c. remain the same
d. remain the same; however, contribution margin per unit will
decrease
2. If fixed costs increase, the break-even point in units will
a. increase
b. decrease
c. remain the same
d. remain the same; however, contribution margin per unit will
decrease
3. If the selling price per unit increases, the break-even point in units will
a. increase
b. decrease
c. remain the same
d. remain the same; however, contribution margin per unit will
decrease
4. If the contribution margin per unit decreases, the break-even point in units
a. will increase
b. will decrease
c. will remain the same
d. cannot be determined from the information given
Structured Questions

5. The Cutlass Company had sold 30,000 units of its product totaling $1,050,000 in
sales and a net income of $90,000. At the break-even point, the company's total
contribution margin equals $600,000.

Based on this information, what would be the company's variable

expenses?

6. The break-even point in units is 2,000 for Lumus Company. Contribution margin
per unit was $20 per unit. What would total sales units if Lumus Company desires
a net income of $45,000?

Figure 16-7

The following information pertains to Kangas Company:

Selling price per unit $250

Variable manufacturing costs per unit $75
Fixed manufacturing costs per unit $90
Variable selling costs per unit $45
Fixed selling costs per unit $20
Expected production and sales 2,000 units

7. By how many units can Kangas Company's sales decline before losses are incurred?

8. Information about two products is as follows:

Product C Product D
Selling price per unit $20 $25
Variable costs per unit  11  18
Contribution margin per unit $ 9 $ 7

The firm expects 60 percent of its sales (in units) to be Product C (a sales mix
of 6:4). Fixed costs are expected to be $82,000.
 What is the Break-even in units?
Figure 16-8

Information about two products is as follows:

Product E Product Z
Selling price per unit $40 $65
Variable costs per unit  15  45
Contribution margin per unit $25 $20

The firm expects 80 percent of its sales (in units) to be Product E (a sales mix
of 8:2). Fixed costs are expected to be $90,000.

9. Refer to Figure 16-8. What is the Break-even in units?

10. Refer to Figure 16-8. How many units of Product E should be sold if the company
is targeting a before-tax income of $120,000?

Figure 16-9

Lily Fan Company has three products: Economy, Standard, and Deluxe. The
following information is available for the three products:

Economy Standard Deluxe

Selling price $10  $20  $35 
Variable cost $ 8  $13  $24 
Contribution margin $2  $7  $11 
Expected sales 18,000  12,000  6,000 

Fixed costs are $170,500.

11. Refer to Figure 16-9. Assuming the sales mix does not change, what would be the
break-even sales in dollars for Economy?

12. Refer to Figure 16-9. Assuming the sales mix does not change and if target net
income before tax for the coming year is $62,000, how many units of Standard must
be sold?

13. Refer to Figure 16-9. What is Lily Fan Company's margin of safety?

14. Danna Company has a margin safety of $20,000. The break-even point is $220,000,
and the variable cost ratio is 25 percent. Given this information, what would be
the net income?

Figure 16-11

The Taylor Company has provided the following information:

Unit Level of
Activity Driver Variable Cost Activity Driver
Units $10      --      
Setups $1,000      20      
Engineering hours $30      1,000      

Other data:
Total fixed costs (ABC) $50,000
Unit selling price $20

15. Refer to Figure 16-11. How many units must be sold if Taylor wants to earn
$56,000 after taxes? Taylor's tax rate is 30 percent.
16. A client has recently decided to launch a new product.
Based on studies done by the staff, the following data has been made available to you.
Estimated Costs (all variable):
per unit
Materials 4.00
Direct labour 0.60
Variable overheads 2.20
6.80
Selling expenses (also variable) is estimated at 20% of the selling price.
The client asks you to assume fixed cost is nil as it has already written off the plant and machinery required to
produce this product.

What selling price must be set to earn a profit of $1.20 per unit?

17. Success Ltd manufactures 75,000 units of a product at a variable cost of $0.75 per unit.
Sales of these units are as follows:
The first 40,000 units will sell for $1.50 each
Any sale above 40,000 units will be at $1.00 each.
Fixed costs are $32,000.
What is the breakeven point in units?

18. Pleasure & Company plans to manufacture and sell 30,000 units of a product next year.
The variable cost of this product is $6.00 per unit. Total fixed costs is expected to be $54,000.
The company has already obtained orders from three of its customers to buy some of the units it will produce.
These orders are as follows:

Customer Hex will buy 6,000 units at $12.00 each

Customer Why will buy 8,000 units at $11.00 each
Customer Zee will buy 10,000 units at $10 each.
Total orders so far 24,000 units.

What is the lowest selling price the company can set on the remaining units if it wants to achieve a profit of
$80,000 from the sale of all 30,000 units?

19. A company has sales of $192,000, fixed costs of $40,000 and a contribution /sales ratio of 1/3

What are its profits?

20. Enola, Inc., manufactures a product that sells for $400. The variable costs per
unit are as follows:

Direct materials $100

Direct labor 80
Variable manufacturing overhead 50

During the year, the budgeted fixed manufacturing overhead is estimated to be

$500,000, and budgeted fixed selling and administrative costs are expected to be
$250,000. Variable selling costs are $20 per unit.

Required:

a. Determine the break-even point in units.

b. Determine the number of units that must be sold to earn $300,000 in profit
before taxes.

c. Determine the number of units that must be sold to generate an after-tax

profit of $90,000 if there is a 40 percent tax rate.
21. LaVerle, Inc., manufactures a product that sells for $480. The variable costs
per unit are as follows:

Direct materials $160

Direct labor 100
Variable manufacturing overhead 40

During the year, the budgeted fixed manufacturing overhead is estimated to be

$100,000, and budgeted fixed selling and administrative costs are expected to be
$40,000. Variable selling costs are $20 per unit.

Required:

a. Determine the break-even point in units.

b. Determine the number of units that must be sold to earn $60,000 in profit
before taxes.

c. Determine the number of units that must be sold to generate an after-tax

profit of $60,000 if there is a 40 percent tax rate

22. Determine the following missing amounts:

Sales $100,000
Total variable costs ?
Contribution margin ?
Total fixed costs $20,000
Net income $12,000
Units sold 100
Price ?
Variable cost per unit ?
Contribution margin per unit ?
Contribution margin ratio ?
Break-even point in units ?

23. Explain why cost-volume-profit analysis can be useful to managers.

Tutorial No. 3 - CVP Analysis
Answer Section

MULTIPLE CHOICE

1. ANS: B
2. ANS: A
3. ANS: B
4. ANS: A
5. ANS: A
SUPPORTING CALCULATIONS:
Fixed costs = $600,000
Total variable costs = $1,050,000 - $90,000 - $600,000 = $360,000
Variable cost per unit = $360,000/30,000 units = $12 per unit

6. ANS: B
SUPPORTING CALCULATIONS:
Total fixed costs = 2,000 x $20 = $40,000
Sales = ($40,000 + $45,000)/$20 = 4,250 units

7. ANS: C
SUPPORTING CALCULATIONS:
$250 - ($75 + $45) = $130

($90 + $20) x 2,000 = $220,000

2,000 - ($220,000/$130 per unit) = 308 units

8. ANS: D
SUPPORTING CALCULATIONS:

CM Mix
Product C: $9 x  6 = $54
Product D: $7 x  4 =  28
$82

Break-even = $82,000/$82 per package = 1,000 packages

Product C: 1,000 packages x 6 units per package = 6,000 units

Product D: 1,000 packages x 4 units per package =  4,000 units
Total 10,000 units

9. ANS: B
SUPPORTING CALCULATIONS:

Product E: $25 x 8 = $200

Product Z: $20 x 2 =   40
$240

Break-even = $90,000/$240 per package = 375 packages

Product E: 375 packages x 8 units per package = 3,000 units

Product Z: 375 packages x 2 units per package =   750 units
Total 3,750 units

10. ANS: D
SUPPORTING CALCULATIONS:

Product E: $25 x 8 = $200

Product Z: $20 x 2 =   40
$240

Break-even = ($90,000 + $120,000)/$240 per package = 875 packages

Product E: 875 packages x 8 units per package = 7,000 units

 11. ANS: D
SUPPORTING CALCULATIONS:
CM of package: ($2 x 3) + ($8 x 2) + ($15 x 1) = $31
BE package: $170,500/$31 = 5,500 units
BE in units for Economy: 5,500 units x 3 = 16,500 units
BE in sales for Economy: 16,500 units x $10 = $165,000

12. ANS: C
SUPPORTING CALCULATIONS:
CM of package: ($2 x 3) + ($8 x 2) + ($15 x 1) = $31
BE package: ($170,500 + $62,000)/$31 = 7,500 units
BE in units for Standard: 7,500 units x 2 = 15,000 units

13. ANS: A
SUPPORTING CALCULATIONS:

CM of package: ($2 x 3) + ($8 x 2) + ($15 x 1) = $31

BE package: $170,500/$31 = 5,500 units
BE in sales for Economy: 5,500 units x 3 x $10 = $165,000
BE in sales for Standard: 5,500 units x 2 x $20 = 220,000
BE in sales for Deluxe: 5,500 units x 1 x $35 =  192,500
Total BE sales $577,500

Total expected sales =

  (18,000 x $10) + (12,000 x $20) + (6,000 x $35) = $630,000

Margin of safety = $630,000 - $577,500 = $52,500

14. ANS: B
SUPPORTING CALCULATIONS:
Fixed costs = $220,000 x .75 = $165,000

Net income = [($220,000 + $20,000) x .75] - $165,000 = $15,000

15. ANS: C
SUPPORTING CALCULATIONS:
Desired before-tax income = $56,000/(1 - .3) = $80,000

Number of units
= (Fixed costs + Income)/(Price per unit - Variable cost per unit)
= [$50,000 + ($1,000 x 20) + ($30 x 1,000) + $80,000]/
  ($20 per unit - $10 per unit)
= 18,000 units

16. ANS: SP = 6.80 + 0.2SP + 1.20

= 8.00/0.2
= 10.00
17. ANS: B
18. ANS: A
19. ANS: B

PROBLEM

20. ANS:

a. 5,000 units ($500,000 + $250,000)/[$400 - ($100 + $80 + $50 + $20)]

b. 7,000 units ($750,000 + $300,000)/($400 - $250)
c. 6,000 units [$750,000 + ($90,000/.6)]/($400 - $250)

REF: p. 658, 659

21. ANS:

a. 875 units ($100,000 + $40,000)/[$480 - ($160 + $100 + $40 + $20)]

b. 1,250 units ($140,000 + $60,000)/($480 - $320)
c. 1,500 units [$140,000 + ($60,000/.6)]/($480 - $320)

REF: p. 658
22. ANS:
 Sales $100,000
Total variable costs $68,000
Contribution margin $32,000
Total fixed costs $20,000
Net income $12,000
Units sold 100
Price ($100,000/100) $10
Variable cost per unit $6.80
Contribution margin per unit $3.20
Contribution margin ratio 32%
Break-even point in units ($20,000/$3.20) 6,250 units

REF: p. 661

ESSAY

23. ANS:
Cost-volume-profit (CVP) analysis is a powerful tool for planning and decision
making. Because CVP analysis emphasizes the interrelationships of costs,
quantity sold, and price, it brings together all of the financial information of
the firm. CVP analysis can be a valuable tool to identify the extent and
magnitude of the economic trouble a division is facing and to help pinpoint the
necessary solution. CVP analysis can address many other issues as well, such as
the number of units that must be sold to break even, the impact of a given
reduction in fixed costs on the break-even point, and the impact of an increase
in price on profit. Additionally, CVP analysis allows managers to do sensitivity
analysis by examining the impact of various prices or cost levels on profit.

REF: p. 656