BAF7014 Business Accounting & Finance

Lecture 2_CVP Analysis

1. Moonwalker's CVP income statement included sales of 4,000 units, a selling price of
$100, variable expenses of $60 per unit, and fixed expenses of $88,000. Contribution
margin is
A) $400,000.
B) $240,000.
C) $160,000.
D) $72,000.

2. Moonwalker's CVP income statement included sales of 4,000 units, a selling price of
$100, variable expenses of $60 per unit, and fixed expenses of $88,000. Net income is
A) $400,000.
B) $160,000.
C) $152,000.
D) $72,000.

3. For Buffalo Co., at a sales level of 5,000 units, sales is $75,000, variable expenses total
$50,000, and fixed expenses are $21,000. What is the contribution margin per unit?
A) $4.20
B) $5.00
C) $10.00
D) $15.00

4. If contribution margin is $120,000, sales is $300,000, and net income is $40,000, then
variable and fixed expenses are
Variable Fixed
A) $180,000 $260,000
B) $180,000 $80,000
C) $80,000 $180,000
D) $420,000 $260,000

5. Hinge Manufacturing's cost of goods sold is $420,000 variable and $240,000 fixed. The
company's selling and administrative expenses are $300,000 variable and $360,000
fixed. If the company's sales is $1,480,000, what is its contribution margin?
A) $160,000
B) $760,000
C) $820,000
D) $880,000

Page 1
 6. Hinge Manufacturing's cost of goods sold is $420,000 variable and $240,000 fixed. The
company's selling and administrative expenses are $300,000 variable and $360,000
fixed. If the company's sales is $1,480,000, what is its net income?
A) $160,000
B) $760,000
C) $820,000
D) $880,000

7. Woolford's CVP income statement included sales of 4,000 units, a selling price of $50,
variable expenses of $30 per unit, and net income of $25,000. Fixed expenses are
A) $55,000.
B) $80,000.
C) $120,000.
D) $200,000.

8. The contribution margin ratio is

A) sales divided by contribution margin.
B) sales divided by fixed expenses.
C) sales divided by variable expenses.
D) contribution margin divided by sales.

9. For Pierce Company, sales is $500,000, variable expenses are $330,000, and fixed
expenses are $140,000. Pierce's contribution margin ratio is
A) 10%.
B) 28%.
C) 34%.
D) 66%.

10. For Sanborn Co., sales is $1,000,000, fixed expenses are $300,000, and the contribution
margin per unit is $48. What is the break-even point?
A) $2,083,334 sales dollars
B) $625,000 sales dollars
C) 20,834 units
D) 6,250 units

2
11. Sales are $500,000 and variable costs are $350,000. What is the contribution margin
ratio?
A) 43%
B) 30%
C) 70%
D) Cannot be determined because amounts are not expressed per unit.

12. A company has total fixed costs of $200,000 and a contribution margin ratio of 20%.
The total sales necessary to break even are
A) $800,000.
B) $1,000,000.
C) $250,000.
D) $240,000.

13. A company sells a product which has a unit sales price of $5, unit variable cost of $3
and total fixed costs of $180,000. The number of units the company must sell to break
even is
A) 90,000 units.
B) 36,000 units.
C) 360,000 units.
D) 60,000 units.

14. The break-even point is where

A) total sales equal total variable costs.
B) contribution margin equals total fixed costs.
C) total variable costs equal total fixed costs.
D) total sales equal total fixed costs.

15. Cunningham, Inc. sells MP3 players for $60 each. Variable costs are $40 per unit, and
fixed costs total $90,000. What sales are needed by Cunningham to break even?
A) $120,000.
B) $225,000.
C) $270,000.
D) $360,000.

3
 16. Cunningham, Inc. sells MP3 players for $60 each. Variable costs are $40 per unit, and
fixed costs total $90,000. How many MP3 players must Cunningham sell to earn net
income of $210,000?
A) 15,000.
B) 5,250.
C) 3,750.
D) 4,500.

17. Hurly Co. has fixed costs totaling $132,000. Its contribution margin per unit is $1.50,
and the selling price is $5.50 per unit.

Instructions
Compute the break-even point in units.
Calculation : Break-even point in units = Fixed costs / Contribution margin
per unit = $132,000 / $1.50 = 88,000 units

Brief Exercise

Question 1
In the month of September, Thai Company sold 800 units of product. The average sales price
was $30. During the month, fixed costs were $7,200 and variable costs were 60% of sales.

Instructions
(a) Determine the contribution margin in dollars, per unit, and as a ratio.
 Total Sales : 800 units × $30 = $24,000
 Variable Costs : 60% of sales = 60% × $24,000 = $14,400
 Contribution Margin (Total) : Sales - Variable Costs = $24,000 - $14,400 = $9,600
 Contribution Margin per Unit : $9,600 / 800 units = $12 per unit
 Contribution Margin Ratio : Contribution Margin / Sales = $9,600 / $24,000 = 40%

(b) Using the contribution margin technique, compute the break-even point in dollars and in
units.
 Break-even Point in Units : Fixed Costs / Contribution Margin per Unit = $7,200 /
$12 = 600 units
 Break-even Point in Dollars : 600 units × $30 = $18,000

Question 2
4
Rankin Company had a net loss of $100,000 in 2016 when the selling price per unit was $20, the
variable costs per unit were $12, and the fixed costs were $600,000. Management expects per
unit data and total fixed costs to be the same in 2017. Management has set a goal of earning net
income of $100,000 in 2017.

Instructions
(a) Compute the units sold in 2016.
 Contribution Margin per Unit : Selling Price - Variable Costs = $20 - $12 = $8 per unit
 Fixed Costs : $600,000
 Net Loss : $100,000
 Total Required Revenue to Break Even: Fixed Costs - Net Loss = $600,000 + $100,000 =
$700,000
 Units Sold : $700,000 / $20 = 35,000 units

(b) Compute the number of units that would have to be sold in 2017 to reach management's
desired net income level.
 Desired Net Income : $100,000
 Total Revenue Required : Fixed Costs + Desired Net Income = $600,000 +
$100,000 = $700,000
 Units Required : $700,000 / $8 (Contribution Margin) = 87,500 units

(c) Assume that Rankin Company sells the same number of units in 2017 as it did in 2016.
What would the selling price have to be in order to reach the target net income? Use the
mathematical equation.
 Total Required Revenue : Fixed Costs + Desired Net Income + Variable Costs ×
Units = $600,000 + $100,000 + $12 × 35,000 = $920,000
 New Selling Price : $920,000 / 35,000 units = $26.29 per unit

Question 3

Polk Company developed the following information for its product:

Per Unit
Sales price $90
Variable cost 54
Contribution margin $36

Total fixed costs $1,080,000

Instructions
Answer the following independent questions and show computations using the contribution
margin technique to support your answers.

5
 1. How many units must be sold to break even?
 Break-even Units: Fixed Costs / Contribution Margin per Unit = $1,080,000 / $36 = 30,000 units

2. What is the total sales that must be generated for the company to earn a profit of
$60,000?
 Total Required Revenue : Fixed Costs + Desired Profit / Contribution Margin
Ratio = ($1,080,000 + $60,000) / ($36 / $90) = $1,140,000 / 0.4
= $2,850,000
3.
3. If the company is presently selling 45,000 units, but plans to spend an additional $108,000 on
an advertising program, how many additional units must the company sell to earn the same
net income it is now making?
 Additional Revenue Required : $108,000
 Additional Units Needed : $108,000 / $36 = 3,000 units

4. Using the original data in the problem, compute a new break-even point in units if the unit
sales price is increased 20%, unit variable cost is increased by 10%, and total fixed costs are
increased by $135,000.
 New Sales Price : $90 × 1.20 = $108
 New Variable Cost : $54 × 1.10 = $59.40
 New Fixed Costs : $1,080,000 + $135,000 = $1,215,000
 New Contribution Margin per Unit : $108 - $59.40 = $48.60
 New Break-even Point in Units: $1,215,000 / $48.60 = 25,000 units