chapter 18 – cost behavior and cost-volume-proﬁt analysis · chapter 18 – cost behavior and...

Chapter18–CostBehaviorandCost-Volume-ProfitAnalysisClickonlinks

Exercise18-6page826 CostbehavioresCmaCon-scaDerdiagramandhigh-low

Exercise18-6 Exercise18-6Alt.

Exercise18-8page826 ContribuConmargin Exercise18-8 Exercise18-8Alt.

Exercise18-9page827 ContribuConmarginandbreak-even Exercise18-9 Exercise18-9Alt.

Exercise18-11page827 IncomereporCngandbreak-evenanalysis


Exercise18-12page827 CompuCngsalestoachievetargetincome


Exercise18-13page827 Forecastedincomestatement Exercise18-13 Exercise18-13Alt.

Exercise18-14page827 PredicCngsalesandvariablecostsusingcontribuConmargin


Exercise18-15page827 ComputaConofvariableandfixedcosts


Exercise18-16page827 Break-even Exercise18-16 Exercise18-16Alt.

Exercise18-17page828 Targetincomeandmarginofsafety(indollars)


Exercise18-18page828 SensiCvityanalysis Exercise18-18 Exercise18-18Alt.


Copyright © 2016 by McGraw-Hill Education, Inc. All rights reserved.

Chapter21–Cost-Volume-ProfitAnalysisClickonlinks


Exercise18-21page828 PredicCngunitanddollarsales Exercise18-21 Exercise18-21Alt.

Exercise18-22page828 CVPanalysisusingcompositeunits Exercise18-22 Exercise18-22Alt.

Exercise18-23page828 CVPanalysisusingcompositeunits Exercise18-23 Exercise18-23Alt.

Exercise18-24page828 OperaCngleveragecomputedandapplied


Copyright © 2015 by McGraw-Hill Education, Inc. All rights reserved.

Exercise18-6page826

18-3

Exercise 18-6 page 826

Felix & Co. reports the following information about its sales and cost of sales.

Period Units Sold

Cost of Sales

Period Units Sold

Cost of Sales

1 0 $2,500 6 2,000 $5,500 2 400 3,100 7 2,400 6,100 3 800 3,700 8 2,800 6,700 4 1,200 4,300 9 3,200 7,300 5 1,600 4,900 10 3,600 7,900

Calculate the fixed cost and variable cost of sales by using the high-low method. (Round cost per unit to 2 decimal places.)

$0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 $8,000 $9,000

0 1,000 2,000 3,000 4,000

18-4


Period Units Sold

Cost of Sales

Period Units Sold

Cost of Sales

1 0 $2,500 6 2,000 $5,500 2 400 3,100 7 2,400 6,100 3 800 3,700 8 2,800 6,700 4 1,200 4,300 9 3,200 7,300 5 1,600 4,900 10 3,600 7,900

Total costs at the high point $7,900 Variable costs at high point (3,600 units x $1.50 per unit) (5,400) Fixed costs at the high point $2,500

Total costs at the low point $2,500 Variable costs at low point (0 units x $1.50 per unit) 0 Fixed costs at the low point $2,500

Variable costs using High-Low Method Cost at high point minus cost at low point

Volume at high point minus volume at low point $7,900 - $2,500

3,600 units - 0 units

Change in cost Change in volume

$5,400 3,600 units

Variable cost = $1.50 per unit

18-5

Exercise 18-6 page 826 Alternate

Felix & Co. reports the following information about its sales and cost of sales.

Calculate the fixed cost and variable cost of sales by using the high-low method. (Round cost per unit to 2 decimal places.)

$0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 $8,000 $9,000

$10,000

0 1,000 2,000 3,000 4,000 5,000

Period Units Sold

Cost of Sales

Period Units Sold

Cost of Sales

1 300 $3,280 6 2,300 $6,000 2 700 4,000 7 2,700 7,000 3 1,100 5,000 8 3,100 8,000 4 1,500 5,200 9 3,500 8,400 5 1,900 6,000 10 3,900 9,040

18-6


Total costs at the high point $9,040 Variable costs at high point (3,900 units x $1.60 per unit) (6,240) Fixed costs at the high point $2,800

Total costs at the low point $3,280 Variable costs at low point (300 units x $1.60 per unit) (480) Fixed costs at the low point $2,800

3,600 units

Variable cost = $1.60 per unit

Change in cost Change in volume

Cost at high point minus cost at low point Volume at high point minus volume at low point

$9,040 - $3,280 3,900 units - 300 units

$5,760

Variable costs using High-Low Method

Period Units Sold

Cost of Sales

Period Units Sold

Cost of Sales

1 300 $3,280 6 2,300 $6,000 2 700 4,000 7 2,700 7,000 3 1,100 5,000 8 3,100 8,000 4 1,500 5,200 9 3,500 8,400 5 1,900 6,000 10 3,900 9,040

18-7

Exercise18-8page826

18-8


1) Compute the contribution margin per pair. Sales $205.00 Variable costs (164.00) Contribution margin $41.00

2) Compute the contribution margin ratio. Contribution margin ratio

$205.00 Contribution margin ratio = 20%

A jeans maker is designing a new line of jeans called the Slims. The jeans will sell for $205.00 per pair and cost $164.00 per pair in variable costs to make.

Contribution margin per unit Selling price per unit

$41.00

18-9


1) Compute the contribution margin per pair. Sales $290.00 Variable costs (197.20) Contribution margin $92.80

2) Compute the contribution margin ratio.

$92.80 $290.00

Contribution margin ratio = 32%

A jeans maker is designing a new line of jeans called the Slims. The jeans will sell for $290.00 per pair and cost $197.20 per pair in variable costs to make.

Contribution margin ratio Contribution margin per unit

Selling price per unit

18-10

Exercise18-9page825

18-11

Exercise 18-9 page 825 18-12

(1) Contribution margin per unit $180 selling price - $135 variable cost = $45 contribution margin (2) Contribution margin ratio $45 contribution margin / $180 selling price = 25% contribution margin ratio (3) Break-even point in units $562,500 fixed costs / $45 contribution margin per unit = 12,500 units (4) Break-even point in sales dollars $562,500 fixed costs / 0.25 = $2,250,000

Sales (12,500 units at $180 each) $2,250,000 Variable costs (12,500 units at $135 each) 1,687,500 Contribution margin (12,500 units at $45 each) 562,500 Fixed costs 562,500 Pretax income $0

Blanchard Company Contribution Margin Income Statement

Blanchard Company manufactures a single product that sells for $180 per unit and whose total variable costs are $135 per unit. The company’s annual fixed costs are $562,500. Use this information to compute the company's:

Exercise 18-9 page 825 Alternate 18-13

(1) Contribution margin per unit $160 selling price - $128 variable cost = $32 contribution margin (2) Contribution margin ratio $32 contribution margin / $160 selling price = 20% contribution margin ratio (3) Break-even point in units $464,000 fixed costs / $32 contribution margin per unit = 14,500 units (4) Break-even point in sales dollars $464,000 fixed costs / 0.20 = $2,320,000

Sales (14,500 units at $160 each) $2,320,000 Variable costs (14,500 units at $128 each) 1,856,000 Contribution margin (14,500 units at $32 each) 464,000 Fixed costs 464,000 Net income $0

Blanchard Company Contribution Margin Income Statement

Blanchard Company manufactures a single product that sells for $160 per unit and whose total variable costs are $128 per unit. The company’s annual fixed costs are $464,000. Use this information to compute the company's:

Exercise18-11page827

18-14


1) Prepare a contribution margin income statement for Blanchard Company at the break-even point. Sales $180.00 100% Variable costs 135.00 75% Contribution margin $315.00 25%

Sales $2,250,000 100% Variable costs 1,687,500 75% Contribution margin 562,500 25% Fixed costs 562,500 Net income $0

Blanchard Company manufactures a single product that sells for $180 per unit and whose total variable costs are $135 per unit. The company’s annual fixed costs are $562,500.

Contribution margin ratio

Dollar sales to break-even Fixed costs

$562,500 25%

Dollar sales to break-even = $2,250,000

18-15




2) Assume the company’s fixed costs increase by $135,000. What amount of sales (in dollars) is needed to break even?

Fixed costs Contribution margin ratio

$562,500 + $135,000 25%

$2,790,000

Dollar sales to break-even

18-16


Sales $160.00 100% Variable costs 128.00 80% Contribution margin $32.00 20%


$464,000 20%

Dollar sales to break-even = $2,320,000


Contribution margin ratio


1) Prepare a contribution margin income statement for Blanchard Company at the break-even point.

18-17




2) Assume the company’s fixed costs increase by $130,000. What amount of sales (in dollars) is needed to break even?


20% Dollar sales to break-even = $2,970,000


Contribution margin ratio $464,000 + $130,000

18-18


18-19


1) Compute the unit sales to earn the target pretax income.

Contribution margin per unit $562,500 + $1,012,500

Blanchard Company manufactures a single product that sells for $180 per unit and whose total variable costs are $135 per unit. The company targets an annual pretax income of $1,012,500. Assume that fixed fixed costs are $562,500.

Unit sales to achieve target net income

$45 Unit sales to achieve target net income = 35,000

Fixed costs + pretax income

18-20

25% Dollar sales to earn the target pretax income = $6,300,000

Fixed costs + pretax income Contribution margin ratio

$562,500 + $1,012,500

Dollar sales to earn the target pretax income

Unit sales to achieve target net income 35,000 Selling price per unit $180 Dollar sales to earn the target pretax income $6,300,000

2) Compute the dollar sales to earn the target pretax income.


1) Compute the unit sales to earn the target pretax income.

$44 Unit sales to achieve target net income = 40,100

Blanchard Company manufactures a single product that sells for $220 per unit and whose total variable costs are $176 per unit. The company targets an annual pretax income of $1,100,000. Assume that fixed costs are $664,400.

Unit sales to achieve target net income Fixed costs + pretax income Contribution margin per unit

$664,400 + $1,100,000

18-21

Sales $220 Variable costs 176 Contribution margin $44


2) Compute the dollar sales to earn the target pretax income.

Sales $220 100% Variable costs 176 80% Contribution margin $44 20%

Fixed costs + pretax income Contribution margin ratio

$664,400 + $1,100,000

Dollar sales to earn the target pretax income

20% Dollar sales to earn the target pretax income = $8,822,000

Unit sales to achieve target net income 40,100 Selling price per unit $220 Dollar sales to earn the target pretax income $8,822,000

18-22

Blanchard Company manufactures a single product that sells for $220 per unit and whose total variable costs are $176 per unit. The company targets an annual pretax income of $1,100,000. Assume that fixed costs are $664,400.


18-23


Units $ per unit Total Sales 40,000 $200 $8,000,000 Variable cost 40,000 140 5,600,000 Contribution margin 40,000 $60 2,400,000 Fixed costs 562,500 Income before taxes $1,837,500 Income tax expense ($1,837,500 x 20%) 367,500 Net income $1,470,000

Blanchard Company manufactures a single product that sells for $180 per unit and whose total variable costs are $135 per unit. The company’s annual fixed costs are $562,500. The sales manager predicts that annual sales of the company’s product will soon reach 40,000 units and its price will increase to $200 per unit. According to the production manager, the variable costs are expected to increase to $140 per unit but fixed costs will remain $562,500. The income tax rate is 20%. What amounts of pretax and after-tax income can the company expect to earn from these predicted changes?

Blanchard Company Forecasted Contribution Margin Income Statement

18-24


Units $ per unit Total Sales 40,200 $202 $8,120,400 Variable cost 40,200 142 5,708,400 Contribution margin 40,200 $60 2,412,000 Fixed costs 632,000 Income before taxes $1,780,000 Income tax expense ($1,780,000 x 25%) 445,000 Net income $1,335,000

Blanchard Company manufactures a single product that sells for $184 per unit and whose total variable costs are $138 per unit. The company’s annual fixed costs are $632,000. The sales manager predicts that annual sales of the company’s product will soon reach 40,200 units and its price will increase to $202 per unit. According to the production manager, the variable costs are expected to increase to $142 per unit but fixed costs will remain $632,000. The income tax rate is 25%. What amounts of pretax and after-tax income can the company expect to earn from these predicted changes?

Blanchard Company Forecasted Contribution Margin Income Statement

18-25


18-26


1) Compute the amount of total dollar sales.

2) Compute the amount of total variable costs.

Sales $1,296,000 100% Sales $1,296,000 Variable costs 972,000 75% Fixed costs (160,000) Contribution margin 324,000 25% Pretax income (164,000) Fixed costs 160,000 Variable costs $972,000 Pretax income $164,000

Bloom Company management predicts that it will incur fixed costs of $160,000 and earn pretax income of $164,000 in the next period. Its expected contribution margin ratio is 25%.

Fixed costs + Targeted pretax income Contribution margin ratio

$160,000 + $164,000 25%

Dollar Sales = $1,296,000

Dollar Sales

18-27


1) Compute the amount of total dollar sales.

2) Compute the amount of total variable costs.

Sales $1,160,000 100% Sales $1,160,000 Variable costs 533,600 46% Fixed costs (266,000) Contribution margin 626,400 54% Pretax income (360,400) Fixed costs 266,000 Variable costs $533,600 Pretax income $360,400

Bloom Company management predicts that it will incur fixed costs of $266,000 and earn pretax income of $360,400 in the next period. Its expected contribution margin ratio is 54%.

Fixed costs + Targeted pretax income Contribution margin ratio

$266,000 + $360,400 54%

Dollar Sales = $1,160,000

Dollar Sales

18-28


18-29


Units $ per unit Total Sales 200,000 $85 $17,000,000 Less: Variable costs 200,000 $60 12,000,000 Contribution margin 200,000 $25 5,000,000 Less: Fixed costs 3,750,000 Income before taxes $1,250,000

Cooper Company Forecasted Contribution Margin Income Statement

Cooper Company expects to sell 200,000 units of its product next year, which would generate total sales of $17,000,000. Management predicts that pretax net income for next year will be $1,250,000 and that the contribution margin per unit will be $25. Use this information to compute next year’s total expected (a) variable costs and (b) fixed costs.


Units $ per unit Total Sales 150,000 $60 $9,000,000 Less: Variable costs 150,000 $25 3,750,000 Contribution margin 150,000 $35 5,250,000 Less: Fixed costs 3,250,000 Income before taxes $2,000,000

Cooper Company Forecasted Contribution Margin Income Statement

Cooper Company expects to sell 150,000 units of its product next year, which would generate total sales of $9,000,000. Management predicts that pretax net income for next year will be $2,000,000 and that the contribution margin per unit will be $35. Use this information to compute next year’s total expected (a) variable costs and (b) fixed costs.


18-32


Hudson Co. reports the following contribution margin income statement.

Sales (9,600 units at $225 each) $2,160,000 Variable costs (9,600 units at $180 each) 1,728,000 Contribution margin 432,000 Fixed costs 324,000 Pretax income $108,000

1) Compute the break-even point in units.

CM = ($225 - $180)

2) Compute the break-even point in sales dollars.

CM Ratio = ($45 / $225)


$324,000 0.20

Break-even point = $1,620,000 in sales

Hudson Co. Contribution Margin Income Statement

For Year Ended December 31

Break-even point = 7,200 units

Fixed costs Contribution margin per unit

$324,000 $45



CM = ($225 - $180)


CM Ratio = ($45 / $225)


$324,000 0.20




$324,000 $45

Sales (7,200 units at $225 each) $1,620,000 Variable costs (7,200 units at $180 each) 1,296,000 Contribution margin 324,000 Fixed costs 324,000 Net income $0





Sales (8,000 units at $400 each) $3,200,000 Variable costs (8,000 units at $240 each) 1,920,000 Contribution margin 1,280,000 Fixed costs 768,000 Pretax income $512,000


CM = ($400 - $240)


CM Ratio = ($160 / $400 = 40%)


$768,000 0.40






$768,000 $160



CM = ($400 - $240)


CM Ratio = ($160 / $400 = 40%)


$768,000 0.40




$768,000 $160

Sales (4,800 units at $400 each) $1,920,000 Variable costs (4,800 units at $240 each) 1,152,000 Contribution margin 768,000 Fixed costs 768,000 Net income $0




18-37






Sales to achieve target pretax income

CM Ratio = ($45 / $225) Sales to achieve the target income = $2,430,000

Assume Hudson Co. has a target pretax income of $162,000. What amount of sales is needed to produce this target income?

Fixed costs + Target Pretax income Contribution margin ratio

$324,000 + $162,000 0.20



CM Ratio = ($45 / $225)

Sales $2,430,000 Variable costs ($2,430,000 x 80%) 1,944,000 Contribution margin ($2,430,000 x 20%) 486,000 Fixed costs 324,000 Pretax income $162,000



Sales to achieve the target income = $2,430,000


$324,000 + $162,000 0.20

If the company achieves its target income, what is its margin of safety (in percent)?

Margin of safety

33.3%

Expected sales - Break-even sales Expected sales

$2,430,000 - $1,620,000 $2,430,000







CM Ratio = $160 / $400 = 40% Sales to achieve the target income = $2,720,000

Assume Hudson Co. has a target pretax income of $320,000. What amount of sales is needed to produce this target income?


$768,000 + $320,000 0.40



CM Ratio = $160 / $400 = 40%

Sales $2,720,000 Variable costs ($2,720,000 x 60%) 1,632,000 Contribution margin ($2,720,000 x 40%) 1,088,000 Fixed costs 768,000 Pretax income $320,000

Sales to achieve the target income = $2,720,000


$768,000 + $320,000 0.40



If the company achieves its target income, what is its margin of safety (in percent)?

Margin of safety $800,000

29.4%

Expected sales - Break-even sales Expected sales

$2,720,000 - $1,920,000 $2,720,000


18-42






Sales (9,600 units at $225 each) $2,160,000 Variable costs (9,600 units at $171 each) 1,641,600 Contribution margin (9,600 units at $54 each) 518,400 Fixed costs ($324,000 + $40,500) 364,500 Pretax income $153,900

Hudson Co. should purchase the machine, as it increases pretax income by $45,900.



Hudson Co. is considering investing in a new machine that will increase its fixed costs by $40,500 per year and decrease its variable costs by $9 per unit. Prepare a forecasted contribution margin income statement assuming the company purchases this machine.






Sales (8,000 units at $400 each) $3,200,000 Variable costs (8,000 units at $224 each) 1,792,000 Contribution margin (8,000 units at $176 each) 1,408,000 Fixed costs ($768,000 + $102,000) 870,000 Pretax income $538,000

Hudson Co. should purchase the machine, as it increases pretax income by $26,000.



Hudson Co. is considering investing in a new machine that will increase its fixed costs by $102,000 per year and decrease its variable costs by $16 per unit. Prepare a forecasted contribution margin income statement assuming the company purchases this machine.


18-45






If the company raises its selling price to $240 per unit, compute: (1) Contribution margin per unit. $240 selling price - $180 variable cost = $60 contribution margin (2) Contribution margin ratio. $60 contribution margin / $240 selling price = 25% contribution margin ratio (3) Break-even point in units. $324,000 fixed costs / $60 contribution margin per unit = 5,400 units (4) Break-even point in sales dollars. $324,000 fixed costs / 0.25 = $1,296,000






If the company raises its selling price to $500 per unit, compute: (1) Contribution margin per unit. $500 selling price - $240 variable cost = $260 contribution margin (2) Contribution margin ratio. $260 contribution margin / $500 selling price = 52% contribution margin ratio (3) Break-even point in units. $768,000 fixed costs / $260 contribution margin per unit = 2,954 units (4) Break-even point in sales dollars. $768,000 fixed costs / 0.52 = $1,476,923


18-48






Sales (11,000 units at $225 each) $2,475,000 Variable costs (11,000 units at $180 each) 1,980,000 Contribution margin (11,000 units at $45 each) 495,000 Fixed costs ($324,000 + $81,000) 405,000 Pretax income $90,000

The marketing manager believes that increasing advertising costs by $81,000 will increase the company’s sales volume to 11,000 units. Prepare a forecasted contribution margin income statement assuming the company incurs the additional advertising costs.



Hudson Co. should reject this advertising campaign, as it decreases pretax income by $18,000.






Sales (9,000 units at $400 each) $3,600,000 Variable costs (9,000 units at $240 each) 2,160,000 Contribution margin (9,000 units at $160 each) 1,440,000 Fixed costs ($768,000 + $176,000) 944,000 Pretax income $496,000

The marketing manager believes that increasing advertising costs by $176,000 will increase the company’s sales volume to 9,000 units. Prepare a forecasted contribution margin income statement assuming the company incurs the additional advertising costs.



Hudson Co. should reject this advertising campaign, as it decreases pretax income by $16,000.


18-51


Units $ per unit Total Sales 65,000 $15.00 $975,000 Variable cost 65,000 6.00 390,000 Contribution margin 65,000 $9.00 585,000 Fixed costs 430,000 Income before taxes $155,000

Nombre Company Forecasted Contribution Margin Income Statement

Nombre Company management predicts $390,000 of variable costs, $430,000 of fixed costs, and a pretax income of $155,000 in the next period. Management also predicts that the contribution margin per unit will be $9. 1) Compute the total expected dollar sales for next period. 2) Compute the number of units expected to be sold in the next period.

18-52


Units $ per unit Total Sales 19,500 $98.00 $1,911,000 Variable cost 19,500 23.00 448,500 Contribution margin 19,500 $75.00 1,462,500 Fixed costs 878,000 Income before taxes $584,500

1) Compute the total expected dollar sales for next period. 2) Compute the number of units expected to be sold in the next period.

Nombre Company Forecasted Contribution Margin Income Statement

Nombre Company management predicts $448,500 of variable costs, $878,000 of fixed costs, and a pretax income of $584,500 in the next period. Management also predicts that the contribution margin per unit will be $75.

18-53


18-54


1) Determine the selling price of each composite unit. Quantity Selling Price

Windows 8 $200.00 Doors 2 $500.00

2) Determine the variable cost of each composite unit. Quantity Variable cost

Windows 8 $125.00 Doors 2 $350.00

Contribution margin per composite unit Selling price Variable cost Contribution margin per composite unit

Handy Home sells windows and doors in the ratio of 8:2 (windows:doors). The selling price of each window is $200.00 and of each door is $500.00. The variable cost of a window is $125.00 and of a door is $350.00. Fixed costs are $900,000.

Total per composite unit $1,600.00

1,000.00 $2,600.00

(1,700.00) $900.00

Total per composite unit $1,000.00

700.00 $1,700.00

$2,600.00

18-55


3) Determine the break-even point in composite units

Quantity Composite units

Windows 8 1,000 Doors 2 1,000

10


Fixed costs Contribution margin per composite unit

8,000 windows 2,000 doors 10,000 total units

4) Determine the number of units of each product that will be sold at the break-even point.

$900,000 $900

Break-even point = 1,000 composite units

Unit sales at break-even point

18-56


1) Determine the selling price of each composite unit. Quantity Selling Price

Windows 7 $111.00 Doors 3 $261.00


Windows 7 $70.00 Doors 3 $180.00


(1,030.00) $530.00

Total per composite unit $490.00

540.00 $1,030.00

$1,560.00



783.00 $1,560.00

18-57



(1,030.00) $530.00

$1,560.00




Windows 7 950 Doors 3 950

10

6,650 2,850 9,500


$503,500 $530

Break-even point = 950 composite units


Fixed costs Contribution margin per composite unit

18-58


18-59


Easy (form 1040EZ) Moderate (form 1040) Business

1) Determine the selling price of each composite unit. Ratio Fee charged

Easy (form 1040EZ) 5 $50.00 Moderate (form 1040) 3 $125.00 Business 2 $275.00



R&R Tax Service offers tax and consulting services to individuals and small businesses. Data for fees and costs of three types of tax returns follow. R&R provides services in the ratio of 5:3:2 (Easy, Moderate, Business). Fixed costs are $18,000 for the tax season.


Fee charged $50.00

$125.00 $275.00

Variable cost per return $30.00 $75.00

$100.00

$575.00

550.00 $1,175.00


200.00

375.00

225.00

Contribution margin per composite unit: Selling price Variable cost Contribution margin per composite unit

$1,175.00 (575.00) $600.00

18-60


R&R Tax Service offers tax and consulting services to individuals and small businesses. Data for fees and costs of three types of tax returns follow. R&R provides services in the ratio of 5:3:2 (Easy, Moderate, Business). Fixed costs are $18,000 for the tax season. Contribution margin per composite unit:

Selling price Variable cost Contribution margin per composite unit

$1,175.00 (575.00) $600.00



Easy (form 1040EZ) 5 30 Moderate (form 1040) 3 30 Business 2 30

10

$600 Break-even point = 30 composite units

Fixed costs

90 Moderate (form 1040)



150 Easy (form 1040EZ)

60 Business 300 Total returns

Contribution margin per composite unit $18,000

18-61


Easy (form 1040EZ) Moderate (form 1040) Business

1) Determine the selling price of each composite unit. Ratio Fee charged





436.00

320.00

$760.00

$1,090.00 (760.00) $330.00

518.00 $1,090.00


360.00



Fee charged $34.00

$109.00 $259.00

Variable cost per return $20.00 $80.00

$180.00

18-62



$1,090.00 (760.00) $330.00




Easy (form 1040EZ) 4 40 Moderate (form 1040) 4 40 Business 2 40

10

160 Moderate (form 1040)



160 Easy (form 1040EZ)

80 Business 400 Total returns

Contribution margin per composite unit $13,200

$330 Break-even point = 40 composite units

Fixed costs

18-63


18-64


Compute the degree of operating leverage (DOL) for each company. Degree of operating leverage:

Company A Company B $3,600,000 $1,125,000 $1,000,000 $750,000

Degree of operating leverage: 3.60 1.50

Contribution Margin Income Statement Company A Company B

Sales $6,000,000 100% $4,500,000 100% Variable costs 2,400,000 40% 3,375,000 75% Contribution margin 3,600,000 60% 1,125,000 25% Fixed costs 2,600,000 375,000 Pretax income $1,000,000 $750,000

Identify which company benefits more from a 20% increase in sales.

Contribution Margin Income Statement - Forecasted Company A Company B

Sales $7,200,000 100% $5,400,000 100% Variable costs 2,880,000 40% 4,050,000 75% Contribution margin 4,320,000 60% 1,350,000 25% Fixed costs 2,600,000 375,000 Pretax income $1,720,000 $975,000

Contribution margin Pretax income

Company A is a manufacturer with current sales of $6,000,000 and a 60% contribution margin. Its fixed costs equal $2,600,000. Company B is a consulting firm with current service revenues of $6,000,000 and a 25% contribution margin. Its fixed costs equal $375,000.

18-65


Company A is a manufacturer with current sales of $3,000,000 and a 60% contribution margin. Its fixed costs equal $1,320,000. Company B is a consulting firm with current service revenues of $3,000,000 and a 25% contribution margin. Its fixed costs equal $270,000. Compute the degree of operating leverage (DOL) for each company.

18-66


Degree of operating leverage: Company A Company B $1,800,000 $750,000

$480,000 $480,000 Degree of operating leverage: 3.75 1.56

Contribution Margin Income Statement Company A Company B

Sales $3,000,000 100% $3,000,000 100% Variable costs 1,200,000 40% 2,250,000 75% Contribution margin 1,800,000 60% 750,000 25% Fixed costs 1,320,000 270,000 Pretax income $480,000 $480,000

Identify which company benefits more from a 20% increase in sales. Contribution Margin Income Statement - Forecasted

Company A Company B Sales $3,600,000 100% $3,600,000 100% Variable costs 1,440,000 40% 2,700,000 75% Contribution margin 2,160,000 60% 900,000 25% Fixed costs 1,320,000 270,000 Pretax income $840,000 $630,000

Contribution margin Pretax income

Company A is a manufacturer with current sales of $3,000,000 and a 60% contribution margin. Its fixed costs equal $1,320,000. Company B is a consulting firm with current service revenues of $3,000,000 and a 25% contribution margin. Its fixed costs equal $270,000.

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chapter 18 – cost behavior and cost-volume-proﬁt analysis · chapter 18 – cost behavior and...

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