Solutions to Exercises

3-1. (15 min.) Profit Equation—Components.

b. Total revenue line

a. Total cost line

c. The variable cost area

d. Slope = Variable cost per unit

e. The fixed costs area

f. The break-even point

g. The profit area

h. The loss area

g. Profit volumeh. Loss volume

3-2. (15 min.) Profit Equations—Components.

a. Total fixed costs (loss at zero volume)

b. Break-even point

c. Slope = contribution margin per unit

d. Profit line

e. Profit area

f. Net loss area

g. Zero profit line

3-3. (20 min.)  Basic Decision Analysis Using CVP: Anu’s Amusement Center

a. $800,000 50,000 tickets = $16.00 per ticket

b. $450,000 50,000 tickets = $9.00 per ticket

c. ($16.00 – $9.00) = $7.00 per ticket

d. Profit = ($16.00 – $9.00)X – $218,750

Let Profit = 0

0 = ($16.00 – $9.00)X – $218,750

X =$218,750

$7.00X = 31,250

tickets

e. Let Profit = $43,750

$43,750 = ($16.00 – $9.00)X – $218,750

X =$218,750 + $43,750

$7.00X = 37,500 tickets

3-4. (20 min.)  Basic CVP Analysis: Kima’s Food Mart

a. Break even point is sales dollars = Fixed costs ÷ Contribution margin ratio

= $900,000 ÷ 0.40 = $2,250,000

b. Break even point is sales dollars = Fixed costs ÷ Contribution margin ratio

= $900,000 ÷ 0.25 = $3,600,000

c. Sales dollars required = (Fixed costs + Desired profit) ÷ Contribution margin ratio

= ($900,000 + $200,000) ÷ 0.40 = $2,750,000

3-5. (25 min.) CVP Analysis—Ethical Issues: Mark Ting

This problem is based on the experience of the authors at several companies.

The problem in this example, which is common, is that the guidelines the company has established (for example, a high break-even point) lead to projects that would be valuable in some way, but cannot meet the standard established by the company.

Mark believes, perhaps honestly, that the new product is valuable for the company. However, the approach he has taken to support the product is unethical.

Mark should persuade the management of the company that the break-even requirement is inappropriate.

3-6. (25 min.) CVP Analysis—Planning and Decision Making: Cambridge, Inc.

a.

Profit =(P – V)X – F$0 =($18 – $10)X – $20,000

$8X =$20,000

X =$20,000

$8X = 2,50

0 units

b. Profit = (P – V)X – F

$16,000 = ($18 – $10)X – $20,000$8X = $36,000

X =$36,000

$8X = 4,500

units

3-7. (30 min.) CVP analysis—Planning and Decision making: Cambridge, Inc.

a. Profit = ($18 – $10) 7,000 – $20,000= $36,000.

b. 10% price decrease. Now P = $16.20

Profit = ($16.20 – $10.00) x 7,000 – $20,000

= $23,400. Profit decreases by $12,600

20% price increase. Now P = $21.60

Profit = ($21.60 – $10.00) x 7,000 – $20,000

= $61,200.   Profit increases by $25,200

c. 10% variable cost decrease. Now V = $9

Profit = ($18 – $9) x 7,000 – $20,000

= $43,000.   Profit increases by $7,000

20% variable cost increase. Now V = $12

Profit = ($18 – $12) x 7,000 – $20,000

= $22,000.   Profit decreases by $14,000

d. Profit = ($18 – $11) x 7,000 – $18,000

= $31,000.   Profit decreases by $5,000

3-8. (25 min.) Basic Decision Analysis Using CVP: Balance, Inc.

a.

Profit =(P – V)X – F$0 =($1.00 – $0.20)X – $400,000

$0.80X =$400,000

X =$400,000

$0.80X = 500,0

00 units

b. Profit = (P – V)X – F

$100,000 = ($1.00 – $0.20)X – $400,000$0.80X = $500,000

X =$500,000

$0.80X = 625,000

units

3-9. (30 min.) Basic Decision Analysis Using CVP: Balance, Inc. (continued)

a. Profit = ($1.00 – $0.20) 700,000 – $400,000= $160,000.

b. 10% price decrease. Now P = $0.90

Profit = ($0.90 – $0.20) x 700,000 – $400,000

= $90,000. Profit decreases by $70,000

20% price increase. Now P = $1.20

Profit = ($1.20 – $0.20) x 700,000 – $400,000

= $300,000.   Profit increases by $140,000

c. 10% variable cost decrease. Now V = $0.18

Profit = ($1.00 – $0.18) x 700,000 – $400,000

= $174,000.   Profit increases by $14,000

20% variable cost increase. Now V = $0.24

Profit = ($1.00 – $0.24) x 700,000 – $400,000

= $132,000.   Profit decreases by $28,000

d. Profit = ($1.00 – $0.22) x 700,000 – $360,000

= $186,000.   Profit increases by $26,000

3-10. (30 min.) Analysis of Cost Structure: The Dollar Store vs. One Mart

a. Dollar Store One-MartAmount Percentage Amount Percentage

Sales ...................................$500,000 100% $500,000 100%Variable cost........................350,000 70 100,000 20Contribution margin ............$150,000 30% $400,000 80%Fixed costs........................... 30,000 6 280,000 56Operating profit....................$120,000 24% $120,000 24%

b. Dollar Store’s profits increase by $22,500 [= .30 x ($500,000 x .15)] and One Mart’s profits increase by $60,000 [= .80 x ($500,000 x .15)].

3-11. (30 min.) Analysis of Cost Structure: Foxx Company vs. Beyonce, Inc.

a. Foxx Company Beyonce, Inc.Amount Percentage Amount Percentage

Sales ...................................$600,000 100% $600,000 100%Variable cost........................450,000 75 120,000 20Contribution margin ............$150,000 25% $480,000 80%Fixed costs...........................100,000 17 400,000 67Operating profit....................$ 50,000 8% $80,000 13%

b. Foxx Company’s profits increase by $30,000 [= .25 x ($600,000 x .20)] and Beyonce Inc’s profits increase by $96,000 [= .80 x ($600,000 x .20)].

3-12. (15 min.) CVP and Margin of Safety: Rainbow Tours

a.

Profit =(P – V)X – F$0 =($40.00 – $16.00)X – $3,600

$24.00X =$3,600

X =$3,600$24.00

X = 150 tours

b. Margin of safety = 175 – 150

= 25 people (16.7%)

3-13. (20 min.) Using Microsoft Excel to Perform CVP Analysis: Cambridge, Inc.

a. 2,500 units.

The following two screenshots show the setup and solution.

3-31 (continued)

b. 3,250 units.

The following two screenshots show the setup and solution.

3-14. (20 min.) Using Microsoft Excel to Perform CVP Analysis: Balance, Inc.

a. 500,000 units.

The following two screenshots show the setup and solution.

3-32 (continued)

b. 510,000 units.

The following two screenshots show the setup and solution.

3-15. (20 min.) CVP With Income Taxes: Crest Industries.

a.

Profit =(P – V)X – F$0 =($80 – $32)X – $360,000

X =$360,000

$48X = 7,500 units

b. In order to achieve a profit of $90,000 after tax, Crest must earn:

$150,000 = [$90,000 ÷ (1.00 – 0.40)] before taxes.

The number of units to earn $150,000 in operating profits is:X = ($360,000+ $150,000) ÷ ($80 – $32) = 10,625 units

3-16. (20 min.) Multiproduct CVP Analysis: Rio Coffee Shoppe

First, compute the weighted average contribution margin per unit:

= $0.96 = 60% x ($1.50 – $0.70) + 40% x ($2.50 – $1.30)

The total number of cups of regular coffee and lattes (X) to break even is:

Profit =(P – V)X – F$0 =$0.96 X – $6,720X =7,000 cups

=4,200 (= 60% x 7,000) cups of coffee and2,800 (= 40% x 7,000) lattes

3-17. (20 min.) Multiproduct CVP Analysis: Mission Foods

a. Profit = ($3.00 – $1.50) x 200,000 + ($4.50 – $2.25) x 300,000 – $117,000

= $858,000

b. First, compute the weighted average contribution margin per unit:

= $1.95 = 40% x ($3.00 – $1.50) + 60% x ($4.50 – $2.25)

The total number of chicken and fish and fish tacos (X) to break even is:

Profit =(P – V)X – F$0 =$1.95 X – $117,000X =60,000 tacos

=24,000 (= 40% x 60,000) chicken tacos and36,000 (= 60% x 60,000) fish tacos

c. First, compute the weighted average contribution margin per unit:

= $1.65 = 80% x ($3.00 – $1.50) + 20% x ($4.50 – $2.25)

The total number of chicken and fish and fish tacos (X) to break even is:

Profit =(P – V)X – F$0 =$1.65 X – $117,000X =70,910 tacos (rounding up)

=56,728 (= 80% x 70,910) chicken tacos and14,182 (= 20% x 70,910) fish tacos