8/9/2019 CHAPTER 3 Question Solutions

1/3

CHAPTER 3

COST–VOLUME–PROFIT ANALYSIS

 NOTATION USED IN CHAPTER 3 SOLUTIONS

SP: Selling priceVCU: Variable cost per nit

C!U: Contribtion "argin per nit

#C: #i$e% costsTOI: Target operating inco"e

3-1 Cost&'ol"e&pro(it )CVP* anal+sis e$a"ines t,e be,a'ior o( total re'enes- total costs-

an% operating inco"e as c,anges occr in t,e nits sol%- selling price- 'ariable cost per nit- or (i$e% costs o( a pro%ct.

3-2 T,e ass"ptions n%erl+ing t,e CVP anal+sis otline% in C,apter 3 are/. C,anges in t,e le'el o( re'enes an% costs arise onl+ becase o( c,anges in t,e n"ber 

o( pro%ct )or ser'ice* nits sol%.

0. Total costs can be separate% into a (i$e% co"ponent t,at %oes not 'ar+ 1it, t,e nits sol%an% a 'ariable co"ponent t,at c,anges 1it, respect to t,e nits sol%.

3. 2,en represente% grap,icall+- t,e be,a'iors o( total re'enes an% total costs are linear 

)represente% as a straig,t line* in relation to nits sol% 1it,in a rele'ant range an% ti"e

 perio%.. T,e selling price- 'ariable cost per nit- an% (i$e% costs are 4no1n an% constant.

3.3 Operating inco"e is total re'enes (ro" operations (or t,e acconting perio% "ins costo( goo%s sol% an% operating costs )e$cl%ing inco"e ta$es*:

Operating inco"e 5 Total re'enes (ro" operations 6

 Net inco"e is operating inco"e pls nonoperating re'enes )sc, as interest re'ene*

"ins nonoperating costs )sc, as interest cost* "ins inco"e ta$es. C,apter 3 ass"es

nonoperating re'enes an% nonoperating costs are 7ero. T,s- C,apter 3 co"ptes net inco"eas:

 Net inco"e 5 Operating inco"e 6 Inco"e ta$es

3-4 Contribtion "argin is t,e %i((erence bet1een total re'enes an% total 'ariable costs.

Contribtion "argin per nit is t,e %i((erence bet1een selling price an% 'ariable cost per nit.

Contribtion&"argin percentage is t,e contribtion "argin per nit %i'i%e% b+ selling price.

3-5 T,ree "et,o%s to e$press CVP relations,ips are t,e e8ation "et,o%- t,e contribtion

"argin "et,o%- an% t,e grap, "et,o%. T,e (irst t1o "et,o%s are "ost se(l (or anal+7ingoperating inco"e at a (e1 speci(ic le'els o( sales. T,e grap, "et,o% is se(l (or 'isali7ing t,e

e((ect o( sales on operating inco"e o'er a 1i%e range o( 8antities sol%.

8/9/2019 CHAPTER 3 Question Solutions

2/3

3-6 9rea4e'en anal+sis %enotes t,e st%+ o( t,e brea4e'en point- 1,ic, is o(ten onl+ an

inci%ental part o( t,e relations,ip bet1een cost- 'ol"e- an% pro(it. Cost&'ol"e&pro(it

relations,ip is a "ore co"pre,ensi'e ter" t,an brea4e'en anal+sis.

3-7 CVP certainl+ is si"ple- 1it, its ass"ption o( otpt as t,e onl+ re'ene an% cost

%ri'er- an% linear re'ene an% cost relations,ips. 2,et,er t,ese ass"ptions "a4e it si"plistic%epen%s on t,e %ecision conte$t. In so"e cases- t,ese ass"ptions "a+ be s((icientl+ accrate

(or CVP to pro'i%e se(l insig,ts. T,e e$a"ples in C,apter 3 )t,e so(t1are pac4age conte$t in

t,e te$t an% t,e tra'el agenc+ e$a"ple in t,e Proble" (or Sel(&St%+* illstrate ,o1 CVP can

 pro'i%e sc, insig,ts. In "ore co"ple$ cases- t,e basic i%eas o( si"ple CVP anal+sis can bee$pan%e%.

3-8 An increase in t,e inco"e ta$ rate %oes not a((ect t,e brea4e'en point. Operating inco"eat t,e brea4e'en point is 7ero- an% no inco"e ta$es are pai% at t,is point.

3-9 Sensiti'it+ anal+sis is a 1,at&i(; tec,ni8e t,at "anagers se to e$a"ine ,o1 anotco"e 1ill c,ange i( t,e original pre%icte% %ata are not ac,ie'e% or i( an n%erl+ing

ass"ption c,anges. T,e a%'ent o( t,e electronic sprea%s,eet ,as greatl+ increase% t,e abilit+ toe$plore t,e e((ect o( alternati'e ass"ptions at "ini"al cost. CVP is one o( t,e "ost 1i%el+ se%

so(t1are applications in t,e "anage"ent acconting area.

3-10 E$a"ples incl%e:

!an(actring66sbstitting a robotic "ac,ine (or ,orl+ 1age 1or4ers!ar4eting66c,anging a sales (orce co"pensation plan (ro" a percent o( sales %ollars to

a (i$e% salar+

Csto"er ser'ice66,iring a sbcontractor to %o csto"er repair 'isits on an annalretainer basis rat,er t,an a per&'isit basis

3-11 E$a"ples incl%e:!an(actring66sbcontracting a co"ponent to a spplier on a per&nit basis to a'oi%

 prc,asing a "ac,ine 1it, a ,ig, (i$e% %epreciation cost

!ar4eting66c,anging a sales co"pensation plan (ro" a (i$e% salar+ to percent o( sales

%ollars basisCsto"er ser'ice66,iring a sbcontractor to %o csto"er ser'ice on a per&'isit basis

rat,er t,an an annal retainer basis

3-12 Operating le'erage %escribes t,e e((ects t,at (i$e% costs ,a'e on c,anges in operating

inco"e as c,anges occr in nits sol%- an% ,ence- in contribtion "argin.

8/9/2019 CHAPTER 3 Question Solutions

3/3

CVP itsel( is not "a%e an+ less rele'ant 1,en t,e ti"e ,ori7on lengt,ens. 2,at ,appens

is t,at "an+ ite"s classi(ie% as (i$e% in t,e s,ort rn "a+ beco"e 'ariable costs 1it, a longer 

ti"e ,ori7on.

3-14 A co"pan+ 1it, "ltiple pro%cts can co"pte a brea4e'en point b+ ass"ing t,ere is a

constant sales "i$ o( pro%cts at %i((erent le'els o( total re'ene.

3-15 >es- gross "argin calclations e"p,asi7e t,e %istinction bet1een "an(actring an%

non"an(actring costs )gross "argins are calclate% a(ter sbtracting 'ariable an% (i$e%"an(actring costs*. Contribtion "argin calclations e"p,asi7e t,e %istinction bet1een (i$e%

an% 'ariable costs. Hence- contribtion "argin is a "ore se(l concept t,an gross "argin in

CVP anal+sis.