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Analysis

L 11

Chapter 20

Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall

20-1

Learning Objectives

1. Determine how changes in

volume affect costs

2. Calculate operating income

using contribution margin and

contribution margin ratio

3. Use cost-volume-profit (CVP)

analysis for profit planning

4. Use CVP analysis to perform

sensitivity analysis

Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall

20-2

Learning Objectives

5. Use CVP analysis to calculate

margin of safety, operating

leverage, and multiproduct

breakeven points

20-3

Learning Objective 1

Determine how

changes in volume

affect costs

20-4

Types of costs

Variable costs

Fixed costs

Mixed costs

20-5

Variable Costs

Batteries in Tablets

Number of

Tablets Produced

Variable Cost

per Tablet

Total

Variable Cost

0 tablets

$55

25 tablets

55

1,375

50 tablets

55

2,750

75 tablets

55

4,125

100 tablets

55

5,500

20-6

20-7

20-8

Fixed Costs

Total

Fixed Costs

Number of

Tablets Produced

Fixed Cost

per Tablet

$12,000

25 tablets

$480

12,000

50 tablets

240

12,000

75 tablets

160

12,000

100 tablets

120

20-9

Characteristics of

Variable and Fixed Costs

20-10

Mixed Costs

Cell Phone

$100 per month plus $0.10 for each minute of use

Number of

Minutes Used

Total Fixed

Cost

Total Variable

Cost

100 minutes

$100

$10

$110

200 minutes

100

20

120

300 minutes

100

30

130

400 minutes

100

40

140

500 minutes

100

50

150

Total Cost

20-11

Mixed Costs

20-12

Manufacturing Equipment

Maintenance Costs

Number of

Tablets Produced

Total

Maintenance

Cost

1st Quarter

360 tablets

$1,720

2nd Quarter

415 tablets

1,830

3rd Quarter

480 tablets

1,960

Highest Volume

4th Quarter

240 tablets

1,480

Lowest Volume

20-13

High-Low Method

Step 1

Step 1: Identify the highest and lowest levels of

activity, and calculate the variable cost per unit.

Variable cost per unit = Change in total cost / Change in volume of activity

= (Highest cost Lowest cost) / (Highest volume Lowest volume)

20-14

High-Low Method

Step 1

Step 1: Identify the highest and lowest levels of

activity, and calculate the variable cost per unit.

Variable cost per unit = Change in total cost / Change in volume of activity

= (Highest cost Lowest cost) / (Highest volume Lowest volume)

= ($1,960 $1,480) / (480 tablets 240 tablets)

= $480 / 240 tablets

= $2 per tablet

20-15

High-Low Method

Step 2

Step 2: Calculate the total fixed cost.

Total fixed cost = Total mixed cost Total variable cost

= Total mixed cost (Variable cost per unit Number of units)

20-16

High-Low Method

Step 2

Step 2: Calculate the total fixed cost.

Total fixed cost = Total mixed cost Total variable cost

= Total mixed cost (Variable cost per unit Number of units)

= $1,960 ($2 per tablet 480 tablets)

= $1,960 $960

= $1,000

20-17

High-Low Method

Step 3

Step 3: Create and use an equation to show the

behavior of a mixed cost.

Total mixed cost = (Variable cost per unit Number of units) + Total fixed cost

20-18

High-Low Method

Step 3

Step 3: Create and use an equation to show the

behavior of a mixed cost.

Total mixed cost = (Variable cost per unit Number of units) + Total fixed cost

Total manufacturing maintenance cost = ($2 per tablet Number of tablets) + $1,000

20-19

maintenance cost at 400 tablets

Total manufacturing maintenance cost = ($2 per tablet Number of tablets) + $1,000

20-20

maintenance cost at 400 tablets

Total manufacturing maintenance cost = ($2 per tablet Number of tablets) + $1,000

= ($2 per tablet 400 tablets) + $1,000

= $1,800

20-21

Relevant Range

20-22

manufacturer that specializes in wood tables.

Classify each cost as variable, fixed, or mixed

relative to tables produced and sold.

1. Wood used to build tables

20-23

manufacturer that specializes in wood tables.

Classify each cost as variable, fixed, or mixed

relative to tables produced and sold.

1. Wood used to build tables

Variable

20-24

manufacturer that specializes in wood tables.

Classify each cost as variable, fixed, or mixed

relative to tables produced and sold.

2. Depreciation

on

saws

and

other

manufacturing equipment

20-25

manufacturer that specializes in wood tables.

Classify each cost as variable, fixed, or mixed

relative to tables produced and sold.

2. Depreciation

on

saws

and

other

manufacturing equipment

Fixed

20-26

manufacturer that specializes in wood tables.

Classify each cost as variable, fixed, or mixed

relative to tables produced and sold.

3. Compensation for sales representatives paid

on a salary plus commission basis

20-27

manufacturer that specializes in wood tables.

Classify each cost as variable, fixed, or mixed

relative to tables produced and sold.

3. Compensation for sales representatives paid

on a salary plus commission basis

Mixed

20-28

manufacturer that specializes in wood tables.

Classify each cost as variable, fixed, or mixed

relative to tables produced and sold.

4. Supervisors salary

20-29

manufacturer that specializes in wood tables.

Classify each cost as variable, fixed, or mixed

relative to tables produced and sold.

4. Supervisors salary

Fixed

20-30

manufacturer that specializes in wood tables.

Classify each cost as variable, fixed, or mixed

relative to tables produced and sold.

5. Wages of production workers

20-31

manufacturer that specializes in wood tables.

Classify each cost as variable, fixed, or mixed

relative to tables produced and sold.

5. Wages of production workers

Variable

20-32

Learning Objective 2

Calculate operating

income using

contribution margin

and contribution

margin ratio

20-33

Contribution Margin

If Smart Touch Learning sells 200 tablets for $500

each that incur variable costs of $275 each, then

the contribution margin is:

Contribution margin = Net sales revenue Variable costs

20-34

Contribution Margin

If Smart Touch Learning sells 200 tablets for $500

each that incur variable costs of $275 each, then

the contribution margin is:

Contribution margin = Net sales revenue Variable costs

= ($500 per tablet 200 tablets) ($275 per tablet 200 tablets)

= $100,000 $55,000

= $45,000

20-35

If Smart Touch Learning sells 200 tablets for $500

each that incur variable costs of $275 each, then

the unit contribution margin is:

Unit contribution margin = Net sales revenue per unit Variable costs per unit

20-36

If Smart Touch Learning sells 200 tablets for $500

each that incur variable costs of $275 each, then

the unit contribution margin is:

Unit contribution margin = Net sales revenue per unit Variable costs per unit

= $500 per tablet $275 per tablet

= $225 per tablet

20-37

If Smart Touch Learning sells 200 tablets for $500

each that incur variable costs of $275 each, then

the contribution margin ratio is:

Contribution margin ratio = Contribution margin / Net sales revenue

20-38

If Smart Touch Learning sells 200 tablets for $500

each that incur variable costs of $275 each, then

the contribution margin ratio is:

Contribution margin ratio = Contribution margin / Net sales revenue

= $45,000 / $100,000

= 45%

= $225 per tablet / $500 per tablet

= 45%

20-39

Traditional Income

Statement Format

Cost of goods sold

Gross profit

Selling and administrative expenses

Operating income

Period costs (some variable, some fixed)

20-40

Contribution Margin

Income Statement Format

Variable costs

Contribution margin

Fixed Costs

Operating income

Some product, some period

20-41

tables. The tables sell for $100 and incur $40 in

variable costs. The company has $6,000 in fixed

costs per month.

6. Prepare a contribution margin income statement

for one month if the company sells 200 tables.

7. What is the total contribution margin for the month

when the company sells 200 tables?

20-42

6. Sales revenue

(200 tables $100 per table) $ 20,000

Variable costs

(200 tables $40 per table)

8,000

Contribution margin (200 tables $60 per table)

12,000

Fixed costs

6,000

Operating income

$ 6,000

7. Contribution margin = $12,000

20-43

tables. The tables sell for $100 and incur $40 in

variable costs. The company has $6,000 in fixed

costs per month.

8. What is the unit contribution margin?

20-44

tables. The tables sell for $100 and incur $40 in

variable costs. The company has $6,000 in fixed

costs per month.

8. What is the unit contribution margin?

Unit contribution margin = $100 per table $40 per table = $60 per table

20-45

tables. The tables sell for $100 and incur $40 in

variable costs. The company has $6,000 in fixed

costs per month.

8. What is the unit contribution margin?

Unit contribution margin = $100 per table $40 per table = $60 per table

Contribution margin ratio = $60 per table / $100 per table = 60%

20-46

Learning Objective 3

Use cost-volume-profit

(CVP) analysis for

profit planning

20-47

Cost-Volume-Profit Analysis

Assumes the Following:

The price per unit does not change as volume

changes.

Managers can classify each cost as variable,

fixed, or mixed.

The only factor that affects total costs is change

in volume, which increases variable and mixed

costs.

Fixed costs do not change.

There are no changes in inventory levels.

Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall

20-48

Equation approach

Contribution margin approach

Contribution margin ratio approach

20-49

Equation Approach

Net sales revenue

Total costs

= Operating income

20-50

Equation Approach

Net sales revenue

Total costs

= Operating income

20-51

Equation Approach

Smart Touch Learning sells tablets for $500 each,

variable costs are $275 each, and fixed costs are

$12,000 per month. If the company desires to earn

$6,000 in profits each month, how many tablets

must it sell?

Net sales revenue Variable costs Fixed costs = Target profit

20-52

Equation Approach

Smart Touch Learning sells tablets for $500 each,

variable costs are $275 each, and fixed costs are

$12,000 per month. If the company desires to earn

$6,000 in profits each month, how many tablets

must it sell?

Net sales revenue Variable costs Fixed costs =

($500 per unit Units sold) ($275 per unit Units sold) - $12,000 =

[($500 $275 per unit) Units sold] - $12,000 =

$225 per unit Units sold =

$225 per unit Units sold =

Units sold =

Units sold =

Target profit

$ 6,000

$ 6,000

$12,000 + $6,000

$18,000

$18,000 / $225 per unit

80 units

20-53

Equation Approach

Check Your Calculation

Net sales revenue Variable costs Fixed costs = Operating income

20-54

Equation Approach

Check Your Calculation

Net sales revenue Variable costs Fixed costs = Operating income

($500 per unit 80 units) ($275 per unit 80 units) $12,000 = $6,000

$40,000 -- $22,000 $12,000 = $6,000

20-55

Smart Touch Learning sells tablets for $500 each,

variable costs are $275 each, and fixed costs are

$12,000 per month. If the company desires to earn

$6,000 in profits each month, how many tablets

must it sell?

Required sales in units = Fixed costs + Target profit

Contribution margin per unit

20-56

Smart Touch Learning sells tablets for $500 each,

variable costs are $275 each, and fixed costs are

$12,000 per month. If the company desires to earn

$6,000 in profits each month, how many tablets

must it sell?

Required sales in units = Fixed costs + Target profit

Contribution margin per unit

=

$12,000 + $6,000

$225 per unit

80 units

Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall

20-57

Check Your Calculation

Variable costs

Contribution margin

Fixed costs

Operating income

20-58

Check Your Calculation

Variable costs

($275 per unit 80 units)

22,000

Contribution margin ($225 per unit 80 units)

18,000

Fixed costs

12,000

Operating income

$ 6,000

20-59

Smart Touch Learning sells tablets for $500 each,

variable costs are $275 each, and fixed costs are

$12,000 per month. If the company desires to earn

$6,000 in profits each month, how many tablets

must it sell?

Required sales in dollars = Fixed costs + Target profit

Contribution margin ratio

20-60

Smart Touch Learning sells tablets for $500 each,

variable costs are $275 each, and fixed costs are

$12,000 per month. If the company desires to earn

$6,000 in profits each month, how many tablets

must it sell?

Required sales in dollars = Fixed costs + Target profit

Contribution margin ratio

=

$12,000 + $6,000

45%

$40,000

Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall

20-61

for Smart Touch Learning

20-62

for Smart Touch Learning

Exhibit 21-6 Breakeven Point Calculations for Smart Touch Learning

Equation approach

Net sales revenue

Variable costs

Fixed Costs

$12,000

= $

$12,000

= $

Target Profit

= $ 12,000

Units sold

Units sold

= 54 units*

*Actual result of 53.3333 rounded up to the next full unit as it is not possible to sell partial tablets.

20-63

for Smart Touch Learning

Exhibit 21-6 Breakeven Point Calculations for Smart Touch Learning

Equation approach

Net sales revenue

Variable costs

Fixed Costs

$12,000

= $

$12,000

= $

Target Profit

= $ 12,000

Units sold

Units sold

= 54 units*

Required sales in units

Contribution margin per unit

$12,000 + $0

$225 per unit

54 units*

*Actual result of 53.3333 rounded up to the next full unit as it is not possible to sell partial tablets.

20-64

for Smart Touch Learning

Exhibit 21-6 Breakeven Point Calculations for Smart Touch Learning

Equation approach

Net sales revenue

Variable costs

Fixed Costs

$12,000

= $

$12,000

= $

Target Profit

= $ 12,000

Units sold

Units sold

= 54 units*

Required sales in units

Contribution margin per unit

$12,000 + $0

$225 per unit

54 units*

Required sales in dollars =

Contribution margin ratio

$12,000 + $0

45%

$26,667**

*Actual result of 53.3333 rounded up to the next full unit as it is not possible to sell partial tablets.

**Actual result of $26,666.6667 rounded up to next full dollar.

20-65

Cost-Volume-Profit Graph

20-66

tables. The tables sell for $100 and incur $40 in

variable costs. The company has $6,000 in

fixed costs per month. The company desires to

earn an operating profit of $12,000 per month.

20-67

target profit using the equation method.

20-68

target profit using the equation method.

Net sales revenue Variable costs Fixed costs =

($100 per unit Units sold) ($40 per unit Units sold) $6,000 =

[($100 $40 per unit) Units sold] $6,000 =

$60 per unit Units sold =

$60 per unit Units sold =

Units sold =

Units sold =

Target profit

$12,000

$12,000

$ 6,000 + $12,000

$18,000

$18,000 / $60 per unit

300 units

20-69

target profit using the contribution margin

method.

20-70

target profit using the contribution margin

method.

Required sales in units =

Contribution margin per unit

$6,000 + $12,000

$100 per unit $40 per unit

= 300 units

20-71

the target profit using the contribution margin

ratio method.

20-72

the target profit using the contribution margin

ratio method.

Contribution margin ratio = $60 per table / $100 per table = 60%

Required sales in dollars = Fixed costs + Target profit

Contribution margin ratio

= $6,000 + $12,000

60%

= $30,000

Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall

20-73

breakeven using the contribution margin

method.

20-74

breakeven using the contribution margin

method.

Required sales in units =

Contribution margin per unit

$6,000 + $0

$100 per unit $40 per unit

= 100 units

20-75

Learning Objective 4

perform sensitivity

analysis

20-76

Contribution Margin Approach

Smart Touch Learning believes it must cut the

selling price to $475 per tablet. Variable costs

remain at $275 per tablet. Fixed costs stay at

$12,000. How many tablets must be sold to break

even?

Required sales in units =

20-77

Contribution Margin Approach

Smart Touch Learning believes it must cut the

selling price to $475 per tablet. Variable costs

remain at $275 per tablet. Fixed costs stay at

$12,000. How many tablets must be sold to break

even?

Required sales in units =

=

$12,000 + $0

$475 per unit $275 per unit

60 units

Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall

20-78

Contribution Margin Approach

Smart Touch Learnings selling price remains at

$500 per tablet. Variable costs increase to $285 per

tablet. Fixed costs stay at $12,000. How many

tablets must be sold to break even?

Required sales in units =

20-79

Contribution Margin Approach

Smart Touch Learnings selling price remains at

$500 per tablet. Variable costs increase to $285 per

tablet. Fixed costs stay at $12,000. How many

tablets must be sold to break even?

Required sales in units = Fixed costs + Target profit

Contribution margin per unit

$12,000 + $0

$500 per unit $285 per unit

= 56 units*

* Rounded up to next full unit

Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall

20-80

Contribution Margin Approach

Smart Touch Learnings selling price remains at

$500 per tablet. Variable costs stay at $275 per

tablet. Fixed costs increase to $15,000. How many

tablets must be sold to break even?

Required sales in units =

20-81

Contribution Margin Approach

Smart Touch Learnings selling price remains at

$500 per tablet. Variable costs stay at $275 per

tablet. Fixed costs increase to $15,000. How many

tablets must be sold to break even?

Required sales in units = Fixed costs + Target profit

Contribution margin per unit

$15,000 + $0

$500 per unit $275 per unit

= 67 units*

* Rounded up to the next full unit

Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall

20-82

Variable Costs, and Fixed Costs

Exhibit 20-8 Effects of Changes in Selling Price, Variable Costs,

and Fixed Costs

Cause

Change

Effect

Contribution Margin per Unit

Result

Breakeven point

Increases

Decreases

Decreases

Increases

Decreases

Increases

Increases

Decreases

No effect

Increases

No effect

Decreases

20-83

tables. The tables sell for $100 and incur $40 in

variable costs. The company has $6,000 in

fixed costs per month. Calculate the breakeven

point in units under each independent

scenario.

20-84

20-85

Variable cost = $40 + $10 = $50

Contribution margin per unit = $100 $50 = $50

Required sales in units = Fixed costs + Target profit

Contribution margin per unit

= $6,000 + $0

$50 per unit

= 120 units

Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall

20-86

20-87

Fixed costs = $6,000 $600 = $5,400

Contribution margin per unit = $100 $40 = $60

Required sales in units = Fixed costs + Target profit

Contribution margin per unit

= $5,400 + $0

$60 per unit

= 90 units

Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall

20-88

20-89

Sales price = $100 1.10 = $110

Contribution margin per unit = $110 $40 = $70

Required sales in units = Fixed costs + Target profit

Contribution margin per unit

= $6,000 + $0

$70 per unit

= 86 units*

Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall

20-90

Learning Objective 5

calculate margin of

safety, operating

leverage, and

multiproduct

breakeven points

Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall

20-91

Margin of Safety

Smart Touch Learnings original breakeven

point was 54 tablets. The company expects to

sell 100 tablets.

Expected sales Breakeven sales =

20-92

Margin of Safety

Smart Touch Learnings original breakeven

point was 54 tablets. The company expects to

sell 100 tablets.

Expected sales Breakeven sales =

100 tablets 54 tablets = 46 tablets

20-93

Margin of Safety

Smart Touch Learnings original breakeven

point was 54 tablets. The company expects to

sell 100 tablets.

Expected sales Breakeven sales =

100 tablets 54 tablets = 46 tablets

safety in dollars

Margin

of

20-94

Margin of Safety

Smart Touch Learnings original breakeven

point was 54 tablets. The company expects to

sell 100 tablets.

Expected sales Breakeven sales =

100 tablets 54 tablets = 46 tablets

safety in dollars

46 tablets $500 per tablet =

$23,000

Margin

of

20-95

Smart Touch Learnings original breakeven

point was 54 tablets. The company expects to

sell 100 tablets.

Expected sales Breakeven sales =

100 tablets 54 tablets = 46 tablets

safety in dollars

46 tablets $500 per tablet =

$23,000

Margin

of

safety ratio

of

20-96

Smart Touch Learnings original breakeven

point was 54 tablets. The company expects to

sell 100 tablets.

Expected sales Breakeven sales =

100 tablets 54 tablets = 46 tablets

safety in dollars

46 tablets $500 per tablet =

$23,000

Margin

of

safety ratio

46 tablets / 100 tablets = 46%

of

20-97

Expected Contribution

Margin Income Statements

Sales Revenue (500 passengers $25 per passenger)

Company A

Company B

$ 12,500

$ 12,500

Variable Cost:

(500 passengers $5 per passenger)

2,500

Contribution Margin

Fixed Costs

Operating Income

7,500

10,000

5,000

6,000

1,000

$ 4,000

$ 4,000

20-98

Actual Contribution

Margin Income Statements

Sales Revenue (400 passengers $25 per passenger)

Company A

Company B

$ 10,000

$ 10,000

Variable Cost:

(400 passengers $5 per passenger)

2,000

6,000

Contribution Margin

8,000

4,000

Fixed Costs

6,000

1,000

$ 2,000

$ 3,000

Operating Income

20-99

Degree of operating leverage = Contribution margin

Operating income

20-100

Degree of operating leverage = Contribution margin

Operating income

Company A

$10,000

$4,000

= 2.50

Company B

$5,000

$4,000

= 1.25

20-101

Predicting Change in Operating Income

20-102

Predicting Change in Operating Income

Estimated sales

Company A

Company B

$ 12,500

$ 12,500

Actual sales

(10,000)

Dollar change

($2,500 / $12,500)

Percent change in operating income

($2,500 / $12,500)

2.50

$

($2,000 / $4,000)

4,000

4,000

(3,000)

2,000

50%

1.25

25%

(2,000)

Dollar change

2,500

20%

50%

2,500

20%

(10,000)

$

($1,000 / $4,000)

1,000

25%

20-103

Sales Mix

Cool Cat Furniture sold 6,000 cat beds and

4,000 scratching posts. Total fixed costs are

$40,000. The cat beds unit selling price is $44,

and variable cost per bed is $24. The

scratching posts unit selling price is $100 and

variable cost per post is $30. What is the

breakeven point?

20-104

Sales Mix

Cool Cat Furniture sold 6,000 cat beds and

4,000 scratching posts. Total fixed costs are

$40,000. The cat beds unit selling price is $44,

and variable cost per bed is $24. The

scratching posts unit selling price is $100 and

variable cost per post is $30. What is the

breakeven point?

Cat beds

6,000

60%

3

Scratching Posts

4,000

40%

2

Total

10,000

100%

5

20-105

Step 1

Step 1: Calculate the weighted-average contribution

margin per unit.

20-106

Step 2

Step 2: Calculate the breakeven point in units for the

package of products.

Required sales in units =

20-107

Step 2

Step 2: Calculate the breakeven point in units for the

package of products.

Required sales in units =

=

$40,000 + $0

$40 per item

1,000 items

20-108

Step 3

Step 3: Calculate the breakeven point in units for each

product. Multiply the package breakeven point in

units by each products proportion of the sales mix.

20-109

Step 3

Step 3: Calculate the breakeven point in units for each

product. Multiply the package breakeven point in

units by each products proportion of the sales mix.

Breakeven sales of cat beds

In sales dollars:

600 cat beds at $44 selling price each

400 scratching posts at $100 selling price each

Total sales revenue

$26,400

40,000

$66,400

20-110

Contribution Income Statement

Cat

Beds

Sales Revenue

Cat beds (600 $44)

Scratching posts (400 $100)

Variable Costs

Cat beds (600 $24)

Scratching posts (400 $30)

Contribution Margin

Fixed Costs

Operating Income

Scratching

Posts

Total

$ 40,000

$ 66,400

12,000

$ 28,000

26,400

40,000

40,000

$

0

$ 26,400

14,400

$ 12,000

20-111

How many units of each product must Cool Cat

sell to earn a target profit of $20,000?

20-112

Step 2

Step 2: Calculate the required sales in units for the

package of products.

Required sales in units =

20-113

Step 2

Step 2: Calculate the required sales in units for the

package of products.

Required sales in units =

=

$40,000 + $20,000

$40 per item

1,500 items

20-114

Step 3

Step 3: Calculate the required sales in units for each

product. Multiply the package required sales in units

by each products proportion of the sales mix.

20-115

Step 3

Step 3: Calculate the required sales in units for each

product. Multiply the package required sales in units

by each products proportion of the sales mix.

Required sales of cat beds (1,500 items 3/5) =

20-116

Contribution Income Statement

Cat

Beds

Sales Revenue

Cat beds (900 $44)

Scratching posts (600 $100)

Variable Costs

Cat beds (900 $24)

Scratching posts (600 $30)

Contribution Margin

Fixed Costs

Operating Income

Scratching

Posts

Total

$ 60,000

$ 99,600

18,000

$ 42,000

39,600

60,000

40,000

$ 20,000

$ 39,600

21,600

$ 18,000

20-117

tables. The tables sell for $100 and incur $40 in

variable costs. The company has $6,000 in

fixed costs per month. Expected sales are 200

tables per month.

20-118

20-119

Breakeven sales in units =

=

Contribution margin per unit

$6,000 + $ 0

$60 per unit

= 100 units

Margin of safety in units = Expected sales Breakeven sales

= 200 tables 100 tables

= 100 tables

20-120

20-121

Sales revenue

(200 tables $100 per table)

Variable costs

(200 tables $40 per table)

Contribution margin (200 tables $60 per table)

Fixed costs

Operating income

Degree of operating leverage

$ 20,000

8,000

12,000

6,000

$ 6,000

= Contribution margin

Operating income

= $12,000

$6,000

= 2.00

20-122

chairs to match the tables. Chairs sell for $50

each and have variable costs of $30. The new

production process increases fixed costs to

$7,000 per month. The expected sales mix is

1 table for every 4 chairs. Calculate the

breakeven point.

20-123

margin per unit.

Cat

Beds

Sales price per unit

$ 100

Scratching

Posts

$

Total

50

40

30

60

20

Contribution margin

60

80

$ 140

($140 per unit / 5 units)

28

20-124

package of products.

Required sales in units =

=

$7,000 + $0

$28 per item

250 items

20-125

product. Multiply the package breakeven point in

units by each products proportion of the sales mix.

Breakeven sales of tables

Breakeven sales of chairs

50 tables

(250 items 4/5) = 200 chairs

20-126

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