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CHAPTER 5
Cost-Volume-Profit
ASSIGNMENT CLASSIFICATION TABLE
Brief A B
Learning Objectives Questions Exercises Do It! Exercises Problems Problems
1. Distinguish between 1, 2, 3, 6 1 1 1, 2, 3, 4, 1A, 6A 1B, 6B

variable and fixed 5, 6
costs.
2. Explain the 4, 5 2 2
significance
of the relevant range.
3. Explain the concept of 6, 7, 8 1, 3, 4, 5 1, 2 1, 3, 4, 1A 1B

5, 6
mixed costs.
4. List the five 9 7

components of cost-
volume-profit analysis.
5. Indicate what 10, 11, 17 6, 7 8, 9, 10, 1A, 2A, 1B, 2B,

contribution margin is 11, 12, 13, 3A, 4A, 3B, 4B,
and how it can 17 5A, 6A 5B, 6B
be expressed.
6. Identify the three 12, 13, 14 8, 9 3, 4 8, 9, 10, 1A, 2A, 1B, 2B,
ways to determine the 11, 12, 13, 3A, 3B,
break-even point. 14, 16, 17 4A, 5A 4B, 5B
7. Give the formulas for 16 10, 12 4 14, 15, 17 2A, 5A, 2B, 5B,
determining sales 6A 6B
required
to earn target net
income.
8. Define margin of 15 11 4 16, 17 2A, 4A, 2B, 4B,

safety, 5A, 6A 5B, 6B
and give the formulas
for computing it.
Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For
Instructor Use Only) 5-1
ASSIGNMENT CHARACTERISTICS TABLE
Proble Difficult Time

m Description y Allotted
Number Level (min.)
1A Determine variable and fixed costs, compute Simple 20–30

break-even point, prepare a CVP graph, and
determine net income.
2A Prepare a CVP income statement, compute Moderat 30–40

break-even point, contribution margin ratio, e
margin of safety ratio,
and sales for target net income.
3A Compute break-even point under alternative Simple 20–30

courses
of action.
4A Compute break-even point and margin of safety Moderat 20–30

ratio, e
and prepare a CVP income statement before
and after changes in business environment.
5A Compute contribution margin, fixed costs, Moderat 20–30

break-even point, sales for target net income, e
and margin of safety ratio.
6A Determine contribution margin ratio, break- Moderat 20–30

even point, and margin of safety. e
1B Determine variable and fixed costs, compute Simple 20–30

break-even point, prepare a CVP graph, and
determine net income.
2B Prepare a CVP income statement, compute Moderat 30–40

break-even point, contribution margin ratio, e
margin of safety ratio,
and sales for target net income.
3B Compute break-even point under alternative Simple 20–30

courses
of action.
4B Compute break-even point and margin of safety Moderat 20–30

ratio, e
and prepare a CVP income statement before
and after changes in business environment.
5B Compute break-even point and margin of safety Moderat 20–30
5-2 Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For
Instructor Use Only)
ratio, and prepare a CVP income statement e
before and after changes in business
environment.
6B Determine contribution margin ratio, break- Moderat 20–30

even point, and margin of safety. e
BLOOM’S TAXONOMY TABLE
Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-of-Chapter Exercises and
Problems
Learning Objective Knowledg Comprehensio Application Analysis Synthesi Evaluation

e n s
* 1. Distinguish between variable E5-4 Q5-1 BE5- E5-5 E5-3 P5-6A
and fixed costs. Q5-2 1 E5-6 P5-6B
Q5-3 E5-1 P5-1A
Q5-6 E5-2 P5-1B
DI5-1
* 2. Explain the significance of the Q5-4 E5-2 BE5-2
relevant range. Q5-5
* 3. Explain the concept of mixed E5-4 Q5-6 DI5-1 Q5-8 DI5-2 BE5-3 P5-1B
costs. E5-5 Q5-7 E5-1 BE5-4 E5-5 E5-3
BE5-1 BE5-5 E5-6 P5-1A
* 4. List the five components of E5-7 Q5-9
cost-volume-profit analysis.
* 5. Indicate what contribution Q5-10 Q5-11 E5-10 BE5-6 P5-3A P5-5B
margin Q5-17 E5-11 P5-1A P5-3B P5-6B
is and how it can be expressed. BE5-6 E5-12 P5-2A P5-4A
BE5-7 E5-13 P5-1B P5-5A
E5-8 E5-17 P5-2B P5-6A
E5-9 P5-4B
* 6. Identify the three ways to Q5-12 Q5-13 E5-10 E5-16 P5-3A
determine the break-even Q5-14 BE5-8 E5-11 P5-1A P5-4A
point. BE5-9 E5-12 P5-2A P5-3B
DI5-3 E5-13 P5-1B P5-4B
DI5-4 E5-14 P5-2B P5-5A
E5-8 E5-17 P5-5B
E5-9
* 7. Give the formulas for Q5-16 E5-12 P5-2A P5-5A
determining sales required to BE5-10 E5-14 P5-2B P5-6A
earn target net BE5-12 E5-15 P5-5B
income. DI5-4 E5-17 P5-6B
* 8. Define margin of safety, and Q5-15 E5-17 E5-16 P5-5A P5-4A P5-6B
give BE5-11 P5-2A P5-5B P5-6A
5-4Copyright © 2012
theJohn
formulas
Wiley &for computing
Sons, it.
Inc. Weygandt, Managerial Accounting, 6/e,
DI5-4 P5-2B
Solutions Manual P5-4B
(For Instructor Use Only)
Broadening Your Perspective BYP5-6 BYP5-4 BYP5-1 BYP5-5 BYP5-3

5-3
ANSWERS TO QUESTIONS
1. (a) Cost behavior analysis is the study of how specific costs respond to changes
in the level of activity within a company.
(b) Cost behavior analysis is important to management in planning business
operations and in deciding between alternative courses of action.
2. (a) The activity index identifies the activity that causes changes in the behavior
of costs. Once the index is determined, it is possible to classify the
behavior of costs in response to changes in activity levels into three
categories: variable, fixed, or mixed.
(b) Variable costs may be defined in total or on a per-unit basis. Variable costs in
total vary directly and proportionately with changes in the activity level.
Variable costs per unit remain the same at every level of activity.
3. Fixed costs remain the same in total regardless of changes in the activity level.
In contrast, fixed costs per unit vary inversely with activity. As volume increases,
fixed costs per unit decline and vice versa.
4. (a) The relevant range is the range of activity over which a company expects to
operate during the year.
(b) Disagree. The behavior of both fixed and variable costs are linear only
over a certain range of activity. CVP analysis is based on the assumption
that both fixed and variable costs remain linear within the relevant
range.
5. This is true. Most companies operate within the relevant range. Within this
range, it is possible to establish a linear (straight-line) relationship for both
variable and fixed costs. If a relevant range cannot be established,
segregation of costs into fixed and variable becomes extremely difficult.
6. Apartment rent is fixed because the cost per month remains the same
regardless of how much Adam uses the apartment. Rent on a Hertz rental truck
is a mixed cost because the cost usually includes a per day charge (a fixed
cost) plus an activity charge based on miles driven (a variable cost).
7. For CVP analysis, mixed costs must be classified into their fixed and variable
elements. One approach to the classification of mixed costs is the high-low
method.
8. Variable cost per unit is $1.30, or [($165,000 – $100,000) ÷ (90,000 – 40,000)]. At
any level of activity, fixed costs are $48,000 per month [$165,000 – (90,000 X
$1.30)].
9. No. Only two of the basic components of cost-volume-profit (CVP) analysis, unit
selling prices and variable cost per unit, relate to unit data. The other
components, volume, total fixed costs, and sales mix, are not based on per-
unit amounts.
10. There is no truth in Faye’s statement. Contribution margin is sales less variable
costs. It is the revenue that remains to cover fixed costs and to produce
income (profit) for the company.
11. Contribution margin is $14 ($40 – $26). The contribution margin ratio is 35%
($14 ÷ $40).
$
1
80
,5
Questions Chapter 5 (Continued)
12. Disagree. Knowledge of the break-even point is useful to management in deciding

whether to introduce new product lines, change sales prices on established
products, and enter new market areas.
+
$ 9
0
,.3
6
13. $26,000 ÷ 25% = $104,000
14. (a) The break-even point involves the plotting of three lines over the full range of
activity: the total revenue line, the total fixed cost line, and the total cost
line. The break-even point is determined at the intersection of the total
revenue and total cost lines.
(b) The break-even point in units is obtained by drawing a vertical line from the
break-even point to the horizontal axis. The break-even point in sales dollars is
obtained by drawing a horizontal line from the break-even point to the
vertical axis.
15. Margin of safety is the difference between actual or expected sales and sales
at the break-even point. 1,250 X $12 = $15,000; $15,000 – $13,200 = $1,800;
$1,800 ÷ $15,000 = 12%.
16. At break-even sales, the contribution margin is equal to the fixed costs. The
contribution margin ratio is:
= 36%
The sales volume to achieve net income of $90,000 is as follows:
= $750,000
17. PACE COMPANY

CVP Income Statement
Sales................................................................................. $900,000
Variable expenses
Cost of goods sold ($600,000 X .70)......................... $420,000
Operating expenses ($200,000 X .70)....................... 140,000
Total variable expenses...................................... 560,000
Contribution margin......................................................... $340,000
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 5-1
Indirect labor is a variable cost because it increases in total

directly and proportionately with the change in the activity level.
Supervisory salaries is a fixed cost because it remains the same in

total regardless of changes in the activity level.
Maintenance is a mixed cost because it increases in total but not

proportionately with changes in the activity level.
BRIEF EXERCISE 5-2
VARIABLE COST FIXED COST

Relevant Range Relevant Range
$10,000 $10,000
8,000 8,000
6,000 6,000
4,000 4,000
2,000 2,000
0 20 40 60 80 100 0 20 40 60 80 100
Activity Level Activity Level
BRIEF EXERCISE 5-3
COST $60,00
0 Total Cost Line

45,000
Variable Cost

Element
30,000

15,000 Fixed Cost Element
0 500 1,000 1,500 2,000 2,500

Direct Labor Hours
BRIEF EXERCISE 5-4
High Low Differen

ce
$15,00 – $13,50 = $1,500
0 0
– = 1,000
8,500 7,500
$1,500 ÷ 1,000 = $1.50—Variable cost per mile.
High Low
Total cost $15,00 $13,50
Less: Variable 0 0
costs
8,500 X $1.50
7,500 X $1.50 12,750 11,25
Total fixed costs 0
$
$ 2,250
2,250
The mixed cost is $2,250 plus $1.50 per mile.
BRIEF EXERCISE 5-5
High Low Differen

ce
$66,10 – $32,00 = $34,100
0 0
– = 22,000
40,000 18,000
$34,100 ÷ 22,000 = $1.55 per unit.
Activity Level
High Low
Total cost $66,10 $32,00
Less: Variable 0 0
costs
40,000 X
$1.55 62,000
18,000 X 000,0 27,900
$1.55 00 $
Total fixed costs $ 4,100
4,100
BRIEF EXERCISE 5-6
1. (a) $288 = ($640 – $352)

(b) 45% ($288 ÷ $640)
2. (c) $207 = ($300 – $93)

(d) 31% ($93 ÷ $300)
3. (e) $1,300 = ($325 ÷ 25%)

(f) $975 ($1,300 – $325)
BRIEF EXERCISE 5-7

RADIAL INC.
For the Quarter Ended March 31, 2014
Sales.................................................................... $2,400,000
Variable costs ($920,000 + $70,000 + $86,000). 1,076,000
Contribution margin............................................ 1,324,000
Fixed costs ($440,000 + $45,000 + $98,000)...... 583,000
Net income.......................................................... $ 741,000
BRIEF EXERCISE 5-8
(a) $520Q – $286Q – $163,800 = $0

$234Q = $163,800
Q = 700 units
(b) Contribution margin per unit $234, or ($520 – $286)

X = $163,800 ÷ $234
X = 700 units
BRIEF EXERCISE 5-9
Contribution margin ratio = [($300,000 – $180,000) ÷ $300,000]

= 40%
Required sales in dollars = $170,000 ÷ 40% = $425,000
BRIEF EXERCISE 5-10
If variable costs are 70% of sales, the contribution margin ratio is ($1
– $0.70) ÷ $1 = .30.
Required sales in dollars = ($195,000 + $75,000) ÷ .30 = $900,000
BRIEF EXERCISE 5-11
Margin of safety = $1,000,000 – $840,000 = $160,000

Margin of safety ratio = $160,000 ÷ $1,000,000 = 16%
BRIEF EXERCISE 5-12
Contribution margin per unit $1.60 is ($6.00 – $4.40)

Required sales in units = ($480,000 + $1,500,000) ÷ $1.60 =
1,237,500.
SOLUTIONS FOR DO IT! REVIEW EXERCISES
DO IT! 5-1
Variable costs: Indirect labor, direct labor, and direct

materials.
Fixed costs: Property taxes and depreciation.
Mixed costs: Utilities and maintenance.
DO IT! 5-2
(a) Variable cost: ($18,580 – $16,200) ÷ (10,500 – 8,800) = $1.40

per unit
Fixed cost: $18,580 – ($1.40 X 10,500 units) = $3,880
or $16,200 – ($1.40 X 8,800) = $3,880
(b) Total cost to produce 9,200 units: $3,880 + ($1.40 X

9,200) = $16,760
DO IT! 5-3
(a) The formula is $250Q – $170Q – $140,000 = 0. Therefore, 80Q =

$140,000,
and the breakeven point in units is 1,750 ($140,000 ÷ $80).
(b) The contribution margin per unit is $80 ($250 – $170). The
formula therefore is $140,000 ÷ $80, and the breakeven point
in units is 1,750.
DO IT! 5-4
(a) CM per unit = Unit selling price – Unit variable costs

$12 = $30 – $18
CM ratio = CM per unit/Unit selling price
40% = $12/$30
Break-even point in dollars = Fixed costs ÷ Contribution
margin ratio
= $220,000 ÷ 40%
= $550,000
DO IT! 5-4 (Continued)
Actual sales – Break-even

Margin of
(b) = sales
safety
Actual sales
$800,000 – $550,000
=
$800,000
= 31.25%
(c) Sales – Variable costs – Fixed costs = Net income

$30Q – $18Q = $220,000 + $140,000
$12Q = $360,000
Q = 30,000 units
30,000 units X $30 = $900,000 required sales
SOLUTIONS TO EXERCISES
EXERCISE 5-1
(a) The determination as to whether a cost is variable, fixed, or

mixed can be made by comparing the cost in total and on a
per-unit basis at two different levels of production.
Variable Vary in total but remain constant on a per-unit

Costs basis.
Fixed Costs Remain constant in total but vary on a per-unit
Mixed Costs basis.
Contain both a fixed element and a variable
element. Vary both in total and on a per-unit
basis.
(b) Using these criteria as a guideline, the classification is as

follows:
Direct Variable Rent Fixed

materials Variable Maintenance Mixed
Direct labor Mixed Supervisory Fixed
Utilities salaries
EXERCISE 5-2
(a)
EXERCISE 5-2 (Continued)
(b) The relevant range is 3,000 – 8,000 units of output since a

straight-line relationship exists for both direct materials and
$
4
,9
0
–$
2
,7
5
0
$
2
,
4
0
rent within this range.
3
(c) Variable cost per unit
Within the relevant range Cost

=
(3,000 – 8,000 units) Units
$15,00
$3 per
= 0* =
5,00 unit
0*
*Any costs and units within the relevant range could have
been used to calculate the same unit cost of $3.
(d) Fixed cost within the

relevant range = $8,000
(3,000 – 8,000 units)
EXERCISE 5-3
(a) Maintenance Costs:
= = $6 variable cost per machine hour
700 300
Machine Machine
Hours Hours
Total costs $4,900 $2,500
Less: Variable
costs 4,200
700 X $6 1,800
300 X $6 $ 700 $ 700
Total fixed costs
Thus, maintenance costs are $700 per month plus $6 per

machine hour.
COSTS
(b) $5,00
Total Cost Line $4,900
0
$4,00
0
$3,00
0 Variable Cost
Element
$2,00
0
$1,00
0
$ 700
Fixed Cost Element
0 100 200 300 400 500 600 700
Machine Hours
EXERCISE 5-4
Wood used in the production of furniture. Variable.

1.
Fuel used in delivery trucks. Variable.
2.
Straight-line depreciation on factory Fixed.
3. building.
Screws used in the production of Variable.
4. furniture.
Sales staff salaries. Fixed.
5.
Sales commissions. Variable.
6.
Property taxes. Fixed.
7.
Insurance on buildings. Fixed.
8.
Hourly wages of furniture craftsmen. Variable.
9.
10 Salaries of factory supervisors. Fixed.
.
11 Utilities expense. Mixed.
.
12 Telephone bill. Mixed.
.
$
5
,8
0
–$2
,3
7
5
0
$
2
,4
=5
0
EXERCISE 5-5
(a) Maintenance Costs:
Total cost
Less: Variable
costs
$.50
$.50
8,000 X
3,500 X
Total fixed costs

= $.50 variable cost per machine hour
High
Activity Level
$5,000
4,000
00,000
$1,000
Low
$2,750
1,750
$1,000
Thus, maintenance costs are $1,000 per month plus $.50 per
machine hour.
COSTS
(b) $5,00
Total Cost
0
Line
$4,00
0
$3,00 Variable Cost

Element
0
$2,00
0
Fixed Cost Element
$1,000
0 2,000 4,000 6,000 8,000
Machine Hours
EXERCISE 5-6
(a) Cost Fixed Variable Mixed

Direct materials X
Direct labor X
Utilities X
Property taxes X
Indirect labor X
Supervisory X
salaries
Maintenance X
Depreciation X
(b) Fixed costs = $1,000 + $1,900 + $2,400

+
$300 + $200
= $5,800
Variable costs to produce 3,000 units = $7,500 + $18,000 +

$4,500
= $30,000
Variable cost per unit = $30,000/3,000 units

= $10 per unit
Variable cost portion of mixed cost = Total cost – Fixed

portion
Utilities:
Variable cost to produce 3,000 units = $2,100 – $300
= $1,800
Variable cost per unit = $1,800/3,000 units

= $.60 per unit
Maintenance:
Variable cost to produce 3,000 units = $1,100 – $200
= $900
Variable cost per unit = $900/3,000 units

= $.30 per unit
Cost to produce 5,000 units = (Variable costs per + Fixed
cost
unit X 5,000 units)
= (($10 + $.60 + $.30) X 5,000) +
$5,800
= $54,500 + $5,800
= $60,300
EXERCISE 5-7
MEMO
To: Jim Taylor
From: Student
Re: Assumptions underlying CVP analysis
CVP analysis is a useful tool in analyzing the effects of changes
in costs and volume on a company’s profits. However, there are
some assumptions which underline CVP analysis. When these
assumptions are not valid, the results of CVP analysis may be
inaccurate.
The five assumptions are:
1. The behavior of both costs and revenues is linear
throughout the relevant range of the activity index.
2. All costs can be classified accurately as either fixed or
variable.
3. Changes in activity are the only factors that affect
costs.
4. All units produced are sold.
5. When more than one type of product is sold, the sales
mix will remain constant.
If you want further explanation of any of these assumptions,
please contact me.
EXERCISE 5-8
(a) Contribution margin per lawn = $60 – ($12 + $10 +
$2)
Contribution margin per lawn =
$36
Contribution margin ratio =
$36 ÷ $60 = 60%
Fixed costs = $1,400 + $200 + $2,000 = $3,600
Break-even point in lawns = $3,600 ÷ $36 = 100
(b) Break-even point in dollars = 100 lawns X $60 per lawn
= $6,000 per month
OR
Fixed costs ÷ Contribution margin ratio = $3,600 ÷ .60
= $6,000 per month
EXERCISE 5-9
1. Contribution margin per room = $60 – ($11 + $28)
Contribution margin per room = $21
Contribution margin ratio = $21 ÷ $60 = 35%
$
2
1
,%
0
4
Fixed costs = $6,200 + $1,100 + $1,000 + $100 = $8,400
8
Break-even point in rooms = $8,400 ÷ $21 = 400
2. Break-even point in dollars = 400 rooms X $60 per

room
= $24,000 per month
OR
Fixed costs ÷ Contribution margin ratio = $8,400 ÷ .35
= $24,000 per month
EXERCISE 5-10
(a) Contribution margin in dollars: Sales = 560 X $120 =

$67,200
Variable costs = $67,200 X .60 =
40,320
Contribution margin $26,880
Contribution margin per unit: $120 – $72 ($120 X 60%) =

$48.
Contribution margin ratio: $48 ÷ $120 = 40%.
(b) Break-even sales in dollars: = $52,560.
Break-even sales in units: = 438.
F
i
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d
c
B
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e
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-
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i
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EXERCISE 5-11
$ 1
2
,(3
0
$27,00
5 ÷
$
5
)
(a 1. Contribution margin 0 = 75%
) ratio is: $36,00
0
Break-even point in $15,000 =

dollars = 75% $20,000
2. Round-trip fare $36,000
1,440 = $25
=
fares
$20,00
Break-even point in fares = 0 = 800 fares
$25
(b) At the break-even point fixed costs and contribution margin

are equal. Therefore, the contribution margin at the break-
even point would be $15,000.
EXERCISE 5-12
(a) Unit contribution margin =
= $1.60
Variable cost per unit = Unit selling price – Unit contribution

margin
= $5.00 – $1.60
= $3.40
OR
= 70,000 X $5.00 = 70,000X + $112,000
= where X = Variable cost per unit
= Variable cost per unit = $3.40
Contribution margin ratio = $1.60 ÷ $5.00 = 32%
(b) Fixed costs ÷ Contribution margin ratio = Break-even sales

in dollars
Fixed costs ÷ .32 = $420,000
= $134,400 ($420,000 X.32)
Since fixed costs were $112,000 in 2013, the increase in 2014

is $22,400 ($134,400 – $112,000).
EXERCISE 5-13
(a) CANNES COMPANY

For the Month Ended September 30, 2014
Total Per
Unit
Sales (600 video game consoles)......... $240,000 $400
Variable costs....................................... 165,000 275
Contribution margin.............................. 75,000 $125
Fixed costs............................................ 52,000
Net income............................................ $ 23,000
(b) Sales = Variable costs + Fixed costs

$400X = $275X + $52,000
$125X = 52,000
X = 416 units
(c) CANNES COMPANY

For the Month Ended September 30, 2014
Tota Per
l Unit
Sales (416 video game consoles)......... $166,400 $400
Variable costs....................................... 114,400 275
Contribution margin.............................. 52,000 $125
Fixed costs............................................ 52,000
Net income............................................ $ –0–
$
5
7
0
,X
+
$ $
5
7
0
,
+
1
$
2
6
,–9
0$
2
1
0
,
–
9
6
0
*
5
0
$
EXERCISE 5-14
(a) Units sold in 2013 =
(b) Units needed in 2014 =
(rounded)
(c)
*$210,000 + $52,000 = $262,000
= 13,000 units
= 13,867 units
= 13,000 units, where X = new selling price
$832,000 = 13,000X – $1,170,000

$2,002,000 = 13,000X
X = $154
EXERCISE 5-15
1. Unit sales price = $400,000 ÷ 5,000 units = $80

Increase selling price to $88, or ($80 X 110%).
Net income = $440,000 – $210,000 – $90,000 = $140,000.
2. Reduce variable costs to 45% of sales.

Net income = $400,000 – $180,000 – $90,000 = $130,000.
Alternative 1, increasing selling price, will produce the highest

net income.
DOLLARS (000)
EXERCISE 5-16
(a) $3,20 Sales Line

0

2,800
Total Cost
Break-even Line
2,400
Point

2,000

1,600

1,200
800
Fixed Cost
400 Line
100 200 300 400 500 600 700 800

Number of Units (in thousands)
(b) 1. Break-even sales in units:

$4X = $2.50X + $600,000
$1.50X = $600,000
X = 400,000 units
2. Break-even sales in dollars:

X = .625X + $600,000
.375X = $600,000
X = $1,600,000 or $600,000 ÷ 37.5%
(c) 1. Margin of safety in dollars: $2,000,000 – $1,600,000 =

$400,000
2. Margin of safety ratio: $400,000 ÷ $2,000,000 = 20%
EXERCISE 5-17
(a) Contribution ratio = Contribution margin ÷ Sales

($40 – $16) ÷ $40 = 60%
(b) Break-even in dollars: $19,500 ÷ 60% = $32,500
(c) Margin of safety = (2,600 X $40) – $32,500 = $71,500

$71,500 ÷ $104,000 = 68.75%
(d) Current contribution margin $40 – $16 = $24

Total contribution margin is $24 X 2,600 = $62,400
30% increase in contribution margin is $62,400 X 30% =
$18,720
Total increase in sales required: $18,720 ÷ 60% = $31,200
SOLUTIONS TO PROBLEMS
PROBLEM 5-1A
(a) Variable costs (per haircut) Fixed costs (per month)

Barbers’ commission $4.50 Barbers’ salaries $4,000
Barber supplies .30 Manager’s extra salary
Utilities .20 500
Total variable cost per Advertising 200
haircut $5.00 Rent 1,100
Utilities 175
Magazines 25
Total fixed $6,000
(b) $10.00X = $5.00X + $6,000 1,200 haircuts X $10 =

$ 5.00X = $6,000 $12,000
X = 1,200 haircuts
DOLLARS (000)
(c) 18 Sales Line
15 Total Cost
Break-even Line
Point
12
9
Fixed Cost
6 Line
3
300 600 900 1,2001,5001,800
Number of Haircuts
(d) Net income = $17,000 – [($5.00 X 1,700) + $6,000]

= $2,500
PROBLEM 5-2A
(a) JORGE COMPANY

CVP Income Statement (Estimated)
For the Year Ending December 31, 2014
Sales.................................................... $1,800,000
Variable expenses
Cost of goods sold........................ $1,170,000*
Selling expenses........................... 70,000
Administrative expenses.............. 20,000
Total variable expenses......... 1,260,000
Contribution margin............................ 540,000
Fixed expenses
Cost of goods sold........................ 280,000
Selling expenses........................... 65,000
Total fixed expenses............... 405,000
Net income.......................................... $ 135,000
*Direct materials $430,000 + direct labor $360,000 + variable

manufacturing overhead $380,000.
(b) Variable costs = 70% of sales ($1,260,000 ÷ $1,800,000) or

$.35 per bottle ($.50 X 70%). Total fixed costs = $405,000.
1. $.50X = $.35X + $405,000

$.15X = $405,000
X = 2,700,000 units
2. 2,700,000 X $.50 = $1,350,000
(c) Contribution margin ratio = ($.50 – $.35) ÷ $.50
= 30% (or 1 – .70)
Margin of safety ratio = ($1,800,000 – $1,350,000) ÷
$1,800,000
= 25%
(d) Required sales
X=
$
4
0
5
,.3
+
$
1
8
0
, = $1,950,000
$
9
0
,.3
2
$
90
,$
.8
4 3
1
0
,.2
PROBLEM 5-3A
7
(a) Sales were $2,500,000, variable expenses were $1,700,000
(68% of sales), and fixed expenses were $900,000. Therefore,
the break-even point in dollars is:
= $2,812,500
(b) 1. The effect of this alternative is to increase the selling

price per unit to $6 ($5 X 120%). Total sales become
$3,000,000 (500,000 X $6). Thus, the contribution margin
ratio changes to 43% [($3,000,000 – $1,700,000) ÷
$3,000,000]. The new break-even point is:
= $2,093,023 (rounded)
2. The effects of this alternative are to change total fixed

costs
to $810,000 ($900,000 – $90,000) and to change the
contribution margin to 27% [($2,500,000 – $1,700,000 –
$125,000) ÷ $2,500,000]. The new break-even point is:
= $3,000,000
Alternative 1 is the recommended course of action because it

has a lower break-even point.
((2
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8
PROBLEM 5-4A
(a) Current break-even point: $40X = $24X + $270,000

(where X = pairs of shoes)
$16X = $270,000
X = 16,875 pairs of shoes
New break-even point: $38X = $24X + ($270,000 + $24,000)

$14X = $294,000
(b) Current margin of safety ratio =
= 16% (rounded)
New margin of safety ratio =
= 13% (rounded)
(c) BARGAIN SHOE STORE

Current New
Sales (20,000 X $40) $800,0 $912,00 (24,000 X
Variable expenses (20,000 X 00 0 $38)
$24) 480,0 576,0 (24,000 X
Contribution margin 00 00 $24)
Fixed expenses
Net income 320,00 336,00
0 0
270,0
00 294,00
$ 0
50,000 $
42,000
The proposed changes will raise the break-even point 4,125

units. This is a significant increase. Margin of safety is 3%
lower and net income is $8,000 lower. The recommendation is
to not accept the proposed changes.
PROBLEM 5-5A
(a) (1)
Current Year
Sales $1,500,000
Variable costs
Direct materials 511,000
Direct labor 290,000
Manufacturing overhead ($350,000 245,000
X .70) 100,000
Selling expenses ($250,000 X .40) 54,000
Administrative expenses ($270,000 1,200,000
X .20) $ 300,000
Total variable costs
Contribution margin
Current Year Projected

Year
Sales $1,500,000 X 1.1 $1,650,000
Variable costs
Direct materials 511,000 X 1.1 562,100
Direct labor 290,000 X 1.1 319,000
Manufacturing 245,000 X 1.1 269,500
overhead 100,000 X 1.1 110,000
Selling expenses 54,000 X 1.1 59,400
Administrative 1,200,000 X 1.1 1,320,000
expenses $ 300,000 X 1.1 $ 330,000
Total variable
costs
Contribution margin
(2)
Fixed Costs Current Projected
Year year
Manufacturing overhead ($350,000 $105,000 $105,000
X .30) 150,000 150,000
Selling expenses ($250,000 X .60) 216,000 216,000
Administrative expenses ($270,000 $471,000 $471,000
X .80)
Total fixed costs
PROBLEM 5-5A (Continued)
(b) Unit selling price = $1,500,000 ÷ 100,000 = $15

Unit variable cost = $1,200,000 ÷ 100,000 = $12
Unit contribution margin = $15 – $12 = $3
Contribution margin ratio = $3 ÷ $15 = .20
Break-even point in = Fixed ÷ Unit contribution

units costs margin
157,000 units = $471,000 ÷ $3
Break-even point in = Fixed ÷ Contribution margin

dollars costs ratio
$2,355,000 = $471,000 ÷ .20
(c) Sales dollars

required = (Fixed + Target net ÷ Contribution margin
for costs income) ratio
target net
income
$3,355,000 = ($471,000 + $200,000) ÷ .20
(d) Margin of = (Expected – Break-even ÷ Expected

safety sales sales) sales
ratio
29.8% = ($3,355,000 – $2,355,000) ÷ $3,355,000
PROBLEM 5-6A
(a) 1. Let variable selling and administrative expenses = VSA

Sales – Variable cost of goods sold – VSA = Contribution
Margin
$1,200,000 – ($400,000 + $500,000 + $50,000 + VSA) =
$180,000
VSA = $70,000
2. Let fixed manufacturing overhead = FMO

Sales – Variable cost of goods sold – FMO = Gross profit
$1,200,000 – ($400,000 + $500,000 + $50,000 + FMO) =
$180,000
FMO = $70,000
3. Let fixed selling and administrative expenses = FSA
Contribution margin ratio = $180,000 ÷ $1,200,000 = 15%

Contribution margin at break-even = $1,300,000 X 15% =
$195,000
At break-even, Contribution margin = Fixed costs (FSA +

FMO)
$195,000 = FSA + $70,000
FSA = $125,000
(b) Incremental sales = $1,200,000 X 25% = $300,000

Incremental contribution margin = $300,000 X 15% = $45,000
The maximum increased advertising expenditure would be

equal to
the incremental contribution margin earned on the increased
sales, which is $45,000. The other fixed costs are irrelevant
to this decision, because they would be incurred whether or
not the advertising expenditure is increased.
PROBLEM 5-1B
(a Variable costs (per haircut) Fixed costs (per month)

)
Barbers’ commission $3.00 Barbers’ salaries $7,500*
Rent .60 Rent
Barber supplies .40 700
Total variable $4.00 Depreciation 400
Utilities 300
Advertising 100
Total fixed $9,000
*($1,500 X 3) + $3,000
(b $10X = $4X + $9,000 1,500 haircuts X $10 =
) $6X = $9,000 $15,000
X = 1,500 haircuts
DOLLARS (000)
Break-even
(c) 18 Sales Line
Point
15 Total Cost
Line
12
9 Fixed Cost
Line
6
3
300 600 900 1,2001,5001,800
Number of Haircuts
(d) Net income = $18,000 – [($4.00 X 1,800) + $9,000]

= $1,800
PROBLEM 5-2B
(a) ALL FRUTE COMPANY

CVP Income Statement (Estimated)
For the Year Ending December 31, 2014
Sales............................................. $2,500,000
Variable expenses
Cost of goods sold.................. $1,080,000 (1)
Selling expenses..................... 80,000
Administrative expenses........ 40,000
Total variable expenses. . . 1,200,000
Contribution margin...................... 1,300,000
Fixed expenses
Cost of goods sold.................. 380,000
Total fixed expenses........ 780,000
Net income.................................... $ 520,000
(1) Direct materials $360,000 + direct labor $450,000 + variable

manufacturing overhead $270,000.
(b) Variable costs = 48% of sales ($1,200,000 ÷ $2,500,000) or

$.24 per bottle ($.50 X 48%). Total fixed costs = $780,000.
1. $.50X = $.24X + $780,000

$.26X = $780,000
X = 3,000,000 units (breakeven)
2. 3,000,000 X $.50 = $1,500,000
(c) Contribution margin ratio = ($.50 – $.24) ÷ $.50

= 52%
Margin of safety ratio = ($2,500,000 – $1,500,000) ÷

$2,500,000
= 40%
X=
$
7
8
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,.5
+
$
6
2
4
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(d) Required sales
= $2,700,000
$
8
4
0
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5
$
84
0
,$
.6
0
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PROBLEM 5-3B
(a) Sales were $1,800,000 and variable expenses were

$1,170,000, which means contribution margin was $630,000
and CM ratio was 35%. Fixed expenses were $840,000.
Therefore, the breakeven point in dollars is:
= $2,400,000
(b) 1. The effect of this alternative is to increase the selling

price per unit to $37.50 ($30 X 125%). Total sales become
$2,250,000 (60,000 X $37.50). Thus, the contribution
margin ratio changes to 48% [($2,250,000 – $1,170,000) ÷
$2,250,000]. The new breakeven point is:
= $1,750,000
2. The effects of this alternative are to change total fixed

costs to $660,000 ($840,000 – $180,000) and to change the
contribution margin to .30 [($1,800,000 – $1,170,000 –
$90,000) ÷ $1,800,000]. The new breakeven point is:
= $2,200,000
3. The effects of this alternative are: (1) variable and fixed

cost of goods sold become $675,000 each, (2) total
variable costs become $915,000 ($675,000 + $125,000 +
$115,000), and (3) total fixed costs are $1,095,000
($675,000 + $355,000 + $65,000). The new breakeven
point is:
X = ($915,000 ÷ $1,800,000)X + $1,095,000
X = .51X + $1,095,000
.49X = $1,095,000
X = $2,234,694 (rounded)
Alternative 1 is the recommended course of action using
breakeven analysis because it has the lowest breakeven
point.
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PROBLEM 5-4B
(a) Current break-even point: $30X = $12X + $216,000

(where X = pairs of shoes)
$18X = $216,000
New break-even point: $27X = $12X + ($216,000 + $18,000)

$15X = $234,000
(b) Current margin of safety ratio =
= 40%
New margin of safety ratio =
= 35%
*$30 X $90
(c) COSTLESS SHOE STORE

Current New
Sales (20,000 X $30) $600,0 $648,0 (24,000 X
Variable expenses (20,000 X 00 00 $27)
$12) 240,0 288,0 (24,000 X
Contribution margin 00 00 $12)
Fixed expenses
Net income 360,00 360,00
0 0
216,0 234,0
00 00
$144,0 $126,00
00 0
No, the changes should not be made because net income will
be lower than the net income currently earned. In addition,
the break-even point would be higher by 3,600 units and the
margin of safety ratio would decrease from 40% to 35%.
PROBLEM 5-5B
(a) (1)
Current Year
Sales $1,800,00
0
Variable costs
Direct materials
Direct labor 456,000
Manufacturing overhead ($480,000 X . 250,000
40) 192,000
Administrative expenses ($484,000 X . 242,00
50) 0
Total variable costs 1,260,00
Contribution margin 0
$
540,000
Current Projected
Year Year
Sales $1,800,00 X 1.2 $2,160,000
0
Variable costs
Direct materials X 1.2 547,200
Direct labor 456,000 X 1.2 300,000
Manufacturing 250,000 X 1.2 230,400
overhead 192,000 X 1.2 144,000
Selling expenses 120,000 X 1.2 290,400
Administrative 242,00 X 1.2 1,512,000
expenses 0 X 1.2 $ 648,000
Total variable costs 1,260,00
Contribution margin 0
$
540,000
(2) Current Projected

Fixed Costs Year Year
Manufacturing overhead ($480,000 $288,000 $288,000
X .60) 280,000 280,000
Selling expenses ($400,000 X .70) 242,000 242,000
Administrative expenses ($484,000 $810,000 $810,000
X .50)
Total fixed costs
PROBLEM 5-5B (Continued)
(b) Unit selling price = $1,800,000 ÷ 100,000 = $18.00

Unit variable cost = $1,260,000 ÷ 100,000 = $12.60
Unit contribution margin = $18.00 – $12.60 = $5.40
Contribution margin ratio = $5.40 ÷ $18.00 = .30
Break-even point in = Fixed ÷ Unit contribution

units costs margin
150,000 units = $810,000 ÷ $5.40
Break-even point in = Fixed ÷ Contribution margin

dollars costs ratio
$2,700,000 = $810,000 ÷ .30
(c) Sales dollars

required for = (Fixed + Target net ÷ Contribution margin ratio
costs income)
target net income
$3,410,000 = ($810,000 + $213,000) ÷ .30
(d) Margin of = (Expected – Break-even ÷ Expected

safety sales sales) sales
ratio
21*% = ($3,410,000 – $2,700,000) ÷ 3,410,000
*(Rounded)
(e) (1)
Sales $1,800,000
Variable costs
Direct materials 456,000
Direct labor ($250,000 – $100,000) 150,000
Manufacturing overhead ($480,000 X . 48,000
10) 320,000
Administrative expenses ($484,000 X . 1,216,000
50) $ 584,000
Total variable costs
Contribution margin
PROBLEM 5-5B (Continued)
(2) Contribution margin ratio = $584,000 ÷ $1,800,000 = .32

(Rounded)
(3) Break-even point in dollars = $754,000 ÷ .32 = $2,356,250
Fixed costs
Manufacturing overhead ($480,000 X . $432,000
90) 80,000
Administrative expenses ($484,000 X . $754,000
50)
Total fixed costs
The break-even point in dollars declined from $2,700,000 to

$2,356,250. This means that overall the company’s risk has
declined because it doesn’t have to generate as much in
sales. The two changes actually had opposing effects on the
break-even point. By changing to a more commission based
approach to compensate its sales staff, the company reduced
its fixed costs, and therefore reduced its break-even point. In
contrast, the purchase of the new equipment increased the
company’s fixed costs (by increasing its equipment
depreciation) and reduced its variable direct labor cost, both
of which would increase the break-even point.
PROBLEM 5-6B
(a) 1. Let variable selling and administrative expenses = VSA

Sales – Variable cost of goods sold – VSA = Contribution
Margin
$2,000,000 – ($600,000 + $700,000 + $200,000 + VSA) =
$150,000
VSA = $350,000
2. Let fixed manufacturing overhead = FMO

Sales – Variable cost of goods sold – FMO = Gross profit
$2,000,000 – ($600,000 + $700,000 + $200,000 + FMO) =
$400,000
FMO = $100,000
3. Let fixed selling and administrative expenses = FSA
Contribution margin ratio = $150,000 ÷ $2,000,000 =

7.50%
Contribution margin at break-even = $2,400,000 X 7.50% =
$180,000
At break-even, Contribution margin = Fixed costs (FSA +

FMO)
$180,000 = FSA + $100,000
FSA = $80,000
(b) Incremental sales = $2,000,000 X 15% = $300,000

Incremental contribution margin = $300,000 X 7.50% =
$22,500
The maximum increased advertising expenditure would be

equal to
the incremental contribution margin earned on the increased
sales, which is $22,500. The other fixed costs are irrelevant
to this decision, because they would be incurred whether or
not the advertising expenditure is increased.
BYP 5-1 DECISION-MAKING AT CURRENT DESIGNS
(a) $250 + $100 + $170 + $420 + $400 = $1,340 total variable

costs
(b) Contribution margin per unit = $2,000 – $1,340 = $660
(c) $359,700* ÷ $660 = 545 units

*$119,700 ÷ $240,000
(d) ($359,700 + $270,600) ÷ $660 = 955 units
(e) Actual (expected) sales = $2,000 X 1,000 = $2,000,000
Break-even sales = $2,000 X 545 = $1,090,000
Margin of safety in dollars = $2,000,000 – $1,090,000

= $910,000
Margin of safety ratio = $910,000 ÷ $2,000,000

= 45.5%
BYP 5-2 DECISION-MAKING ACROSS THE ORGANIZATION
(a)
(1) Capital-Intensive (2) Labor-Intensive
Fixed manufacturing costs Fixed manufacturing costs
$2,524,000 $1,550,000
Incremental selling expenses Incremental selling expenses
502,000 502,000
Total fixed costs $3,026,000 Total fixed costs $2,052,000
Selling price $32.00 Selling price $32.00

Variable costs Variable costs
Direct materials $5.00 Direct materials $5.50
Direct labor 6.00 Direct labor 8.00
Variable overhead 3.00 Variable overhead 4.50
Selling expenses 2.00 16.00 Selling expenses 2.00 20.00
Contribution margin $16.00 Contribution margin $12.00
Total fixed costs (1) $3,026,000 Total fixed costs (1) $2,052,000
Contribution margin per unit (2) Contribution margin per unit (2)
$16.00 $12.00
Break-even in units (1) ÷ (2) 189,125 Break-even in units (1) ÷ (2) 171,000
(b) Creative Ideas Company would be indifferent between the two

manufacturing methods at the volume (X) where total costs
are equal.
$16X + $3,026,000 = $20X + $2,052,000

$4X = $974,000
X = 243,500 units
(c) Creative Ideas should employ the capital-intensive

manufacturing method if annual sales are expected to exceed
243,500 units and the labor-intensive manufacturing method if
annual sales are not expected to exceed 243,500 units. The
labor-intensive method is more profitable for sales up to
243,500 units because the fixed costs are lower. The capital-
intensive method is more profitable for sales above 243,500
units because its contribution margin is higher.
BYP 5-3 MANAGERIAL ANALYSIS
(a) The variable costs per unit are:

Cost of goods sold ($600,000 ÷ 240,000)........ $2.50
Selling expenses ($117,600 ÷ 240,000)............ .49
Administrative expenses ($60,000 ÷ 240,000). .25
Total........................................................... $3.24
Fixed costs are:
Cost of goods sold ($800,000 X .25)................ $200,000
Selling expenses ($280,000 X .58)................... 162,400
Administrative expenses ($150,000 X .60)...... 90,000
$452,400
The break-even points are:

X = ($3.24 ÷ $5.00) X + $452,400
X = .65X + $452,400
.35X = $452,400
X = $1,292,571 (rounded)
$5.00X = $3.24X + $452,400
$1.76X = $452,400
X = 257,045 units (rounded)
(b) Variable unit cost of goods sold = $2.75

($600,000 ÷ 240,000 = $2.50; $2.50 + $.25)
Sales volume = 300,000 units (240,000 X 125%)
Total sales = 300,000 X $5.25 = $1,575,000
Net income computation:
Sales............................................. $1,575,000
Variable expenses
Cost of goods sold
(300,000 X $2.75)................ $825,000
Selling expenses
(300,000 X $.49).................. 147,000
Administrative expenses
(300,000 X $.25).................. 75,000
Total variable expenses. . . 1,047,000
Contribution margin...................... 528,000
BYP 5-3 (Continued)
Fixed expenses
Cost of goods sold.................. $200,000
Total fixed expenses........ 452,400
Net income.................................... $ 75,600
X = ($1,047,000 ÷ $1,575,000)X + $452,400

X = .66X + $452,400
.34X = $452,400
X = $1,330,588 (rounded)
Profits and the break-even point would both increase.
(c) Sales [384,000 (1) X ($5.00 – $.25)].... $1,824,000

Variable expenses
Cost of goods sold
(384,000 X $2.50)....................... $960,000
Selling expenses (384,000 X $.59) 226,560
Administrative expenses
(384,000 X $.25) ........................ 96,000
Total variable expenses.......... 1,282,560
Contribution margin............................ 541,440
Fixed expenses
Cost of goods sold........................ $200,000
Selling expenses
($162,400 + $40,000)................. 202,400
Total fixed expenses............... 492,400
Net income.......................................... $ 49,040
(1) Sales volume = 240,000 X 160% = 384,000
X = ($1,282,560 ÷ $1,824,000)X + $492,400
X = .70X + $492,400
.30X = $492,400
X = $1,641,333
Profits and the break-even point would both increase.
(d) Peri’s plan should be accepted. It produces a higher net
income and
a lower break-even point than Paul’s plan.
BYP 5-4 REAL-WORLD FOCUS
(a) Sweeteners and packaging are a variable cost to Coca-Cola

because their use is directly proportional to the amount of
product produced. If the unit cost of a variable cost item
increases, the contribution margin will decline. This will lead
to a decline in net income unless the company can increase its
selling price, increase the number of units it sells, or reduce
other costs.
(b) This description makes the marketing expenditures sound

like they are a variable cost, since it suggests that they vary
with the amount of units sold. However, unlike variable costs,
the relationship of marketing costs is not directly proportional
to sales, since other factors also influence units sold. Thus, it
is not a pure variable cost. However, it is also not a fixed
cost, in that there usually is a relationship between
marketing expenditures and sales. For CVP purposes, it might
best be handled as a mixed cost, having both a fixed and
variable component.
(c) The first measure, gallon shipments of concentrates and

syrups, is the activity index, since it best reflects the
company’s production and sales activity at the wholesale
level, its primary line of business. The second measure, unit
cases of finished product, indicates the amount of activity by
Coke’s primary customers, the bottlers. Coke also keeps
track of this since it provides information about what is
happening at the retail level.
BYP 5-5 REAL-WORLD FOCUS
(a) Barnes and Noble has 1,362 stores with a total of 18.8 million
square feet. That is a huge investment in fixed costs that
have very little value in an e-book environment.
(b) Barnes and Noble’s big advantage (which enabled it to put

lots of small independent book sellers out of business), was
that each of its superstores had 150,000 books in stock.
However, that is no longer as impressive when you consider
that booksellers’ websites now give you access to millions of
e-book titles which can be downloaded directly to e-readers.
(c) The authors say that the arrival of Apple’s iPad has huge
implications for e-books. ITunes has more than 125 million
customers. They represent a very wide potential audience for
e-books.
(d) Barnes and Nobel earns about $12.50 on a $25 hardcover

book. The same book, as an e-book, would sell for $12.99 and
Barnes and Noble would earn $3.90. Obviously they can’t
afford this decline unless they can dramatically reduce their
fixed costs.
(e) Barnes and Noble was one of the first companies to have an
e-reader, called the Rocket e-book. However, it abandoned its
e-reader in 2003 because sales of e-books had been very low.
Four years later Amazon introduced its Kindle e-reader, which
has been hugely popular. A second mistake was that Barnes
and Noble was very slow to upgrade its website to encourage
the sale of e-books. Again, Amazon was more than happy to fill
the void.
BYP 5-6 COMMUNICATION ACTIVITY
To: My Roommate
From: Your Roommate
Subject: Cost-Volume-Profit Questions
In response to your request for help, I provide you the following:
(a) The mathematical formula for break-even sales is:
Break-even Sales = Variable Costs + Fixed Costs
Break-even sales in dollars is found by expressing variable

costs as a percentage of unit selling price. For example, if the
percentage is 70%, the break-even formula becomes X = .70X +
Fixed Costs. The answer will be in sales dollars.
Break-even sales in units is found by using unit selling price

and unit variable costs in the formula. For example, if the
selling price is $300 and variable costs are $210, the break-
even formula becomes $300X = $210X + Fixed Costs. The
answer will be in sales units.
(b) The formulas for contribution margin per unit and

contribution margin ratio differ as shown below:
Unit Selling Price – Unit Variable Costs = Contribution Margin

per Unit
Contribution Margin per Unit ÷ Unit Selling Price = Contribution

Margin Ratio
You can see that CM per Unit is used in computing the CM

ratio.
(c) When contribution margin is used to determine break-even
sales, total fixed costs are divided by either the contribution
margin ratio or contribution margin per unit. Using the CM
ratio results in determining the break-even point in dollars.
Using CM per unit results in determining the break-even point
in units.
BYP 5-6 (Continued)
The formula for determining break-even sales in dollars is:
Fixed Costs ÷ Contribution Margin Ratio = Break-even Sales

in Dollars
The formula for determining break-even sales in units is:
Fixed Costs ÷ Contribution Margin per Unit = Break-even

Sales in Units
I hope this memo answers your questions.
BYP 5-7 ETHICS CASE
(a) The stakeholders in this situation are:
 Scott Bestor, accountant of Westfield Company.

 The dislocated personnel of Westfield.
 The senior management who made the decision.
(b) Scott is hiding an error and is knowingly deceiving the

company’s management with inaccurate data.
(c) Scott’s alternatives are:
 Keep quiet.
 Confess his mistake to management.
The students’ recommendations should recognize the

practical aspects of the situation but they should be
idealistic and ethical. If the students can’t be totally ethical
when really nothing is at stake, how can they expect to be
ethical under real-world pressures?
BYP 5-8 ALL ABOUT YOU
(a) The variable gasoline cost of going one mile in the hybrid car
would be $0.09 ($3.60/40). The variable gasoline cost of
going one mile in the traditional car would be $0.12
($3.60/30).
(b) The savings per mile of driving the hybrid vehicle would be
$0.03 ($0.12 – $0.09).
(c) In order to break even on your investment, you would need to

drive 150,000 miles. This is determined by dividing the
additional fixed cost of $4,500 by the cost savings per mile
of $0.03.
(d) There are many other factors that you would want to
consider in your analysis. For example, do the vehicles differ
in their expected repair bills, insurance costs, licensing fees,
or ultimate resale value. Also, some states and some
employers offer rebates for the purchase of hybrid vehicles.
In addition, your decision might be influenced by non-financial
factors, such as a desire to reduce emissions.

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CHAPTER 5

ASSIGNMENT CLASSIFICATION TABLE

1. Distinguish between 1, 2, 3, 6 1 1 1, 2, 3, 4, 1A, 6A 1B, 6B

3. Explain the concept of 6, 7, 8 1, 3, 4, 5 1, 2 1, 3, 4, 1A 1B

4. List the five 9 7

5. Indicate what 10, 11, 17 6, 7 8, 9, 10, 1A, 2A, 1B, 2B,

8. Define margin of 15 11 4 16, 17 2A, 4A, 2B, 4B,

Proble Difficult Time

1A Determine variable and fixed costs, compute Simple 20–30

2A Prepare a CVP income statement, compute Moderat 30–40

3A Compute break-even point under alternative Simple 20–30

4A Compute break-even point and margin of safety Moderat 20–30

5A Compute contribution margin, fixed costs, Moderat 20–30

6A Determine contribution margin ratio, break- Moderat 20–30

1B Determine variable and fixed costs, compute Simple 20–30

2B Prepare a CVP income statement, compute Moderat 30–40

3B Compute break-even point under alternative Simple 20–30

4B Compute break-even point and margin of safety Moderat 20–30

5B Compute break-even point and margin of safety Moderat 20–30

6B Determine contribution margin ratio, break- Moderat 20–30

Learning Objective Knowledg Comprehensio Application Analysis Synthesi Evaluation

Broadening Your Perspective BYP5-6 BYP5-4 BYP5-1 BYP5-5 BYP5-3

12. Disagree. Knowledge of the break-even point is useful to management in deciding

The sales volume to achieve net income of $90,000 is as follows:

17. PACE COMPANY

BRIEF EXERCISE 5-1

Indirect labor is a variable cost because it increases in total

Supervisory salaries is a fixed cost because it remains the same in

Maintenance is a mixed cost because it increases in total but not

BRIEF EXERCISE 5-2

VARIABLE COST FIXED COST

0 500 1,000 1,500 2,000 2,500

BRIEF EXERCISE 5-4

High Low Differen

$1,500 ÷ 1,000 = $1.50—Variable cost per mile.

The mixed cost is $2,250 plus $1.50 per mile.

High Low Differen

$34,100 ÷ 22,000 = $1.55 per unit.

BRIEF EXERCISE 5-6

1. (a) $288 = ($640 – $352)

2. (c) $207 = ($300 – $93)

3. (e) $1,300 = ($325 ÷ 25%)

BRIEF EXERCISE 5-7

BRIEF EXERCISE 5-8

(a) $520Q – $286Q – $163,800 = $0

(b) Contribution margin per unit $234, or ($520 – $286)

BRIEF EXERCISE 5-9

Contribution margin ratio = [($300,000 – $180,000) ÷ $300,000]

BRIEF EXERCISE 5-10

BRIEF EXERCISE 5-11

Margin of safety = $1,000,000 – $840,000 = $160,000

Contribution margin per unit $1.60 is ($6.00 – $4.40)

Variable costs: Indirect labor, direct labor, and direct

(a) Variable cost: ($18,580 – $16,200) ÷ (10,500 – 8,800) = $1.40

or $16,200 – ($1.40 X 8,800) = $3,880

(b) Total cost to produce 9,200 units: $3,880 + ($1.40 X

(a) The formula is $250Q – $170Q – $140,000 = 0. Therefore, 80Q =

(a) CM per unit = Unit selling price – Unit variable costs

Actual sales – Break-even

(c) Sales – Variable costs – Fixed costs = Net income

(a) The determination as to whether a cost is variable, fixed, or

Variable Vary in total but remain constant on a per-unit

(b) Using these criteria as a guideline, the classification is as