12th February, 2011

COST-VOLUME –
PROFIT ANALYSIS
 As changes What happens
occur here. here?

Total Total
Revenues Output Revenue

Sales
Total Price Total
Cost Cost
Variable
Costs

Operating Fixed Operating

Costs
Income Income
Sales $xxx
Production
COGS (xx) FC & VC

Gross Margin $xxx

Selling Exp. (xx)Selling
FC & VC

Admin. Exp (xx)

Administrative
FC & VC
Net Income $xxx
Sales $xxx
Variable Costs (xx)
Cont. Margin $xxx
Fixed Costs (xx)
Net Income $xxx
 Income Statements . . .
Traditional Contribution Format
Sales $xxx Sales $xxx
COGS (xx) Variable Costs (xx)
Gross Margin $xxx Cont. Margin $xxx
Operating Exp (xx) Fixed Costs (xx)
Net Income $xxx Net Income $xxx
 Variable and Fixed Cost Behavior

AAvariable
variablecost
cost AAfixed
fixedcost
costisis
changes
changesinindirect
direct not
notimmediately
immediately
proportion
proportiontotochanges
changes affected
affectedby
bychanges
changes
in
inthe
thecost-driver
cost-driverlevel.
level. in
inthe
thecost-driver.
cost-driver.

Think
Thinkofofvariable
variable Think
Thinkofoffixed
fixedcosts
costs
costs
costson
onaaper-unit
per-unitbasis.
basis. on
onaatotal-cost
total-costbasis.
basis.

The
Theper-unit
per-unitvariable
variable Total
Totalfixed
fixedcosts
costsremain
remain
cost
costremains
remainsunchanged
unchanged unchanged
unchangedregardless
regardlessof
of
regardless
regardlessof
ofchanges
changesin
in changes
changesininthe
thecost-driver.
cost-driver.
the
thecost-driver.
cost-driver.
 Cost Behavior Summary
Summary of Variable and Fixed Cost Behavior
Variable Costs Fixed costs

Remains the same even Dereases as activity level

Per Unit
when activity level changes. increases.
Changes as activity level Remains the same over wide
Total
changes. ranges of activity.
 Fixed Costs
Total fixed costs remain unchanged
when activity changes.
Monthly Telephone
Bill – Line Rent

Your monthly telephone

line rent bill probably
does not change when
Number of Local Calls you make more local calls.
 Fixed Costs
Fixed costs per unit decline as activity increases.

Monthly Telephone Line

Rent Bill per Local Call
Your average cost per
local call decreases as
more local calls are made.
Number of Local Calls
 Variable Costs
Total variable costs change when activity
changes.
Total Calls Charges

Telephone Bill
(Local + Long
Distance)

Your total call charges

telephone bill is based
on how many minutes
Minutes Talked you talk.
 Variable Costs
Variable costs per unit do not change
as activity increases.

Telephone Charge
Per Minute
The cost per minutes
talked is constant.

Minutes Talked
 Semivariable Costs (Mixed Costs)
Mixed costs contain a fixed portion that is
incurred even when facility is unused, and a
variable portion that increases with usage.

Example: monthly electric utility charge

Fixed service fee i.e. Meter Rent
Variable charge per
kilowatt hour used
 Semivariable Costs (Mixed Costs)
Slope
Slope is
is
variable
variable cost
cost
per
per unit
unit
of
of activity.
activity.
Total Utility Cost

cos t Variable
xe d
m i
tal Utility Charge
To

Fixed Monthly
Utility Charge

Activity (Kilowatt Hours)

 Relevant Range

The
Therelevant
relevantrange
rangeisisthe
thelimit
limit
of
of cost-driver
cost-driveractivity
activitylevel
levelwithin
withinwhich
whichaa
specific
specificrelationship
relationshipbetween
betweencosts
costs
and
andthe
thecost
costdriver
driverisisvalid.
valid.

Even
Evenwithin
withinthe
therelevant
relevantrange,
range,aafixed
fixed
cost
costremains
remainsfixed
fixedonly
onlyover
overaagiven
given
period
periodof
of time
timeUsually
Usuallythe
thebudget
budgetperiod.
period.
 CVP Scenario
Cost-volume-profit
Cost-volume-profit(CVP)
(CVP)analysis
analysisisisthe
thestudy
studyof
ofthe
theeffects
effectsof
ofoutput
output
volume
volumeon
onrevenue
revenue(sales),
(sales),expenses
expenses(costs),
(costs),and
andnet
netincome
income(net
(netprofit).
profit).
Per
PerUnit
Unit Percentage
Percentageof
ofSales
Sales
Selling
Sellingprice
price $1.50
$1.50 100%
100%
Variable
Variablecost
costof
ofeach
eachitem
item 1.20
1.20 80
80
Selling
Sellingprice
priceless
lessvariable
variablecost
cost $$ .30
.30 20%
20%

Monthly
Monthlyfixed
fixedexpenses:
expenses:
Rent
Rent $3,000
$3,000
Wages
Wagesforforreplenishing
replenishingand
and
servicing
servicing 13,500
13,500
Other
Otherfixed
fixedexpenses
expenses 1,500
1,500
Total
Totalfixed
fixedexpenses
expensesper
permonth
month $$18,000
18,000
 Break-Even Point

The
Thebreak-even
break-evenpoint
pointisisthe
thelevel
levelofofsales
salesatatwhich
which
revenue
revenueequals
equalsexpenses
expensesand andnet
netincome
incomeisiszero.
zero.

Sales
Sales
--Variable
Variableexpenses
expenses
-- Fixed
Fixedexpenses
expenses
Zero
Zeronet
netincome
income(break-even
(break-evenpoint)
point)
 Computing Break-Even Point
Total Unit
Sales Revenue (2,000 units) $ 100,000 $ 50
Less: Variable costs 60,000 30
Contribution margin $ 40,000 $ 20
Less: Fixed costs 30,000
Operating income $ 10,000

How
How much
much contribution
contribution margin
margin must
must this
this company
company have
have to
to cover
cover its
its fixed
fixed
How
How How
many
many many
Contribution
Contribution
How much units
margin
units
margin
contributionunits
ismust
is
costs
amount
must
amount
margin
costsofcosts must
this
by
by
mustwhich
this
(break
producing
costs (break
which
this this
company
revenue
company
revenue
company
even)?
the
therevenue.
company
sell
exceeds
sell
exceeds
have to to
the
to
the
cover cover
variable
cover
variable
its fixed
of
costs (breakeven)?
producing revenue.
even)?
its
its fixed
sell fixed
to cover costs
costs
Answer:
Answer: (break
its fixedeven)?
(break
$30,000
$30,000 even)?
costs
Answer:
Answer: $30,000
$30,000 (break ÷÷ $20 per
per unit
$20even)? unit == 1,500
1,500 units
units
 Finding the Break-Even
Formula for ComputingPoint
Break-Even Sales (in Units)
We have just seen one of the basic CVP relationships – the
break-even computation.

Fixed costs
Break-even point in units =
Contribution margin per unit

Unit sales price less unit variable cost

($20 in previous example)
 Contribution Margin Method

Contribution
Contributionmargin
margin Contributionmargin
Contribution marginratio
ratio
Per
PerUnit
Unit PerUnit
Per Unit %%
Selling
Sellingprice
price $1.50
$1.50 Sellingprice
Selling price 100
100
Variable
Variablecosts
costs 1.20
1.20 Variablecosts
Variable costs .80
.80
Contribution
Contributionmargin
margin $$ .30
.30 Contributionmargin
Contribution margin .20.20

$18,000
$18,000 fixed
fixed costs
costs ÷÷ $.30
$.30
== 60,000
60,000 units
units (break
(break even)
even)
 Formula for Computing
Break-Even Sales (in Dollars)
The break-even formula may also be
expressed in sales dollars.
Fixed costs
Break-even point in dollars =
Contribution margin ratio

Contribution margin per unit

Unit sales price
 Computing Break-Even Sales
ABC
ABC Co.
Co. sells
sells product
product XYZ
XYZ at
at $5.00
$5.00 per
per unit.
unit. If
If fixed
fixed
costs
costs are
are $200,000
$200,000 and
and variable
variable costs
costs are
are $3.00
$3.00 per
per
unit,
unit, how
how many
many units
units must
must be
be sold
sold to
to break
break even?
even?

a.
a. 100,000
100,000 units
units
b.
b. 40,000
40,000 units
units
c.
c. 200,000
200,000 units
units
d.
d. 66,667
66,667 units
units
 Computing Break-Even Sales
ABC
ABC Co.
Co. sells
sells product
product XYZ
XYZ at
at $5.00
$5.00 per
per unit.
unit. If
If fixed
fixed
costs
costs are
are $200,000
$200,000 and
and variable
variable costs
costs are
are $3.00
$3.00 per
per
unit,
unit, how
how many
many units
units must
must be
be sold
sold to
to break
break even?
even?

a.
a. 100,000
100,000 units
units
b.
b. 40,000
40,000 units
units
c.
c. 200,000
200,000 units
units
Unit contribution = $5.00 - $3.00 = $2.00
d.
d. 66,667
66,667 units
units
Fixed costs $200,000
=
Unit contribution $2.00 per unit
= 100,000 units
 Computing Break-Even Sales
Use
Use the
the contribution
contribution margin
margin ratio
ratio formula
formula to to
determine
determine the the amount
amount ofof sales
sales revenue
revenue ABC
ABC must
must
have
have to
to break
break even.
even. All
All information
information remains
remains
unchanged:
unchanged: fixedfixed costs
costs are
are $200,000;
$200,000; unit
unit sales
sales
price
price is
is $5.00;
$5.00; and
and unit
unit variable
variable cost
cost is
is $3.00.
$3.00.

a.
a. $200,000
$200,000
b.
b. $300,000
$300,000
c.
c. $400,000
$400,000
d.
d. $500,000
$500,000
 Computing Break-Even Sales
Use
Use the
the contribution
contribution margin
margin ratio
ratio formula
formula to to
determine
determine the the amount
amount ofof sales
sales revenue
revenue ABC
ABC must
must
have
have to
to break
break even.
even. All
All information
information remains
remains
unchanged:
unchanged: fixedfixed costs
costs are
are $200,000;
$200,000; unit
unit sales
sales
price
price is
is $5.00;
$5.00; and
and unit
unit variable
variable cost
cost is
is $3.00.
$3.00.
Unit contribution = $5.00 - $3.00 = $2.00
a.
a. $200,000
$200,000
Contribution margin ratio = $2.00 ÷ $5.00 = .40
b.
b. Break-even revenue = $200,000 ÷ .4 = $500,000
$300,000
$300,000
c.
c. $400,000
$400,000
d.
d. $500,000
$500,000
 Contribution Margin Method

60,000
60,000units
units×× $1.50
$1.50 == $90,000
$90,000
in
insales
salesto
tobreak
breakeven
even

$18,000
$18,000fixed
fixedcosts
costs
÷÷ 20%
20% (contribution-margin
(contribution-marginpercentage)
percentage)
== $90,000
$90,000ofof sales
salesto
tobreak
breakeven
even
 Equation Method

Let
LetN
N == number
numberofof units
units
to
tobe
besold
soldto
tobreak
breakeven.
even.

Sales
Sales––variable
variableexpenses
expenses–– fixed
fixedexpenses
expenses== net
netincome
income
$1.50N
$1.50N –– $1.20N
$1.20N –– $18,000
$18,000 == 00
$.30N
$.30N == $18,000
$18,000
N
N == $18,000
$18,000 ÷÷ $.30
$.30
N
N == 60,000
60,000 Units
Units
 Equation Method

Let
LetSS==sales
salesin
indollars
dollars
needed
neededto
tobreak
breakeven.
even.

SS––.80S
.80S––$18,000
$18,000==00
.20S
.20S==$18,000
$18,000
SS==$18,000
$18,000÷÷.20
.20
SS==$90,000
$90,000

Shortcut
Shortcut formulas:
formulas:
Break-even
Break-even volume
volume in
in units
units == fixed
fixed expenses
expenses
unit
unit contribution
contribution margin
margin
Break-even
Break-even volume
volume in
in sales
sales == fixed
fixed expenses
expenses
contribution
contribution margin
margin ratio
ratio
 Cost-Volume-Profit Graph

$150,000 A
Net Income
138,000 Sales C
120,000 Net Income Area
Dollars

D
90,000 Variable
Total Break-Even Point Expenses
60,000Expenses 60,000 units
Net Loss
30,000 or $90,000
Area
18,000 B
Fixed Expenses
0 10 20 30 40 50 60 70 80 90 100

Units (thousands)
 Preparing a CVP Graph
 Starting at the origin, draw the total revenue Revenue
line with a slope equal to the unit sales price.
Costs and Revenue
in Dollars

 Total fixed cost

extends horizontally
from the vertical axis.

Total fixed cost

Volume in Units
 Preparing a CVP Graph
Revenue
 Draw the total cost line with a slope
equal to the unit variable cost.

Break-even
Costs and Revenue

Profit
Point
in Dollars

Total cost

Loss
Total fixed cost

Volume in Units
 Target Net Profit

Managers
Managers use use CVP
CVPanalysis
analysis
to
to determine
determine the the total
total sales,
sales,
in
in units
units and
and dollars,
dollars, needed
needed
To
To reach
reach aa target
target net
net profit.
profit.

Target
Target sales
sales
–– variable
variable expenses
expenses Say:
Say: $1,440
$1,440per
permonth
month
–– fixed
fixed expenses
expenses isisthe
theminimum
minimum
acceptable
acceptablenet
netincome.
target
target net
net income
income income.
 Computing Sales Needed to
Achieve Target Operating Income
Break-even
Break-even formulas
formulas may
may be
be adjusted
adjusted to
to show
show the
the sales
sales
volume
volume needed
needed to
to earn
earn
any
any amount
amount of
of operating
operating income.
income.

Unit sales = Fixed costs + Target income

Contribution margin per unit

Dollar sales = Fixed costs + Target income

Contribution margin ratio
 Computing Sales Needed to
Achieve Target Operating Income
ABC
ABCCo.Co.sells
sellsproduct
productXYZ
XYZat
at$5.00
$5.00per
perunit.
unit. If
If
fixed
fixedcosts
costsare
are$200,000
$200,000and
andvariable
variablecosts
costsare
are
$3.00
$3.00per
perunit,
unit,how
howmany
manyunits
unitsmust
mustbebesold
sold
to
toearn
earnoperating
operatingincome
incomeofof $40,000?
$40,000?

a.
a. 100,000
100,000units
units
b.
b. 120,000
120,000units
units
c.
c. 80,000
80,000units
units
d.
d. 200,000
200,000units
units
 Computing Sales Needed to
Achieve Target Operating Income
ABC
ABCCo.Co.sells
sellsproduct
productXYZ
XYZat
at$5.00
$5.00per
perunit.
unit. If
If
fixed
fixedcosts
costsare
are$200,000
$200,000and
andvariable
variablecosts
costsare
are
$3.00
$3.00per
perunit,
unit,how
howmany
manyunits
unitsmust
mustbebesold
sold
to
toearn
earnoperating
operatingincome
incomeofof $40,000?
$40,000?

Unit contribution = $5.00 - $3.00 = $2.00

a.
a. 100,000 units
100,000 unitsFixed costs + Target income
b.
b. 120,000
120,000units
units Unit contribution
$200,000 + $40,000
c.
c. 80,000 units
80,000 units $2.00 per unit
= 120,000 units
d.
d. 200,000 units
200,000 units
 Target Net Profit
Target
Targetsales
salesvolume
volumein
inunits
units==
(Fixed
(Fixedexpenses
expenses++Target
Targetnet
netincome)
income)
÷÷Contribution
Contributionmargin
marginper
perunit
unit
Selling
Sellingprice
price $1.50
$1.50
Variable
Variablecosts
costs 1.20
1.20
Contribution
Contributionmargin
marginper
perunit
unit $$ .30
.30

($18,000
($18,000++$1,440)
$1,440)÷÷$.30
$.30==64,800
64,800units
units

Target
Targetsales
salesdollars
dollars==sales
salesprice
priceXXsales
salesvolume
volumeininunits
units
Target
Targetsales
salesdollars
dollars==$1.50
$1.50XX64,800
64,800units
units==$97,200.
$97,200.
 Margin of Safety (MS)
 Amount you can drop before losses are incurred
How much can our sales drop before we start losing
money
Every company has a different % because each is
structured differently
How much excess you have over break even.
 How much you have after you cover your fixed costs.
 What is our Margin of Safety?
Margin of safety is the amount by which sales may
decline before reaching break-even sales:

Margin of safety = Actual sales - Break-even sales

Margin of safety provides a quick means of estimating

operating income at any level of sales:

Operating Margin Contribution

Income = of safety × margin ratio
 What is our Margin of Safety?
ADM contribution margin ratio is 40 percent. If sales are
$100,000 and break-even sales are $80,000, what is
operating income?

Operating =
Margin ×
Contribution
Income of safety margin ratio

Operating
= $20,000 × .40 = $8,000
Income
 What Change in Operating Income
Do We Anticipate?
Once break-even is reached, every additional dollar of
contribution margin becomes operating income:
Change in = Change in Contribution
operating income sales volume × margin ratio

ADM expects sales to increase by $15,000 and has a

contribution margin ratio of 40%. How much will
operating income increase?

Change in
operating income = $15,000 × .40 = $6,000
 Business Applications of CVP
Consider the following information developed by the
accountant at Speedo, a bicycle retailer:

Total Per Unit Percent

Sales (500 bikes) $ 250,000 $ 500 100%
Less: variable expenses 150,000 300 60%
Contribution margin $ 100,000 $ 200 40%
Less: fixed expenses 80,000
Operating income $ 20,000
 Business Applications of CVP
Should Speedo spend $12,000 on advertising to
increase sales by 10 percent?

Total Per Unit Percent

Sales (500 bikes) $ 250,000 $ 500 100%
Less: variable expenses 150,000 300 60%
Contribution margin $ 100,000 $ 200 40%
Less: fixed expenses 80,000
Operating income $ 20,000
 Business Applications of CVP
Should Speedo spend $12,000 on advertising
to increase sales by 10 percent?
500 550
550 × $500
Bike s Bike s
Sale s $ 250,000 $ 275,000
Le ss: va ria ble e xpe nses 150,000 550 × $300 165,000
Contribution m a rgin $ 100,000 $ 110,000
Le ss: fix ed e x pe nse s 80,000 92,000
Ope ra ting incom e $ 20,000 $80K + $12K $ 18,000

No, income is decreased.

 Business Applications of CVP
Now, in combination with the advertising,
Speedo is considering a 10 percent price reduction that will
increase sales by 25 percent. What is the income effect?
500
Bikes
Sales $ 250,000
Less: variable expenses 150,000
Contribution margin $ 100,000
Less: fixed expenses 80,000
Operating income $ 20,000
 Business Applications of CVP
Now, in combination with the advertising,
Speedo is considering a 10 percent price reduction that will
increase sales by 25 percent. What is the income effect?
500 1.25 × 500 625
Bike s Bike s
Sale s $ 250,000 625 × $450 $ 281,250
Le ss: va ria ble e xpe nses 150,000 187,500
Contribution m a rgin $ 100,000 625 × $300 $ 93,750
Le ss: fix ed e x pe nse s 80,000 92,000
Ope ra ting incom e $ 20,000 $80K + $12K $ 1,750

Income is decreased even more.

 Business Applications of CVP
Now, in combination with advertising and a price cut, Speedo
will replace $50,000 in sales salaries with a $25 per bike
commission, increasing sales by 50 percent above the
original 500 bikes. What is the effect on income?
500
Bikes
Sales $ 250,000
Less: variable expenses 150,000
Contribution margin $ 100,000
Less: fixed expenses 80,000
Operating income $ 20,000
 Business Applications of CVP
Now, in combination with advertising and a price cut, Speedo
will replace $50,000 in sales salaries with a $25 per bike
commission, increasing sales by 50 percent above the
original 500 bikes. What is the effect on income?

500 1.5 × 500 750

Bikes Bikes
Sales $ 250,000 750 × $450 $ 337,500
Less: variable expenses 150,000 243,750
750 × $325
Contribution margin $ 100,000 $ 93,750
Less: fixed expenses 80,000 $92K - $50K 42,000
Operating income $ 20,000 $ 51,750
The combination of advertising, a price cut,
and change in compensation increases income.
 The High-Low Method
Matrix, Inc. recorded the following production activity
and maintenance costs for two months:

Units Cost
High activity level 9,000 $ 9,700
Low activity level 5,000 6,100
Change 4,000 $ 3,600
Using these two levels of activity, compute:
 the variable cost per unit.
 the total fixed cost.
 total cost formula.
 The High-Low Method
Units Cost
High activity level 9,000 $ 9,700
Low activity level 5,000 6,100
Change 4,000 $ 3,600

in cost $3,600

 Unit variable cost = in units = 4,000 = $0.90 per unit
 The High-Low Method

Units Cost
High activity level 9,000 $ 9,700
Low activity level 5,000 6,100
Change 4,000 $ 3,600

in cost $3,600

 Unit variable cost = in units = 4,000 = $0.90 per unit
Fixed cost = Total cost – Total variable cost
 The High-Low Method
Units Cost
High activity level 9,000 $ 9,700
Low activity level 5,000 6,100
Change 4,000 $ 3,600

in cost $3,600

 Unit variable cost = in units = 4,000 = $0.90 per unit
 Fixed cost = Total cost – Total variable cost
Fixed cost = $9,700 – ($0.90 per unit × 9,000 units)
Fixed cost = $9,700 – $8,100 = $1,600
 The High-Low Method

Units Cost
High activity level 9,000 $ 9,700
Low activity level 5,000 6,100
Change 4,000 $ 3,600

in cost $3,600

 Unit variable cost = in units = 4,000 = $0.90 per unit
 Fixed cost = Total cost – Total variable cost
Fixed cost = $9,700 – ($0.90 per unit × 9,000 units)
Fixed cost = $9,700 – $8,100 = $1,600
 Total cost = $1,600 + $.90 per unit
 The High-Low Method
If
If sales
sales commissions are $10,000 when 80,000
units
units are
are sold
sold and
and $14,000
$14,000 when
when 120,000
120,000 units
units are
are
sold,
sold, what
what is
is the
the variable
variable portion
portion of
of sales
sales
commission
commission per per unit
unit sold?
sold?

a.
a. $.08
$.08 per unit
b.
b. $.10
$.10 per
per unit
unit
c.
c. $.12
$.12 per
per unit
unit
d.
d. $.125
$.125 per unit
 The High-Low Method
If
If sales
sales commissions
commissions are are $10,000
$10,000 when
when 80,000
80,000
units
units are
are sold
sold and
and $14,000
$14,000 when
when 120,000
120,000 units are
sold,
sold, what
what is
is the variable
variable portion of sales
commission
commission per per unit
unit sold?
sold?
Units Cost
a.
a. $.08
$.08 per
per unit
unit High le ve l 120,000 $ 14,000
Low le ve l 80,000 10,000
b.
b. $.10
$.10 per
per unit
unit Cha nge 40,000 $ 4,000
c.
c. $.12
$.12 per
per unit
unit $4,000 ÷ 40,000 units
d.
d. $.125
$.125 per
per unit
unit = $.10 per unit
 The High-Low Method
If sales commissions are $10,000 when
80,000 units are sold and $14,000 when
120,000 units are sold, what is the fixed
portion of the sales commission?
a. $ 2,000
b. $ 4,000
c. $10,000
d. $12,000
 The High-Low Method
If sales commissions are $10,000 when
80,000 units are sold and $14,000 when
120,000 units are sold, what is the fixed
portion of the sales commission?
Total cost = Total fixed cost +
Total variable cost
a. $ 2,000 $14,000 = Total fixed cost +
b. $ 4,000 ($.10 × 120,000 units)
Total fixed cost = $14,000 - $12,000
c. $10,000
Total fixed cost = $2,000
d. $12,000
 Assumptions Underlying CVP Analysis
 A limited range of activity, called the relevant
range, where CVP relationships are linear.
Unit selling price remains constant.
Unit variable costs remain constant.
Total fixed costs remain constant.
 Sales mix remains constant.
 Production = sales (no inventory changes).
The following information is available regarding the total manufacturing overhead of Bursa
Manufacturing Company for a recent four month period:
Mfg. Overhead
Months Machine Hours
(Rs.)
January, 2010 5,500 311,500
February, 2010 3,200 224,000
March, 2010 4,900 263,800
April, 2010 2,800 184,600
(a) Use the high-low method to determine:
(1) The variable element of manufacturing overhead costs per machine hour.
(2) The fixed element of monthly overhead cost.
(b) Bursa expects machine hours in May, 2010 to equal to 5,300. Use the cost relationships
determined in part a to forecast May's manufacturing overhead costs.
(c) Suppose Bursa had used the cost relationships determined in part a to estimate the total
manufacturing overhead expected for the month of February and March. By what amounts would Bursa
have over or underestimated these costs?
 Mfg.
Machine
Months Overhead
Hours
(Rs.)
High Point 5,500 311,500
(-) Low Point 2,800 184,600
Difference (only variable cost) 2,700 126,900
Variable mfg. O/H rate (126,900 ÷ 2,700) 47.00

Total manufacturing overhead at 5,500 MH 311,500

(-) Variable manufacturing O/H (5,500 x 47) 258,500
(-) Fixed manufacturing O/H (311,500 - 258,500) 53,000
Variable manufacturing O/H May (5,300 x 47) 249,100
(+) Fixed manufacturing overhead 53,000
Total manufacturing overhead in May 5,300 MH 302,100

Particulars February March

Variable manufacturing O/H 150,400 230,300
(+) Fixed manufacturing overhead 53,000 53,000
Total manufacturing overhead 203,400 283,300
(-) Already estimated mfg. O/H 224,000 263,800
Over/(under) estimated mfg. O/H - 20,600 19,500
By using High & Low cost method break down following factory overhead costs into its variable and
fixed components:
Mfg. Overhead
Months Unit Produced
(Rs.)
January, 2010 1,700 2,700
February, 2010 2,200 3,200
March, 2010 2,500 3,500
April, 2010 1,500 2,500
May, 2010 1,200 2,200
June, 2010 2,300 3,300
 Mfg.
Units
Months Overhead
Produced
(Rs.)
High Point 2,500 3,500
(-) Low Point 1,200 2,200
Difference (only variable cost) 1,300 1,300
Variable mfg. O/H rate (1,300 ÷ 1,300) 1.00

Total
Months Variable Fixed Overhead
(Rs.)
January, 2010 1,700 1,000 2,700
February, 2010 2,200 1,000 3,200
March, 2010 2,500 1,000 3,500
April, 2010 1,500 1,000 2,500
May, 2010 1,200 1,000 2,200
June, 2010 2,300 1,000 3,300
Porter Corporation has fixed costs of $660,000, variable costs of $24 per unit and a contributionmargin
ratio of 40%. Compute the following:

(a) Unit sales price and unit contribution margin for the above product.
(b) The sales volume in units required for Porter Corporation to earn an operating income of
$300,000.

(c) The dollar sales volume required for Porter Corporation to earn an operating income of $300,000.
 Particulars Per unit ($) Ratio
Sales (24 ÷ 0.60 x 1.00) 40.00 1.00
(-) Variable Cost 24.00 0.60
Contribution margin (24 ÷ 0.60x0.40) 16.00 0.40

Fixed cost ($) 660,000

(+) Targeted operating income ($) 300,000
Total ($) 960,000
Sales volume in units ( 960,000 ÷ 16 ) 60,000

Fixed cost ($) 660,000

(+) Targeted operating income ($) 300,000
Total ($) 960,000
Sales volume in ($) ( 960,000 ÷ 0.40 ) 2,400,000