Exercise A Chapter 3 Cost-Volume-Profit Analysis

Exercise A Chapter 3 Cost Volume Profit Analysisea1lo 31 Calcula

Calculate the per-unit contribution margin of a product with a sales price of $200 if variable costs per unit are $65.

Calculate the per-unit contribution margin of a product with a sales price of $400 if variable costs per unit are $165.

A product has a sales price of $150 and a per-unit contribution margin of $50. What is the contribution margin ratio?

A product has a sales price of $250 and a per-unit contribution margin of $75. What is the contribution margin ratio?

Maple Enterprises sells a single product with a selling price of $75 and variable costs per unit of $30. The company’s monthly fixed expenses are $22,500.

A. What is the company’s break-even point in units?

B. What is the company’s break-even point in dollars?

C. Construct a contribution margin income statement for September assuming they sell 900 units.

D. How many units must Maple sell to reach a target profit of $45,000?

E. What dollar sales are needed to reach a $45,000 target profit?

F. Construct a contribution margin income statement reflecting $150,000 in sales volume.

Marlin Motors sells a single product with a selling price of $400 and variable costs per unit of $160. Monthly fixed expenses are $36,000.

A. What is the break-even point in units?

B. What is the break-even point in dollars?

C. Prepare a contribution margin income statement for November with 130 units sold.

D. How many units are needed to realize a target profit of $48,000?

E. What dollar sales are required for a $48,000 target profit?

F. Construct an income statement reflecting $200,000 in sales revenue.

Flanders Manufacturing is considering purchasing a new machine that will reduce variable costs per part by $0.15; fixed costs will increase by $18,250 annually.

Marchete Company can increase their retail price by 8% without losing market share; all other costs remain unchanged. Using previous CVP data, what will be their new break-even point in units and dollars?

Brahma Industries contemplates an additional $25,000 advertising spend to increase sales volume by 10,000 units. Prepare forecasted contribution margin income statement incorporating these changes.

Salvador Manufacturing sells snowboards, skis, and poles with known sales prices and variable costs. Their sales mix is 7:3:2.

Determine the overall unit contribution margin for Salvador with current product mix.

Given fixed costs of $196,200, how many units of each product must be sold to break even?

Calculate their break-even point in sales dollars based on current sales mix and fixed costs.

Company A has current sales of $10 million with a 45% contribution margin; fixed costs are $3 million.

Company B has sales of $5 million and a 20% contribution margin with fixed costs of $500,000.

Compute the degree of operating leverage for both companies and analyze which benefits more from a 25% sales increase.

Marshall & Company’s recent break-even calculation is known; determine the target margin of safety in units and dollars if they require a $14,000 safety margin.

Paper For Above instruction

Cost-Volume-Profit (CVP) analysis is a fundamental tool used in managerial accounting to understand the relationships between costs, sales volume, and profit. It provides critical insights for decision-making, such as pricing strategies, product line evaluations, and profitability analysis. This paper explores various CVP concepts, including contribution margin calculations, break-even analysis, and the impact of changes in costs and sales on profitability, supported by numerical examples from multiple companies.

Contribution Margin and Ratios

The contribution margin per unit is vital for understanding how much each product contributes to covering fixed costs and generating profit. It is calculated by subtracting variable costs per unit from the selling price. For instance, a product with a $200 selling price and $65 variable cost has a contribution margin of $135, while another with a $400 price and $165 variable cost yields a contribution margin of $235. These margins assist managers in determining product viability and pricing strategies.

The contribution margin ratio, which is the contribution margin divided by the sales price, indicates the percentage of each sales dollar available to cover fixed costs. For a product priced at $150 with a $50 contribution margin, the ratio is approximately 33.33%. Similarly, a product priced at $250 with a $75 contribution margin yields a ratio of 30%. These ratios help in assessing the profitability of different products and setting sales targets.

Break-even Analysis

Break-even analysis determines the sales volume needed to cover all fixed and variable costs, resulting in zero profit. Maple Enterprises, with unit sales price of $75, variable costs of $30, and fixed costs of $22,500, can compute the break-even point in units by dividing fixed costs by the contribution margin per unit ($45), resulting in 500 units. In dollar terms, this equals $37,500 (500 units x $75).

Similarly, Marlin Motors with a selling price of $400 and variable costs of $160 has a break-even point of 225 units and $90,000 in sales. These calculations are critical for setting sales targets and assessing the risk level of new products.

Profit Planning and Target Profit Analysis

To achieve targeted profits, companies must sell sufficient units or dollar amount of sales. Maple Enterprises, aiming for $45,000 profit, needs to sell 1,000 units (($45,000 + fixed costs) / contribution margin per unit). The corresponding sales dollar amount would be $75,000. Marlin Motors would require 300 units to reach the same profit target, equating to $120,000 in sales revenue.

When considering sales volume adjustments, companies can evaluate the impact of price increases or new investments. Flanders Manufacturing’s proposal to purchase new machinery to reduce variable costs involves a trade-off between increased fixed costs and potential profitability improvements.

Impact of Price Changes and Product Mix

Adjusting prices without losing market share can improve profitability. Marchete Company’s 8% price increase would raise the sale price to approximately $162. Incorporating this into CVP analysis reveals a new break-even point in units and dollars, which might decrease due to higher unit margins.

Product mix significantly affects overall profitability, especially for companies like Salvador Manufacturing, which sells multiple products with different contribution margins and sales ratios. Calculations of weighted average contribution margin per unit and sales volume are essential for determining break-even sales in dollars and units.

Leverage and Business Analysis

Operational leverage measures how sensitive net operating income is to changes in sales volume, influenced by the ratio of fixed to variable costs. Company A, with higher sales and fixed costs, exhibits a higher degree of operating leverage, meaning it benefits more from sales increases. Conversely, Company B’s lower leverage indicates less sensitivity.

Margin of safety analysis indicates how much sales can decline before losses occur. Marshall & Company’s margin of safety in units or dollars provides a risk assessment and strategic buffer to achieve financial stability.

Conclusion

Effective CVP analysis enables managers to make informed decisions regarding pricing, production, and sales strategies. By understanding contribution margins, break-even points, impact of cost changes, and leverage, organizations can optimize profit and reduce risk. The various calculations and examples discussed exemplify the practical application of CVP principles across different industries and scenarios.

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