Cost-Volume-Profit Problems



QUESTION 1

Bridal Shoppe sells wedding dresses. The cost of each dress is comprised of the following: Selling price of $1,000 and variable (flexible) costs of $400. Total fixed (capacity-related) costs for Bridal Shoppe are $90,000.

A. What is the Bridal Shoppe’s total profit when 200 dresses are sold?

Revenues – Flexible Costs – Capacity-Related Costs = Total Profit

200 ($1,000) – 200($400) - $90,000 = $30,000

B. How many dresses must Bridal Shoppe sell to reach the breakeven point?

X = Capacity-Related Costs/Contribution Margin

X = $90,000/$600

X = 150 dresses

C. How many dresses must Bridal Shoppe sell to yield a profit of $60,000?

Total Revenues – Total Costs = Total Profit

$1,000X - $400X - $90,000 = $60,000

$600X = $150,000

X = $150,000/$600

X = 250 dresses

QUESTION 2

Northenscold Company sells several products. Information of average revenue and costs are as follows:

Selling price per unit $20.00

Variable costs per unit:

Direct materials $4.00

Direct manufacturing labor $1.60

Manufacturing overhead $0.40

Selling costs $2.00

Annual fixed costs $96,000

1. Calculate the number of units Northenscold’s must sell each year to break even.

20X - 8X - 96,000 = 0; X = 8,000 units

2. Calculate the number of units Northenscold’s must sell to yield a profit of $144,000.

20X – 8X – 96,000 = $144,000; X = 20,000 units

QUESTION 3

Berhannan’s Cellular sells phones for $100. The unit variable cost per phone is $50 plus a selling commission of 10%. Fixed manufacturing costs total $1,250 per month, while fixed selling and administrative costs total $2,500.

A. What is the breakeven point in phones?

N = Breakeven in phones

$100N - $50N - $10N - $1,250 - $2,500 = 0

$40N - $3,750 = 0

N = $3,750 / $40 = 93.75 phones

Breakeven Point = 94 phones

c. How many phones must be sold to earn a targeted profit of $7,500?

N = Phones to be sold

$100N - $50N - $10N - $1,250 - $2,500 = $7,500

$40N = $11,250

N = $11,250 / $40 = 281.25 phones

To achieve target profit: Must sell 282 phones

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 1 THROUGH 2:

Kaiser’s Kraft Korner sells a single product. 7,000 units were sold resulting in $70,000 of sales revenue, $28,000 of variable costs, and $12,000 of fixed costs.

1. Breakeven point in units is:

a. 2,000 units

b. 3,000 units

c. 5,000 units

d. None of these answers are correct.

$10X – $4X – $12,000 = 0; X = 2,000 units

2. At the breakeven point of 200 units, variable costs total $400 and fixed costs total $600. The 201st unit sold will contribute ___________ to profits.

a. $1

b. $2

c. $3

d. $5

$1,000 – $400 – $600 = 0; Sales ($1,000 / 200) – Variable costs ($400 / 200) = $3 CM

3. Sales total $200,000 when variable costs total $150,000 and fixed costs total $30,000. The breakeven point in sales dollars is:

a. $200,000

b. $120,000

c. $ 40,000

d. $ 30,000

($200,000 – $150,000) / $200,000 = 25% CM%; $30,000 / 0.25 = $120,000 BE sales

4. What is the breakeven point in units, assuming a product's selling price is $100, fixed costs are $8,000, unit variable costs are $20, and operating income is $32,000?

a. 100 units

b. 300 units

c. 400 units

d. 500 units

$100N – $20N – $8,000 = 0; $80N = $8,000; N = 100 units

5. If breakeven point is 100 units, each unit sells for $30, and fixed costs are $1,000, then on a graph the:

a. total revenue line and the total cost line will intersect at $3,000 of revenue

b. total cost line will be zero at zero units sold

c. revenue line will start at $1,000

d. All of these answers are correct.

Beta Company sells blouses in Washington, USA. Blouses are imported from Pakistan and are sold to customers in Washington at a profit. Salespersons are paid basic salary plus a decent commission on sales made by them. Sales and expense data is given below:

|Selling price per blouse |$80.00 |

| |——— |

|Variable expenses per blouse: | |

|Invoice cost |$36.00 |

|Sales commission |$14.00 |

| |——— |

|Total |$50.00 |

| |——— |

|Annual fixed expenses: | |

|Rent |$160,000 |

|Marketing | $300,000 |

|Salaries | $140,000 |

| |——— |

|Total |$600,000 |

| |——— |

Required:

1. Compute the number of units to be sold to break-even.

2. Prepare a CVP graph (break-even chart) and show the break-even point on the graph.

3. If the manage is paid a commission of $6 blouse (in addition to the salesperson’s commission), what will be the effect on company’s break-even point?

4. As an alternative to (3) above, company is thinking to pay $6 commission to manager on each blouse sold in excess of break-even point. What will be the effect of these changes on the net operating income or loss of the Beta company if 23,500 blouses are sold in a year?

5. Refer to the original data. What will be the break-even point of the company if commission is entirely eliminated and salaries are increased by $214,000? Should the company make this change?

Solution:

(1) Calculation of break-even point:

Fixed expenses / Contribution margin per unit

$600,000 / $30

20,000 units

or

20,000 units × $80 = $1,600,000

(2) CVP graph or break-even chart:

[pic]

(3) Break-even point if manager is also paid a commission of $6 per blouse sold:

The payment of a commission of $6 to manager will decrease the unit contribution margin and increase the number of units required to sell to break-even.

$600,000 / $24

25,000 Units

Now the company requires 25000 units or $2,000,000 in sales just to break-even.

(4) Effect on net operating income or loss if manager is paid a commission of $6 on each blouse sold after break-even point:

|Sales (23,500 × $80) |$|1,880,000 |

|Less variable expenses (23,500 × $50) | |1,175,000 |

| | |———— |

| | |705,000 |

|Less manager’s commission [(23,500 - 20,000) × 6] | |21,000 |

| | |———— |

| | |684,000 |

| Fixed expenses | |600,000 |

| | |———— |

|Net operating income | |84,000 |

| | |———— |

(5) Break-even point after elimination of commission and increase in salaries:

$814,000 /$44

18,500 units

or

18,500 × $80 = $14,80,000

Fixed cost after change: $600,000 + 214,000 = 814,000

Unit contribution margin after change: $80 – $36 = $44

With the new system, Beta company will start making profits after selling $18,500 units but with the old system company needs to sell 20,000 units before making any profit. The change should, therefore, be implemented.

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download