Balakrishnan2e_SM_Ch05 - CHAPTER 5 Cost-Volume-Profit Analysis Solutions Review Questions 5.1 Profit before taxes =(Price Unit variable cost Sales

Balakrishnan2e_SM_Ch05 - CHAPTER 5 Cost-Volume-Profit...

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C HAPTER 5 Cost-Volume-Profit Analysis Solutions Review Questions 5.1 Profit before taxes = [(Price – Unit variable cost) × Sales volume in units] – Fixed costs = Unit contribution margin × Sales volume in units – Fixed costs. 5.2 The contribution margin statement. 5.3 The sales volume at which profit equals zero. 5.4 The sales dollars at which profit equals zero. 5.5 The unit contribution margin divided by price. 5.6 Taxes reduce profit by a certain percentage beyond the breakeven point. Above the breakeven point, the slope of the profit line decreases by taxes paid. 5.7 We can use the CVP relation to estimate profit at each price, quantity combination. 5.8 The amount by which sales exceed breakeven sales. It equals (Sales in units – Breakeven volume)/Sales in Units or, equivalently, (Revenues – Breakeven revenues)/Revenues. 5.9 The percentage change in profit = the percentage change in sales volume (or revenues) × (1/Margin of safety). 5.10 Operating leverage is a measure of risk from having more fixed costs. It equals Fixed costs/Total costs. 5.11 The relative proportion in which a company expects to sell products – e.g., two units of product A for every unit of product B. 5.12 The contribution margin per average unit. 5.13 The contribution margin per average sales dollar. 5.14 It is easier to work with revenues directly and comparing contribution margin ratios across products makes more sense than comparing unit contribution margins. Balakrishnan, Sivaramakrishnan, & Sprinkle – 2e FOR INSTRUCTOR USE ONLY
5.15 (1) Revenues increase proportionally with sales volume, (2) variable costs increase proportionally with sales volume, (3) selling prices, unit variable costs, and fixed costs are known with certainty, (4) a single-period analysis, (5) a known and constant product mix, (6) CVP analysis does not always provide the “best” solution to a short-term decision, and (7) the availability of capacity. Discussion Questions 5.16 Unit contribution margin equals unit selling price less unit variable cost. Assuming that unit contribution margin is positive, unit selling price is a bigger number than unit variable cost, and therefore a 10% increase in unit selling price will increase the unit contribution margin more than a 10% decrease in unit variable cost. To illustrate, let the unit selling price be $50 and the unit variable cost be $30. The unit contribution margin will be $20 (=$50 - $30). A 10% increase in unit selling price will increase the unit contribution margin to $25 (=$55 - $20), but a 10% reduction in unit variable cost will increase the unit contribution margin to only $23 (= $50 - $27). 5.17 Profit before taxes = .15 * Revenues (fact 1) Profit before taxes = .40*Revenues – $200,000 (fact 2) Setting these equations equal to each other, we have: Revenues = $200,000/.25 = $ 800,000 . 5.18 It is generally advisable to conduct CVP analysis on a cash basis. Non-cash items such as depreciation are not relevant. However, it is not uncommon to see CVP analysis being used in conjunction with accounting profits ---which would include depreciation as an expense---rather than net cash flow. Such an analysis can be

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