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CHAPTER5Cost-Volume-Profit AnalysisSolutionsReview Questions5.1Profit before taxes = [(Price – Unit variable cost) × Sales volume in units] – Fixedcosts = Unit contribution margin × Sales volume in units – Fixed costs.5.2The contribution margin statement.5.3The sales volume at which profit equals zero.5.4The sales dollars at which profit equals zero.5.5The unit contribution margin divided by price.5.6Taxes reduce profit by a certain percentage beyond the breakeven point. Above the breakeven point, the slope of the profit line decreases by taxes paid.5.7We can use the CVP relation to estimate profit at each price, quantity combination.5.8The amount by which sales exceed breakeven sales. It equals (Sales in units – Breakeven volume)/Sales in Units or, equivalently, (Revenues – Breakeven revenues)/Revenues.5.9The percentage change in profit = the percentage change in sales volume (or revenues) × (1/Margin of safety).5.10Operating leverage is a measure of risk from having more fixed costs. It equals Fixed costs/Total costs.5.11The relative proportion in which a company expects to sell products – e.g., two units of product A for every unit of product B.5.12The contribution margin per average unit.5.13The contribution margin per average sales dollar.5.14It 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 – 2eFOR 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 knownand 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 Questions5.16 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 accountingprofits---which would include depreciation as an expense---rather than net cash flow. Such an analysis can be