CPAPrepChapter3 - CHAPTER 3 COST-VOLUME-PROFIT ANALYSIS...

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CHAPTER 3 COST-VOLUME-PROFIT ANALYSIS NOTATION USED IN CHAPTER 3 SOLUTIONS SP: Selling price VCU: Variable cost per unit CMU: Contribution margin per unit FC: Fixed costs TOI: Target operating income 3-8 An increase in the income tax rate does not affect the breakeven point. Operating income at the breakeven point is zero, and no income taxes are paid at this point. 3-21 (10 min.) CVP analysis, income taxes. 1. Monthly fixed costs = $60,000 + $70,000 + $10,000 = $140,000 Contribution margin per unit = $26,000 – $22,000 – $500 = $ 3,500 Breakeven units per month = Monthly fixed costs Contribution margin per unit = $140,000 $3,500 per car = 40 cars 2. Tax rate 40% Target net income $63,000 Target operating income = Target net income $63,000 $63,000 1 - tax rate (1 0.40) 0.60 = = = - $105,000 Quantity of output units required to be sold = Fixed costs + Target operating income $140,000 $105,000 Contribution margin per unit $3,500 + = = 70 cars 3-22 (20–25 min.) CVP analysis, income taxes. 1. Variable cost percentage is $3.20 ÷ $8.00 = 40% Let R = Revenues needed to obtain target net income R – 0.40 R – $450,000 = 30 . 0 1 000 , 105 $ - 0.60 R = $450,000 + $150,000 R = $600,000 ÷ 0.60 1
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R = $1,000,000 or, Target net income 1 Tax rate - Contribution margin percentage Proof: Revenues $1,000,000 Variable costs (at 40%) 400,000 Contribution margin 600,000 Fixed costs 450,000 Operating income 150,000 Income taxes (at 30%) 45,000 Net income $ 105,000 2.a. Customers needed to earn net income of $105,000: Total revenues ÷ Sales check per customer $1,000,000 ÷ $8 = 125,000 customers b. Customers needed to break even: Contribution margin per customer = $8.00 – $3.20 = $4.80 Breakeven number of customers = Fixed costs ÷ Contribution margin per customer = $450,000 ÷ $4.80 per customer = 93,750 customers 3. Using the shortcut approach: Change in net income = × × (1 – Tax rate) = (150,000 – 125,000) × $4.80 × (1 – 0.30) = $120,000 × 0.7 = $84,000 New net income = $84,000 + $105,000 = $189,000 The alternative approach is: Revenues, 150,000 × $8.00 $1,200,000 Variable costs at 40% 480,000 Contribution margin 720,000 Fixed costs 450,000 Operating income 270,000 Income tax at 30% 81,000 Net income $ 189,000 3.35 (20–25 min.) CVP analysis. 1. Selling price $16.00 Variable costs per unit: Purchase price $10.00 Shipping and handling 2.00 12.00 2 $450,000 + 30 . 0 1 000 , 105 $ - 0.60 Breakeven revenues = = = $1,000,000
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Contribution margin per unit (CMU) $ 4.00 Breakeven point in units = unit per margin Contr. costs Fixed = $4.00 $600,000 = 150,000 units Margin of safety (units) = 200,000 – 150,000 = 50,000 units 2. Since Galaxy is operating above the breakeven point, any incremental contribution margin will increase operating income dollar for dollar. Increase in units sales = 10% × 200,000 = 20,000
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This note was uploaded on 08/11/2009 for the course ACCT 612 taught by Professor Jamesswanson during the Spring '09 term at Univ. of Massachusetts Med. School.

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CPAPrepChapter3 - CHAPTER 3 COST-VOLUME-PROFIT ANALYSIS...

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