CPAPrepChapter3

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

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