HDFRIChapter3Solutions13e - CHAPTER 3 COST-VOLUME-PROFIT...

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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 3-1 Cost-volume-profit (CVP) analysis examines the behavior of total revenues, total costs, and operating income as changes occur in the output level, selling price, variable cost per unit, or fixed costs of a product. 3-2 The assumptions underlying the CVP analysis outlined in Chapter 3 are 1. Changes in the level of revenues and costs arise only because of changes in the number of product (or service) units produced and sold. 2. Total costs can be separated into a fixed component that does not vary with the output level and a component that is variable with respect to the output level. 3. When represented graphically, the behavior of total revenues and total costs are linear (represented as a straight line) in relation to output level within a relevant range and time period. 4. The selling price, variable cost per unit, and fixed costs are known and constant. 5. The analysis either covers a single product or assumes that the sales mix, when multiple products are sold, will remain constant as the level of total units sold changes. 6. All revenues and costs can be added and compared without taking into account the time value of money. 3-4 Contribution margin is the difference between total revenues and total variable costs. Contribution margin per unit is the difference between selling price and variable cost per unit. Contribution-margin percentage is the contribution margin per unit divided by selling price. 3-12 Operating leverage describes the effects that fixed costs have on changes in operating income as changes occur in units sold, and hence, in contribution margin. Knowing the degree of operating leverage at a given level of sales helps managers calculate the effect of fluctuations in sales on operating incomes. 3-18 (35–40 min.) CVP analysis, changing revenues and costs. 1a. SP = 8% × $1,000 = $80 per ticket VCU = $35 per ticket CMU = $80 – $35 = $45 per ticket FC = $22,000 a month
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Q = CMU FC = per ticket $45 $22,000 = 489 tickets (rounded up) 1b. Q = CMU TOI FC + = per ticket $45 $10,000 $22,000 + = per ticket $45 $32,000 = 712 tickets (rounded up) 2a. SP = $80 per ticket VCU = $29 per ticket CMU = $80 – $29 = $51 per ticket FC = $22,000 a month Q = CMU FC = per ticket $51 $22,000 = 432 tickets (rounded up) 2b. Q = CMU TOI FC + = per ticket $51 $10,000 $22,000 + = per ticket $51 $32,000 = 628 tickets (rounded up) 3a. SP = $48 per ticket VCU = $29 per ticket CMU = $48 – $29 = $19 per ticket FC = $22,000 a month Q = CMU FC = per ticket $19 $22,000 = 1,158 tickets (rounded up) 3b. Q = CMU TOI FC + = per ticket $19 $10,000 $22,000 + = per ticket $19 $32,000
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= 1,685 tickets (rounded up) The reduced commission sizably increases the breakeven point and the number of tickets required to yield a target operating income of $10,000: 8% Commission
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HDFRIChapter3Solutions13e - CHAPTER 3 COST-VOLUME-PROFIT...

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