The equation method shows break-even in units.8.The algebraic equation method for determining break-even is stated as follows:3-2

Chapter 03 - Analysis of Cost, Volume, and Pricing to Increase Profitability Selling price per unitVariable cost per unitx=x+ Fixed costNo. of units soldNo. of units soldThe results of this method do not differ from the per unit contribution marginapproach. Both determine break-even in units produced and sold.9.The break-even point can be affected by the relative quantities (sales mix) ofthe products sold.10.CVP analysis assumes a strictly linear relationship between the variables,constant worker efficiency within the relevant range, and a constant level ofinventory where production equals sales. To the extent these assumptions areinvalid, CVP analysis will be inaccurate. Estimates are used frequently in businessdecision making. Actual data is not available until after the fact so managers mostoften have to rely on projections that by their nature are estimates. 11.From Hartwell’s perspective, the $2,000 cost of the computer is a fixed cost.The computer costs $2,000 with or without Jamail’s contribution. Accordingly,whatever Jamail is willing to contribute toward the purchase will contribute tothe coverage of the fixed cost. Jamail’s $750 offer should be accepted.12.Break-even:(Sales price x Units) = (Variable cost x Units) + Fixed costTarget profit considered:(Sales price x Units) = (Variable cost x Units) + Fixed cost + Desired profit13.The cost-volume-profit formulas provide only quantitative data. For example,they do not account for factors such as competitive forces and consumerdemand. Cost-volume-profit formulas provide only one source of data in acomplicated price-setting decision.3-3

Chapter 03 - Analysis of Cost, Volume, and Pricing to Increase Profitability 14.Cost-volume-profit analysis is based on a set of assumptions that are normallyinvalid at extreme levels of production. For example, even the fixed cost forplant and equipment will not remain constant if production is raised abovesome level. However, most companies do not operate at the extremes.Instead, they have a narrow range of activity over which they usually operate.This range is called the relevant range. Fortunately, most of the assumptionsused in cost-volume-profit analysis are valid over the relevant range of activity.Exercise 3-1AN = Number of units to break-evenSales − Variable cost − Fixed cost = Profit (Sales price x N) − (Variable cost per unit x N) = Fixed cost + Profit (Contribution margin per unit x N) = Fixed cost + ProfitN = (Fixed cost + Profit) ÷ Contribution margin per unita.N = ($140,000 + 0) ÷($12 − $5) = 20,000 unitsBreak-even dollars = $12 x 20,000 units = $240,000b.N = ($140,000 + 21,000) ÷($12 − $5) = 23,000 unitsSales in $ = $12 x 23,000 = $276,000Exercise 3-2AN = Number of units to break-evenN = Fixed cost ÷Contribution margin per unitN = $264,000 ÷($25 – $13)N = 22,000 unitsBreak-even dollars = $25.00 x 22,000 units = $484,0003-4

Chapter 03 - Analysis of Cost, Volume, and Pricing to Increase Profitability Exercise 3-3AContribution margin = Sales price – Variable cost/Unit = $35.00 – $22.75 = $12.25

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