Actual or budgeted sales break even sales 438750

6-15

Chapter 06 - Cost-Volume-Profit Analysis
Req. 3
1. Buffer zone that identifies how much sales can drop before the business suffers
a loss.
2. Increases the break-even point because fixed costs are higher, but each unit
adds more profit because of the lower variable cost per unit.
3. (Total fixed costs + Target profit) / Contribution margin ratio.
4. How a company uses variable costs versus fixed costs to perform its operation.
5. The extent to which fixed costs can be used to magnify a given change in sales
volume into a larger change in profit.
6. Two alternatives yield the same profit.
7. Actual or budgeted sales minus break-even sales.
B Margin of safety
8. Total fixed costs plus target profit.
F Total contribution margin
9. Contribution margin / Profit.
H Degree of operating leverage
10. (Total fixed costs + Target profit)/Contribution margin per unit.
J Target Units
E6−8
Req. 1
Break-even units = Total fixed cost / Unit contribution margin
Unit contribution margin = Sales price – variable cost per unit
6-16

Chapter 06 - Cost-Volume-Profit Analysis
= $0.50 – $0.20
= $0.30 per mile driven
Break-even units = Total fixed cost / Unit contribution margin
= $215 / $0.30
= 717 miles (rounded up from 716.67)
6-17

Chapter 06 - Cost-Volume-Profit Analysis
Req. 2
Contribution Margin Income Statement
For 4,200 Miles
Sales revenue (4,200 x $0.50) $2,100
Less: Variable costs (4,200 x $0.20) 840
Contribution margin (4,200 x 0.30) 1,260
Less: Fixed costs 215
Income from Operations $1,045
Degree of Operating Leverage = Contribution Margin / Profit
= $1,260/$1,045
= 1.2057
Req. 3
Effect on Profit = Change in Sales x Degree of Operating Leverage
= 25% x 1.2057
= 30.1425%
Thus, a 25% decrease in sales will result in a 30.1425% decrease in Joyce’s profit.
E6-9
Req. 1
Unit contribution margin = Sales price – Variable cost per unit
= $25.00 - $9.00
= $16.00
Contribution margin ratio = Unit contribution margin / Sales price
= $16.00/$25.00
= 64%
Req. 2
Break-even units = Total fixed costs / Unit contribution margin
= $2,520 / $16.00
= 158 units (rounded from 157.5)
Break-even sales dollars = Break-even units x Sales price
= 158 x $25.00
= $3,950.00
Alternatively,
Break-even sales dollars = Fixed costs / Contribution margin ratio
= $2,520 / .64
= $3,937.50 (difference due to rounding # of units)
6-18

Chapter 06 - Cost-Volume-Profit Analysis
Req. 3
6-19