Absorption costing the 4 unit cost difference is

absorption costing, the $4 unit cost difference is contained in the inventory,
whereas under variable costing, the $4 unit cost difference is expensed as a
period cost.

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Chapter 21: Cost-Volume-Profit Analysis Page 97 of 132
P21-56B
Requirements
1. Fill in the blanks for each missing value. (Round the contribution margin per unit to the nearest cent.)
2. Which company has the lowest breakeven point in sales dollars?
3. What causes the low breakeven point?
Solution:
Requirement 1
Company
Up Down Left Right
Sales Revenue
$900,000 $(d) 520,000 $710,000 $(j) 300,000
Variable Costs
(a) 540,000 208,000 319,500 240,000
Fixed Costs
(b) 350,000 135,000 235,000 (k) 11,000
Operating Income (Loss) $10,000 $ (e)177,000 $(g) 155,500 $49,000
Units Sold
100,000 16,000 (h) 5,000 (l) 6,000
Contribution Margin per Unit
$3.60 $ (f)19.50 $78.10 $10.00
Contribution Margin Ratio
(c) 40% 60% (i) 55% 20%

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Chapter 21: Cost-Volume-Profit Analysis Page 98 of 132
Calculations:
a. $900,000 – (100,000 units × $3.60 per unit)
b. $900,000 – $540,000 – $10,000
c. ($900,000 – $540,000) / $900,000
d. $208,000 / (1 – 60%)
e. $520,000 – $208,000 – $135,000
f. ($520,000 – $208,000) / 16,000 units
g. $710,000 – $319,500 – $235,000
h. ($710,000 – $319,500) / $78.10 per unit
i. ($710,000 – $319,500) / $710,000
j. $240,000 / (1 – 20%)
k. $300,000 – $240,000 – $49,000
l. ($300,000 – $240,000) / $10 per unit
Requirement 2
Required sales in units = Fixed costs + Target profit
Contribution margin ratio
Up = $350,000 + $0 = $875,000
40%
Down = $135,000 + $0 = $225,000
60%
Left = $235,000 + $0 = $427,273
55%

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Chapter 21: Cost-Volume-Profit Analysis Page 99 of 132
Right = $11,000 + $0 = $55,000
20%
The breakeven point in sales dollars for Right Company is $55,000. This is the lowest
breakeven point in sales dollars.
Requirement 3
The low breakeven point for Right Company is primarily caused by its low fixed costs.

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Chapter 21: Cost-Volume-Profit Analysis Page 100 of 132
P21-57B
Requirements
1. Compute revenue and variable costs for each show.
2. Use the equation approach to compute the number of shows British Productions must perform each year to break even.
3.
4.
Solution:
Requirement 1
Sales revenue per show = 900 tickets × $65 per ticket = $58,500
Variable cost per show = Cost of performers + Cost of programs
= (55 performers × $330 per performer) + (900 guests × $9 per guest)
= $18,150 + $8,100
= $26,250 per show
Use the contribution margin ratio approach to compute the number of shows needed each year to earn a profit of
$4,128,000. Is this profit goal realistic? Give your reasoning.
Prepare British Productions’ contribution margin income statement for 155 shows performed in 2014. Report only two
categories of costs: variable and fixed.

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Chapter 21: Cost-Volume-Profit Analysis Page 101 of 132
Requirement 2
Net sales revenue − Variable costs − Fixed costs = Operating income
($58,500 × Nbr. of shows) − ($26,250 × Nbr. of shows) − $580,500 = $0
[($58,500 – $26,250) × Nbr. of shows] = $580,500
$32,250 × Nbr. of shows = $580,500
Nbr. of shows = $580,500 / $32,250
Nbr. of shows = 18 shows
Requirement 3
Contribution margin ratio = Contribution margin / Net sales revenue
= (Net sales revenue – Variable costs) / Net sales revenue
= $58,500 – $26,250 / $58,500
= $32,250 / $58,500
= 55.13%
Required sales in dollars = Fixed costs + Target profit
Contribution margin ratio
= $580,500 + $4,128,000 = $8,540,722
55.13%

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Chapter 21: Cost-Volume-Profit Analysis Page 102 of 132
Required sales in units = Required sales in dollars
Sales price per show
= $8,540,722 = 146 shows
$58,500 per show
Because 146 shows is less than the maximum possible shows of 155, the profit goal of $4,128,000 is a
realistic profit goal.