Chapter 3 analysis of cost volume and pricing to

Chapter 3 Analysis of Cost, Volume, and Pricing to Increase Profitability
Sales Price $ 80
x Number of units 10,640
Sales volume in dollars $851,200
Income Statement
Sales ($80 x 10,640) $ 851,200
Variable cost ($30 x 10,640) (319,200)
Contribution margin 532,000
Fixed cost (280,000)
Net income $ 252,000
g. Margin of Safety Computations Units Dollars
Budgeted sales at $80 per unit 10,000 $800,000
Break-even sales at $80 per unit* 5,600 (448,000)
Margin of safety 4,400 $352,000
*[$280,000 ÷ ($80 – $30)] = 5,600
Percentage Computation
Margin of safety in dollars $352,000
––––––––––––––––––––––––––– = –––––––––––––– = 44%
Budgeted sales $800,000
3-16

Chapter 3 Analysis of Cost, Volume, and Pricing to Increase Profitability
Problem 3-23A (continued)
h. Break-Even Graph
3-17
2,000 4,000 6,000 8,000 10,000
-0-
Total cost
Total sales
5,600 break-even
point in units
Units
300,000
400,000
$800,000
700,000
600,000
500,000
-0-
Area of
Loss
Area of
profitability
Fixed cost
$280,000
$448,000
Break-even
point in dol-
lars
Break-even
point
200,000
100,000

Chapter 3 Analysis of Cost, Volume, and Pricing to Increase Profitability
Problem 3-24A
Formula for Computing Sales Volume to Earn Target Profit of $60,000
Fixed cost + Target profit $240,000 + $60,000
–––––––––––––––––––––––––––––– = ––––––––––––––––––––– = 6,000 units
Contribution margin per unit $125 – $75
Required Sales in Dollars
Sales price $ 125
x Number of units 6,000
Sales volume in dollars $750,000
Income Statement
Sales (6,000 x $125) $750,000
Variable cost (6,000 x $75) (450,000)
Contribution margin 300,000
Fixed cost (240,000)
Net income $ 60,000
b. Mayer should proceed with plans to improve product quality. As
indicated by the following income statement, the quality enhance-
ment project would add $90,000 to net income ($150,000 –
$60,000).
Income Statement
Sales (10,000 x $125) $1,250,000
Variable cost (10,000 x $85) (850,000)
Contribution margin 400,000
Fixed cost ($240,000 + $10,000) (250,000)
Net income $ 150,000
3-18
a
.

Chapter 3 Analysis of Cost, Volume, and Pricing to Increase Profitability
Problem 3-24A (continued)
c.
Formula for Computation of Break-Even Point in Units
Fixed cost $250,000
–––––––––––––––––––––––––––
–
= ––––––––––––––– = 6,250 units
Contribution margin per unit $125 – $85
Break-Even Point in Sales Dollars
Sales price $ 125
x Number of units 6,250
Sales volume in dollars $781,250
Margin of Safety Computations Units Dollars
Budgeted sales 10,000 $1,250,000
Break-even sales 6,250 781,250
Margin of safety 3,750 $ 468,750
Percentage Computation
Margin of safety in dollars $468,750
––––––––––––––––––––––––––
–
=
––––––––––––––
= 37.5%
Budgeted sales $1,250,000
3-19

Chapter 3 Analysis of Cost, Volume, and Pricing to Increase Profitability
Problem 3-24A (continued)
d. Break-Even Graph
3-20
200,000
400,000
1,200,000
1,000,000
800,000
600,000
1,000 2,000 3,000 4,000 5,000 -0-
-0-
Area of
loss
Area of
profitability
Fixed cost
$250,000
Total cost
Total sales
6,250 break-even
point in units
Units
$781,250
break-even
point in dol-
lars
Break-even
point
6,000 7,000 8,000 9,000
$

Chapter 3 Analysis of Cost, Volume, and Pricing to Increase Profitability
Problem 3-25A
a. Total units sold = 160 + 640 = 800 units
Relative percentage for Power = 160 / 800 = 20%
Relative percentage for Lite = 640 / 800 = 80%
b. Contribution margin per unit of Power: $180 x .20 =$ 36
Contribution margin per unit of Lite: $120 x .80 = 96
Weighted-average contribution margin per unit $132
c. Break-even point = Fixed cost ÷ Weighted-average CM per
unit
Break-even point = $66,000 / $132 = 500 units
d. Required sales for Power = 500 units x .20 = 100 units
Required sales for Lite = 500 units x .80 = 400 units
Total 500 units
Power Lite Total
Sales price (a) $500 $450
Variable costs (b) $320 $330
Break-even units (c) 100 units