Chapter 3 Analysis of Cost Volume and Pricing to Increase Profitability Sales

Chapter 3 analysis of cost volume and pricing to

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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
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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
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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 .
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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
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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 $
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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
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