Cost-Volume-Profit Analysis

Use the following information to complete Short Exercises S20-10 through S20-15. 

Funday Park competes with Cool World by providing a variety of rides. Funday Park sells tickets at \(70 per person as a one-day entrance fee. Variable costs are \)42 per person, and fixed costs are \(170,800 per month. 

Refer to the original information (ignoring the changes considered in Short Exercise S20-12). Suppose Funday Park increases fixed costs from \)170,800 per month to $231,000 per month. Compute the new breakeven point in tickets and in sales dollars.

Use the following information to complete Short Exercises S20-10 through S20-15. 

Funday Park competes with Cool World by providing a variety of rides. Funday Park sells tickets at \(70 per person as a one-day entrance fee. Variable costs are \)42 per person, and fixed costs are $170,800 per month. 

S20-14 Computing margin of safety 

Refer to the original information (ignoring the changes considered in Short Exercises S20-12 and S20-13). If Funday Park expects to sell 8,100 tickets, compute the margin of safety in tickets and in sales dollars.

Use the following information to complete Short Exercises S20-10 through S20-15. 

Funday Park competes with Cool World by providing a variety of rides. Funday Park sells tickets at \(70 per person as a one-day entrance fee. Variable costs are \)42 per person, and fixed costs are $170,800 per month. 

S20-15 Computing degree of operating leverage 

Refer to the original information (ignoring the changes considered in Short Exercises S20-12 and S20-13). If Funday Park expects to sell 8,100 tickets, compute the degree of operating leverage (round to two decimal places). Estimate the operating income if sales increase by 15%.

Use the following information to complete Short Exercises S20-16 and S20-17. 

Wild Waters Swim Park sells individual and family tickets. With a ticket, each person receives a meal, three beverages, and unlimited use of the swimming pools. Wild Waters has the following ticket prices and variable costs for 2018: 

                                                                                      Individual             Family Sales price per ticket                                                       \( 50                   \) 150 Variable cost per ticket                                                             35                        140

Wild Waters expects to sell one individual ticket for every four family tickets. Wild Waters’s total fixed costs are $27,500. 

S20-16 Calculating breakeven point for two products 

Using the Wild Waters Swim Park information presented, do the following tasks. 

Requirements 

1. Compute the weighted-average contribution margin per ticket. 

2. Calculate the total number of tickets Wild Waters must sell to break even. 

3. Calculate the number of individual tickets and the number of family tickets the company must sell to break even.

Use the following information to complete Short Exercises S20-16 and S20-17. 

Wild Waters Swim Park sells individual and family tickets. With a ticket, each person receives a meal, three beverages, and unlimited use of the swimming pools. Wild Waters has the following ticket prices and variable costs for 2018: 

                                                                                      Individual             Family Sales price per ticket                                                       \( 50                   \) 150 Variable cost per ticket                                                             35                        140

Wild Waters expects to sell one individual ticket for every four family tickets. Wild Waters’s total fixed costs are $27,500. 

S20-17 Calculating breakeven point for two products 

For 2019, Wild Waters expects a sales mix of four individual tickets for every one family ticket. 

Requirements 

1. Compute the new weighted-average contribution margin per ticket. 

2. Calculate the total number of tickets Wild Waters must sell to break even. 

3. Calculate the number of individual tickets and the number of family tickets the company must sell to break even.

Using terminology Match the following terms with the correct definitions:

1. Costs that do not change in total over wide ranges of volume. 

2. Technique that estimates profit or loss results when conditions change. 

3. The sales level at which operating income is zero. 

4. Drop in sales a company can absorb without incurring an operating loss. 

5. Combination of products that make up total sales. 

6. Net sales revenue minus variable costs. 

7. Describes how a cost changes as volume changes. 

8. Costs that change in total in direct proportion to changes in volume. 

9. The band of volume where total fixed costs and variable cost per unit remain constant. 

a. Breakeven point 

b. Contribution margin 

c. Cost behavior 

d. Margin of safety 

e. Relevant range 

f. Sales mix 

g. Fixed costs 

h. Variable costs 

i. Sensitivity analysis

Following is a list of costs for a furniture manufacturer that specializes in wood tables. Classify each cost as variable, fixed, or mixed relative to the number of tables produced and sold. 

1. Wood used to build tables 

2. Depreciation on saws and other manufacturing equipment 

3. Compensation for sales representatives paid on a salary plus commission basis 

4. Supervisor’s salary 

5. Wages of production workers

A furniture manufacturer specializes in wood tables. The tables sell for \(100 per unit and incur \)40 per unit in variable costs. The company has $6,000 in fixed costs per month. 

6. Prepare a contribution margin income statement for one month if the company sells 200 tables. 

7. What is the total contribution margin for the month when the company sells 200 tables? 

8. What is the unit contribution margin? 

9. What is the contribution margin ratio?

A furniture manufacturer specializes in wood tables. The tables sell for \(100 per unit and incur \)40 per unit in variable costs. The company has \(6,000 in fixed costs per month. The company desires to earn an operating profit of \)12,000 per month. 

10. Calculate the required sales in units to earn the target profit using the equation method. 

11. Calculate the required sales in units to earn the target profit using the contribution margin method. 

12. Calculate the required sales in dollars to earn the target profit using the contribution margin ratio method. 

13. Calculate the required sales in units to break even using the contribution margin method.

A furniture manufacturer specializes in wood tables. The tables sell for \(100 per unit and incur \)40 per unit in variable costs. The company has \(6,000 in fixed costs per month. Calculate the breakeven point in units under each independent scenario. 

14. Variable costs increase by \)10 per unit. 

15. Fixed costs decrease by $600. 

16. Sales price increases by 10%.

A furniture manufacturer specializes in wood tables. The tables sell for \(100 per unit and incur \)40 per unit in variable costs. The company has \(6,000 in fixed costs per month. Expected sales are 200 tables per month. 

17. Calculate the margin of safety in units. 

18. Determine the degree of operating leverage. Use expected sales. 

19. The company begins manufacturing wood chairs to match the tables. Chairs sell for \)50 each and have variable costs of \(30. The new production process increases fixed costs to \)7,000 per month. The expected sales mix is one table for every four chairs. Calculate the breakeven point in units for each product.

What is a variable cost? Give an example.

What is a fixed cost? Give an example.

What is a mixed cost? Give an example.

What is the purpose of using the high-low method?

Describe the three steps of the high-low method.

What is the relevant range?

A chain of convenience stores has one manager per store who is paid a monthly salary. Relative to Store #36 located in Atlanta, Georgia, is the manager’s salary fixed or variable? Why?

A chain of convenience stores has one manager per store who is paid a monthly salary. Relative to the number of stores, is the manager’s salary fixed or variable? Why?

What are the three approaches to calculating the sales required to achieve the breakeven point? Give the formula for each one.

Of the three approaches to calculate sales required to achieve the breakeven point, which one(s) calculate the required sales in units and which one(s) calculate the required sales in dollars?

What is target profit?

Why is the calculation to determine the target profit considered a variation of the breakeven calculation?

On the CVP graph, where is the breakeven point shown? Why?

What is contribution margin?

What are the three ways contribution margin can be ex

How does a contribution margin income statement differ from a traditional income statement?

What is cost-volume-profit analysis?

What are the CVP assumptions?

What is the breakeven point?

What are the three approaches to calculating the sales required to achieve the breakeven point? Give the formula for each one.

Question: Of the three approaches to calculate sales required to achieve the breakeven point, which one(s) calculate the required sales in units and which one(s) calculate the required sales in dollars?

Question: What is target profit?

Question: Why is the calculation to determine the target profit considered a variation of the breakeven calculation?

On the CVP graph, where is the breakeven point shown? Why?

What is sensitivity analysis? How do managers use this tool

What is sensitivity analysis? How do managers use this tool?

Identifying variable, fixed, and mixed costs 

Philadelphia Acoustics builds innovative speakers for music and home theater systems. Identify each cost as variable (V), fixed (F), or mixed (M), relative to number of speakers produced and sold. 

1. Units of production depreciation on routers used to cut wood enclosures. 

2. Wood for speaker enclosures. 

3. Patents on crossover relays. 

4. Total compensation to salesperson who receives a salary plus a commission based on meeting sales goals. 

5. Crossover relays. 

6. Straight-line depreciation on manufacturing plant. 

7. Grill cloth. 

8. Insurance on the corporate office. 

9. Glue. 

10. Quality inspector’s salary.

Identifying variable, fixed, and mixed costs Holly’s Day Care has been in operation for several years. Identify each cost as variable (V), fixed (F), or mixed (M), relative to number of students enrolled. 

1. Building rent. 

2. Toys. 

3. Compensation of the office manager, who receives a salary plus a bonus based on number of students enrolled. 

4. Afternoon snacks. 

5. Lawn service contract at $200 per month. 

6. Holly’s salary. 

7. Wages of afterschool employees. 

8. Drawing paper for students’ artwork. 

9. Straight-line depreciation on furniture and playground equipment. 

10. Fee paid to security company for monthly service.

What is cost stickiness? Why do managers need to be aware of cost stickiness?

What is the margin of safety? What are the three ways it can be expressed?

What effect does an increase in sales price have on contribution margin? An increase in fixed costs? An increase in variable costs?

What effect does an increase in sales price have on contribution margin? An increase in fixed costs? An increase in variable costs?

What is the margin of safety? What are the three ways it can be expressed?

What is a company’s cost structure? How can cost structure affect a company’s profits?

What is operating leverage? What does it mean if a company has a degree of operating leverage of 3?

How can CVP analysis be used by companies with multiple products?

What effect does an increase in sales price have on contribution margin? An increase in fixed costs? An increase in variable costs?

Using the high-low method 

Mark owns a machine shop. In reviewing the shop’s utility bills for the past 12 months, he found that the highest bill of \(2,600 occurred in August when the machines worked 1,200 machine hours. The lowest utility bill of \)2,300 occurred in December when the machines worked 600 machine hours. 

Requirements 

1. Use the high-low method to calculate the variable cost per machine hour and the total fixed utility cost. 

2. Show the equation for determining the total utility cost for the machine shop. 

3. If Mark anticipates using 800 machine hours in January, predict the shop’s total utility bill using the equation from Requirement 2.

Calculating contribution margin 

Glenn Company sells a product for \(80 per unit. Variable costs are \)60 per unit, and fixed costs are $800 per month. The company expects to sell 560 units in September. Calculate the contribution margin per unit, in total, and as a ratio.