l11 - nobles finman4 ppt 20
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Cost-Volume-Profit
Analysis
L 11
Chapter 20
20-1 Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall
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Learning Objectives
1. Determine how changes in
volume affect costs
2. Calculate operating income
using contribution margin and
contribution margin ratio
3. Use cost-volume-profit (CVP)
analysis for profit planning
4. Use CVP analysis to perform
sensitivity analysis
20-2 Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall
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Learning Objectives
5. Use CVP analysis to calculate
margin of safety, operating
leverage, and multiproduct
breakeven points
20-3 Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall
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Learning Objective 1
Determine how
changes in volume
affect costs
20-4 Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall
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Types of costs
Variable costs
Fixed costs
Mixed costs
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-5
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Variable Costs Batteries in Tablets
Number of
Tablets Produced
Variable Cost
per Tablet
Total
Variable Cost
0 tablets $55 $ 0
25 tablets 55 1,375
50 tablets 55 2,750
75 tablets 55 4,125
100 tablets 55 5,500
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-6
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Total Variable Costs
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Total Fixed Costs
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Fixed Costs
Total
Fixed Costs
Number of
Tablets Produced
Fixed Cost
per Tablet
$12,000 25 tablets $480
12,000 50 tablets 240
12,000 75 tablets 160
12,000 100 tablets 120
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-9
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Characteristics of
Variable and Fixed Costs
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Mixed Costs Cell Phone
$100 per month plus $0.10 for each minute of use
Number of
Minutes Used
Total Fixed
Cost
Total Variable
Cost
Total Cost
100 minutes $100 $10 $110
200 minutes 100 20 120
300 minutes 100 30 130
400 minutes 100 40 140
500 minutes 100 50 150
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-11
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Mixed Costs
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Manufacturing Equipment
Maintenance Costs
Number of
Tablets Produced
Total
Maintenance
Cost
1st Quarter 360 tablets $1,720
2nd Quarter 415 tablets 1,830
3rd Quarter 480 tablets 1,960
4th Quarter 240 tablets 1,480
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-13
Highest Volume
Lowest Volume
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High-Low Method
Step 1
Step 1: Identify the highest and lowest levels of
activity, and calculate the variable cost per unit.
Variable cost per unit = Change in total cost / Change in volume of activity
= (Highest cost Lowest cost) / (Highest volume Lowest volume)
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-14
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High-Low Method
Step 1
Step 1: Identify the highest and lowest levels of
activity, and calculate the variable cost per unit.
Variable cost per unit = Change in total cost / Change in volume of activity
= (Highest cost Lowest cost) / (Highest volume Lowest volume)
= ($1,960 $1,480) / (480 tablets 240 tablets)
= $480 / 240 tablets
= $2 per tablet
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-15
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High-Low Method
Step 2
Step 2: Calculate the total fixed cost.
Total fixed cost = Total mixed cost Total variable cost
= Total mixed cost (Variable cost per unit Number of units)
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-16
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High-Low Method
Step 2
Step 2: Calculate the total fixed cost.
Total fixed cost = Total mixed cost Total variable cost
= Total mixed cost (Variable cost per unit Number of units)
= $1,960 ($2 per tablet 480 tablets)
= $1,960 $960
= $1,000
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-17
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High-Low Method
Step 3
Step 3: Create and use an equation to show the
behavior of a mixed cost.
Total mixed cost = (Variable cost per unit Number of units) + Total fixed cost
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-18
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High-Low Method
Step 3
Step 3: Create and use an equation to show the
behavior of a mixed cost.
Total mixed cost = (Variable cost per unit Number of units) + Total fixed cost
Total manufacturing maintenance cost = ($2 per tablet Number of tablets) + $1,000
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-19
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Estimated manufacturing equipment
maintenance cost at 400 tablets
Total manufacturing maintenance cost = ($2 per tablet Number of tablets) + $1,000
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-20
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Estimated manufacturing equipment
maintenance cost at 400 tablets
Total manufacturing maintenance cost = ($2 per tablet Number of tablets) + $1,000
= ($2 per tablet 400 tablets) + $1,000
= $1,800
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-21
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Relevant Range
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-22
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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 tables produced and sold.
1. Wood used to build tables
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-23
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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 tables produced and sold.
1. Wood used to build tables
Variable
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-24
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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 tables produced and sold.
2. Depreciation on saws and other
manufacturing equipment
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-25
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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 tables produced and sold.
2. Depreciation on saws and other
manufacturing equipment
Fixed
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-26
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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 tables produced and sold.
3. Compensation for sales representatives paid
on a salary plus commission basis
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-27
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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 tables produced and sold.
3. Compensation for sales representatives paid
on a salary plus commission basis
Mixed
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-28
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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 tables produced and sold.
4. Supervisors salary
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-29
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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 tables produced and sold.
4. Supervisors salary
Fixed
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-30
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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 tables produced and sold.
5. Wages of production workers
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-31
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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 tables produced and sold.
5. Wages of production workers
Variable
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-32
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Learning Objective 2
Calculate operating
income using
contribution margin
and contribution
margin ratio
20-33 Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall
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Contribution Margin
If Smart Touch Learning sells 200 tablets for $500
each that incur variable costs of $275 each, then
the contribution margin is:
Contribution margin = Net sales revenue Variable costs
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-34
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Contribution Margin
If Smart Touch Learning sells 200 tablets for $500
each that incur variable costs of $275 each, then
the contribution margin is:
Contribution margin = Net sales revenue Variable costs
= ($500 per tablet 200 tablets) ($275 per tablet 200 tablets)
= $100,000 $55,000
= $45,000
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-35
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Unit Contribution Margin
If Smart Touch Learning sells 200 tablets for $500
each that incur variable costs of $275 each, then
the unit contribution margin is:
Unit contribution margin = Net sales revenue per unit Variable costs per unit
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-36
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Unit Contribution Margin
If Smart Touch Learning sells 200 tablets for $500
each that incur variable costs of $275 each, then
the unit contribution margin is:
Unit contribution margin = Net sales revenue per unit Variable costs per unit
= $500 per tablet $275 per tablet
= $225 per tablet
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-37
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Contribution Margin Ratio
If Smart Touch Learning sells 200 tablets for $500
each that incur variable costs of $275 each, then
the contribution margin ratio is:
Contribution margin ratio = Contribution margin / Net sales revenue
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-38
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Contribution Margin Ratio
If Smart Touch Learning sells 200 tablets for $500
each that incur variable costs of $275 each, then
the contribution margin ratio is:
Contribution margin ratio = Contribution margin / Net sales revenue
= $45,000 / $100,000
= 45%
= $225 per tablet / $500 per tablet
= 45%
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-39
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Traditional Income
Statement Format
Net sales revenue
Cost of goods sold
= Gross profit
Selling and administrative expenses
= Operating income
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Period costs (some variable, some fixed)
Product cost (some variable, some fixed)
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Contribution Margin
Income Statement Format
Net sales revenue
Variable costs
= Contribution margin
Fixed Costs
= Operating income
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-41
Some product, some period
Some product, some period
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A furniture manufacturer specializes in wood
tables. The tables sell for $100 and incur $40 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?
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-42
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6. Sales revenue (200 tables $100 per table) $ 20,000
Variable costs (200 tables $40 per table) 8,000
Contribution margin (200 tables $60 per table) 12,000
Fixed costs 6,000
Operating income $ 6,000
7. Contribution margin = $12,000
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-43
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A furniture manufacturer specializes in wood
tables. The tables sell for $100 and incur $40 in
variable costs. The company has $6,000 in fixed
costs per month.
8. What is the unit contribution margin?
9. What is the contribution margin ratio?
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-44
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A furniture manufacturer specializes in wood
tables. The tables sell for $100 and incur $40 in
variable costs. The company has $6,000 in fixed
costs per month.
8. What is the unit contribution margin?
Unit contribution margin = $100 per table $40 per table = $60 per table
9. What is the contribution margin ratio?
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-45
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A furniture manufacturer specializes in wood
tables. The tables sell for $100 and incur $40 in
variable costs. The company has $6,000 in fixed
costs per month.
8. What is the unit contribution margin?
Unit contribution margin = $100 per table $40 per table = $60 per table
9. What is the contribution margin ratio?
Contribution margin ratio = $60 per table / $100 per table = 60%
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-46
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Learning Objective 3
Use cost-volume-profit
(CVP) analysis for
profit planning
20-47 Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall
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Cost-Volume-Profit Analysis
Assumes the Following:
The price per unit does not change as volume changes.
Managers can classify each cost as variable, fixed, or mixed.
The only factor that affects total costs is change in volume, which increases variable and mixed
costs.
Fixed costs do not change.
There are no changes in inventory levels.
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-48
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Target ProfitThree Approaches
Equation approach
Contribution margin approach
Contribution margin ratio approach
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-49
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Equation Approach
Net sales revenue Total costs = Operating income
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-50
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Equation Approach
Net sales revenue Total costs = Operating income
Net sales revenue Variable costs Fixed costs = Operating income
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-51
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Equation Approach
Smart Touch Learning sells tablets for $500 each, variable costs are $275 each, and fixed costs are $12,000 per month. If the company desires to earn $6,000 in profits each month, how many tablets must it sell?
Net sales revenue Variable costs Fixed costs = Target profit
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-52
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Equation Approach
Smart Touch Learning sells tablets for $500 each, variable costs are $275 each, and fixed costs are $12,000 per month. If the company desires to earn $6,000 in profits each month, how many tablets must it sell?
Net sales revenue Variable costs Fixed costs = Target profit
($500 per unit Units sold) ($275 per unit Units sold) - $12,000 = $ 6,000
[($500 $275 per unit) Units sold] - $12,000 = $ 6,000
$225 per unit Units sold = $12,000 + $6,000
$225 per unit Units sold = $18,000
Units sold = $18,000 / $225 per unit
Units sold = 80 units
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-53
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Equation Approach Check Your Calculation
Net sales revenue Variable costs Fixed costs = Operating income
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-54
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Equation Approach Check Your Calculation
Net sales revenue Variable costs Fixed costs = Operating income
($500 per unit 80 units) ($275 per unit 80 units) $12,000 = $6,000
$40,000 -- $22,000 $12,000 = $6,000
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-55
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Contribution Margin Approach
Smart Touch Learning sells tablets for $500 each, variable costs are $275 each, and fixed costs are $12,000 per month. If the company desires to earn $6,000 in profits each month, how many tablets must it sell?
Required sales in units = Fixed costs + Target profit
Contribution margin per unit
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-56
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Contribution Margin Approach
Smart Touch Learning sells tablets for $500 each, variable costs are $275 each, and fixed costs are $12,000 per month. If the company desires to earn $6,000 in profits each month, how many tablets must it sell?
Required sales in units = Fixed costs + Target profit
Contribution margin per unit
= $12,000 + $6,000
$225 per unit
= 80 units
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-57
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Contribution Margin ApproachCheck Your Calculation
Net sales revenue
Variable costs
= Contribution margin
Fixed costs
= Operating income
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-58
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Contribution Margin ApproachCheck Your Calculation
Net sales revenue ($500 per unit 80 units) $ 40,000
Variable costs ($275 per unit 80 units) 22,000
= Contribution margin ($225 per unit 80 units) 18,000
Fixed costs 12,000
= Operating income $ 6,000
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-59
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Contribution Margin Ratio Approach
Smart Touch Learning sells tablets for $500 each, variable costs are $275 each, and fixed costs are $12,000 per month. If the company desires to earn $6,000 in profits each month, how many tablets must it sell?
Required sales in dollars = Fixed costs + Target profit
Contribution margin ratio
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-60
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Contribution Margin Ratio Approach
Smart Touch Learning sells tablets for $500 each, variable costs are $275 each, and fixed costs are $12,000 per month. If the company desires to earn $6,000 in profits each month, how many tablets must it sell?
Required sales in dollars = Fixed costs + Target profit
Contribution margin ratio
= $12,000 + $6,000
45%
= $40,000
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-61
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Breakeven Point Calculations
for Smart Touch Learning
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-62
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Breakeven Point Calculations
for Smart Touch Learning Exhibit 21-6 Breakeven Point Calculations for Smart Touch Learning
Equation approach
Net sales revenue Variable costs Fixed Costs = Target Profit
($500 per unit Units sold) ($275 per unit Units sold) $12,000 = $ 0
[($500$275 per unit) Units sold] $12,000 = $ 0
$225 per unit Units sold = $ 12,000
Units sold = $ 12,000/$225 per unit
Units sold = 54 units*
Contribution Margin Approach
Contribution Margin Ratio Approach
*Actual result of 53.3333 rounded up to the next full unit as it is not possible to sell partial tablets.
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-63
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Breakeven Point Calculations
for Smart Touch Learning Exhibit 21-6 Breakeven Point Calculations for Smart Touch Learning
Equation approach
Net sales revenue Variable costs Fixed Costs = Target Profit
($500 per unit Units sold) ($275 per unit Units sold) $12,000 = $ 0
[($500$275 per unit) Units sold] $12,000 = $ 0
$225 per unit Units sold = $ 12,000
Units sold = $ 12,000/$225 per unit
Units sold = 54 units*
Contribution Margin Approach
Required sales in units = Fixed Costs + Target profit
Contribution margin per unit
= $12,000 + $0
$225 per unit
= 54 units*
Contribution Margin Ratio Approach
*Actual result of 53.3333 rounded up to the next full unit as it is not possible to sell partial tablets.
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-64
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Breakeven Point Calculations
for Smart Touch Learning Exhibit 21-6 Breakeven Point Calculations for Smart Touch Learning
Equation approach
Net sales revenue Variable costs Fixed Costs = Target Profit
($500 per unit Units sold) ($275 per unit Units sold) $12,000 = $ 0
[($500$275 per unit) Units sold] $12,000 = $ 0
$225 per unit Units sold = $ 12,000
Units sold = $ 12,000/$225 per unit
Units sold = 54 units*
Contribution Margin Approach
Required sales in units = Fixed Costs + Target profit
Contribution margin per unit
= $12,000 + $0
$225 per unit
= 54 units*
Contribution Margin Ratio Approach
Required sales in dollars = Fixed Costs + Target profit
Contribution margin ratio
= $12,000 + $0
45%
= $26,667**
*Actual result of 53.3333 rounded up to the next full unit as it is not possible to sell partial tablets.
**Actual result of $26,666.6667 rounded up to next full dollar.
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-65
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Cost-Volume-Profit Graph
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-66
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A furniture manufacturer specializes in wood
tables. The tables sell for $100 and incur $40 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.
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-67
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10. Calculate the required sales in units to earn the
target profit using the equation method.
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-68
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10. Calculate the required sales in units to earn the
target profit using the equation method.
Net sales revenue Variable costs Fixed costs = Target profit
($100 per unit Units sold) ($40 per unit Units sold) $6,000 = $12,000
[($100 $40 per unit) Units sold] $6,000 = $12,000
$60 per unit Units sold = $ 6,000 + $12,000
$60 per unit Units sold = $18,000
Units sold = $18,000 / $60 per unit
Units sold = 300 units
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-69
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11. Calculate the required sales in units to earn the
target profit using the contribution margin
method.
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-70
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11. Calculate the required sales in units to earn the
target profit using the contribution margin
method.
Required sales in units = Fixed costs + Target profit Contribution margin per unit
= $6,000 + $12,000
$100 per unit $40 per unit
= 300 units
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-71
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12. Calculate the required sales in dollars to earn
the target profit using the contribution margin
ratio method.
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-72
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12. Calculate the required sales in dollars to earn
the target profit using the contribution margin
ratio method.
Contribution margin ratio = $60 per table / $100 per table = 60%
Required sales in dollars = Fixed costs + Target profit
Contribution margin ratio
= $6,000 + $12,000
60%
= $30,000
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-73
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13. Calculate the required sales in units to
breakeven using the contribution margin
method.
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-74
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13. Calculate the required sales in units to
breakeven using the contribution margin
method.
Required sales in units = Fixed costs + Target profit
Contribution margin per unit
= $6,000 + $0
$100 per unit $40 per unit
= 100 units
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-75
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Learning Objective 4
Use CVP analysis to
perform sensitivity
analysis
20-76 Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall
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Change in the Selling PriceContribution Margin Approach
Smart Touch Learning believes it must cut the selling price to $475 per tablet. Variable costs remain at $275 per tablet. Fixed costs stay at $12,000. How many tablets must be sold to break even?
Required sales in units = Fixed costs + Target profit
Contribution margin per unit
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-77
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Change in the Selling PriceContribution Margin Approach
Smart Touch Learning believes it must cut the selling price to $475 per tablet. Variable costs remain at $275 per tablet. Fixed costs stay at $12,000. How many tablets must be sold to break even?
Required sales in units = Fixed costs + Target profit
Contribution margin per unit
= $12,000 + $0
$475 per unit $275 per unit
= 60 units Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-78
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Change in the Variable CostsContribution Margin Approach
Smart Touch Learnings selling price remains at $500 per tablet. Variable costs increase to $285 per tablet. Fixed costs stay at $12,000. How many tablets must be sold to break even?
Required sales in units = Fixed costs + Target profit
Contribution margin per unit
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-79
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Change in the Variable CostsContribution Margin Approach
Smart Touch Learnings selling price remains at $500 per tablet. Variable costs increase to $285 per tablet. Fixed costs stay at $12,000. How many tablets must be sold to break even?
Required sales in units = Fixed costs + Target profit
Contribution margin per unit
= $12,000 + $0
$500 per unit $285 per unit
= 56 units*
* Rounded up to next full unit
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-80
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Change in the Fixed CostsContribution Margin Approach
Smart Touch Learnings selling price remains at $500 per tablet. Variable costs stay at $275 per tablet. Fixed costs increase to $15,000. How many tablets must be sold to break even?
Required sales in units = Fixed costs + Target profit
Contribution margin per unit
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-81
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Change in the Fixed CostsContribution Margin Approach
Smart Touch Learnings selling price remains at $500 per tablet. Variable costs stay at $275 per tablet. Fixed costs increase to $15,000. How many tablets must be sold to break even?
Required sales in units = Fixed costs + Target profit
Contribution margin per unit
= $15,000 + $0
$500 per unit $275 per unit
= 67 units*
* Rounded up to the next full unit
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-82
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Effects of Changes in Selling Price,
Variable Costs, and Fixed Costs
Exhibit 20-8 Effects of Changes in Selling Price, Variable Costs,
and Fixed Costs
Cause Effect Result
Change Contribution Margin per Unit Breakeven point
Selling price per unit increases Increases Decreases
Selling price per unit decreases Decreases Increases
Variable cost per unit increases Decreases Increases
Variable cost per unit decreases Increases Decreases
Total fixed cost increases No effect Increases
Total fixed cost decreases No effect Decreases
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-83
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A furniture manufacturer specializes in wood
tables. The tables sell for $100 and incur $40 in
variable costs. The company has $6,000 in
fixed costs per month. Calculate the breakeven
point in units under each independent
scenario.
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-84
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14. Variable costs increase by $10 per unit.
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-85
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14. Variable costs increase by $10 per unit.
Variable cost = $40 + $10 = $50
Contribution margin per unit = $100 $50 = $50
Required sales in units = Fixed costs + Target profit
Contribution margin per unit
= $6,000 + $0
$50 per unit
= 120 units
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-86
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15. Fixed costs decrease by $600.
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15. Fixed costs decrease by $600.
Fixed costs = $6,000 $600 = $5,400
Contribution margin per unit = $100 $40 = $60
Required sales in units = Fixed costs + Target profit
Contribution margin per unit
= $5,400 + $0
$60 per unit
= 90 units
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-88
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16. Sales price increases by 10%.
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-89
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16. Sales price increases by 10%.
Sales price = $100 1.10 = $110
Contribution margin per unit = $110 $40 = $70
Required sales in units = Fixed costs + Target profit Contribution margin per unit
= $6,000 + $0 $70 per unit
= 86 units*
* Rounded up to next whole unit
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-90
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Learning Objective 5
Use CVP analysis to
calculate margin of
safety, operating
leverage, and
multiproduct
breakeven points
20-91 Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall
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Margin of Safety
Smart Touch Learnings original breakeven point was 54 tablets. The company expects to sell 100 tablets.
Expected sales Breakeven sales = Margin of safety in units
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-92
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Margin of Safety
Smart Touch Learnings original breakeven point was 54 tablets. The company expects to sell 100 tablets.
Expected sales Breakeven sales = Margin of safety in units
100 tablets 54 tablets = 46 tablets
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-93
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Margin of Safety
Smart Touch Learnings original breakeven point was 54 tablets. The company expects to sell 100 tablets.
Expected sales Breakeven sales = Margin of safety in units
100 tablets 54 tablets = 46 tablets
Margin of safety in units Sales price per unit = Margin of
safety in dollars
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-94
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Margin of Safety
Smart Touch Learnings original breakeven point was 54 tablets. The company expects to sell 100 tablets.
Expected sales Breakeven sales = Margin of safety in units
100 tablets 54 tablets = 46 tablets
Margin of safety in units Sales price per unit = Margin of
safety in dollars
46 tablets $500 per tablet = $23,000
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-95
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Margin of Safety
Smart Touch Learnings original breakeven point was 54 tablets. The company expects to sell 100 tablets.
Expected sales Breakeven sales = Margin of safety in units
100 tablets 54 tablets = 46 tablets
Margin of safety in units Sales price per unit = Margin of
safety in dollars
46 tablets $500 per tablet = $23,000
Margin of safety in units / Expected sales in units = Margin of
safety ratio
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-96
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Margin of Safety
Smart Touch Learnings original breakeven point was 54 tablets. The company expects to sell 100 tablets.
Expected sales Breakeven sales = Margin of safety in units
100 tablets 54 tablets = 46 tablets
Margin of safety in units Sales price per unit = Margin of
safety in dollars
46 tablets $500 per tablet = $23,000
Margin of safety in units / Expected sales in units = Margin of
safety ratio
46 tablets / 100 tablets = 46% Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-97
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Expected Contribution
Margin Income Statements
Company A Company B
Sales Revenue (500 passengers $25 per passenger) $ 12,500 $ 12,500
Variable Cost:
(500 passengers $5 per passenger) 2,500
(500 passengers $15 per passenger) 7,500
Contribution Margin 10,000 5,000
Fixed Costs 6,000 1,000
Operating Income $ 4,000 $ 4,000
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-98
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Actual Contribution
Margin Income Statements
Company A Company B
Sales Revenue (400 passengers $25 per passenger) $ 10,000 $ 10,000
Variable Cost:
(400 passengers $5 per passenger) 2,000
(400 passengers $15 per passenger) 6,000
Contribution Margin 8,000 4,000
Fixed Costs 6,000 1,000
Operating Income $ 2,000 $ 3,000
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-99
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Degree of Operating Leverage
Degree of operating leverage = Contribution margin
Operating income
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Degree of Operating Leverage
Degree of operating leverage = Contribution margin
Operating income
Company A $10,000 = 2.50
$4,000
Company B $5,000 = 1.25
$4,000
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-101
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Degree of Operating Leverage Predicting Change in Operating Income
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-102
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Degree of Operating Leverage Predicting Change in Operating Income
Company A Company B
Estimated sales $ 12,500 $ 12,500
Actual sales (10,000) (10,000)
Dollar change $ 2,500 $ 2,500
Percent change in sales ($2,500 / $12,500) 20% ($2,500 / $12,500) 20%
Degree of operating leverage 2.50 1.25
Percent change in operating income 50% 25%
Estimated operating income $ 4,000 $ 4,000
Actual operating income (2,000) (3,000)
Dollar change $ 2,000 $ 1,000
Percent change in operating income ($2,000 / $4,000) 50% ($1,000 / $4,000) 25%
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-103
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Sales Mix
Cool Cat Furniture sold 6,000 cat beds and 4,000 scratching posts. Total fixed costs are $40,000. The cat beds unit selling price is $44, and variable cost per bed is $24. The scratching posts unit selling price is $100 and variable cost per post is $30. What is the breakeven point?
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-104
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Sales Mix
Cool Cat Furniture sold 6,000 cat beds and 4,000 scratching posts. Total fixed costs are $40,000. The cat beds unit selling price is $44, and variable cost per bed is $24. The scratching posts unit selling price is $100 and variable cost per post is $30. What is the breakeven point?
Cat beds Scratching Posts Total
6,000 4,000 10,000
60% 40% 100%
3 2 5
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-105
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Breakeven Point with Sales Mix:
Step 1
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-106
Step 1: Calculate the weighted-average contribution margin per unit.
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Breakeven Point with Sales Mix:
Step 2
Step 2: Calculate the breakeven point in units for the package of products.
Required sales in units = Fixed costs + Target profit
Weighted-average contribution margin per unit
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-107
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Breakeven Point with Sales Mix:
Step 2
Step 2: Calculate the breakeven point in units for the package of products.
Required sales in units = Fixed costs + Target profit
Weighted-average contribution margin per unit
= $40,000 + $0
$40 per item
= 1,000 items
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-108
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Breakeven Point with Sales Mix:
Step 3
Step 3: Calculate the breakeven point in units for each product. Multiply the package breakeven point in units by each products proportion of the sales mix.
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-109
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Breakeven Point with Sales Mix:
Step 3
Step 3: Calculate the breakeven point in units for each product. Multiply the package breakeven point in units by each products proportion of the sales mix.
Breakeven sales of cat beds (1,000 items 3/5) = 600 cat beds
Breakeven sales of scratching posts (1,000 items 2/5) = 400 scratching posts
In sales dollars:
600 cat beds at $44 selling price each $26,400
400 scratching posts at $100 selling price each 40,000
Total sales revenue $66,400
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-110
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Breakeven Point with Sales Mix:
Contribution Income Statement
Cat
Beds
Scratching
Posts Total
Sales Revenue
Cat beds (600 $44) $ 26,400
Scratching posts (400 $100) $ 40,000 $ 66,400
Variable Costs
Cat beds (600 $24) 14,400
Scratching posts (400 $30) 12,000 26,400
Contribution Margin $ 12,000 $ 28,000 40,000
Fixed Costs 40,000
Operating Income $ 0
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-111
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Sales Mix with Target Profit
How many units of each product must Cool Cat
sell to earn a target profit of $20,000?
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-112
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Sales Mix with Target Profit:
Step 2
Step 2: Calculate the required sales in units for the package of products.
Required sales in units = Fixed costs + Target profit
Weighted-average contribution margin per unit
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-113
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Sales Mix with Target Profit:
Step 2
Step 2: Calculate the required sales in units for the package of products.
Required sales in units = Fixed costs + Target profit
Weighted-average contribution margin per unit
= $40,000 + $20,000
$40 per item
= 1,500 items
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-114
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Target Profit with Sales Mix:
Step 3
Step 3: Calculate the required sales in units for each product. Multiply the package required sales in units by each products proportion of the sales mix.
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-115
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Target Profit with Sales Mix:
Step 3
Step 3: Calculate the required sales in units for each product. Multiply the package required sales in units by each products proportion of the sales mix.
Required sales of cat beds (1,500 items 3/5) = 900 cat beds
Required sales of scratching posts (1,500 items 2/5) = 600 scratching posts
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-116
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Target Profit with Sales Mix:
Contribution Income Statement
Cat
Beds
Scratching
Posts Total
Sales Revenue
Cat beds (900 $44) $ 39,600
Scratching posts (600 $100) $ 60,000 $ 99,600
Variable Costs
Cat beds (900 $24) 21,600
Scratching posts (600 $30) 18,000 39,600
Contribution Margin $ 18,000 $ 42,000 60,000
Fixed Costs 40,000
Operating Income $ 20,000
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-117
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A furniture manufacturer specializes in wood
tables. The tables sell for $100 and incur $40 in
variable costs. The company has $6,000 in
fixed costs per month. Expected sales are 200
tables per month.
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-118
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17. Calculate the margin of safety in units.
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-119
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17. Calculate the margin of safety in units.
Breakeven sales in units = Fixed costs + Target profit
Contribution margin per unit
= $6,000 + $ 0
$60 per unit
= 100 units
Margin of safety in units = Expected sales Breakeven sales = 200 tables 100 tables = 100 tables
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18. Determine the degree of operating leverage.
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-121
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18. Determine the degree of operating leverage.
Sales revenue (200 tables $100 per table) $ 20,000
Variable costs (200 tables $40 per table) 8,000 Contribution margin (200 tables $60 per table) 12,000
Fixed costs 6,000 Operating income $ 6,000
Degree of operating leverage = Contribution margin
Operating income
= $12,000
$6,000
= 2.00
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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
1 table for every 4 chairs. Calculate the
breakeven point.
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-123
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Cat
Beds
Scratching
Posts Total
Sales price per unit $ 100 $ 50
Variable cost per unit 40 30
Contribution margin per unit 60 20
Sales mix in units 1 4 5
Contribution margin $ 60 $ 80 $ 140
Weighted-average contribution margin per unit
($140 per unit / 5 units) $ 28
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-124
Step 1: Calculate the weighted-average contribution margin per unit.
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Step 2: Calculate the breakeven point in units for the package of products.
Required sales in units = Fixed costs + Target profit
Weighted-average contribution margin per unit
= $7,000 + $0
$28 per item
= 250 items
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-125
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Step 3: Calculate the breakeven point in units for each product. Multiply the package breakeven point in units by each products proportion of the sales mix.
Breakeven sales of tables (250 items 1/5) = 50 tables
Breakeven sales of chairs (250 items 4/5) = 200 chairs
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-126