Basic Decision Analysis Using CVP
Refer to the data for Warner Clothing in Exercise 3-30. Assume that the company plans to sell 5,000 units per month. Consider requirements (b), (c), and (d) independently of each other.
Required
- a. What will be the operating profit?
- b. What is the impact on operating profit if the sales price decreases by 10 percent? Increases by 20 percent?
- c. What is the impact on operating profit if variable costs per unit decrease by 10 percent? Increase by 20 percent?
- d. Suppose that fixed costs for the year are 10 percent lower than projected, and variable costs per unit are 10 percent higher than projected. What impact will these cost changes have on operating profit for the year? Will profit go up? Down? By how much?
a.
Calculate the operating profit of Company W per month.
Answer to Problem 32E
The operating profit of Company W is $18,000 per month.
Explanation of Solution
Operating profit: The operating profit is the excess of total revenues over total expenses after adjusting for depreciation and taxes.
Compute the operating profit per month:
Thus, the operating profit of Company W is $18,000 for every month.
Working note 1:
Compute the total revenue:
Working note 2:
Compute the total cost:
b.
Calculate the impact of a 10% decrease and a 20% increase in sales price on operating profit.
Answer to Problem 32E
The change in operating profit when the sales price decreases by 10% is ($7,500).
The change in operating profit when the sales price increases by 20% is $15,000.
Explanation of Solution
Target volume: the level of sales which need to be achieved during a particular period of time is termed as target volume.
Target profit: the amount of profit which needs to be achieved during a particular period of time on a particular level of sales is termed as target profit.
Compute the impact of a 10% decrease in sales price on operating profit:
Thus, operating profit decreases by $7,500 when sales price decreases by 10%.
Compute the impact of 20% increases in sales price on operating profit:
Thus, operating profit increased by $15,000 when the sales price increases by 20%.
Working note 3:
Compute the operating profit, revised sales price and total revenue when the sales price decreases by 10%:
Operating profit:
Revised sales price:
Total revenue:
Working note 4:
Compute the total costs when the sales price decreases by 10%:
Compute the operating profit and revised sales price when the sales price increases by 20%:
Operating profit:
Revised sales price:
Working note 5:
Compute the total revenue:
Working note 6:
Compute the total costs:
c.
Calculate the impact of a 10% decrease and a 20% increase in Variable cost on operating profit.
Answer to Problem 32E
The change in operating profit when variable cost decreases by 10% is $1,500.
The change in operating profit when variable cost increases by 20% is ($3,000).
Explanation of Solution
Target volume: the level of sales which need to be achieved during a particular period of time is termed as target volume.
Target profit: the amount of profit which needs to be achieved during a particular period of time on a particular level of sales is termed as target profit.
Compute the impact of a 10% decrease in variable cost on operating profit:
Thus, operating profit decreases by $7,500 when sales price decreases by 10%.
Compute the impact of 20% increases in variable cost on operating profit:
Thus, operating profit increased by $15,000 when the sales price increases by 20%.
Compute the operating profit, revised sales price, total revenue and total cost when the variable cost decreases by 10%:
Operating profit:
Revised variable cost:
Working note 7:
Total revenue:
Working note 8:
Total costs:
Compute the operating profit, revised sales price, total revenue and total cost when the variable cost increases by 20%:
Operating profit:
Revised variable cost:
Working note 9:
Total revenue:
Working note 10:
Total costs:
d.
Calculate the impact of a 10% decrease in fixed cost and a 10% increase in Variable cost on the operating profit.
Answer to Problem 32E
The operating profit increases by $2,700, when fixed cost decreases by 10% and Variable cost increases by 10%.
Explanation of Solution
Target volume: the level of sales which need to be achieved during a particular period of time is termed as target volume.
Target profit: the amount of profit which needs to be achieved during a particular period of time on a particular level of sales is termed as target profit.
Compute the impact of a 10% decrease in fixed cost and a 10% increase in variable cost on operating profit:
Thus, operating profit increased by $2,700 when fixed cost decreases by 10% and variable cost increases by 10%.
Working note:
Compute the operating profit, revised sales price, total revenue and total cost when fixed cost decreases by 10% and variable cost increases by 10%.
Operating profit:
Revised fixed cost:
Revised variable cost:
Working note 11:
Total revenue:
Working note 12:
Total costs:
Want to see more full solutions like this?
Chapter 3 Solutions
FUNDAMENTALS OF COST ACCOUNTING
- Sales Needed to Earn Target Income Chillmax Company plans to sell 3,500 pairs of shoes at 60 each in the coming year. Variable cost is 35% of the sales price; contribution margin is 65% of the sales price. Total fixed cost equals 78,000 (includes fixed factory overhead and fixed selling and administrative expense). Required: 1. Calculate the sales revenue that Chillmax must make to earn operating income of 81,900 by using the point in sales equation. 2. Check your answer by preparing a contribution margin income statement based on the sales dollars calculated in Requirement 1.arrow_forwardSales Revenue Approach, Variable Cost Ratio, Contribution Margin Ratio Arberg Companys controller prepared the following budgeted income statement for the coming year: Required: 1. What is Arbergs variable cost ratio? What is its contribution margin ratio? 2. Suppose Arbergs actual revenues are 30,000 more than budgeted. By how much will operating income increase? Give the answer without preparing a new income statement 3. How much sales revenue must Arberg earn to break even? Prepare a contribution margin income statement to verify the accuracy of your answer. 4. What is Arbergs expected margin of safety? 5. What is Arbergs margin of safety if sales revenue is 380,000?arrow_forwardKlamath Company produces a single product. The projected income statement for the coming year is as follows: Required: 1. Compute the unit contribution margin and the units that must be sold to break even. 2. Suppose 10,000 units are sold above break-even. What is the operating income? 3. Compute the contribution margin ratio. Use the contribution margin ratio to compute the break-even point in sales revenue. (Note: Round the contribution margin ratio to four decimal places, and round the sales revenue to the nearest dollar.) Suppose that revenues are 200,000 more than expected for the coming year. What would the total operating income be?arrow_forward
- Macom Manufacturing has total contribution margin of $61,250 and net income of $24,500 for the month of June. Marcus expects sales volume to increase by 10% in July. What are the degree of operating leverage and the expected percent change in income for Macom Manufacturing? 0.4 and 10% 2.5 and 10% 2.5 and 25% 5.0 and 50%arrow_forwardWest Island distributes a single product. The companys sales and expenses for the month of June are shown. Using the information presented, answer these questions: A. What is the break-even point in units sold and dollar sales? B. What is the total contribution margin at the break-even point? C. If West Island wants to earn a profit of $21,000, how many units would they have to sell? D. Prepare a contribution margin income statement that reflects sales necessary to achieve the target profit.arrow_forwardFaldo Company produces a single product. The projected income statement for the coming year, based on sales of 200,000 units, is as follows: Required: 1. Compute the unit contribution margin and the units that must be sold to break even. Suppose that 30,000 units are sold above the break-even point. What is the profit? 2. Compute the contribution margin ratio and the break-even point in dollars. Suppose that revenues are 200,000 greater than expected. What would the total profit be? 3. Compute the margin of safety in sales revenue. 4. Compute the operating leverage. Compute the new profit level if sales are 20 percent higher than expected. 5. How many units must be sold to earn a profit equal to 10 percent of sales? 6. Assume the income tax rate is 40 percent. How many units must be sold to earn an after-tax profit of 180,000?arrow_forward
- Variable Cost Ratio, Contribution Margin Ratio Chillmax Company plans to sell 3,500 pairs of shoes at 60 each in the coming year. Unit variable cost is 21 (includes direct materials, direct labor, variable factory overhead, and variable selling expense). Fixed factory overhead is 30,000 and fixed selling and administrative expense is 48,000. Required: 1. Calculate the variable cost ratio. 2. Calculate the contribution margin ratio. 3. Prepare a contribution margin income statement based on the budgeted figures for next year. In a column next to the income statement, show the percentages based on sales for sales, total variable cost, and total contribution margin.arrow_forwardMaple Enterprises sells a single product with a selling price of $75 and variable costs per unit of $30. The companys monthly fixed expenses are $22,500. What is the companys break-even point in units? What is the companys break-even point in dollars? Construct a contribution margin income statement for the month of September when they will sell 900 units. How many units will Maple need to sell in order to reach a target profit of $45,000? What dollar sales will Maple need in order to reach a target profit of $45,000? Construct a contribution margin income statement for Maple that reflects $150,000 in sales volume.arrow_forwardContribution margin, break-even sales, cost-volume-profit chart, margin of safety, and operating leverage Belmain Co. expects to maintain the same inventories at the end of 20Y7 as at the beginning of the year. The total of all production costs for the year is therefore assumed to be equal to the cost of goods sold. With this in mind, the various department heads were asked to submit estimates of the costs for their departments during the year. A summary report of these estimates is as follows: It is expected that 12,000 units will be sold at a price of 240 a unit. Maximum sales within the relevant range are 18,000 units. Instructions 1. Prepare an estimated income statement for 20Y7. 2. What is the expected contribution margin ratio? 3. Determine the break-even sales in units and dollars. 4. Construct a cost-volume-profit chart indicating the break-even sales. 5. What is the expected margin of safety in dollars and as a percentage of sales? (Round to one decimal place.) 6. Determine the operating leverage.arrow_forward
- Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage LearningManagerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College PubPrinciples of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax College
- Managerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage LearningFinancial And Managerial AccountingAccountingISBN:9781337902663Author:WARREN, Carl S.Publisher:Cengage Learning,Excel Applications for Accounting PrinciplesAccountingISBN:9781111581565Author:Gaylord N. SmithPublisher:Cengage Learning