Concept explainers
Concept introduction:
Cost Volume Profit (CVP) Analysis:
The Cost Volume Profit analysis is the analysis of the relation between cost, volume, and profit of a product. It analyzes the cost and profits at the different level of production, in order to determine the breakeven point and required the level of sales to earn the desired profit.
Contribution margin means the margin that is left with the company after recovering variable cost out of revenue earned by selling smart phones. The formula for contribution margin is as follows:
Contribution margin = Sales - Variable cost.
Similarly contribution margin ratio = Contribution/sales
Breakeven Point:
The Breakeven point is the level of sales at which the net profit is nil. It can be explained as a situation where the business is generating a sale that is equal to the expenses incurred and hence no
To indicate:
The Breakeven Point in units without any calculation
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- Contribution Margin Ratio, Break-Even Sales, Operating Leverage Elgart Company produces plastic mailboxes. The projected income statement for the coming year follows: Required: 1. Compute the contribution margin ratio for the mailboxes. 2. How much revenue must Elgart earn in order to break even? 3. What is the effect on the contribution margin ratio if the unit selling price and unit variable cost each increase by 15%? 4. CONCEPTUAL CONNECTION Suppose that management has decided to give a 4% commission on all sales. The projected income statement does not reflect this commission. Recompute the contribution margin ratio, assuming that the commission will be paid. What effect does this have on the break-even point? 5. CONCEPTUAL CONNECTION If the commission is paid as described in Requirement 4, management expects sales revenues to increase by 80,000. How will this affect operating leverage? Is it a sound decision to implement the commission? Support your answer with appropriate computations.arrow_forwardManatoah Manufacturing produces 3 models of window air conditioners: model 101, model 201, and model 301. The sales price and variable costs for these three models are as follows: The current product mix is 4:3:2. The three models share total fixed costs of $430,000. Calculate the sales price per composite unit. What is the contribution margin per composite unit? Calculate Manatoahs break-even point in both dollars and units. Using an income statement format, prove that this is the break-even point.arrow_forwardBreak-even for a multiple product firm. can be calculated by dividing total fixed costs by the contribution margin of a composite unit can be calculated by multiplying fixed costs by the contribution margin ratio of a composite unit can only be calculated when the proportion of products sold is the same for all products can be calculated by multiplying fixed costs by the contribution margin ratio of the most common product in the sales mixarrow_forward
- Show step by step solution: Cost-volume-profit analysis. PJ Company produces one type of sunglasses with the following costs and revenues for the year: Total Revenues............................................................................................P5,000,000 Total Fixed Costs ....................................................................................... 1,000,000 Total Variable Costs .................................................................................... 3,000,000 Total Quantity Produced and Sold.............................................................. 1,000,000 Units What is the selling price per unit? What is the variable cost per unit? What is the contribution margin per unit? What is the break-even point in units?arrow_forwarda. Given the following graphs, calculate the total fixed costs, variable costs per unit, andsales price for Firm A. Firm B’s fixed costs are $120,000, its variable costs per unit are$4, and its sales price is $8 per unit.b. Which firm has the higher operating leverage at any given level of sales? Explain.c. At what sales level, in units, do both firms earn the same operating profit?arrow_forwardWhich of the following statements is true with respect to the degree of operating leverage (DOL)? Multiple Choice It is calculated as the ratio of contribution margin (CM) to operating income, at each level of output. It can be calculated and used by manufacturing but not service firms. For most firms, it is relatively constant in amount as sales volume changes. It is calculated as the amount of operating income × (1 − t), where t = the income tax rate. It provides a simple way to estimate the change in total fixed cost for a given change in sales volume.arrow_forward
- Contribution Margin Ratio, Variable Cost Ratio, Break-Even Sales Revenue The controller of Ashton Company prepared the following projected income statement: Sales $88,000 Total Variable cost 61,600 Contribution margin $26,400 Total Fixed cost 10,500 Operating income $15,900 Required: 1. Calculate the contribution margin ratio. % 2. Calculate the variable cost ratio. % 3. Calculate the break-even sales revenue for Ashton.$ 4. How could Ashton increase projected operating income without increasing the total sales revenue?arrow_forwardMost businesses sell several products at varying prices. The products often have different unit variable costs. Thus, the total profit and the breakeven point depend on the proportions in which the products are sold. Sales mix is the relative contribution of sales among various products sold by a firm. Assume that the sales of Jordan Incorporated for a typical year are as follows: Product Units Sold Sales Mix A 18,384 80% B 4,596 20 Total 22,980 100% Assume the following unit selling prices and unit variable costs: Product Selling Price Variable Cost Contribution Margin A $ 92 $ 77 $ 15 B 152 112 40 Fixed costs are $424,000 per year. Assume that the sales mix, expressed in terms of relative physical units sold, is constant as sales volume changes. Required:5. Assume the original facts except that now fixed costs are expected to be $42,400 higher than originally planned. How does this expected increase in fixed costs affect the breakeven point in…arrow_forwardMost businesses sell several products at varying prices. The products often have different unit variable costs. Thus, the total profit and the breakeven point depend on the proportions in which the products are sold. Sales mix is the relative contribution of sales among various products sold by a firm. Assume that the sales of Jordan Incorporated for a typical year are as follows: Product Units Sold Sales Mix A 18,384 80% B 4,596 20 Total 22,980 100% Assume the following unit selling prices and unit variable costs: Product Selling Price Variable Cost Contribution Margin A $ 92 $ 77 $ 15 B 152 112 40 Fixed costs are $424,000 per year. Assume that the sales mix, expressed in terms of relative physical units sold, is constant as sales volume changes. Required: 1. Determine the breakeven point in total units and, for this breakeven point, calculate the number of units of A and B that must be sold. Use the weighted-average contribution margin approach.3.…arrow_forward
- Most businesses sell several products at varying prices. The products often have different unit variable costs. Thus, the total profit and the breakeven point depend on the proportions in which the products are sold. Sales mix is the relative contribution of sales among various products sold by a firm. Assume that the sales of Jordan Incorporated for a typical year are as follows: Product Units Sold Sales Mix A 18,288 80% B 4,572 20 Total 22,860 100% Assume the following unit selling prices and unit variable costs: Product Selling Price Variable Cost Contribution Margin A $ 89 $ 74 $ 15 B 149 109 40 Fixed costs are $418,000 per year. Assume that the sales mix, expressed in terms of relative physical units sold, is constant as sales volume changes. Required: Determine the breakeven point in total units and, for this breakeven point, calculate the number of units of A and B that must be sold. Use the weighted-average contribution margin approach. Determine the…arrow_forwardOriole Company has a unit selling price of $630, variable costs per unit of $410, and fixed costs of $199,980.Compute the break-even point in units using (a) the mathematical equation and (b) unit contribution margin. (a) Mathematical Equation (b) Unit contribution margin Break-even point units unitsarrow_forwardBreak-Even Units, Contribution Margin Ratio, Multiple-Product Breakeven, Margin of Safety, Degree of Operating Leverage Jellico Inc.'s projected operating income (based on sales of 450,000 units) for the coming year is as follows: Line Item Description Total Sales $ 13,050,000 Total variable cost 8,482,500 Contribution margin $ 4,567,500 Total fixed cost 2,664,375 Operating income $ 1,903,125 Required: 1(a). Compute variable cost per unit. Enter your answer to the nearest cent. fill in the blank 1 of 1$ 18.85 per unit 1(b). Compute contribution margin per unit. Enter your answer to the nearest cent. fill in the blank 1 of 1$ 10.15 per unit 1(c). Compute contribution margin ratio. Enter to one decimal point. fill in the blank 1 of 1 35 % 1(d). Compute break-even point in units. Reminder: round-up to ensure partial units are completed. fill in the blank 1 of 1 262,500 units 1(e). Compute break-even point in sales dollars. fill in the blank 1 of 1$ 7,612,500 2. How…arrow_forward
- Principles of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax CollegeManagerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage Learning