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 profits no loss. Breakeven point in $ is calculated with the help of following formula:
To indicate:
If the company would earn profit or loss at the level of 600 units
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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_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_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
- Gelbart Company manufactures gas grills. Fixed costs amount to 16,335,000 per year. Variable costs per gas grill are 225, and the average price per gas grill is 600. Required: 1. How many gas grills must Gelbart Company sell to break even? 2. If Gelbart Company sells 46,775 gas grills in a year, what is the operating income? 3. If Gelbart Companys variable costs increase to 240 per grill while the price and fixed costs remain unchanged, what is the new break-even point?arrow_forwardCost Classification, Income Statement Gateway Construction Company, run by Jack Gateway, employs 25 to 30 people as subcontractors for laying gas, water, and sewage pipelines. Most of Gateways work comes from contracts with city and state agencies in Nebraska. The companys sales volume averages 3 million, and profits vary between 0 and 10% of sales. Sales and profits have been somewhat below average for the past 3 years due to a recession and intense competition. Because of this competition, Jack constantly reviews the prices that other companies bid for jobs. When a bid is lost, he analyzes the reasons for the differences between his bid and that of his competitors and uses this information to increase the competitiveness of future bids. Jack believes that Gateways current accounting system is deficient. Currently, all expenses are simply deducted from revenues to arrive at operating income. No effort is made to distinguish among the costs of laying pipe, obtaining contracts, and administering the company. Yet all bids are based on the costs of laying pipe. With these thoughts in mind, Jack looked more carefully at the income statement for the previous year (see below). First, he noted that jobs were priced on the basis of equipment hours, with an average price of 165 per equipment hour. However, when it came to classifying and assigning costs, he needed some help. One thing that really puzzled him was how to classify his own 114,000 salary. About half of his time was spent in bidding and securing contracts, and the other half was spent in general administrative matters. Required: 1. Classify the costs in the income statement as (1) costs of laying pipe (production costs), (2) costs of securing contracts (selling costs), or (3) costs of general administration. For production costs, identify direct materials, direct labor, and overhead costs. The company never has significant work in process (most jobs are started and completed within a day). 2. Assume that a significant driver is equipment hours. Identify the expenses that would likely be traced to jobs using this driver. Explain why you feel these costs are traceable using equipment hours. What is the cost per equipment hour for these traceable costs?arrow_forward
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