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
Degree of operating leverage:
The Degree of operating leverage shows the relation between change in net operating income and change in sales. The formulas for degree of operating leverage are as follows:
To calculate:
The Change in profits
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MANAGERIAL ACCOUNTING W/CONNECT
- Faldo 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_forwardContribution 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_forwardUse the following information about Rat Race Home Security, Inc. to answer the questions: Average selling price per unit $324. Variable cost per unit $187 Units sold 449 Fixed costs $8,589 Interest expense 17,204 Based on the data above, what will be the resulting percentage change in earnings per share of Rat Race Home Security, Inc. if they expect operating profit to change 4.2 percent? (You should calculate the degree of financial leverage first). (Write the percentage sign in the "units" box).arrow_forward
- A company would like to determine various costs and points to aid them in deciding whether to expand or not. If you are given the following information, compute the required amounts and / or figures.Selling price / unit = P100 Variable cost / unit = P70Annual fixed cost = P500,000 Compute 5. Sales in units to earn a profit of 10% of sales.arrow_forwardPROBLEM SOLVING: (show step by step solution) Break-even and target profits. Analysis of the operations of FAST Company shows the fixed costs to be P200,000 and the variable costs to be P8 per unit. Selling price is P16 per unit. Derive the break-even point expressed in units. How many units must the firm sell to earn a profit of P280,000? What would profits be if revenue from sales were P2,000,000?arrow_forwardA projected income statement of Hailwork’s company for the coming year follows: Sales $506300 |Total Variable Cost 170865 Contribution Margin ? Total Fixed Cost 175000 Operating Income ? Compute contribution margin and contribution margin ratio Compute the Operating Income How much revenue must be earned in order to breakeven What is the effect on contribution margin ratio if the unit selling price and unit variable cost increase by 10 percent each?arrow_forward
- ne Breakeven point-Algebraic and graphical Fine Leather Enterprises sells its single product for $128.12 per unit. The firm's fixed operating costs are $472,300 annually, and its variable operating costs are $85.55 per unit. a. Find the firm's operating breakeven point in units. b. Label the x axis "Sales (units)" and the y axis "Costs/Revenues ($)," and then graph the firm's sales revenue, total operating cost, and fixed operating cost functions on these axes. In addition, label the operating breakeven point and the areas of loss and profit (EBIT). ts a. The operating breakeven point is units. (Round to the nearest integer.) Text dia Librai Calculat Resource Enter your answer in the answer box and then click Check Answer. Study 1 part remaining Clear All Check Answer unication Tools > Ouestion 10 (0/1) Question 11 (0/1) Ouestion 12 (0/1) Question 9 (0/1) Type here to searcharrow_forwardCost Volume Profit (CVP) Relationships (Algo) You are provided with the following data. Unit sales Selling price per unit Variable expenses per unit Fixed expenses Target Profit 80,000 units $70 per unit $ 28 per unit $ 2,688,000 $ 1,610,000 Required: Compute the CM ratio and variable expense ratio. Compute the break-even. Compute the target profit. Compute the margin of safety with the original data. Compute the degree of operating leverage with the original data. Use the Degree of Operating Leverage to determine the new Net Operating Income if sales increase by: 16% 1. Use the Open Excel in New Tab button to launch this question. 2. When finished in Excel, use the Save and Return to Assignment button in the lower right to return to Connect.arrow_forwardSuppose ABC Corp’s break-even point is revenues of $1,100,000. Fixed costs are $660,000 a. Calculate the contribution margin percentage. b. Calculate the selling price if variable costs are $16 per unit. c. Suppose 75 000 units are sold. Calculate the profit earned. d. Will the company be profitable if able to sell 30,000 units? Explain. c. What should the company do to increase its profit above break-even point?arrow_forward
- a. 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_forwardFinch Corporation produces products that it sells for $20 each. Variable costs per unit are $5, and annual fixed costs are $318,000. Finch desires to earn a profit of $51,000. Required a. Use the equation method to determine the break-even point in units and dollars. b. Determine the sales volume in units and dollars required to earn the desired profit. a. Break-even point in units a. Break-even point in dollars b. Sales volume in units b. Sales in dollars Prev 1 of 16 Next >arrow_forwardWilderness Products, Incorporated, has designed a self-inflating sleeping pad for use by backpackers and campers. The following information is available about the new product: a. An investment of $1,350,000 will be necessary to carry inventories and accounts receivable and to purchase some new equipment needed in the manufacturing process. The company's required rate of return is 24% on all investments. b. A standard cost card has been prepared for the sleeping pad, as shown below: Direct materials Direct labor Manufacturing overhead (20% variable) Total standard cost per pad Standard Quantity or Hours 4.0 yards 2.4 hours 2.4 hours Standard Price or Rate $2.70 per yard $8.00 per hour $12.50 per hour Standard Cost $10.80 19.20 30.00 $ 60.00 c. The only variable selling and administrative expense will be a sales commission of $9 per pad. The fixed selling and administrative expenses will be $732,000 per year. d. Because the company manufactures many products, no more than 38,400 direct…arrow_forward
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