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    CVP Analysis Class Exercise Solutions

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    aryan bhandari
    The document provides information on cost behavior and break even analysis for multiple companies. It includes: - An analysis of how profits would change for a company if sales volumes decrease by 10% or increase by 20% - Estimating a cost function using the high-low method based on weekly customer service costs and reports - Performing a break even analysis for two companies (Juicy Beauty and Lifetime Escapes) including calculating break even points, target profits, and the effects of cost and price changes - Analyzing alternatives for Derby Shoe Company to meet or exceed a target profit - Calculating a weighted average contribution margin and break even point for Stackpole Company with two product lines

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    CVP Analysis Class Exercise Solutions

    Uploaded by

    aryan bhandari
    229 views4 pages
    The document provides information on cost behavior and break even analysis for multiple companies. It includes: - An analysis of how profits would change for a company if sales volumes decrease by 10% or increase by 20% - Estimating a cost function using the high-low method based on weekly customer service costs and reports - Performing a break even analysis for two companies (Juicy Beauty and Lifetime Escapes) including calculating break even points, target profits, and the effects of cost and price changes - Analyzing alternatives for Derby Shoe Company to meet or exceed a target profit - Calculating a weighted average contribution margin and break even point for Stackpole Company with two product lines

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    Additional Exercise Solutions(2) (1)

    Original Title

    CVP Analysis Class Exercise Solutions(4) (2)

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    The document provides information on cost behavior and break even analysis for multiple companies. It includes: - An analysis of how profits would change for a company if sales volumes decrease by 10% or increase by 20% - Estimating a cost function using the high-low method based on weekly customer service costs and reports - Performing a break even analysis for two companies (Juicy Beauty and Lifetime Escapes) including calculating break even points, target profits, and the effects of cost and price changes - Analyzing alternatives for Derby Shoe Company to meet or exceed a target profit - Calculating a weighted average contribution margin and break even point for Stackpole Company with two product lines

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    229 views4 pages

    CVP Analysis Class Exercise Solutions

    Uploaded by

    aryan bhandari
    The document provides information on cost behavior and break even analysis for multiple companies. It includes: - An analysis of how profits would change for a company if sales volumes decrease by 10% or increase by 20% - Estimating a cost function using the high-low method based on weekly customer service costs and reports - Performing a break even analysis for two companies (Juicy Beauty and Lifetime Escapes) including calculating break even points, target profits, and the effects of cost and price changes - Analyzing alternatives for Derby Shoe Company to meet or exceed a target profit - Calculating a weighted average contribution margin and break even point for Stackpole Company with two product lines

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 4

    Cost Behaviour

    Q1. Rally Synthesis Inc. manufactures and sells 100 bottles per day. Fixed costs are $22,000 and the
    variable costs for manufacturing 100 bottles are $30,000. Each bottle is sold for $1,200.
    A) How would the daily profit be affected if the daily volume of sales drop by 10%?

    Normal Sales (100 Bottles) Reduced Sales (90 Bottles)


    Item Amount ($) Item Amount
    Revenue 120,000 Revenue 108,000
    FC 22,000 FC 22,000
    VC (100*300) 30,000 VC (90*300) 27,000
    TC 52,000 TC 49,000
    Operating Profit 68,000 Operating Profit 59,000
    Hence the operating profit would decrease by 9,000.
    B) How would the fixed cost be impacted if the manufacturing increases 20%?
    FC will remain same.
    C) How would the fixed cost per unit be impacted if the manufacturing increases 20%?
    Normal Sales (100 Bottles) Increased Sales (120 Bottles)
    Item Amount ($) Item Amount
    FC 22,000 FC 22,000
    FC Per Unit 220 FC Per Unit 183.33
    Hence the FCPU will decrease by $36.67
    D) How would the variable costs be impacted if the manufacturing decreases by 10%?
    VC would decrease by 10% ($3,000). Refer to Part A.
    E) How would the variable costs per unit be impacted if the manufacturing decreases by
    10%?
    VCPU will remain constant.

    2. Estimating a cost function, high-low method. Lacy Dallas is examining customer-service costs in
    the southern region of Camilla Products. Camilla Products has more than 200 separate electrical
    products that are sold with a 6-month guarantee of full repair or replacement with a new product.
    When a product is returned by a customer, a service report is prepared. This service report includes
    details of the problem and the time and cost of resolving the problem. Weekly data for the most
    recent 8-week period are as follows:

    Week Customer-Service Department Costs Number of Service Reports


    1 $13,300 185
    2 20,500 285
    3 12,000 120
    4 18,500 360
    5 14,900 275
    6 21,600 440
    7 16,500 350
    8 21,300 315

    Required:

    1. Use the high-low method to compute the cost function relating customer-service costs to the
    number of service reports.
    Step 1:
    X – Number of service reports
    Y – Total Cost
    Step 2:
    High (X2, Y2) = (440, 21,600)
    Low (X1, Y1) = (120, 12,000)
    Step 3:
    Slope = (21,600 – 12,000)/(440 – 120) = 30 = VCPU (m)
    Step 4:
    Total Cost Function: Y = 30 X + C
    Step 5:
    Substituting (X2, Y2) in the above equation and solving for C, We get C = $8400

    Hence the cost function is: Customer Service Dep. Cost = 30 (No. of Service Report) + 8400

    2. What variables, in addition to number of service reports, might be cost drivers of weekly
    customer-service costs of Camilla Products?
     Number of service dept personnel
     Number of Problems reported
     Time taken to resolve the problem
    3. Estimate the FC, Variable cost and total cost functions using regression method.
    Slope (m) = 29.55598

    Intercept = 8716.82

    FC: Y = 8716.82

    VC: Y = 29.55598 (X)

    TC: Y = 29.55598 (X) + 8716.82

    CVP Analysis.
    Q1) CVP computations.

    Variable Fixed Total Operating Contribution Contribution


    Revenues Costs Costs Costs Income Margin Margin %
    a. $2,400 $600 $200 $800 $1,600 $1,800 75%
    b. $2,500 $1,400 $200 $1,600 $900 $1,100 44%
    c. $500 $300 $200 $500 $0 $200 40%
    d. $1,200 $900 $200 $1,100 $100 $300 25%

    Q2) Juicy Beauty

    1. Recast Income Statement

    $ $
    Revenue 200000
    Less Variable costs and expenses:
    Variable Manufacturing costs 110000
    Variable Marketing 10000 (120000)
    Contribution Margin 80000
    Less Fixed Costs:
    Fixed Manufacturing Costs 40000
    Fixed Marketing 20000 (60000)
    Operating Income 20000

    2. CM% = (80000/200000)*100 = 40%


    BEP in units = FC/CMPU = 60000/(80000/20000) = 15 000 units
    BEP in revenue = BEP in units*SP = 15000*10 = $150,000

    3. Operating Income = 16000(0.4) – 60000 = 4,000


    Net Income = 4000*(1-0.3) = $ 2,800

    Q3) Lifetime Escapes

    1. BEP in units = 570000/(7500-6300) = 475 package tours


    2. Target Profit Quantity = (570000+102000)/1200 = 560 package tours
    Target Profit Revenue = 560*7500 = $4,200,000
    3. If FC increase by $19000, then New FC = $589000
    Let new CMPU needed to achieve the same BEQ be x
    (589000/x) = 475, x=$1240
    7500 – VCPU = 1240, VCPU = $6260
    Hence, a decrease of $40 in VCPU is required
    4. If SP increases to $8,200, New BEP in units = 570000/(8200-6300) = 300 tours

    Q4) Derby Shoe Company, Current sales = 5000 shoes

    Alt 1: Reduce VC by 20% but Increase FC by 15%

    New VCPU = $24, New TFC = $115,000

    New Operating Income = 350000 – (24*5000) – 115000 = $115,000


    Hence, Increase in profitability of 15%

    Alt 2: Increase sales by 10%, Increase FC by $25,000 (Advertising)

    New Sales = 5500 shoes, New Revenue = 5500*70 = $385,000, New FC = $125,000

    New Operating Income = 385000 – (30*5500) – 125000 = $95,000, hence decrease in profitability:
    5%

    Alt 3: Increase SP by $10 causing a fall in sales of 20%, Increase VCPU by $8

    New SP = $80, New VCPU = $38, New sales = 4,000 shoes

    New Operating Income = (80-38)*4000 – 100000 = $68,000

    Decrease in profitability of 32%

    Alt 4: Add another manufacturing facility that would double FC, Sales increase by 60%

    New sales = 8000 shoes, New FC = $200,000

    New Operating Income = (70-30)*8000 – 200000 = $120,000

    Hence, increase in profitability of 20%

    None of the alternatives help to meet or exceed the target. The best option is Alternative 4.

    Q5) Stackpole Company (To be discussed in Decision Making Concept)

    STD DELUXE
    SP 28 50
    VCPU 18 30
    CMPU 10 20
    Sales proportion 75% 25%

    BEP in units = FC/Weighted Avg CMPU = 2250000/((10*0.75)+(20*0.25)) = 180,000 carriers

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