COST VOLUME PROFIT ANALYSIS

STRATEGIC COST MANAGEMENT
COST VOLUME PROFIT ANALYSIS
1. Cutlass Company's projected profit for the coming year is as follows:
a. Compute the break-even point in units.

b. How many units must be sold to earn a profit of $30,000?
c. Compute the contribution margin ratio. Using that ratio, compute the additional profit that Cutlass
would earn if sales were $25,000 more than expected.
d. Suppose Cutlass would like to earn operating income equal to 20 percent of sales revenue. How many
units must be sold for this goal to be realized? Prepare an income statement to prove your answer.
e. For the projected level of sales, compute the margin of safety.
f. For the projected level of sales, compute the degree of operating leverage. What is the percent change
in profit if sales increase by 15 percent?
2. Dory Manufacturing Company produces T-shirts that are screen-printed with the logos of various sports teams.
Each shirt is priced at $10. Costs are as follows:
a. Compute the break-even point in units using conventional analysis.

b. Compute the break-even point in units using activity-based analysis.
c. Suppose that Dory could reduce the setup cost by $150 per setup and could reduce the number of
engineering hours needed to 425. How many units must be sold to break even in this case?
3. Super-Tees Company plans to sell 12,000 T-shirts at $16 each in the coming year. Product costs include:
Variable selling expense is the redemption of a coupon, which averages $0.80 per T-shirt; fixed selling and
administrative expenses total $19,000.
a. Calculate the:
i. Variable product cost per unit
ii. Total variable cost per unit
iii. Contribution margin per unit
iv. Contribution margin ratio (rounded to four significant digits)
v. Total fixed expense for the year
b. Prepare a contribution-margin-based income statement for Super-Tees Company for the coming year.
c. What if the per unit selling expense increased from $0.80 to $1.75? Calculate the new values for the
following:
i. Variable product cost per unit
ii. Total variable cost per unit
iii. Contribution margin per unit
iv. Contribution margin ratio (rounded to four significant digits)
v. Total fixed expense for the year
4. Jay-Zee Company makes an in-car navigation system. Next year, Jay-Zee plans to sell 16,000 units at a price of
$320 each. Product costs include:
Variable selling expense is a commission of 5 percent of price; fixed selling and administrative expenses total
$116,400.
a. Calculate the sales commission per unit sold. Calculate the contribution margin per unit.
b. How many units must Jay-Zee Company sell to break even? Prepare an income statement for the
calculated number of units.
c. Calculate the number of units Jay-Zee Company must sell to achieve target operating income (profit) of
$333,408.
d. What if the Jay-Zee Company wanted to achieve a target operating income of $322,000? Would the
number of units needed increase or decrease compared to your answer in Requirement 3? Compute the
number of units needed for the new target operating income.
5. Health-Temp Company is a placement agency for temporary nurses. It serves hospitals and clinics throughout the
metropolitan area. Health-Temp Company believes it will place temporary nurses for a total of 23,500 hours next
year. Health-Temp charges the hospitals and clinics $90 per hour and has variable costs of $75.60 per hour (this
includes the payment to the nurse). Total fixed costs equal $321,000.
a. Calculate the contribution margin per unit and the contribution margin ratio.
b. Calculate the sales revenue needed to break even.
c. Calculate the sales revenue needed to achieve a target profit of $100,000.
d. What if Health-Temp had target operating income (profit) of $110,000? Would sales revenue be larger or
smaller than the one calculated in Requirement 3? Why? By how much?
6. Olivian Company wants to earn $420,000 in net (after-tax) income next year. Its product is priced at $275 per
unit. Product costs include:
Variable selling expense is $14 per unit; fixed selling and administrative expense totals $290,000. Olivian has a
tax rate of 40 percent.
a. Calculate the before-tax profit needed to achieve an after-tax target of $420,000.

b. Calculate the number of units that will yield operating income calculated in Requirement 1 above.
(Round to the nearest unit.)
c. Prepare an income statement for Olivian Company for the coming year based on the number of units
computed in Requirement 2.
d. What if Olivian had a 35 percent tax rate? Would the units sold to reach a $420,000 target net income be
higher or lower than the units calculated in Requirement 3? Calculate the number of units needed at the
new tax rate. (Round dollar amounts to the nearest dollar and unit amounts to the nearest unit.)
7. Vandenberg, Inc., produces and sells two products: a ceiling fan and a table fan. Vandenberg plans to sell 30,000
ceiling fans and 70,000 table fans in the coming year. Product price and cost information includes:
Common fixed selling and administrative expenses total $85,000.
a. What is the sales mix estimated for next year (calculated to the lowest whole number for each product)?
b. Using the sales mix from Requirement 1, form a package of ceiling fans and table fans. How many ceiling
fans and table fans are sold at break-even?
c. Prepare a contribution-margin-based income statement for Vandenberg, Inc., based on the unit sales
calculated in Requirement 2.
d. What if Vandenberg, Inc., wanted to earn operating income equal to $14,400? Calculate the number of
ceiling fans and table fans that must be sold to earn this level of operating income. (Hint: Remember to
form a package of ceiling fans and table fans based on the sales mix and to first calculate the number of
packages to earn an operating income of $14,400.)
8. Dupli-Pro Copy Shop provides photocopying service. Next year, Dupli-Pro estimates it will copy 2,800,000 pages
at a price of $0.08 each in the coming year. Product costs include:
There is no variable selling expense; fixed selling and administrative expenses total $46,000.
a. Calculate the break-even point in units.

b. Calculate the break-even point in sales revenue.
c. Calculate the margin of safety in units for the coming year.
d. Calculate the margin of safety in sales revenue for the coming year.
e. What if the total selling and administrative expenses are reduced to $38,800? Recalculate:
i. Break-even point in units
ii. Break-even point in sales revenue
iii. Margin of safety in units for the coming year
iv. Margin of safety in sales revenue for the coming year
9. Ringsmith Company is considering two different processes to make its product—process 1 and process 2. Process
1 requires Ringsmith to manufacture subcomponents of the product in-house. As a result, materials are less
expensive, but fixed overhead is higher. Process 2 involves purchasing all subcomponents from outside suppliers.
The direct materials costs are higher, but fixed factory overhead is considerably lower. Relevant data for a sales
level of 30,000 units follow:
a. Compute the degree of operating leverage for each process.

b. Suppose that sales are 20 percent higher than budgeted. By what percentage will operating income
increase for each process? What will be the increase in operating income for each system? What will be
the total operating income for each process?
c. What if unit sales are 10 percent lower than budgeted? By what percentage will operating income
decrease for each process? What will be the total operating income for each process?

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STRATEGIC COST MANAGEMENT

1. Cutlass Company's projected profit for the coming year is as follows:

a. Compute the break-even point in units.

a. Compute the break-even point in units using conventional analysis.

a. Calculate the before-tax profit needed to achieve an after-tax target of $420,000.

Common fixed selling and administrative expenses total $85,000.

a. Calculate the break-even point in units.

a. Compute the degree of operating leverage for each process.

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