COST VOLUME PROFIT ANALYSIS:

A MANAGEMENT TOOL FOR PLANNING AND DECISION

MAKING

MODULE 4
 MANAGERIAL
ACCOUNTING

TOOLS FUNCTIONS
(A) (B)

Fundamental
Mgnt Acctg Concepts
PLANNING:
CVP(4), Budgeting(5)
(1)

Different Costs for CONTROL

Different purposes (Balanced Scorecard)
(2) (6)

Cost mgnt systems: DECISION MAKING

ABC
(3)
(7)
Mgrl_2023_11 _ALL_A_Charitou 2
 What is management accounting?

Value
Creation

Strategic
Goals MANAGERIAL
(PLANNING)

How do mgrl decisions ACCOUNTING

affect strategic goals? Design of Cost mgnt
systems (CMS) for
(DECISION MAKING) planning, decision
making and control for
value creation.
Have we achieved our goals?
(CONTROL)

One of the major organizational goals is to create value. To create value, organizations need
to set strategic goals (eg., increase profitability via revenue growth or cost reduction etc).
You as managers, should know which are these strategic goals [PLANNING], know how to
measure those goals, and know how your managerial decisions [DECISION MAKING] affect
these goals. After you implement your decision, you as a manager, you should be able to
evaluate whether you achieved your goals [CONTROL].
2016_06_MGRL ALL_Charitou 3
 COST VOLUME PROFIT ANALYSIS (CVP):
A MANAGEMENT TOOL FOR PLANNING AND DECISION MAKING

Learning Objectives
1) (LO1) What actions managers take to improve firm’s
profitability?
2) (LO2) What is Cost Volume Profit Analysis? Characteristics?
Usefulness?
3) (L03) What is a breakeven point, margin of safety and
operating leverage?
4) (L04) How does CVP/breakeven analysis is applied when a firm
produces (renders) more than one type of product (service).
5) Practical Applications/Cases of CVP from the real world

2023_11 _ _MGRL ALL_Charitou 4

 (LO1)
What actions managers take to
improve firm’s profitability?

2023_11 _ _MGRL ALL_Charitou 5

 What actions would YOU take (as a manager) to improve firm
profitability?
•Recent Covid crisis / Wars & Global Financial Crisis: Your firm?
•How many additional units should your firm need to sell to make up the lost profits
from the reduction in price due to the competition ( or from Covid/Wars/ financial
crisis)?
• What percentage of aircraft seats must be sold so that
Aegean/Emirates/Etihad/KLM/Cyprus Airways/can achieve their targeted profitability?
•How many customers should they use the ATM machines to cover our costs (or cover
those costs incurred by the branch related transactions)?
• How many minutes should Cyta/Vodafone/Cosmote/Wind clients use their 5G services
to achieve their goals?
• How many clients (€€€) should (Cytavision, Primetel, Cablenet, ERT etc) get to achieve
a profitability of 10% if get the rights to televise Champions league/ Europa league of
Anorthosis games!!?
• TV and entertainment: Sigma/Mega/ANT1/Alpha/RIK fired xxx since did not make the
%.
• Should a medical doctor join GESY or NHS (Geniko Sxedio Igias!!/National Health
Service)
•What effect on profitability can /HBS…… if they increase the number of students in
each class by 10%?
* How many additional products must be sold by Wilson/Pepsi/Nike… to cover
advertising costs to be paid to Federer/ Djokovich/Nadal/Tsitsibas, Alcaraz or…?
2023_11_AFN_A.Charitou 7
Recent pandemic/ Wars & Global
Financial Crisis
Which are the major challenges /
problems faced by
executives/managers?

Tools U should know

Cost Volume Profit (CVP)

2023_11 _ _MGRL ALL_Charitou 8

 (LO2)
What is Cost Volume Profit
Analysis?
Characteristics? Usefulness?

2023_11 _ _MGRL ALL_Charitou 9

 CVP: Is it really a NEW fruit!!!!!!!!!!!!?

CVP Analysis Income Statement

Sales XX
Cost
Volume -Costs XX

Profit Profit XX

CVP analysis: What is the effect on PROFITABILITY when there

are changes in COST or VOLUME of sales (or price?)
2023_11 _ _MGRL ALL_Charitou 10
How should costs be broken down under CVP analysis? B.
Which type of income statement is used for CVP analysis?

qUsed primarily for Used primarily for planning

external reporting. (CVP analysis)
 How is CVP relate to the concept of “Different
costs for different purposes”

1. PURPOSES PLANNING DEC MAKING CONTROL

?
INCREMENTAL CONTROLLABLE FIXED
2. COSTS VS SUNK VS UNCONTR vs VARIABLE

Value
Creation

Strategic
Goals
(PLANNING)

QUESTION: Draw lines to match above. How do mgrl decisions

affect strategic goals?
(DECISION MAKING)
e.g., Airlines, ATMs, Telecoms, ALBA U, Coke, etc
2011_05_Germanos_ALL_Charitou Have we achieved our goals?
12
(CONTROL)
 (L03)
What is a breakeven point,
margin of safety and operating
leverage?

Illustration via a Case

2023_11 _ _MGRL ALL_Charitou 13

 Wilson Case 4.1
Application of CVP
Aim: To illustrate how CVP can be applied in the real world

Major Issues: Understand

1. what is the breakeven point for a single product
2. what is the margin of safety
3. what is the operating leverage
4. Differences in breakeven analysis when a firm produces
more than one product or renders more than one type of
service (sales mix)

023_11 _ _MGRL ALL_Charitou 14

 CASE 4-1: Wilson *
‘The profitability of the Deluxe Wilson Tennis Racquet has reached
its minimum levels ever. Currently, its ROI is only 4%. The last
time that this Racquet achieved its profitability target was when it
was advertized by Sampras.’ These were some of the comments
made by the VP, Ken Elles, during the last meeting of the board of
directors. Mr. Elles is very upset with the profitability of this
product line because the targeted ROI for this Deluxe Tennis
racquet is at least 15%.
Ken Elles has just called in his office the controller, Vanessa Rogers, to discuss ways to
improve the profitability of this product. The VP asked for all relevant revenue, cost,
and sales volume information. Vanessa prepared an income statement for this product
line similar to the one she prepared for financial reporting purposes. This statement
was actually part of the reports given to the auditors, PWC. [see Table I].
The controller suggested several ways to improve the profitability of this racquet,
among those, to raise selling price or reduce costs, such as selling and advertising costs,
etc. The VP does not fully agree with Vanessa. He would like to find an excellent athlete
to advertise the racquet, such as Roger Federer or Nadal or Bagdatis or Sharapova.
Preliminary estimates indicate that all above will cost them about 500,000 euro.
Estimates also indicate that the maximum sales volume that this deluxe tennis racquet
could have is 200,000.
The VP is currently looking for a management consultant to advise them.
* [use table 1 to answer case]
2023_11 _ _MGRL ALL_Charitou 15
 TABLE 1

Wilson Deluxe Racket

Income Statement: Contribution Margin Approach
Per Unit Total *
Sales 25.00 3,000,000
Less: Variable Costs (DM, DL, OH, Selling) ** 19.80 2,376,000
Contribution profit margin 5.20 624,000
Less Fixed Costs (OH, selling) 468,000
Net Income 156,000

* Based on selling 120,000 racquets

**(Direct Mat=10.50, Dir lab=5.00, OH &selling exp=4.30)
2023_11 _ _MGRL ALL_Charitou 16
 PART A: AS A MANAGEMENT CONSULTANT ADVISE
Wilson CORPORATION
1. What is CVP analysis?
CVP analysis shows the effects of changes in an organization’s volume of activity on its
costs, revenues and profit.
To be able to apply CVP analysis, total costs must be broken into Variable and fixed
(concept of different costs for different purposes)

2. Why is CVP analysis considered a management planning and

decision making tool?
CVP analysis is considered a mgnt planning tool because it aids management in
budgeting, setting goals. It is considered a decision making tool since aids management
in choosing the right alternative for value creation.

3. How does the concept of ‘different costs for different purposes’

relate to CVP analysis?
CVP analysis also shows the effect on profit of changes in costs, sales prices, and sales
mix. By using CVP analysis, mgnt can determine what effect increases or decreases in
prices, costs (fixed or variable) will have on profitability, and thus select the best
alternative that achieves its goals. (for example, should Federer/Nadal/Agassi advertise
our products? should Carnavaro, Ronaldignio
2023_11 be recruited in our team? etc.
_ _MGRL ALL_Charitou 17
 Part B: Wilson Case
BREAKEVEN ANALYSIS
1. When management consultants discuss CVP analysis, one of the major
issues is the so called ‘Breakeven Point’. What do we mean with BP?
Find the BP (in units and sales volume) for the Deluxe Wilson racquet,
i.e., How many racquets should Wilson sell to Breakeven?
2. 2. How many racquets should Wilson sell to make a profit of 260,000
euro, to cover the additional advertising costs to be paid to Federer or
Sharapova and at the same time raise the price to 30 euro?
3. What is the margin of safety?
4. Use original data. Find operating leverage. What is the importance of the
operating leverage to the managers?

2023_11_ _ _MGRL_ADV ALL_Charitou 18

Breakeven Analysis: Different Scenarios [Solution]
What Conclusions can you draw?

Given
? ?
SCENARIOS SP pu Targeted BP
BP units
units BP $BP € million
profit (millions)
1. What is the BP? $25 0 90,000
90,000 2.25
2,25m
2. Targeted profit $30 260,000 255,833 6.396
260,000, Federer 500,000 120,392 3,61m
and Selling price=$30
3. Margin of safety? $25 0 125,306 3.76
30,000 0,75m
30,000 0.750
4. Operating leverage 4

2017_07_MGRL_ADV ALL_Charitou 19
 GRAPH THE CVP RELATIONSHIPS (Q 1&2)
€ (revenue, VC, FC, total cost) Revenue
Break-even
point

Total
€3.5 Cost

€3.24*
Profit
€2.25 260000
BP € VC

Fixed
Cost

BP # Racquets
*3.24=140000units*VC pu+FC
90 140
2017_07_MGRL_ADV ALL_Charitou 20
=(140000* 19.80)+468,000
1. When management consultants discuss CVP analysis, one of the
major issues is the so called ‘Breakeven Point’. What do we mean
with BP? Find the BP (in units and sales volume) for the Deluxe
Wilson racquet, I.e., How many racquets should Wilson sell to
Breakeven?
SOLUTION:
The BP is the volume of activity at which an organization’s revenues and
expenses equal I.e. zero profit. Or the point that the organization achieves its
targeted profit.

a. Break-even point ( in units ) = fixed costs = €468,000= 90,000 units

unit contribution margin €25.00 - €19.80

€5.20
b. BP in sales euro =BP in units*Sales price p.u= 90,000units*25 =€2.25m

or .Break-even point(in sales euro)=fixed costs = €468,000 = €2,250,000

CM ratio €25.00 - €19.80
€25.00
2023_11_ _ _MGRL_ADV ALL_Charitou 21
2. Assume targeted profit of 260,000, advertising with
Federer and assume that the price will be raised to 30
euro. How many racquets should Wilson sell to
achieve its targeted goal?

Solution:

BP = (468,000 + 500,000 + 260,000)/ 10.20 = 120,392 racquets

(10.20= 5.20 + €5 increase in selling price from 25 to 30)

2023_11_ _ _MGRL_ADV ALL_Charitou 22

3. Use original data. What is the margin of safety (MS)?

120,000=
Solution: Budgeted
MS units = 120,000 - 90,000 = 30,000 racquets Sales

90,000= BP
Margin of Safety:
How much “breathing room” your
firms has (if sales budget is not
achieved) before the firm starts
making losses [and thus get into the
“shark´s mouth”.

2023_11_ _ _MGRL_ADV ALL_Charitou 23

 4. Operating Leverage
Operating Leverage(OL) = Contribution margin / Net profit
= 624,000 / 156,000 = 4
Table 1: Wilson Deluxe Racket: Inc. Stat: Contribution Margin Approach
Per Unit Total *
Sales 25.00 3,000,000
Less: Variable Costs (DM, DL, OH, Selling) ** 19.80 2,376,000
Contribution profit margin 5.20 624,000
Less Fixed Costs (OH, selling) 468,000
Net Income 156,000

What is the meaning of OL?

It shows how many times the profitability is expected to change for
every 1% change in sales revenue. For example, if OL = 4, it means that if
sales revenue goes up (down) by 1%, profitability will go up (down) by 4%.
qA new controller of a company said recently the following ‘I am glad that
during the recent global financial crisis our OL is high’. Agree? Explain fully.
2023_11_ _ _MGRL_ADV ALL_Charitou 24
 (L04)

How does CVP/breakeven

analysis is applied when a firm
produces (renders) more than
one type of product (service).

2023_11 _ _MGRL ALL_Charitou 25

 Wilson Case: Part C
BREAKEVEN ANALYSIS
&
SALES MIX
q What if your firm produces more than one
product or renders more than one type of
service? Can CVP analysis be applied?
qYes, use sales mix

2023_11 _ _MGRL ALL_Charitou 26

 CASE 4-1 (C) : Wilson ON SALES MIX
Assume that Wilson produces another tennis racquet, the Pro-DLX. The
following cost and revenue information relates to this racquet which is
produced under the same Flexible manufacturing system.
Selling Price per Pro-DLX racquet €40
Variable Cost per racquet €24
Assume that current sales mix is 70% for deluxe and 30% PRO-dlx.
Fixed Costs are common for both racquets. Assume that currently 70% of
the total FC are allocated to DELUXE and the rest to PRO_DLX.
[Total FC= 668,571 = 200,571+ 468,000]
Required:
1. Find breakeven point
2. How many racquets should be sold of each type to earn a profit of
260,000 euro?
2023_11 _ _MGRL ALL_Charitou 27
 1. Find the breakeven point (assuming 0 profits)

BP = Fixed Costs /WACM# = 668,571/8.44 = 79,215 racquets

#weighted average contribution margin = CM of product A * % of racquet A + CM of product B * % of racquet B

#WACM = €5.20 * 70% + €16 * 30% = €3.64 + €4.80 = €8.44

2. How many racquets should be sold of each type to

earn a profit of €260,000?
BP = 668,571 + 260,000/ 8.44 = 110,020 racquets

so, 70% deluxe * 110,020 = 77,014

and 30% PRO * 110,020 = 33,006
2023_11_ _ _MGRL_ADV ALL_Charitou 28
 CASE 4-2
KRI KRI ICE CREAM

2017_07_MGRL_ADV ALL_Charitou 29
 Case: KRI-KRI
q KRI-KRI sells two types of ice-cream, Vanilla 3L (with 4
flavors) and the Fruits 0% (master mini 0% sugar red
fruits).
qInformation on sales for July follow:

Ice cream type Vanilla 3L Fruits 0% Total

Units 9,000 6,000 15,000

Determine the number of units and sales revenue for each

product at the breakeven point for KRI-KRI. The sales mix
is expected to remain steady.
2017_07_MGRL_ADV ALL_Charitou 30
1. Find the Breakeven point in units in total and for each type of ice
cream separately
BP units = FC / WACM pu
= 54,000 / 6 euro = 9,000 ice creams
WACM = CM of prod A * % units + CM of prod B * % units
5 * 9000/15000 + 7.50 * 6/15000= $6.00 per unit

The 9,000 units represent the total Vanilla3L and Fruits0% ice-creams
that KRI-KRI will sell at breakeven.

2. Find the BP in units and in sales revenue for each product separately
and total :
= 9,000 x % of units sold for each type of ice cream

=9,000 x 60% for Vanilla3L = 5,400 ice creams @ 8€ = 43,200€

=9,000 x 40% for Fruits0% = 3,600 ice creams @10€ = 36,000€
Total = 79,200€
2017_07_MGRL_ADV ALL_Charitou 31
(ALT #2. how to get same answer)
Find the Breakeven point in units in total and for each type of ice cream
separately

BP $ = FC / CM % = FC / (CM / Sales Rev)

= 54,000 / (90,000/132,000) = 79,200 $

[* 90,000 = (5$ * 9000 units) + (7.5 $ * 6,000 units)]

The 79,200$ represents the total Vanilla3L and Fruits0% ice-creams that
KRI-KRI will sell at breakeven.

Find the BP for each product separately:

= 79,200 x % of revenue for each type of ice cream

=79,200 x (72,000 / 132,000) for Vanilla3L = 5,400 ice creams

=79,200 x (60,000 / 132,000) for ALL_Charitou
2017_07_MGRL_ADV Fruits0% = 3,600 ice creams 32
 Case: Deloitte 4-3
One of Deloitte’s offices in downtown Salonica provides
three types of services, Tax, Audit and Consulting.
Information for these three types of services is as follows:

Assume the sales mix remains the same at all levels of sales.
qRequired
q1a. Find the BP in euro for Deloitte’s office.

q1b. Find the BP in euro for Deloitte’s office for each type

of service rendered.
q2 Find the total revenue to be generated to make a profit

of 200,000 euro. 2017_07_MGRL_ADV ALL_Charitou 33

q Solution
q1a. Find the BP in euro for Deloitte’s office.

BP = FC / WACM %
q = 120,000 euro / 45% = 266,667 euro for all services

q WACM % = 225,000 / 500,000 = 45%

q1b. Find the BP in euro for Deloitte’s office for each type
of service rendered.

qTax = 266,667 euro x 20% = 53,333 €

qAudit = 266,667 euro x 30% = 80,000 €
q Consulting = 266,667 euro x 50% = 133,334 €

[Note: Tax 20%= 100,000/500,000 revenue; Audit 30%= 150,000/500,000

revenue; Consulting 50%= 250,000/500,000 revenue;]
2017_07_MGRL_ADV ALL_Charitou 34
1b (Alt B to get same answer)
q

q BP $ = FC /CM % = FC / (CM / Sales rev)

q = 120,000 / (225,000 / 500,000)=
q = 120,000 / 45%=
q = 266,667 $

2023_11 _ _MGRL ALL_Charitou 35

q Answer
q2 Find the total revenue to be generated to make a profit of

200,000 €euro.
BP = FC + Targeted Profit / WACM %
q = 120,000€ + 200,000€ / 45% = 711,111€ for all services

2017_07_MGRL_ADV ALL_Charitou 36
 COST VOLUME PROFIT ANALYSIS (CVP):
A MANAGEMENT TOOL FOR PLANNING AND DECISION MAKING

What have we Learned?

1) (LO1) What actions managers take to improve firm’s
profitability?
2) (LO2) What is Cost Volume Profit Analysis? Characteristics?
Usefulness?
3) (L03) What is a breakeven point, margin of safety and
operating leverage?
4) (L04) How does CVP/breakeven analysis is applied when a firm
produces (renders) more than one type of product (service).
5) Practical Applications/Cases of CVP from the real world

2023_11 _ _MGRL ALL_Charitou 37

 REVIEW
CASES /EXERCISES / PROBLEMS
Case 4-4: Vodafone Live Plus
Case 4-5: Designing CVP on ATMs
Case 4-7: Design a CVP system for your firm (**).
Case 4-8: Cytavision and Cable TV case
Case 4-9: Asimina hotel and Covid19 Case
Case 4-10: American Medical Centre and Covid19

2023_11 _ _MGRL ALL_Charitou 38

 CASE 4_4: VODAFONE LIVE plus
Group Decision Analysis

Telecommunication companies worldwide have been making

tremendous investments in the past few years. One of those
investments they made relates to the third generation
telecommunications (so called 3G). Vodafone, one of the
largest companies worldwide (ranked in the top 20 as per
Business Week) has made huge investments as well. One of
its European subsidiaries, Vodafone-Panafon made during
the past year investments of about 200 million to be able to
offer competitive services to its customers, including 3G
services.
2023_11 _ _MGRL ALL_Charitou 39
The services that Vodafone intends to introduce in the
market include among other the Vodafone a la Carte, the
Vodafone CU and the Vodafone Live. Vodafone is the first
firm that intends to introduce this service in the market that
will give ´life´ in the telecommunication services, with
colour, sound, picture and direct access to information with
unique easiness to the customer.
Moreover, Vodafone is planning to launch also corporate
services customized to business customers. One of those
services relates to the unique service called Vodafone Mobile
Connect Card, which would offer quick and reliable wireless
access to the Internet and email any time from anywhere.

2023_11 _ _MGRL ALL_Charitou 40

In an attempt to offer the aforementioned services they
estimated the relevant costs and benefits from those types of
services and they are looking forward to your advice (see
attached Appendices for the cost information).

2023_11 _ _MGRL ALL_Charitou 41

 EXHIBIT A
Estimated costs and benefits from the Vodafone Live Service (VLS)
(all in Euro)
Fixed cost (related to licence, network, 10 million
operations, distribution and marketing)
Variable costs for this service (related to 0,05 cents
network and operating costs) per unit
Estimated revenue per unit 0,20 cents

Estimated maximum capacity 100 million

units (or min)
Budgeted sales (in units or minutes) 80 million

2023_11 _ _MGRL ALL_Charitou 42

 EXHIBIT B
Estimated costs and benefits from the Vodafone Mobile Connect
Card (MCC) service (all in Euro)
Fixed cost (related to licence, network, 5 million
operations, distribution and marketing)
Variable costs for this service (related to 0,10 cents
network and operating costs) per unit
Estimated revenue per unit 0,40 cents

Estimated maximum capacity 50 million units

(or min)
Budgeted sales (in units or minutes) 25 million

2023_11 _ _MGRL ALL_Charitou 43

REQUIRED:
1. Estimate the number of customer units (or minutes) and in euro that
Vodafone should get for each one of its products in order to break even.
Answer
Break-even point ( in units ) = fixed costs =
unit contribution margin
VLS = 10 m / (0.20-0.05) = 66,667 million
VLS in euro = 66,667 * 0.20 = 13,3 million euro
MCC = 5m /(0.40-0.10) = 16,667 million
MCC in euro = 16,667 * 0.40 =6,667 million euro

2. What should be the estimated number of customer units (eg. in minutes)

that Vodafone should have for each one of its products if they have as a
target to make a profit of 10% on their total fixed cost investment (eg., 1
million profit for the Vodafone live and 0,5 million for the MCC service).
Answer
VLS = (10 m + 1 ) / (0.20-0.05) = 73,333 million
MCC = (5m + 0.5m) (0.40-0.10) = 18,333 million

2023_11 _ _MGRL ALL_Charitou 44

REQUIRED:
3. Assume that they want to achieve their aforementioned profit target
by getting Messi, or Ronaldo or David Beckam to advertise their
product. Preliminary estimates show that they want 200,000 Euro to
accept to participate in the advertising campaign for either the
Vodafone Live or the MCC service. Find the breakeven point.
answer
VLS = (10 m + 1 +0.200 ) / (0.20-0.05) = 74,667 million
MCC = (5m + 0.5m +0.200) (0.40-0.10) = 19 million

4. Use the information from the previous question. What is the

estimated number of customer units that should be achieved if the cost
per unit increases by 10%.
Answer
VLS = (10 m + 1 +0.200 ) / (0.20-(0.05*1.10%) = 77,241 million
MCC = (5m + 0.5m +0.200)
2023_11 _(0.40-(0.10*1.10%)
_MGRL ALL_Charitou = 19,655 million
45
5. Use the information from the previous question. What is the
estimated number of customer units that should be achieved if the
estimated revenue per customer unit goes down by 10% due to the
competition.
VLS = (10 m + 1 +0.200 ) / [(0.20*0.9)-(0.05*1.10%)] =89.6m
MCC = (5m + 0.5m +0.200) /[(0.40*0.9)-(0.10*1.10%) = 22.8m
6. Use original information. Estimate the margin of safety for each
service. What conclusions can you draw?
VLS = budgeted sales in units– BP in sales in units
= 80 million units – 66,667 million units = 13,333 million units
MCC = budgeted sales in units – BP in sales in units
= 25 million units – 16,667 million units = 8,333 million units
Note: 66,667 is the BP from answer 1.
2023_11 _ _MGRL ALL_Charitou 46
CASE 4-5: Designing CVP on ATMs (Group Decision Analysis)
The recent global financial crisis made banks face
tougher competition. Their profit margins are
shrinking partly due to higher costs and to lower
revenue generated from the services rendered due to
the competition and global crisis. Banks also have
experienced lower profitability partly due to the
foreign exchange revenue lost due to the replacement
of the European currencies with the Euro.
Bank of Piraeus/NBG/Alpha Bank/ Bank of
Cyprus/Citibank, the leading banks in their region, in an
attempt to improve their financial performance, have
recently taken various actions. Among those, they are in the
process of evaluating the further expansion and usage of
their ATM machines. ATMs have already become part of our
life. Can we live without them? For the banks, though, to
provide this valuable service to us, they need to sacrifice
some resources (eg costs).
2023_11 _ _MGRL ALL_Charitou 47
The Bank thus far has estimated that annually more than 6
million customers are using their branch facilities for services
that they can get currently from the ATM machines or
services that can be added on the ATMs. So, at this point, the
Bank is considering to add new ATM machines at certain
locations where ATMs are not available at the moment. It is
estimated that the branch cost savings will be 1 million Euro
(eg., fixed cost or opportunity cost, or both). Moreover, they
estimated that on average each customer who uses the
branches for services rendered that can be acquired by the
ATMs (eg, withdrawals, deposits, payment of bills, balance
checking etc) costs them on average additional 0,50 cents per
transaction. It is estimated that the total additional fixed costs
for the new ATM machines will be 2,5 million Euro and the
average cost for each aforementioned transaction is expected
to be 0,20 cents (see attached table for the summary of all
related costs). 2023_11 _ _MGRL ALL_Charitou 48
 EXHIBIT A

Branch ATM

Current fixed cost from the 1m

above transactions
Additional ATM costs 2.5 m

Current costs per transaction at 0,50c

the branch
Estimated costs per transaction 0,20
at the ATMs
From marketing research they estimated that the
maximum transactions that can be redirected are 6
million. 2023_11 _ _MGRL ALL_Charitou 49
REQUIRED.
As a management consultant, advice Bank of Piraeus/ NBG/Alpha
Bank/ EFG/ Bank of Cyprus/Hellenic Bank/ Citibank, … what
they should do regarding the decision they are facing.
a. Find the incremental fixed costs and incremental variable
costs from the decision to switch customers from branches to
ATMs.
b. Find how many customers should use the ATM machines so
the bank would be better off (eg breakeven point in
transactions).
c. Assume that the bank decided to introduce a new advertising
campaign for their ATMs and services that will cost them
annually 200,000 Euro. Find how many customers now should
use the ATM machines so the bank to be better off (eg. new
breakeven point)
2023_11 _ _MGRL ALL_Charitou 50
d. Use original information. Assume that it is estimated
that additional 100,000 transactions would incur at the
ATMs beyond the ones that will be directed from the
branches. Assume that on average each of those
transactions would bring them additional revenue per
transaction 0,80 cents on average. How many
transactions, beyond the aforementioned ones, should
take place in order to breakeven?
e. What other factors would you take into consideration
in making your final decision? Explain.

2023_11 _ _MGRL ALL_Charitou 51

Case 4_5: Designing CVP on ATMs -- Suggested Solution

REQUIRED.
As a management consultant, advice Bank of
Piraeus/EFG/NBG/ Bank of Cyprus etc… what they should
do regarding the decision they are facing.
a. Find the incremental fixed costs and incremental variable
costs from the decision to switch customers from branches
to ATMs.

SOLUTION:
Incremental Fixed Costs = 2.5 – 1 = 1.5 million
Incremental VC = 0.50 –0.20 = 0.30 cents

2023_11 _ _MGRL ALL_Charitou 52

b. Find how many customers should use the ATM machines
so the bank would be better off (eg breakeven point in
transactions).

SOLUTION:
BP = FC / CM per unit
= (2.5m – 1 m) / (0.50 – 0.20)
= 1.5 m / 0.30 =
= 5 million

2023_11 _ _MGRL ALL_Charitou 53

REQUIRED.
c. Assume that the bank decided to introduce a new
advertising campaign for their ATMs and services that will
cost them annually 200,000 Euro. Find how many
customers now should use the ATM machines so the bank
to be better off (eg. new breakeven point)

SOLUTION:
BP = (FC + Adv costs) / CM per unit
= (2.5m – 1 m +200,000) / (0.50 – 0.20)
= 1.7 m / 0.30 =
= 5,666,667 transactions

2023_11 _ _MGRL ALL_Charitou 54

d. Use original information. Assume that it is estimated that additional
transactions would incur at the ATMs beyond the ones that will be
directed from the branches that will be about 2% of the total
transactions. Assume that on average each of those transactions would
bring them additional revenue per transaction 0,80 cents on average.
How many transactions should take place in order to breakeven?
SOLUTION:
BP units = FC / WACM pu
= (2.5m – 1.5m) / 0.306 = 4,901,961 transactions

WACM = CM of A * % transactions + CM of B * % transactions

(0.50 – 0.20) * 98% + (0.80 -0.20) * 0.02 =
= 0.294 +0.012 = 0.306

Product mix is:

4,901,961 * 98% = 4,803,921 (from Bank’s clients)
4,901,961 * 2% = 98,039 (from OTHER bank’s clients)
2023_11 _ _MGRL ALL_Charitou 55
 Case 4-7: Group Decision Analysis (*)
Design a CVP system for your organization.
Cost volume analysis (CVP) is considered one of the major planning
systems that aid management in setting goals and thus be able to
achieve their goals.
Apply CVP analysis for your firm.
1. Give at least 1 example where CVP could be applied to your firm.
2. Identify a product or service (existing or design a new one)
3. Identify costs and revenues related to your firm´s product or service.
a. What is the selling price per product or service provided?
b. Costs must be broken down into:
• Fixed costs & Variable costs
4. What is the breakeven point?
5. Find the breakeven point that will allow your firm to generate its
targeted profit (set the profit amount).
6. What conclusions can you draw?

2023_11 _ _MGRL ALL_Charitou 56

 Case 4.7 Suggested solution
q 1. Give at least 1 example where CVP could be applied to your firm.
q a.:……………………………………………………………………………………………………………
……………………………………………………………………………………………

q 2.Identify a product or service (either existing OR design one)

Ø …………………………………………………………………………………………..
q 3. Identify revenues and costs:
a. Revenue per product or service provided (per unit):....................
b. Fixed Costs:
………………………………………………… Amount:………………………….
………………………………………………… …………………………….
………………………………………………… …………………………….
………………………………………………… …………………………….
………………………………………………… …………………………….
Other fixed costs……………………….. …………………………….
TOTAL FIXED COSTS: …………………………….
c. Variable Costs:
………………………………………………… Cost per unit:…………………..
………………………………………………… …………………………….
………………………………………………… …………………………….
………………………………………………… …………………………….
………………………………………………… …………………………….
Other variable costs……………………….. …………………………….
TOTAL VARIABLE COSTS PER UNIT: …………………………….

2023_11 _ _MGRL ALL_Charitou 57

q 4. What is the breakeven point (BP)?
q Answer:
q BP = Fixed Costs / Contribution Margin
q (where Contribution margin= Selling price p.u. – Variable cost p.u.)
q ………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
………………............................................................................
q 5. Find the breakeven point that will allow your firm to generate its targeted
profit (decide the targeted profit amount ).
q Answer:
q BP = (Fixed Costs + Targeted Profit) / Contribution Margin
q ………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………
q 6. What conclusions can you draw?
q ………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………

2023_11 _ _MGRL ALL_Charitou 58

 Case 4-7b: Group Decision Analysis (*) SALES MIX
Design a CVP system for your organization.
Cost volume analysis (CVP) is considered one of the major planning
systems that aid management in setting goals and thus be able to
achieve their goals.
Apply CVP analysis for your firm.
1. Give at least 1 example where CVP could be applied to your firm.
2. Identify a product or service (existing or design a new one)
3. Identify costs and revenues related to your firm´s product or service.
a. What is the selling price per product or service provided?
b. Costs must be broken down into:
• Fixed costs & Variable costs
4. What is the breakeven point?
5. Find the breakeven point that will allow your firm to generate its
targeted profit (set the profit amount).
6. What conclusions can you draw?
 Case 4.7B SALES MIX (2 PRODUCTS): Suggested solution
q 1. Give at least 1 example where CVP could be applied to your firm.
q a.:……………………………………………………………………………………………………………
……………………………………………………………………………………………

q 2.Identify two products or services (either existing OR design one)

Ø …………………………………………………………………………………………..
q 3. Identify revenues and costs: A B
a. Revenue per product or service provided (per unit):....................
b. Fixed Costs: (for both products since from the same production line)
………………………………………………… Amount:………………………….
………………………………………………… …………………………….
………………………………………………… …………………………….
………………………………………………… …………………………….
………………………………………………… …………………………….
Other fixed costs……………………….. …………………………….
TOTAL FIXED COSTS: …………………………….
c. Variable Costs: Product/ Service
………………………………………………… Cost p.u.. A:……………B……..
………………………………………………… …………………………….
………………………………………………… …………………………….
………………………………………………… …………………………….
………………………………………………… …………………………….
Other variable costs……………………….. …………………………….
TOTAL VARIABLE COSTS PER UNIT: …………………………….

2017_07_MGRL_ADV ALL_Charitou 60
q 4. What % of sales in units is for each product or service?
q Product A: …………………………..Product B:…………………………………….
q 4. What is the breakeven point (BP) in units for the firm and for each
product/separately?
q Answer:
q BP = Fixed Costs / Contribution Margin (Weighted average)
q (where Contribution margin= Selling price p.u. – Variable cost p.u.)
q ………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
………………............................................................................
q 5. Find the breakeven point that will allow your firm to generate its targeted
profit (decide the targeted profit amount ).
q Answer:
q BP = (Fixed Costs + Targeted Profit) / Weighted average contribution Margin:
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………
q 6. What conclusions can you draw?
q ………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………
2017_07_MGRL_ADV ALL_Charitou 61
Case 4.8 on Cytavision and Cable TV
Up to 2019, the three major cable TV companies, Cytavision, Primetel and
Cablenet had contracts with all Cypriot football clubs to televise their games, so
clients had to subscribe to all three cable TV companies to watch all games,
which was a bit expensive. On the one hand, cable companies were making
money but on the other hand was not that good for the clients. Recently, these
three major cable TV companies agreed to give the opportunity to all clients to
watch all football games by having only one subscription with any of the three
cable firms. Cytavision prior to this agreement had on average 120,000 clients
and was charging 35 euro per client for this service. Currently, it charges only
28 euro for the same service. Assume that the annual fixed cost in providing
this service is 2,8 million euro and the variable cost for providing this service is
10 euro.
a) How many additional clients should they get to break even?

Break-even point ( in units ) = fixed costs = €2,800,000= 112,000 clients (before)

unit contribution margin €35.00 - €10

Break-even point ( in units ) = fixed costs = €2,800,000= 155,556 clients (after)

unit contribution margin €28.00 - €10

Difference of 155,556 – 112,000= 43,556 clients

2023_11 _ _MGRL ALL_Charitou 62
Case Cytavision and Cable TV
b1) How many clients should they get to make a profit of 200,000 euro?

Break-even point ( in units ) = fixed costs = €2,800,000 + 200,000= 166,667 clients (after)
unit contribution margin €28.00 - €10

b2) What total revenue should they achieve to meet this profitability goal?

q Answer: 166,667 * 28 = 4,666,667 euro

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Case Cytavision and Cable TV ?
q The existing clients do subscribe to the Cyta telephony. Assume
now that the new clients that they will get from the new
subscriptions to the Cable services will become Cyta telephony
subscribers and they are estimated to be about 30% of the total
clients. Cyta will make a contribution margin of 20 euro per client.
Find how many clients should get from each category to break
even.
Answer:
BP units = FC / WACM pu
= (2.8m) / 24 euro = 116,667 clients

WACM = CM of A * % transactions + CM of B * % transactions

(28 - 10) * 100% + (20) * 30% =
= 18 + 6 = 24 euro

Client mix is:

116,667 * 100% = 116,667 (existing clients, with already subscriptions to Cyta telephony)
116,667 * 30% = 35,000 (new clients, that will subscribe to Cyta telephony)
2023_11 _ _MGRL ALL_Charitou 64
Case Cytavision and Cable TV
q The existing clients do subscribe to the Cyta telephony. Assume
now that the new clients that they will get from the new
subscriptions to the Cable services will become Cyta telephony
subscribers and they are estimated to be about 30% of the total
clients. Cyta will make a contribution margin of 20 euro per client.
Find how many clients should get from each category to break
even.
Answer:
BP units = FC / WACM pu
= (2.8m) / 18.6 euro = 150,538 clients

WACM = CM of A * % transactions + CM of B * % transactions

(28 - 10) * 70% + (20) * 30% =
= 12.6 + 6 = 18.6 euro

Client mix is:

150,538 * 70% = 105,376 (existing clients, with already subscriptions to Cyta telephony)
150,538 * 30% = 45,162 (new clients, that will subscribe to Cyta telephony)
2023_11 _ _MGRL ALL_Charitou 65
Case 4.9 on Asimina Suites Hotel, 5* Cyprus
Covid19 virus affected the tourist industry in Cyprus to a great extent. Several
executives have to decide whether they should open their hotels or not during
the summer of 2021. Asimina suites hotel is considered one of the best hotels in
Cyprus and its owner if facing this challenge as well and needs your advice.
Estimates show that by opening, the estimated hotel fixed costs will be
approximately 1 million per month for each of the months from april to october. If
they open the estimate charge per client will be 80 euro and the variable cost per
client will be 30 euro. Note that hotel has 400 beds in total and estimates show
that on average they may get 20% of their total capacity.
q Find the Breakeven point per month.
Answer:
Break-even point ( in units ) = fixed costs = €1,000,000= 20,000 clients
unit contribution margin €80.00 - €30

What would you suggest to the owner? Justify

Is it reasonable?
20000/30 days = 667 clients daily!!!
Cyprus tourist org estimated only 20%
capacity
Have only 400 beds. What do you 2023_11
suggest?
_ _MGRL ALL_Charitou 66
 Case on Asimina Suites Hotel, 5* Cyprus
Assume now that approximately 60% of the hotel clients use the hotel facilities (e.g,
restaurants, bars, etc) and the hotel makes additional 20 euro contribution profit margin
from those clients.
Find new Breakeven point per month. (Hint: product mix)
Answer:
BP units = FC / WACM pu
= (1m) / 62 euro = 16,129 clients

See below how to find WACM

WACM = CM of A * % clients + CM of B * % of clients
(80 - 30) * 100% + 20 * 60% =
= 50 + 12 = 62 euro
Product mix is:
16,129 * 100% = 16,129 clients
16,129 * 60% = 9,677 clients that will
use extra facilities

2023_11 _ _MGRL
What would you suggest to the owner? Justify fully ALL_Charitou

67
Case 4.10 on Covid19 and American Medical Centre (AMC)
Covid19 has changed our lives, the owner of the AMC, Dr. Christos Christou, said.
For this reason they are in the process of buying a new sophisticated equipment
that gives results in just 1.5 hrs. This equipment will cost 200,000 euro and will last
for 5 years, so annual cost is 40,000 euro. Additional fixed costs to operate
equipment relate to the expenses of doctors and nurses that will operate
equipment, cost of utilities and space, maintenance etc (20,000 euro), The
variable costs for each Covid19 test are 20 euros (processing costs, direct labor
from chemists, nurses, etc). Estimated charge for each Covid19 test is 80 euro. It
is estimated that the maximum Covid19 tests that will take place in Cyprus are
100,000 (note more tests will take place during the 1st years and fewer later on, but
average was given here) and AMC will have approximately 2% of the market.

2023_11 _ _MGRL ALL_Charitou 68

Case on Covid19 and American Medical Centre (AMC)
a)Find breakeven point. What advice would you give to the
owner?

Break-even point ( in units ) = fixed costs = €40,000+20,000= 1,000 patients

unit contribution margin €80.00 - €20

b) Find BP in euro
BP euro = 1,000 patients * 80 euro = 80,000 euro

2023_11 _ _MGRL ALL_Charitou 69

Case on Covid19 and American Medical Centre (AMC)
c) Dr. Christou informed you that this equipment could be also used for other tests
(eg., flu, aids, etc). On average it will be used for about 40% for Covid19 tests and
for the other tests 60%. Other tests will have a contribution margin of about 30
euro. How many clients should they get on average per year to breakeven?

BP units = FC / WACM pu = (60,000) / 62 euro = 968 patients

WACM = CM of A * % clients + CM of B * % of clients

(80 - 20) * 40% + 30 * 60% =
= 24 + 18 = 42 euro
Product mix is:
968 * 40% = 387 clients
968 * 60% = 581 clients that will use extra facilities
d) How many clients should they get to make a profit of 100,000 euro per year.
BP units = (FC + targeted profit )/ WACM pu =
= (60,000+100,000) / 62 euro = 2,581 patients

e) What advice would you give to the owners?

2023_11 _ _MGRL ALL_Charitou 70
 End

2023_11 _ _MGRL ALL_Charitou 71

 HW

Further Exercises / Problems /

Cases for Practice and HW

2023_11 _ _MGRL ALL_Charitou 72

 Case 4-51
Compute the Break-Even Point for a multiproduct Company [LO9]
Lucky Products markets two computer games: Predator and Runway. A contribution format income
statement for a recent month for the two games appears below:

Predator Runaway Total

Sales $100,000 $50,000 $150,000

Variable expenses 25,000 5,000 30,000

Contribution Margin $75,000 $45,000

Fixed expenses 90,000

Net operating income $30,000

Required:
1. Compute the overall contribution margin (CM) ratio for the company.
2. Compute the overall break-even point for the company sales dollars.
3. Verify the overall break-even point for the company by constructing a
contribution formal income statement showing the appropriate levels of sales
for the two products.
1. The overall contribution margin ratio can be computed as follows:

Overall CM Total contribution

ratio = margin
Total sales

= $120,000 = 80%
$150,000

2. The overall break-even point in sales dollars can be computed as

follows:
Overall
break- Total fixed
even= expenses
Overall CM ratio

= $90,000 = $112,500
80%
2023_11 _ _MGRL ALL_Charitou 75
 Case 4-52
Break-Even and Target Profit analysis [LO4, LO5, LO6]
Raven Products sells camping equipment. One of the company’s products, a camp
lantern, sells for $90 per unit. Variable expenses are $63 per lantern, and fixed
expenses associated with the lantern total $135,000 per month.
Required:
1. Compute the company’s break-even point in number of lanterns and in total
sales dollars.
2. If variable expenses per lantern increase as a percentage of the selling price,
will it result in a higher or lower break-even point? Why? (Assume that the
fixed expenses remain unchanged.)
3. At present, the company is selling 8,000 lanterns per month. The sales
manager is convinced that a 10% reduction in the selling price will result in a
25% increase in the number of lanterns sold each month. Prepare two
contribution format income statements, one under present operating
conditions, and one as operations would appear after the proposed changes.
Show both total and per unit data on your statements.
4. Refer to the data in (3) above. How many lanterns would have to be sold at
the new selling price to yield a minimum net operating income of $72,000 per
month?
1. Profit = Unit CM x Q – Fixed expenses
$0 = ($90 - $63) x Q - $135,000
$0 = ($27) x Q - $135,000
$27Q = $135,000
Q = $135,000 ÷ $27 per lantern
Q = 5,000 lanterns, or at $90 per lantern, $450,000 in sales
Alternative solution:

Unit sales to
break-even= Fixed expenses
Unit contribution
margin

= 5,000
= $135,000 lanterns
$27 per lantern

Or at $90 per lantern, $450,000 in sales

2. An increase in variable expenses as a percentage of the selling price would result in a higher break-even
point. If variable expenses increase as a percentage of sales, then the contribution margin will decrease as a
percentage of sales. With a lower CM ratio, more lanterns would have to be sold to generate enough
contribution margin to cover the fixed costs.
3. Present: Proposed:
8,000 Lanterns 10,000 Lanterns*
Per
Total unit Total Per unit
Sales $720,000 $90 $810,000 $81**
Variable expenses 504,000 63 630,000 63

Contribution Margin 216,000 $27 180,000 $18

Fixed expenses 135,000 135,000

Net operating income $81,000 45,000

*8,000 lanterns x 1.25 = 10,000 lanterns
**$90 per lantern x 0.9 = $81 per lantern
As shown above a 25% increase in volume is not enough to offset a 10%
reduction in the selling price; thus, net operating income decreases.
4. Profit = Unit CM x Q – Fixed expenses
$72,000 = ($81 - $63) x Q - $135,000
$72,000 = ($18) x Q - $135,000
$18Q = $207,000
Q = $207,000 ÷ $18 per lantern
Q = 11,500 lanterns
Alternative solution:

Unit sales to attain

target profit= Target profit + Fixed expenses
Unit contribution margin

= 11,500
= $72,000 + $135,000 lanterns
$18 per lantern
 Case 4-53
Multiproduct Break-Even Analysis
Okabee Enterprises is the distributor for the two products, Model A100 and Model B900.
Monthly sales and contribution margin ratios for the two products follow:

Product

Model A100 Model B900 Total

Sales $700,000 $300,000 $1,000,000

Contribution
margin ratio 60% 70% ?

The company’s fixed expenses total $598,500 per month.

Required:
1. Prepare a contribution format income statement for the company as a whole.
2. Compute the break-even point for the company based on the current sales mix.
3. If sales increase by $50,000 per month, by how much would you expect net operating income to
increase? What are your assumptions?
2023_11 _ _MGRL ALL_Charitou 81
2023_11 _ _MGRL ALL_Charitou 82
 Case 4-54
Missing Data; Basic CVP Concepts
Fill in the missing amounts in each of the eight case situations below. Each
case is independent of the others. (Hint: One way to find the missing amounts
would be to prepare a contribution format income statement for each case,
enter the known data, and then compute the missing items.)
a. Assume that only one product is being sold in each of the four following
case situations:

Contribution Fixed
Variable Margin per expense Net Operating
Case Units Sold Sales expenses Unit s Income (Loss)
1 9,000 $270,000 $162,000 ? $90,000 ?
$170,00
2 ? $350,000 ? $15 0 $40,000
3 20,000 ? $280,000 $6 ? $35,000
4 5,000 $160,000 ? ? $82,000 $(12,000)
 Case 4-54

Assume that more than one product is being sold in each of the four
b.

following case situations:

Average Net
Variable Contribution Margin Fixed Operating
Case Sales expenses (percentage) expenses Income (Loss)
1 $450,000 ? 40% ? $65,000
2 $200,000 $130,000 ? $60,000 ?
3 ? ? 80% $470,000 $90,000
4 $300,000 $90,000 ? ? $(15,000)
2023_11 _ _MGRL ALL_Charitou 85
2023_11 _ _MGRL ALL_Charitou 86
 Case 4-55
Basic CVP Analysis Graphing Shirts Unlimited operates a chain of shirt stores that carry many styles
of shirts that are all sold at the same price. To encourage sales personnel to be aggressive in their
sales efforts, the company pays a substantial sales commission on each shirt sold. Sales personnel
also receive a small base salary.
The following worksheet contains cost and revenue data for Store 36. These data are typical of the
company’s many outlets: Per shirt
Selling price $40.00
Variable expenses:
Invoice cost $18.00
Sales commission 7.00
Total Variable expenses $25.00

Annual
Fixed expenses:
Rent $80,000
Advertising 150,000
Salaries 70,000
Total fixed expenses $300,000
The company has asked you, as a member of its planning group, to assist in some basic analysis of its
stores and company policies
 Case 4-55
Required:
1. Calculate the annual break-even point in dollar sales and in unit sales for Store
36.
2. Prepare a CVP graph showing cost and revenue data for Store 36 from zero
shirts up to 30,000 shirts sold each year. Clearly indicate the break-even point
on the graph.
3. If 19,000 shirts are sold in a year what would be Store 36,s net operating
income or loss?
4. The company is considering paying the store manager of Store 36 an incentive
commission of $3 per shirt (in addition to the salespersons’ commission). If this
change is made, what will be the new break-even point in dollar sales and in
unit sales?
5. Refer to the original data. As an alternative to (4) above, the company is
considering paying the store manager $3 commission on each shirt sold in
excess of the break-even point. If this change is made, what will be the store’s
net operating income or loss if the 23,500 shirts are sold in a year?
6. Refer to the original data. The company is considering eliminating sales
commissions entirely in its stores and increasing fixed salaries by $107,000
annually.
a. If this change is made, what will be the new break-even point in dollar sales
and in unit sales in Store 36?
b. Would you recommend that the change be made? Explain.
2023_11 _ _MGRL ALL_Charitou 89
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2023_11 _ _MGRL ALL_Charitou 91
2023_11 _ _MGRL ALL_Charitou 92
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 Case 4-56
Basics of CVP Analysis Structure
Memofax, inc., produces memory enhancements kits for fax machines. Sales
have been very erratic, with some months showing a profit and some months
showing loss. The company’s contributions format income statement for the
most recent month is given below:

Sales(13,500 units at $20

per unit) $270,000
Variable expenses 189,000
Contribution margin 81,000
Fixed expenses 90,000
Net operating loss $(9,000)
Required:
Case 4-56
1. Compute the company’s CM ratio and its break-even point in both units and dollars.
2. The sales manager feels that an $8,000 increase in the monthly advertising budget,
combined with an intensified effort by the sales staff, will result in a $70,000 increase in
monthly sales. If the sales manager is right, what will be the effect on the company’s
monthly net operating income or loss? (Use the incremental approach in preparing your
answer.)
3. Refer to the original data the president is convinced that a 10% reduction in the selling
price, combined with an increase of $35,000 in the monthly advertising budget, will
double unit sales, What will the new contribution format income statement look like if
these changes are adopted?
4. Refer to the original data. The company’s advertising agency thinks that a new package
would help sales. The new package being proposed would increase packaging costs by
$0.60 per unit. Assuming no other changes, how many units would have to be sold each
month to earn a profit of $4,500?
5. Refer to the original data. By automating, the company could slash its variable expenses
in half. However, fixed costs would increase by $118,000 per month.
a. Compute the new CM ratio and the new break-even point in both units and dollars.
b. Assume that the company expects to sell 20,000 units next month. Prepare two
contribution format income statements, one assuming that operations are not automated and
one assuming that they are.
c. Would you recommend that the company automate its operations? Explain
 Case 4-57
Sales Mix; Break-Even Analysis; Margin of Safety [LO7,LO9]
Puleva Milenario SA, a company located in Toledo, Spain, manufactures and sells two
models of luxuriously finished cutlery—Alvaro and Bazan. Present revenue, cost and unit
sales data for the two products appear below. All currency amounts are stated in terms of
euros, which are indicated by the symbol €.

Alvaro Bazan

Selling price per unit € 4,00 € 6,00

Variable expenses per unit € 2,40 € 1,20

Number of units sold monthly 200 units 80 units

Fixed expenses are €660 per month.
 Case 4-57
Required:
1. Assuming the sales mix above, do the following:
a. Prepare a contribution format income statement showing both euro and
percent columns for each product and for the company as whole.
b. Compute the break-even point in euros for the company as a whole and the
margin of safety in both euros and percent of sales.
2. The company has developed another product, Cano that the company plans to
sell for €8 each. At this price, the company expects to sell 40 units per month of the
product. The variable expense would be €6 per unit. The company’s fixed expense
would not change.
a. Prepare another contribution format income statement, including sales of
Cano (sales of the other two products would not change).
b. Compute the company’s new break-even point in euros for the company as a
whole and the new margin of safety in both euros and percent of sales.
3. The president of the company was puzzled by your analysis. He did not
understand why the break-even point has gone up even though there has been no
increase in fixed expenses and the additions of the new product has increased the
total contribution margin. Explain to the president what has happended.
 Case 4-58
Sales Mix; Multiproduct Break-Even Analysis
Topper Sports, inc., produces high-quality sports equipment. The company’s Racket
Division manufactures there tennis rackets– Standard, the Deluxe, and the Pro– that are
widely used in amateur play. Selected information on the rackets is given below:

Standard Deluxe Pro

Selling price per racket $40.00 $60.00 $90.00
Variable expenses per
racket:
Production $22.00 $27.00 $31.50
Selling (5% pf selling price) $2.00 $3.00 $4.50

All sales are made through the company’s own retail outlets. The Racket Division has the following
fixed costs:
Per Month
Fixed production costs $120,000
Advertising expense 100,000
Administrative salaries 50,000
Total $270,000
 Case 4-58
Sales, in units, over the past two moths have been as follows:

Standrad Deluxe Pro Total

April 2,000 1,000 5,000 8,000
May 8,000 1,000 3,000 12,000
Required:
1. Prepare contribution format income statements for April and May. Use the following headings:

Standard Deluxe Pro Total

Amount Percent Amount Percent Amount Percent Amount Percent
Sales
Etc.
Place the fixed expenses only in the Total column. Do not show percentages for the fixed expenses.
2. Upon seeing the income statement in (1) above, the president stated, “ I can’t believe this! We
sold 50% more rackets in May that in April, yet profits went down. It’s obvious that costs are out of
control in that division” What other explanation can you give for the drop in the net operating
income?
3. Compute the Racket Division’s break-even point in dollar sales in April.
4. Without doing any calculations, explain whether the break-even point would be higher or lower
with May’s sales mix that April’s sales mix.
5. Assume that sales of the Standard racket increase by $20,000. What would be the effect on the
net operating income? What would be the effect if Pro racket sales increased by $20,000? Do no
prepare income statements; use the incremental analysis approach in determining your answer.
 Case 4-59
Break-Even Analysis
Detmer Holdings AG of Zurich, Switzerland, has just introduced a new fashion watch
for which the company is trying to find an optimal selling price. Marketing studies
suggest that the company can increase sales by 5,000 units for each SFr2 per unit
reduction in the selling price. (SFr2 denotes 2 Swiss francs.) The company’s present
selling price is SFr90 per unit, and variable expenses are SFr60 per unit. Fixed
expenses are SFr840,000 per year. The present annual sales volume (at the SFr90
selling price) is 25,000 units.

Required:
1. What is the present yearly net operating income or loss?
2. What is the present break-even point In units and in Swiss franc sales?
3. Assuming that the marketing studies are correct, what is the maximum profit that
the company can earn yearly? At how many units and at what selling price per
unit would the company generate this profit?
4. What would be the break-even point in units and Swiss franc sales using the
selling price you determined in (3) above (i.e., the selling price at the level of
maximum profits)? Why is this break-even point different from the break-even
point you computed in (2) above?
 END

2023_11 _ _MGRL ALL_Charitou 102