Chapter Greak-Even Point and CostValume-Profi Analysis $25 — $12 = $13 per unit $13 + $25 = 52 percent BED = FC + CM = $589,550 + $13 ~ 45,350 plant stands BEP = FC + CM% = $589,550 + 0.52 = $1,133,750 in sales ‘MS,, = Current unit sales — BEP unit sales = 120,000 — 45,350 = 74,650 plant stands MSS= Current sales in dollars — BEP sales in dollars = $3,000,000 ~ $1,133,750 = $1,866,250 MS% = MS in units + Current unit sales = 74,650 + 120,000 = 62 percent (rounded) DOL = Current CM + Current Pre-Tax Income = $1,560,000 + $970,450 = 1.61 (rounded) Increase in Income = DOL X % Increase in Sales = 1.61 % 0,25 = 40.25 percent Proof New sales = 120,000 x 1.25 = 150,000 New CM = 150,000 $13.00 = $1,950,000 ‘New pre-tax profit = New CM ~ FC'= $1,950,000 — $589,550 = $1,360,450 Increase = New pre-tax profit ~ Old pre-tax profit = $1,360,450 ~ $970,450 — 390,000 Increase in % tezms = $390,000 + $970,450 = 40.19 percent (rounded) S13X = $589,550 + $996,450 X =$1,586,000 + $13 X = 122,000 plant stands PBI = PAT = (1 — Tax rate) = $657,800 ~ (1 ~ 0.20) = $657,800 + 0.80 = $822,250 $13X = $589,580 + $822,250 X= $1,411,800 + $13 X = 108,600 plant stands increase in FC + CM 7,865 ~ $13 305 units over BEP Now BEP = 45,350 + 605 = 45,955 plant stands New CM for each acditional unit = $20.00 ~ $12.60 = $7.40 Total new CM = $7.40 x 4,000 = $29,600 Increase in pre-tax profit = Increase in CM ~ Inerease in FC = $29,600 ~ $18,000 = $11,600 Yes, the company should aecept the offer. POTENTIAL ETHICAL ISSUES Ignoring the relevant range when setting assumptions about cost behavior to disregard the implications of cost changes on the calculation of BEP or CVP analysis Treating some or all fixed costs as per-unit costs (ic., using absorption costing) in calculating BEP or performing CVP ana Using untested or inaccurate assumptions about the relationship between variables such as advertising and sales volume or sales price and sales volume to assure a particu- lar decision outcome Assuming a constant sales mix ratio while ignoring expected changes in demand for individual products when conducting CVP analysis for multiproduct firms Using CVP analyses to support long-term cost management strategies Visually distorting BED graphs to project improper conclusions Including irrelevant information in incremental analysis to manipulate calculation results376 Chapter 9 Break-Even Point nd Cost.Volume-Proft Analysis QUESTIONS ‘What information provided by a variable costing income statement is used in comput ing the break-even point? Is this information on an absorption costing income state ment? Exphin your answer How is “break-even point” defined? What are the differences among the formula, ‘graph, and income statement approaches for computing breakeven? What is the contribution margin ratio? How is it used to calculate the break-even point? Why is CVP analysis generally used as a short-run tool? Would CVP ever be appropri- ate as a long-run model? How is the “bag” assumption used in CVD analysis for a multiproduet fem? What additional assumption must be made in multiproduct CVP analysis that does not per tain toa single-product CVP situation? A tnultiproduct company has a sales mix of nine widgees to three squigees. Widgees hhave a contribution margin ratio of 45 percent, and squigees have a contribution margin ratio of 80 percent. Ifthe sales mix changes 10 six widgees to six squigees, will the com- pany have a higher or lower weighted average contribution margin ratio and a higher or lower break-even point (in sales dollars)? Explain the rationale for your answer. Define and explain the relationship between margin of safety and degree of operating leverage. EXERCISES 8. EXCEL L0.1 (Variable costing income statement) Sports Drinks, Inc. began business in 2013 selling bottles of a thirst-quenching drink. Production for the first year was 104,000 bottles, and sales were 98,000 bottles. The selling price per bottle was $3.10. Costs incurred during the year were as follows: Ingredients used $ 56,000 Direct labor 26,000 Variable overhead 48,000 Fixed overhead 5,200 Variable soling expenses 10,000 Fixed selling and adminictrative expenses 28,000 Total actual cost $173,200 For 2013: a, What was the production cost per bottle under variable costing? bb. What was variable cost of goods sold? . What was tie contribution margin per bottle? 4. What was the contribution margin ratio? LO.1 (Variable costing income statement) Top Disc manufactures frsbees. The following information is available for 2013, the company’s frst year in business when it produced 325,000 units. Revenue of $450,000 was generated by the sale of 180,000 frisbees Variable Cost 1d Cost Production Direct material $150,000 Direct labor 100,000 Overhead 75,000 $112,500 Selling and administrative 90,000 100,000 a. What is the variable production cost per unit? , What is the total contribution margin per unit? cc. Prepare a variable costing income statement.CChepter9 Break-Even Point and CostVolume-Prit Analysis 377 10, LO.2 (Cost and revenue behavior) The following financial data have been deter ‘mined from analyzing the records of Joe’s Ceramics (a one-product firm): Contribution margin per unit Variable cost per unit Annual fixed cost $25, $21 $90,000 How does each of the following measures change when product volume goes up by ‘one unit at Joe's Ceramics? a, Total revenue b, Total cost «. Income before tax LO.2 (Break-even point) Llano Lamps has the following revenue and cost functions: Cost = $90,000 + $40 por unit a, What is the break-even point in units? b, Whats the break-even point in dollars? 12) LO.2 (Bre Operating information is as follows: k-even point) Diamond Jim's makes and sells class rings for local schools. Selling priee per ting $600 Variable cost per ring Rings and stones $220 Salos commissions 48 Overhead 2 Annual fixed costs Seling $180,000 Administrative 105,000 Manufacturing 60,000 a, What is Diamond Jim’s break-even point in rings? bb. What is Diamond Jim’s break-even point in sales dollars? ‘c. What would Diamond Jim’s break-even point be if'sales commissions increased to $542 d. What would Diamond Jim’s break-even point be if selling expenses decreased by $6,000 13, LO.2 (Formula; graph; income statement) Pittsburg Tar Co. had the following, income statement for 2013: Sales (30,000 gallons x $8) $240,000 Variable cost Production (40,000 gallons x $3) $120,000 Selling (80,000 gallons x $0.50) 15,000 (135,000) Contribution margin § 105,000, Fixed cost Production $ 46,000 Solin and administrative 6,200 62,200) Income before tax § 52,800 Income tax (40%) 21,120) Net income $31,680 4, Compute the break-even point using the equation approach, b. Prepare a CVP graph to reflect the relationships among cost, revenue, profit, and volume. «, Prepare a profit-volume graph 4, Prepate a short explanation for company management about each of the graphs. €. Prepare an income statement at break-even point using variable costing (D103 (CVP) Salina Sports Wear has designed a new athletic suit. ‘The company plans to produce and sell 30,000 units of the new product in the coming year. Anndal Bxed EXCEL