Topic 4: Cost-Volume-Profit Analysis / Break-even Point Analysis

Problem I.
The Garry Corporation's most recent contribution format income statement is shown below:
Total Per unit
Sales (15,000 units) $225,000 $15
Variable expenses 135,000 9
Contribution margin 90,000 $6
Fixed expenses 35,000
Net operating income $ 55,000

Required: Prepare a new contribution format income statement under each of the following conditions
(consider each case independently):
a. The sales volume increases by 10% and the price decreases by $0.50 per unit.
b. The selling price decreases $1.00 per unit, fixed expenses increase by $15,000, and the sales
volume decreases by 5%.
c. The selling price increases by 25%, variable expense increases by $0.75 per unit, and the sales
volume decreases by 15%.
d. The selling price increases by $1.50 per unit, variable cost increases by $1.00 per unit, fixed
expenses decrease by $15,000, and sales volume decreases by 12%.

Problem II.
Spencer Company's most recent monthly contribution format income statement is given below:
Sales $60,000
Variable expenses 45,000
Contribution margin 15,000
Fixed expenses 18,000
Net operating loss ($3,000)
The company sells its only product for $10 per unit. There were no beginning or ending inventories.

Required:
a. What are total sales in dollars at the break-even point?
b. What are total variable expenses at the break-even point?
c. What is the company's contribution margin ratio?
d. If unit sales were increased by 10% and fixed expenses were reduced by $2,000, what would be
the company's expected net operating income? (Prepare a new income statement.)

Problem III.
Merlin Enterprises manufactures a cellular telephone. The company's partial contribution format income
statement for the most recent year is below.
Total Per Unit Ratio
Sales $300,000 $60
Variable expenses 55%
Contribution margin
Fixed expenses 108,000
Net operating income

Required:
a. Complete the contribution income statement above.
b. Determine the breakeven sales and units using either the equation or the contribution approach.
c. Determine the sales necessary to earn a profit of $54,000.
d. Determine the margin of safety percentage for the year above.

Problem IV.
Rachal Corporation produces and sells a single product whose selling price is $150.00 per unit and
whose variable expense is $57.00 per unit. The company's monthly fixed expense is $381,300.

Required:
a. Assume the company's monthly target profit is $9,300. Determine the unit sales to attain that
target profit. Show your work!
b. Assume the company's monthly target profit is $18,600. Determine the dollar sales to attain that
target profit. Show your work!

Problem V.
Mcquage Corporation has provided its contribution format income statement for July.
Sales $558,000
Variable expenses 306,900
Contribution margin 251,100
Fixed expenses 209,800
 Net operating income $ 41,300

Required:
a. Compute the degree of operating leverage to two decimal places.
b. Using the degree of operating leverage, estimate the percentage change in net operating income
that should result from a 19% increase in sales.

Problem VI.
Brancati Inc. produces and sells two products. Data concerning those products for the most recent month
appear below:
Product W07C Product B29Z
Sales $25,000 $27,000
Variable expenses $7,000 $8,600
Fixed expenses for the entire company were $32,860.

Required:
a. Determine the overall break-even point for the company. Show your work!
b. If the sales mix shifts toward Product W07C with no change in total sales, what will happen to the
break-even point for the company? Explain.

Problem VII.
Veren Inc. produces and sells two products. During the most recent month, Product F73A's sales were
$27,000 and its variable expenses were $9,450. Product L75P's sales were $14,000 and its variable
expenses were $5,310. The company's fixed expenses were $21,060.

Required:
a. Determine the overall break-even point for the company. Show your work!
b. If the sales mix shifts toward Product F73A with no change in total sales, what will happen to the
break-even point for the company? Explain.

Problem VIII.
Acme Company's product sells for $80 and has a variable cost per unit of $60. Fixed costs are $400,000.
a. Compute the break-even point in dollars.
b. Compute the number of units must Acme sell to earn a $100,000 profit.
c. Acme has a target profit of $152,000 and expects to sell 30,000 units. Compute the selling price
Acme must charge to earn the target profit.
d. Acme wants to keep its selling price at $80 per unit and earn a 10% return on sales. Calculate
the number of units Acme must sell to meet the target.

Problem IX.
Craik Company sells a product for $25, variable costs are 12 per unit, and fixed costs are $180,000.
a. What is Craik's break-even point?
b. Find the selling price that Craik must charge to earn a $40,000 profit selling 16,000 units.
c. Craik is considering new equipment that would increase fixed costs by $20,000 while reducing
unit variable costs by $2.00 per unit. Find the sales level where Craik is indifferent between the
two cost structures.

Problem X.
Eleva Company has sales of $350,000, variable costs of $200,000, and fixed costs of $125,000. Eleva
has an effective tax rate of 40%.
a. Compute the break-even point.
b. Compute Eleva's sales needed to earn a $75,000 after-tax profit.
c. Compute the sales Eleva would need to earn a 15% after-tax return on sales.

Problem XI.
The Young Manufacturing Company produces the following three products:
Hammers Screwdrivers Saws
Selling price per unit $40 $16 $50
Variable costs per unit 28 12 30
Contribution per unit $12 $ 4 $20
Fixed costs are $76,000 per year.
Fifty percent of all sales in units are hammers, 30 percent are screwdrivers, and 20 percent are saws.

Required: Calculate the following values: