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- Chapter 03
Fundamentals of Cost·Volume·Profit Analysis

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UVThe president of AMG Enterprises is considering expanding sales by producing three different
versions of their product. Each will be targeted by the marketing department to different income levels and
hence will be produced from three d' 01 qualities of materials. After reviewing the sales forecasts, the
sales department feels tha for every item of A sold, 4 of Mcan be sold and 8 of G can be sold.
The following information has been assembled by the sales department and the production department.

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A M G

Sales price (per unit) $15 .00 $10.00 $5.00

f500 141.50
.00 Lt,ro f 2.00
IvIaterial cost

Direct labor 9 2.00 7 1. 25

Variable overhead
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The fixed costs associated with the manufacture of these three products are $75,000 per ye
Required: ~
Determine the number o~f each product that would be sold at the~ak-ev~oint. ~..s
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Chapter 03
Fundamentals of Cost-Volume-Profit Analysis

87. The president of AMG Enterprises is considering expanding sales by producing three
different versions of their product. Each will be targeted by the marketing department to
different income levels and hence will be produced from three different qualities of
materials. After reviewing the sales forecasts, the sales department feels that for every
itern of A sold, 4 of Mcan be sold and 8 of G can be sold.
The following information has been assembled by the sales department and the
production department.

A M G
Sales price (per unit) $15.00 $10.00 $5 .00
tvIaterial cost 5.00 4.00 2.00
Direct labor 2.00 1.50 1.25
Variable overhead 2.00 1.50 1.25

The fixed costs associated with the manufacture of these three products are $75,000 per
year.
Required:
Determine the number of units of each product that would be sold at the break-even
point.

Weighted average eM = [(15 - 9)(1) + (10 - 7)(4) + (5 - 4.50)(8)]/(1 + 4 + 8) = $1.69231

BE = $75,00011.69231 = 44,319 total units
A = 44,319 x (1/13) = 3,410
M = 44,319 x (4/13) = 13,637 .
G = 44,319 x (8/13) = 27,274

AACSB: Analytic
AICPA: FN-Decision Making
Bloom's: Application
Difficulty: Medium
Learning Objective: 4
Topic Area: Multiproduct CVP Analysis

3- 1
2­
88. Stanley Clipper, now retired, owns the Campus Barber Shop. He employs five (5) barbers and pays
each a base rate of $500 per month. One of the barbers serves as the manager and receives an extra
$300 per month. In addition to the base rate, each barber also receives a commission of $3 per haircut. A
barber can do as many as 20 haircuts a day, but the average is 14 haircuts per day. The Campus Barber
Shop is open 24 days a month. You can safely ignore income taxes.
Other costs are incurred as follows:

Advertising $200 per month

Rent $400 per month

Barber Supplies $.90 per haircut

Utilities $175 per month plus $.35 per haircut

Magazines $ 25 per month

Cleaning Supplies $.15 per haircut

Stanley currently charges $8 per haircut.

Required:
(a) Com8ut~ the break-even point in@ number of haircu~~1 sales dollars)and percenta~ §
of capacity.
'it In March, 1,400 haircuts were given. Compute the operating profits for the month.
)

(c) Stanley wants a $2,160 operating profit in April. Compute the number of haircuts that must be given in
order to achieve this goal.
(d) If 1,500 haircuts are given in April, compute the selling price that would have to be charged in order to
have $2,160 in operating profits.
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88. Stanley Clipper, now retired, owns the Campus Barber Shop. He employs five (5)
barbers and pays each a base rate of $500 per month. One of the barbers serves as the
manager and receives an extra $300 per month. In addition to the base rate, each barber
also receives a commission of $3 per haircut. A barber can do as many as 20 haircuts a
day, but the average is 14 haircuts per day. The Campus Barber Shop is open 24 days a
month. You can safely ignore income taxes.
Other costs are incurred as follows:

Advertising $200 per month

Rent $400 per month
Barber Supplies $.90 per haircut
Utilities $175 per month plus $.35 per haircut
Magazines $ 25 per month
Cleaning Supplies $.15 per haircut

Stanley currently charges $8 per haircut.

Required:
(a) Compute the break-even point in (1) number of haircuts, (2) total sales dollars, and
(3) as a percentage of capacity.
(b) In March, 1,400 haircuts were given. Compute the operating profits for the month.
(c) Stanley wants a $2,160 operating profit in April. Compute the number of haircuts that
must be given in order to achieve this goal.
(d) If 1,500 haircuts are given in April, compute the selling price that would have to be
charged in order to have $2,160 in operating profits.

Fixed costs =5($500) + $300 + $200 + $400 + $175 + $25 =$3,600

Variable costs = $3.00 + $0.90 + $0.35 + $0.15 = $4.40 per haircut
(a) (1) $3,600/($8 - 4.40) = 1,000 haircuts
(2) 1,000 x $8.00 = $8,000
@) 1,000/(5 x~x 24) =~ L/-I," 1t1J.o
(b) [($8.00 - 4.40)' x 1,400] -: $-3,600 = $1,440
(c) ($3,600 + $2,160)/($8.00 - 4.40) = 1,600 haircuts
(d) [($SP - 4.40) x 1,500] - 3,600 = 2,160; SP = $8.24 per haircut.

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@l'uma, Inc. is considering the introduction of a new music player with the following price and cost
characteristics:

Sales price $ 125 each

Variable costs 75 each
Fixed costs 180,000 per year

Projected sales are 7,500 units per year.

Required (consider each question independent of each other):
(a) What will the operating profit be?
(b) What is the impact on operating profit if the selling price per unit decreases by 15%?
(c) What is the net incorne if variable costs per unit increase by 15% and Zurna has a 38% tax rate?
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93. Zuma, Inc. is considering the introduction of a new music player with the following
price and cost characteristics:

Sales price $ 125 each

Variable costs 75 each
Fixed costs 180,000 per year

Projected sales are 7,500 units per year.

Required (consider each question independent of each other):

(a) What will the operating profit be?

(b) What is the impact on operating profit if the selling price per unit decreases by 15%?
(c) What is the net income if variable costs per unit increase by 15% and Zuma has a
38% tax rate?

(a) [($125 - 75)7,500] -180,000 =$195,000

(b) [($106.25 - 75)7,500] - 180,000 =$54,375,a decrease of 72%
(c) {[($125 - 86.25)7,500] -180,000]}(1 - .38) =$68,587.50

AACSB: Analytic
AICPA: FN-Decision Making
Bloom's: Analysis
Difficulty: Medium
Learning Objective: 1
Learning Objective: 2
Topic Area: Cost-Volume-Profit Analysis

3-4
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~u have been provided with the following information regarding the York Manufacturing Company:
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Sales price S '5D

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Variable manufacturing cost per unit
Fixed manufacturing costs per unit
Variable marketing cost per unit
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This information is based on forecasted sales of 30,000 units. (tJ-)
Required:
(a) What are the expected operating profits for the upcoming year?

(b) What is the break-even point in units?

'(c) If $160,000 of operating profits is desired, how many units must be sold?

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96. You have been provided with the following information regarding the York
Manufacturing Company:

Sales price $ 50

Variable manufacturing cost per unit 24

Fixed manufacturing costs per unit 12

Variable marketing cost per unit 6

Fixed administrative costs per unit "

.)

This information is based on forecasted sales of 30,000 units.

Required:
(a) What are the expected operating profits for the upcoming year?
(b) What is the break-even point in units?
(c) If $160,000 of operating profits is desired, how many units must be sold?

(a) [($50 - 24 - 6) x 30,000] - ((12 + 3) x 30,000) = $150,000

(b) $450,000/$20 = 22,500 units
(c) ($450,000 + 160,000)/20 = 30,500 units

AACSB: Analytic
AICPA: FN-Decision Making
Bloom's: Application
Difficulty: Hard
Learning Objective: 1
Learning Objective: 2
Topic Area: Cost-Volume-Profit Analysis

3-5
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 W
~dOCk sells three products. Last month's results are as follows:
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Revenues $150,000 $225,000 $225,000 ,"00, dUV

Variable costs 60,000

90to t.nro -210,000
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Total fixed costs are $100,000 marketing and $125,000 administrative.
120,000
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Required:
(a) What was the contribution margin ratio?
(b) What sales volume does Craddock need to achieve a $100,000 monthly profit?
(c) What will profits be if Craddock increases sales by 20%?

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99. Craddock sells three products. Last month's results are as follows:

PI P2 P3
Revenues $150,000 $225,000 $225,000
Variable costs 60,000 210,000 120,000

Total fixed costs are $100,000 marketing and $125,000 administrative.

Required:
(a) What was the contribution margin ratio?
(b) What sales volume does Craddock need to achieve a $100,000 monthly profit?
(c) What will profits be if Craddock increases sales by 20%?

(a) ($600,000 - 390,000)/600,000 = 35%

(b) ($225,000 + 100,000)/35% = $928,571
(c) ($600,000 - 390,000) x 1.2 =$252,000 - 225,000 =$27,000

AACSB: Analytic
AICPA: FN-Decision Making
Bloom's: Analysis
Difficulty: Hard
Learning Objective: 1
Learning Objective: 4
Topic Area: Multiproduct CVP Analysis

3-6
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100. The Scottso Corporation has budgeted fixed costs of $225,000 and an estimated selling price of $24

per unit. Thevariable cost ratio is 40% and the company plans to sell 48,000 units in 2010.

Required:

(a) Compute the break-even point in units.

(b) Compute the margin of safety (in units) for 2010.

(c) Compute the expected operating profit for 2010.

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100. The Scottso Corporation has budgeted fixed costs of $225,000 and an estimated

selling price of $24 per unit. The variable cost ratio is 40% and the company plans to sell

48,000 units in 2010.

Required:

(a) Compute the break-even point in units.

(b) Compute the margin of safety (in units) for 2010.

(c) Compute the expected operating profit for 2010.

(a) BE =$225,000/($24 - 040 x $24) =15,625 units

(b) Margin of safety =48,000 - 15,625 =32,375 units
(c) 48,000 x ($24 x .6) - $225,000 =$466,200

AACSB: Analytic
AICPA: FN-Decision Making
Bloom's: Application
Difficulty: Medium
Learning Objective: 1
Topic Area: Cost-Volume-Profit Analysis

3-7
1'--'
102. The sales manager of Acme Enterprises is considering expanding sales by producing three different
versions of their product. Each will be targeted by the marketing department to different income levels and
will be produced from three different qualities of materials. After reviewing the sales forecasts, the sales
department feels that 40% of units sold will be the original product, 35% will be new model #1 and the
remainder will be new model #2.
The following information has been assembled by the sales department and the production department.
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Original Model # 1 Model #2

Sales price (per unit) $100.00 $70.00 $50.00

Material cost l 45.00 \ 30.00 1 20.00

Direct labor 20.00 15 .00 10.00
Variable overhead 15.00 1l.25 7.50
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The fixed costs associated with the manufacture of these three products are $175,000 per year.
Required:
Determine the number of units of each product that would be sold at the break-even point.
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102. The sales rnanager of Acme Enterprises is considering expanding sales by

producing three different versions of their product. Each will be targeted by the marketing
department to different income levels and will be produced from three different qualities
of materials. After reviewing the sales forecasts, the sales department feels that 40% of
units sold will be the original product, 35% will be new model #1 and the remainder will
be new model #2.
The following information has been assembled by the sales department and the
production department.

Original l'vfodel # 1 Model #2

Sales price (per unit) $100.00 $70.00 $50 .00
Material cost 45.00 30.00 20.00
Direct labor 20.00 15.00 10.00
Variable overhead 15.00 11.25 7.50

The fixed costs associated with the manufacture of these three products are $175,000
per year.
Required:
Determine the number of units of each product that would be sold at the break-even
point.

Weighted average eM =(100 - 80)(.4) + (70 - 56.25)(.35) + (50 - 37.50)(.25) =$15.9375

BE = $175,000/15.9375 = 10,980 total units
Original = 10,980 x 40% = 4,392 units
Model #1 = 10,980 x 35% =3,843 units
Model #2 = 10,980 x 25% = 2,745 units

AACSB: Analytic
AICPA: FN-Decision Making
Bloom's: Application
Difficulty: Medium
Learning Objective: 4
Topic Area: Multiproduct CVP Analysis

3-8
It{
105. The Spice House packages horseradish and mustards in a factory that can operate one, two or three
shifts. The product sells for $10 a case and has variable costs of $4 per case. Fixed costs are related to
the number of shifts that are operated, with the estimated costs as follows:

Dailv volume Fixed Costs

1 shift 0 - 2,000 $3,000
2 shifts 2,001 - 4,000 $5 ,700
3 shifts 4,001 - 6,000 $8,200

Required:
(a) Determine the break-even point(s).
(b) If Spice House can sell all it can produce, how many shifts should be operated?

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105. The Spice House packages horseradish and mustards in a factory that can operate
one, two or three shifts. The product sells for $10 a case and has variable costs of $4 per
case. Fixed costs are related to the number of shifts that are operated, with the estimated
costs as follows:

Daily volume Fixed Costs

1 shift 0-2,000 $3,000
2 shifts 2,001 - 4,000 $5 ,700
:1 shifts 4,001 - 6,000 $8,200

Required:
(a) Determine the break-even point(s).
(b) If Spice House can sell all it can produce, how many shifts should be operated?

1shift = $3,000/(10 - 4) = 500 cases: break-even

2 shifts = $5,700/6 = 950 cases: break-even
3 shifts = $8,200/6 = 1,367 cases: break-even
Spice House will break-even at any shift level
(b) 1shift: 2,000 x 6 - 3,000 = $9,000
2 shift: 4,000 x 6 - 5,700 = $18,300
3 shift: 6,000 x 6 - 8,200 = $27,800
Spice House will maximize profits by operating 3 shifts

AACSB: Analytic
AICPA: FN-Decision Making
Bloom's: Synthesis
Difficulty: Hard
Learning Objective: 4
Topic Area: Alternative Cost Structures

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