Comprehensive Cost-Volume-Profit Problem - Unit Basis
ACCT 2102 - Handout 3-1
The Robinson Lawn Chair Company produces and sells a single high-priced
lawn chair and in fiscal 1999 the company produced and sold 30,000
units. The 1999 income statement of the company reported the following:
Robinson Lawn Chair Company
Income Statement
For Fiscal Year 1999
Total $'s
Sales
Variable Costs
Contribution Margin
Fixed Costs
Income Before Taxes
Tax Expense
Income After Taxes
$1,800,000
$1,350,000
450,000
$240,000
210,000
63,000
147,000
Note: total sales and production:
30,000 units
Determine the following items:
1. Calculate the per unit figures for each item from the information
provided above. Determine which of these figures is needed for
performing C-V-P analysis. (Note, for example, that fixed costs per
unit are of no use in determining breakeven points since it is total
fixed costs that are needed for calculations.)
2. Compute the breakeven point in units for fiscal 1999.
3. Determine the company's margin of safety in units for fiscal 1999.
4. Determine the company's degree of operating leverage at the
current level of operations. If the company's sales in units were to
increase 30%, how much would profits before taxes increase in
percentage
percentageterms?
terms?
5. Compute the sales level required in units to achieve a level of profits
before taxes of $270,000.
6. Based on the original data above, determine the sales level required
if the company desires a profit after taxes of $210,000. It is believed
that the tax rate will remain at current levels.
7. Assume the company is expecting to experience a shortage of its
main raw material. This situation is expected to result in an increase
in the company's manufacturing costs of $3 per unit. Under this
circumstance, and assuming that the company does not believe that
it can increase its selling price, determine the company's breakeven
point and new safety margin.
8. Management has decided to raise the price of its product to $65 per
unit. It also will spend an additional $102,000 per year foradvertising.
Although it has never paid commissions before, the company has
decided to begin paying sales personnel $1 per unit for every unit
sold. Determine the new breakeven point. Also determine the
safety margin of the company under this plan if sales only reach
27,000 units. Note: in calculating your solution, ignore question #7
and solve this question starting with the original data above.
Comprehensive Cost-Volume-Profit Problem - Unit Basis
Handout 3-1 Solution
Question #1:
Sales
Variable Costs
Contribution Margin
Fixed Costs
Income Before Taxes
Tax Expense
Income After Taxes
Total $'s
$1,800,000
1,350,000
450,000
$240,000
210,000
63,000
147,000
Per Unit
Figures**
$60.00
45.00
15.00
8.00
7.00
2.10
4.90
**All per unit figures based on 30,000 units
Relevant figures for breakeven analysis: CM per unit & Total Fixed costs.
- the CM per unit = $15 & the Total Fixed Costs = $240,000
Question #2:
Breakeven Point = $240,000/$15 per unit = 16,000 units
Question #3:
Safety Margin = 30,000 units - 16,000 units = 14,000 units
Question #4:
Degree of
Operating Leverage = Total Contribution Margin/Total Income Before Taxes
= $450,000/$210,000
= 2.14
Percentage increase in Profits = 30% x 2.14 = 64.2%
(with 30% increase in sales)
Question #5:
Sales Level Required = ($240,000 + $270,000)/$15 per unit = 34,000 units
Question #6:
Tax Rate = $63,000/$210,000 = .30 or 30%.
Retention Rate = (1-Tax Rate) = (1-.30) = .70 or 70%
Income Before Taxes = Targeted Income After Tax/Retention Rate
Required
= ($210,000)/.70 = $300,000
Sales Level Required = ($240,000 + $300,000)/$15 per unit = 36,000 units
Question #7:
New Breakeven Point = $240,000/($15-3) per unit = 20,000 units
Safety Margin = 30,000 units - 20,000 units = 10,000 units
Question #8:
New Breakeven Point = ($240,000+ $102,000)/($65-45-1) per unit
= 18,000 units
Safety Margin = 27,000 units - 18,000 units = 9,000 units