Tutorial 10
BUSINESS DECISIONS USING COST BEHAVIOUR:
COST-VOLUME-PROFIT ANALYSIS
Question 1
Fill in the blanks for each of the following independent cases (ignore
income taxes):
Sales
1 $90,000
2 $800,000
3 ?
Variable costs
Contribution
$500,000
?
$600,000
?
$350,000
$340,000
Fixed
costs
$275,000
?
$260,000
Net income
?
$80,000
?
Question 2
Prepare a Contribution Income Statement
Fresh Baked Cookie Company sells cookies in a large shopping mall.
The following multi-step income statement was prepared for the year
ending December 31, 2004.
Fresh Baked Cookie Company
Income Statement
For the Year Ended December 31, 2004
Sales
Cost of Goods Sold
Gross Profit
Operating Expense:
Selling Expense
Administrative Expense
Operating Income
$
36,000
4,000
32,000
18,000
10,000
(28,000)
4,000
Cost of goods sold is a variable cost. Selling expense is 20% variable
and 80% fixed, and administrative expense is 5% variable and 95%
fixed.
Required: Prepare a contribution income statement for the Fresh Baked
Cookie Company.
Tutorial 10
BUSINESS DECISIONS USING COST BEHAVIOUR:
COST-VOLUME-PROFIT ANALYSIS
Question 3
Ray Placid is considering opening the Placid Greeting Card Shop in a
local mall. The store rent will be $550 per month, the cost of the
telephone service will be about $95 per month, and based on the size of
the store, Ray believes that cost of electricity will average about $200
per month. Ray will be able to buy the greeting cards for $0.50 each and
plans to sell them for $2.00 each. Salaries are expected to be $1,200
per month regardless of the number of cards sold. Ray estimates that
other miscellaneous fixed costs will total $150 per month and
miscellaneous variable cost will be $0.10 per card. Ray anticipates that
he will be able to sell about 3,000 greeting cards per month. If Ray
opens the store, his first month of business will be November 2004.
TASK: Prepare a projected contribution approach income statement for
November 2004.
Question 4
Breakeven and Revenue Analysis
The following information is available for Medical Testing Corporation:
Amount charged for each test
performed
Annual fixed cost
Variable cost per test
$
90
200,000
25
TASKS:
a. Calculate how many tests Medical Testing Corporation must perform
each year to breakeven. Ans: 3,077
b. Calculate how many tests Medical Testing Corporation must perform
each year to earn a profit of $25,000. Ans: 3,462
Tutorial 10
BUSINESS DECISIONS USING COST BEHAVIOUR:
COST-VOLUME-PROFIT ANALYSIS
Question 5
Melissa is planning to expand her clothing business by opening another
store. In planning for the new store, Melissa believes that selling prices
and costs of the various products sold will be similar to that of the
existing store. In fact, she thinks that variable and fixed costs for the new
store will be similar to that of the existing store, except that rent for the
new store will be $300 per month more than the rent paid for the existing
store. The following information is available for the existing store for the
year ended 31 December 2004:
Sales
Variable cost
Fixed cost
$
200,000
130,000
48,000
TASKS:
a. Determine the sales required for the new store to breakeven. Ans:
$147,428.57
b. Determine the sales required for the new store to earn profit of
$20,000 per year. (Hint: Keep in mind that the $300 increase in rent is
a monthly amount and the fixed cost of $48,000 is an annual amount)
Ans: $204,571.43
Tutorial 10
BUSINESS DECISIONS USING COST BEHAVIOUR:
COST-VOLUME-PROFIT ANALYSIS
Question 6
The Global United Moving Company specializes in hauling heavy
goods over long-distances. The company`s revenues and expenses
depend on revenue miles, a measure that combines both weight and
mileage. Summarised budget data for next year are based on predicted
total revenue miles of 800,000.
Average selling price
(revenue)
Average variable expenses
Fixed expenses, $120,000
Per Revenue Mile
$1.50
$1.30
TASKS:
1. Compute the budgeted income. Ignore income taxes. Ans: $40,000
2. Management is trying to decide how various possible conditions or
decisions might affect net income. Compute the new net income for
each of the following changes. Consider each case independently.
a. A 10% increase in revenue miles. Ans: $56,000
b. A 10% increase in sales price. Ans: $160,000
c. A 10% increase in variable expenses. Ans: ($64,000)
d. A 10% increase in fixed expenses. Ans: $28,000
e. An average decrease in selling price of 3 cent per mile and a 5%
increase in revenue miles. Refer to original data. Ans: $22,800
f. An average increase in selling price of 5% and a 10% decrease
in revenue miles. Ans: $81,600
g. A 10% increase in fixed expenses in the form of more
advertising and a 5% increase in revenue miles. Ans: $36,000
Tutorial 10
BUSINESS DECISIONS USING COST BEHAVIOUR:
COST-VOLUME-PROFIT ANALYSIS
Question 7
Andre`s Hair Styling in Singapore has five barbers. (Andre is not one of
them). Each barber is paid $9.90 per hour and works a 40-hour week
and a 50-week year, regardless of the number of haircuts. Rent and
other fixed expenses are $1,750 per month. Assume that the only
service performed is the giving of haircuts, the unit price of which is $12.
TASKS:
1. Find the contribution margin per haircut. Assume that the barbers`
compensation is a fixed cost. Ans: $12
2. Determine the annual break-even point, in number of haircuts. Ans:
10,000
3. What will be the operating income if 20,000 haircuts are sold? Ans:
$120,000
4. Suppose Andre revises the compensation method. The barbers will
receive $4 per hour plus $6 for each haircut. What is the new
contribution margin per haircut? What is the annual break-even point
(in number of haircuts)? Ans: 10,167
5. Ignore task 3 and 4 and assume that the barbers cease to be paid by
the hour but receive $7 for each haircut. What is the new contribution
margin per haircut? The annual break-even point (in number of
haircuts)? Ans: 4,200
6. Refer to task 5. What would be the operating income if 20,000
haircuts are sold? Compare your answer with the answer in Task 3
above. Ans: $79,000
7. Refer to task 5. If 20,000 haircuts are sold, at what rate of commission
would Andre earn the same operating income as he earned in task 3.
Ans: $4.95
Tutorial 10
BUSINESS DECISIONS USING COST BEHAVIOUR:
COST-VOLUME-PROFIT ANALYSIS
Question 8
Each problem is unrelated to the others:
1. Given: Selling price per unit $20; total fixed expenses $6,000;
variable expenses per unit $15. Find break-even sales in units. ANS:
1,200 units
2. Given: Sales $40,000; variable expenses $30,000; fixed expenses
$7,500; net income $2,500. Find break-even sales. ANS: $30,000
3. Given: Selling price per unit $40; total fixed expenses $80,000;
variable expenses per unit $30. Assume that variable expenses are
reduced by 20% per unit, and the total fixed expenses are increased
by 10%. Find the sales in units to achieve a profit of $24,000,
assuming no change in selling price. ANS: 7,000 units
Question 9
A contribution income statement for Mount Washington Lodge is
shown below:
Revenue ………………………………………
Less: Variable expenses ……………….
Contribution margin …………………...
Less: Fixed expenses …………………...
Net income …………………………………
$
500,000
300,000
200,000
150,000
50,000
TASKS:
a. Show the hotel`s cost structure by indicating the percentage of the
hotel`s revenue represented by each item on the income
statement.
b. Suppose the hotel`s revenue declines by 25%. Use the
contribution margin percentage to calculate the resulting decrease
in net income. ANS: $50,000
Tutorial 10
BUSINESS DECISIONS USING COST BEHAVIOUR:
COST-VOLUME-PROFIT ANALYSIS
Question 10
Carmen Guerrero opened Corner, a small day care facility, just over two years ago.
After a rocky start, Carmen`s has been thriving. Guerrero is now preparing a budget
for November 19X9.
Monthly fixed costs for Carmen`s are:
Rent
Salaries
Other fixed costs
Total
$
800
1,500
100
2,400
The salary is for Ann Penilla, the only employee who works with Carmen in caring for
the children. Guerrero does not pay herself a salary, but she receives the excess of
revenues over costs each month.
The cost driver for variable costs is “child-days”. One child-day is one day in day
care for one child, and the variable costs is $10 per child-day. The facility is open
6.00AM to 6.00PM weekdays (that is Monday through Friday), and there are 22
weekdays in November 19X9. An average day has 8 children attending Carmen`s
Corner. State law prohibits Carmen`s from having more than 14 children, a limit it
has never reached. Guerrero charges $30 per day per child, regardless of how long
the child is at the facility.
TASKS:
1. Suppose attendance for November 19X9 is equal to the average, resulting in
22x8 = 176 child-days. What amount will Guerrero have left after paying all her
expenses? ANS: $1,120
2. Suppose both costs and attendance are difficult to predict. Compute the amount
Guerrero will have left after paying all her expenses for each of the following
situations. Consider each case independently.
a. Average attendance is 9 children per day instead of 8, generating 198
child-days. ANS: $1,560
b. Variable costs increase to $11 per child-day. ANS: $944
c. Rent is increased by $200 per month. ANS: $920
d. Guerrero spends $300 on advertising (a fixed cost) in November, which
increases average daily attendance to 9.5 children. ANS: $1,480
e. Guerrero begins charging $33 per day on November 1, and average daily
attendance slips to 7 children. ANS: $1,142