M5
Business Decisions Using
Cost Behavior
Discussion Questions
5-1. This question will ask your students to apply the concepts
learned in previous chapters concerning cost behavior. Many
of your students may be overwhelmed by this question if
they have not read ahead. Since the selling price of each
shirt was $12 each, the total sales will be $12 x 5,000 shirts.
Cost of goods sold, a variable cost, is given at $7.20 per
shirt. Students must determine the variable cost per unit for
selling and administrative expenses. Total selling expenses
consist of both fixed ($5,700) and variable ($3,800) portions.
The variable cost per unit of selling expenses is $1.27
($5,700/3,000). Next, variable cost per unit of administrative
expenses must be determined. Variable administrative
expenses are $1,600. The administrative variable cost per
unit is $0.53 ($1,600/3,000).
Variable cost per unit of selling expenses:
Variable selling expense
Cost per unit at 3,000 units sold
3,800
$ 1.27
Variable cost per unit of administrative expenses:
Variable selling expense
1,600
Cost per unit at 3,000 units sold
$ 0.53
The contribution margin income statement will
segregate variable costs from fixed costs. Total variable
costs per unit are $1.27 plus $0.53 plus $7.20, for a total of
$9.00 per unit. The income statement presented below
calculates each of the variable cost separately. Fixed selling
Chapter M5 – Business Decisions Using Cost Behavior
M5-1
costs are $5,700. Fixed administrative costs are $6,300. The
net income is based on sales of 5,000 units.
Sales
(5,000 x $12)
Variable cost:
Cost of goods sold (5,000 x
$36,000
$7.20)
Variable selling expense (5,000 x
6,350
$1.27)
Variable admin. expense (5,000 x
2,650
$0.53)
Contribution margin
Fixed selling expense
5,700
Fixed administrative expense
6,300
Net income
$ 60,000
45,000
$ 15,000
12,000
$ 3,000
The contribution margin per unit is determined by subtracting
the total variable costs of $9.00 from the unit selling price of
$12.00 per unit, for a net of $3.00 per unit.
5-2. This question encourages students to think about the
difference between the functional income statement and the
contribution margin income statement. Gross margin is
determined by subtracting cost of goods sold from sales
revenue. Cost of goods sold includes both a fixed and a
variable portion. Contribution margin is sales revenue minus
total variable costs. Total variable costs consist of three
components: cost of goods sold, variable selling cost, and
administrative variable cost. No fixed costs are deducted to
arrive at contribution margin.
M5-2
Chapter M5 – Business Decisions Using Cost Behavior
5-3. Net income or net loss will be exactly the same regardless of
the format of the statement because both statements use
identical costs. The operating loss computation on both
statements is calculated by subtracting total fixed and total
variable costs to obtain the bottom line. The difference in the
statements is the arrangement of the fixed and variable
costs within each statement.
5-4. This question provides an opportunity for your students to
practice using what they have learned thus far about
contribution margin. Using the formula for contribution
margin ratio, we can plug in the contribution margin ratio and
plug the increase in sales and solve for the increase in profit.
X / $20, 000 = 25%
If sales increases by $20,000, profits will increase by $5,000.
5-5. To prove that 13,000 T-shirts must be sold to earn $27,000
total profit, we can use the income statement format.
Sales revenue (13,000 x $12)
Less variable costs (13,000 x $9)
Less fixed costs
Net income
$156,000
117,000
12,000
$ 27,000
As an alternative, CVP formula 3 may be used as follows:
($12,000 + $27,000) / $3 = 13,000
5-6. As shown in Discussion Question 5-5, a condensed
income statement can be created to prove the profit of
$27,000. As an alternative, CVP formula 4 may be used as
follows:
($12,000 + $27,000) / 25% = x
Selling for x, sales must be $156,000.
Chapter M5 – Business Decisions Using Cost Behavior
M5-3
5-7. This question demonstrates how a CVP graph can be used
as a management tool. Caution your students that graphs
often make data appear more useful, but should not be used
in place of calculations. This is also an opportunity to tie in
the concept of relevant range.
a. Based on Exhibit 5-8, profit is equal to $10,500 when
fixed costs equal $12,000 and sales equal $90,000.
First, the sales level must be identified horizontally on
the graph. At the point where $90,000 crosses the sales
line, a vertical line can be drawn to identify the number
of units that must be sold at this sales level, which is
7,500 shirts.
b. From CVP formula 4, we know that a profit of $27,000
requires $156,000 in sales. Once the sales level is
identified on the sales line, a vertical line can be drawn
to intersect the x-axis at the number of units needed to
produce this amount of sales—13,000 units. This
amount can be verified by dividing the unit price of $13
into total sales of $156,000.
5-8. This question requires students to use analytical skills in
applying sensitivity analysis. Those students who have read
ahead will have an idea of how this question might be
solved. The reduction in price to $11 reduces the
contribution margin from $3 to $2 per unit. Using CVP
Formula 3 we know that:
Required Unit Sales =
13,000
=
Fixed Cost + Target Profit
Contribution Margin per Unit
$12,000 + 
$2.00
Solving for  (target profit), gives us $14,000. The profit will
drop to $14,000 if the sales price is dropped to $11 per unit.
M5-4
Chapter M5 – Business Decisions Using Cost Behavior
5-9. This Discussion Question helps students associate the
contribution margin statement with contribution margin
analysis. The best way to prove the amount of profit is to
create a condensed contribution income statement.
Sales (19,500 x $11)
$214,500
Variable cost (19,500 x $9) 175,500
Contribution margin
39,000
Fixed costs
12,000
Net income
$ 27,000
The computation can also be approved by substituting back
into CVP Formula 4.
5-10. The first step is to calculate a new contribution margin ratio.
If selling price is reduced to $11 per unit and the variable
cost remains at $9 per unit, the new contribution margin per
unit is $2. The new contribution margin ratio is $2/$11 or
18.18%. Next, the new contribution margin ratio is
substituted into CVP formula 4:
($12,000 + $27,000) / .1818 = $214,500 rounded
5-11. A new contribution margin ratio must be calculated when the
selling price changes because the change in selling price
reduces or increases the contribution margin per unit. For
each additional unit sold, a different amount equal to the
change in selling price is available to cover fixed cost and go
towards profit.
5-12. A new contribution margin ratio will be calculated when
either component of contribution margin changes—selling
price or variable cost.
Chapter M5 – Business Decisions Using Cost Behavior
M5-5
5-13. This question asks students to consider alternatives possible
when the number of units cannot be increased. Some
students may wonder why it may be impossible to increase
the number of units sold. Ask them to play the role of a store
manager with 200 cases of Tickle Me Elmo dolls for sale.
These stuffed toys were so popular during 1998 that some
people were willing to pay up to $300 to buy one. How many
of these toys could be sold today, even if the store manager
really wanted to sell all of them? Chances are customers
would only buy one if the selling price were reduced even
further. Unless the merchandiser wants to incur a loss,
sometimes increasing volume is not possible. Some
alternatives that Claudia might consider to retain the desired
profit include reducing the variable cost, reducing the fixed
cost, or reducing the selling price even lower than $11.
5-14. CVP formula 4 can be used to prove that sales must total
$123,750. First, the contribution margin ratio must be
calculated. If the selling price is $11 per unit and the variable
cost is $7.80, the contribution margin per unit is $3.20. The
contribution margin ratio is calculated by dividing the
contribution margin per unit by selling price per unit,
$3.20/$11, for a ratio of 29.1%. Substituting this ratio into
CVP formula 4, we get:
($9,000 + $27,000) / 29.1% = $123,750 (rounded)
5-15. This question can be used to complete your discussion of
changes in variable and fixed costs as they are affected by
changes in selling price and volume. Answer this question by
creating a contribution margin income statement as follows:
Sales (13,000 x $11)
Variable cost (13,000 x $7.80)
Contribution margin
Fixed costs
Net income
M5-6
$ 143,000
101,400
41,600
9,000
$ 32,600
Chapter M5 – Business Decisions Using Cost Behavior
Profits will increase to $32,600 if 13,000 shirts are sold
during 2010.
5-16. This question encourages your students to think about
factors that may make CVP analysis unreliable. Some
factors are:






Some cost may be considered mixed that can be
separated into fixed and variable components.
The volume of activity may go outside the relevant
range.
Fixed cost may predictably vary within the relevant
range.
Some customers may be offered volume discounts while
others are not.
Some merchandise is marked down for sale.
The average contribution margin ratio varies throughout
the relevant range
5-17. The contribution margin income statement that follows
proves that sales must equal $602,703 in order to obtain a
net income of $80,000.
Sales
Variable cost
Contribution margin
Fixed costs
Net income
$602,703
379,703
223,000
143,000
$ 80,000
Review the Facts
A.
A contribution income statement classifies costs by their
behavior  fixed, variable, or mixed. A functional income
statement classifies costs by their function  product or
period.
Chapter M5 – Business Decisions Using Cost Behavior
M5-7
B.
C.
The contribution margin is the difference between sales
and total variable costs.
The contribution margin is the difference between
operating revenues and variable costs which measures the
amount of revenues remaining after variable costs to
contribute towards fixed costs and profits. The contribution
margin is effective in helping to determine an entity’s breakeven point or desired profit.
D.
The total contribution margin is the difference between
total sales and total variable costs. The contribution
margin per unit is the difference between the sales price
per unit and the unit variable costs.
E.
The contribution margin ratio is the contribution margin
expressed as a percentage of sales as opposed to a dollar
amount for the contribution margin.
F.
Cost-volume-profit analysis is the analysis of the
relationships between cost and volume, and the effect on
profit of those relationships. For planning and analysis, it
helps managers find the break-even point, determine the
dollar volume or sales volume required for a desired profit
level, and create data for operating budgets.
G.
The break-even point is the volume of sales dollars or units
required for an entity to achieve breakeven, or the point at
which the company achieves neither a net income or loss.
H.
The break-even point in units divides fixed costs by the
unit contribution margin, whereas the break-even point in
sales dollars divides fixed costs by the contribution margin
ratio.
I.
To calculate the required sales in units to attain a target
profit, add the target profit to the fixed costs and divide by
the unit contribution margin.
M5-8
Chapter M5 – Business Decisions Using Cost Behavior
J.
To calculate the required sales in dollars to attain a target
profit, add the target profit to the fixed costs and divide by
the contribution margin ratio.
K.
Sensitivity analysis is a technique used to determine the
effect of changes on the CVP relationship. Sensitivity
analysis attempts to answer “what if” questions. An example
is the analysis of what would happen to profit if a manager
were to raise or lower the selling price of product, or obtain
quantity discounts on purchases.
L.
The average contribution margin ratio for a company with
multiple products is the total contribution margin divided by
total sales.
M.
The two CVP formulas used to compute target profits for a
multiproduct company use the contribution margin ratio.
N.
CVP formulas that require per unit information are useless in
a multiproduct situation because there is a separate
contribution margin for each product.
Chapter M5 – Business Decisions Using Cost Behavior
M5-9
Apply What You Have Learned
5-18.
Fresh Baked Cookie Company
Contribution Income Statement
For the Year Ended December 31, 2007
Sales
Variable Cost:
Cost of Goods Sold
Variable Selling Expense
Variable Administrative Expense
Total Variable Cost
Contribution Margin
Fixed Cost:
Fixed Selling Expense
Fixed Administrative Expense
Total Fixed Cost
Operating Income
$36,000
$ 4,000
3,600
500
8,100
$27,900
$14,400
9,500
23,900
$ 4,000
5-19.
Stieferman's Bait Shop
Contribution Income Statement
For the Year Ended December 31, 2007
Sales
Variable Cost:
Cost of Goods Sold
Variable Selling Expense
Variable Administrative Expense
Total Variable Cost
Contribution Margin
Fixed Cost:
Fixed Selling Expense
Fixed Administrative Expense
Total Fixed Cost
Operating Income
M5-10
$98,000
$22,000
8,100
3,600
33,700
$64,300
$18,900
32,400
51,300
$13,000
Chapter M5 – Business Decisions Using Cost Behavior
5-20.
Quality Fishing Gear Company
Contribution Income Statement
For the Year Ended December 31, 2007
Sales
Variable Cost:
Cost of Goods Sold
Variable Selling Expense
Variable Administrative Expense
Total Variable Cost
Contribution Margin
Fixed Cost:
Fixed Selling Expense
Fixed Administrative Expense
Total Fixed Cost
Operating Income
Chapter M5 – Business Decisions Using Cost Behavior
$540,000
$360,000
57,200
18,000
435,200
$104,800
$ 30,800
54,000
84,800
$ 20,000
M5-11
5-21.
a.
Shannon Davis
Projected Contribution Income Statement
For the Month of November, 2007
Sales (3000 x $2)
$6,000
Variable Cost:
Cost of Goods Sold (3000 x $.50)
$1,500
Miscellaneous Variable Cost (3000 x $.10)
300
Total Variable Cost
1,800
Contribution Margin
$4,200
Fixed Cost:
Salaries
$1,200
Rent
550
Electricity
200
Telephone
95
Miscellaneous Fixed Cost
150
Total Fixed Cost
2,195
Operating Income
$2,005
b.
Contribution margin per unit = $4,200 / 3,000 = $1.40
Break-even point = $2,195 / $1.40 = 1,568 units
11 hours per day for 24 days = 264 hours
1,568 cards / 264 hours = 6 cards per hour
c.
Contribution Margin Ratio = $4,200 / $6,000 = 70%
Break-even Point in Sales =
d.
FC = $2,195
CMR
.70
= $3,136
Target Profit = FC + DP = $2,195 + $40,000 = $60,279
CMR
.70
312 days per year x 11 hours = 3,432 hours per year
$60,279 / $2 = 30,140 card sales required per year
30,140 / 3,432 = 8.78 cards per hour
This is a feasible number of card sales per hour.
M5-12
Chapter M5 – Business Decisions Using Cost Behavior
5-22.
a.
Jon's Pretzel Stand
Contribution Income Statement
For the Year Ended December 31, 2007
Sales (8,000 x $2)
Variable Cost:
Cost of Goods Sold (8,000 x $.25)
Wages (8000 x $.20)
Total Variable Cost
Contribution Margin
Fixed Cost:
Rent
Total Fixed Cost
Operating Income
$16,000
$ 2,000
1,600
3,600
$12,400
$12,000
12,000
$ 400
b.
If Jon were to invest his rent money each year in a certificate
of deposit and could make five percent interest, he would
earn $720 per year. The $720 represents his opportunity
cost. If Jon were to work the stand himself, he would
increase his profits to $2,000.
c.
John could increase his profits by:
 increasing his selling price, limited to the amount the
market will bear.
 adding additional products such as cheese dip or drinks.
 reduce the costs of the product, rent, or labor.
Chapter M5 – Business Decisions Using Cost Behavior
M5-13
5-23.
Janet's Snow Cone Stand
Contribution Income Statement
For the Year Ended December 31, 2007
Sales (6,000 x $2.00)
Variable Cost:
Cost of Goods Sold (6,000 x $.30)
Wages (6,000 x $.40)
Total Variable Cost
Contribution Margin
Fixed Cost:
Rent
Total Fixed Cost
Operating Income
$12,000
$1,800
2,400
4,200
$ 7,800
$2,400
2,400
$ 5,400
b.
Janet could invest her fixed cost of $2,400 per year in a
certificate of deposit earning 5% and make $120 per year.
In this case, she makes much more than her opportunity
costs at the snow cone stand.
c.
Janet might increase her profits by:
 increasing her sales price to what the market will bear.
 adding additional products to sell such as candy, ice
cream, or drinks.
 doing the work herself instead of hiring others to increase
her profits to $7,800.
M5-14
Chapter M5 – Business Decisions Using Cost Behavior
5-24.
The Bevens Company
Contribution Income Statement
For the Year Ended December 31, 2008
Sales
Variable Cost
Contribution Margin
Fixed Cost
Operating Income
$800,000
528,000
$272,000
181,000
$ 91,000
5-25.
The Bevens Company
Income Statement
For the Year Ended December 31, 2008
Sales
Cost of Goods Sold
Gross Profit
Operating Expenses:
Selling Expenses
Administrative Expenses
Operating Income
$800,000
420,000
$380,000
$203,000
86,000 289,000
$ 91,000
5-26.
The Heidi Company
Contribution Income Statement
For the Year Ended December 31, 2008
Sales
Variable Cost
Contribution Margin
Fixed Cost
Operating Income
Chapter M5 – Business Decisions Using Cost Behavior
$4,800,000
3,069,000
$1,731,000
1,621,000
$ 110,000
M5-15
5-27.
The Heidi Company
Income Statement
For the Year Ended December 31, 2008
Sales
Cost of Goods Sold
Gross Profit
Operating Expenses:
Selling Expenses
Administrative Expenses
Operating Income
$4,800,000
2,320,000
$2,480,000
$ 913,000
1,457,000
2,370,000
$ 110,000
5-28.
Carl's Athletic Shop
Contribution Income Statement
For the Year Ended December 31, 2008
Sales
Variable Cost
Contribution Margin
Fixed Cost
Operating Income
$422,000
282,000
$140,000
109,000
$ 31,000
5-29.
Carl's Athletic Shop
Income Statement
For the Year Ended December 31, 2008
Sales
Cost of Goods Sold
Gross Profit
Operating Expenses:
Selling Expenses
Administrative Expenses
Operating Income
M5-16
$422,000
205,000
$217,000
$130,000
56,000 186,000
$ 31,000
Chapter M5 – Business Decisions Using Cost Behavior
5-30.
Paradise Manufacturing
Contribution Income Statement
For the Year Ended December 31, 2007
Sales
Variable Cost:
Direct Material
Direct Labor
Variable Manufacturing Overhead
Variable Selling Cost
Variable Administrative Cost
Total Variable Cost
Contribution Margin
Fixed Cost:
Fixed Manufacturing Overhead
Fixed Selling Cost
Fixed Administrative Cost
Total Fixed Cost
Operating Income
Chapter M5 – Business Decisions Using Cost Behavior
$2,780,000
$680,000
420,000
130,000
240,000
198,000
1,668,000
$1,112,000
$900,000
60,000
22,000
982,000
$ 130,000
M5-17
5-31.
Nicole’s Toy Manufacturing Company
Contribution Income Statement
For the Year Ended December 31, 2007
Sales
$3,164,000
Variable Cost:
Direct Material
$440,000
Direct Labor
90,000
Variable Manufacturing Overhead
70,000
Variable Selling Cost
522,500
Variable Administrative Cost
85,500
Total Variable Cost
1,208,000
Contribution Margin
$1,956,000
Fixed Cost:
Fixed Manufacturing Overhead
$800,000
Fixed Selling Cost
427,500
Fixed Administrative Cost
484,500
Total Fixed Cost
1,712,000
Operating Income
$ 244,000
M5-18
Chapter M5 – Business Decisions Using Cost Behavior
5-32.
Rick’s Watch Company
Contribution Income Statement
For the Year Ended December 31, 2007
Sales
Variable Cost:
Direct Material
Direct Labor
Variable Manufacturing Overhead
Variable Selling Cost
Variable Administrative Cost
Total Variable Cost
Contribution Margin
Fixed Cost:
Fixed Manufacturing Overhead
Fixed Selling Cost
Fixed Administrative Cost
Total Fixed Cost
Operating Income
Chapter M5 – Business Decisions Using Cost Behavior
$2,745,000
$534,000
129,000
397,000
131,320
53,460
1,244,780
$1,500,220
$998,000
64,680
189,540
1,252,220
$ 248,000
M5-19
5-33.
Alumacraft Manufacturing
Contribution Income Statement
For the Year Ended December 31, 2008
Sales
Variable Cost:
Direct Material
Direct Labor
Variable Manufacturing Overhead
Variable Selling Cost
Variable Administrative Cost
Total Variable Cost
Contribution Margin
Fixed Cost:
Fixed Manufacturing Overhead
Fixed Selling Cost
Fixed Administrative Cost
Total Fixed Cost
Operating Income
M5-20
$7,900,000
$2,600,000
1,820,000
540,000
323,000
218,500
5,501,500
$2,398,500
$1,900,000
57,000
11,500
1,968,500
$ 430,000
Chapter M5 – Business Decisions Using Cost Behavior
5-34.
a.
Total Fixed Cost_____ = Breakeven Point in Units
Contribution Margin per Unit
$200,000 = $200,000 = 3,077 units
$90 – $25
$65
b.
Total Fixed Cost + Target Profit = Required Unit Sales
Contribution Margin per Unit
$200,000 + $25,000 = $225,000 = 3,462 units
$65
$65
c.
3,462 / 2080 hours in a year = 1.67 per hour
d.
4 tests per hour x 2,000 hours x $65 CM = $520,000
minus fixed costs of
200,000
Potential profit $320,000
e.
Most students will come to the following potential customers:
 insurance companies
 doctors and clinics
 sports teams and schools
 employers
When they think about it, these organizations are the
sources of the business. To promote the business, the
owner must make contacts with these organizations to
attract the business.
Chapter M5 – Business Decisions Using Cost Behavior
M5-21
5-35.
a.
Total Fixed Cost __ = Breakeven Point in Units
Contribution Margin per Unit
$385,000 = $385,000 = 500,000 units
$.99 – $.22
$.77
b.
Total Fixed Cost + Target Profit = Required Unit Sales
Contribution Margin per Unit
$385,000 + $35,000 = $420,000 = 545,455 units
$.99 – $.22
$.77
5-36.
a.
Total Fixed Cost___ = Breakeven Point in Units
Contribution Margin per Unit
$3,000 = 1,000 units
$5 – $2
b.
Total Fixed Cost + Target Profit = Required Unit Sales
Contribution Margin per Unit
$3,000 + $5,000 = 2,667 units
$5 – $2
M5-22
Chapter M5 – Business Decisions Using Cost Behavior
5-37.
a.
Total Fixed Cost_____ = Breakeven Point in Units
Contribution Margin per Unit
$4,558___ = $4,558 = 5,300 units
$3.97 – $3.11
$.86
b.
Total Fixed Cost + Target Profit = Required Unit Sales
Contribution Margin per Unit
$4,558 + $2,580
$3.97 – $3.11
= $7,138 = 8,300 units
$.86
5-38.
a. Contribution Margin = Contribution Margin Ratio
Sales
$200,000 – $130,000 = .35
$200,000
___Total Fixed Cost __ = Breakeven Sales in Dollars
Contribution Margin Ratio
$48,000 + (12x300) = $51,600 = $147,429
.35
.35
b.
Total Fixed Cost + Target Profit = Required Sales
Contribution Margin Ratio
$51,600 + $20,000 = $204,571
.35
Chapter M5 – Business Decisions Using Cost Behavior
M5-23
5-39.
a. Contribution Margin = Contribution Margin Ratio
Sales
$1,250,000 – $600,000 = .52
$1,250,000
___Total Fixed Cost __ = Breakeven Sales in Dollars
Contribution Margin Ratio
$420,000 + $75,000 = $495,000 = $951,923
.52
.52
b.
Total Fixed Cost + Target Profit = Required Sales
Contribution Margin Ratio
$495,000 + $120,000 = $1,182,692
.52
5-40.
a. Contribution Margin = Contribution Margin Ratio
Sales
$3,650,000 – $1,387,000 = .62
$3,650,000
___Total Fixed Cost __ = Breakeven Sales in Dollars
Contribution Margin Ratio
$225,000 = $362,903
.62
b.
Total Fixed Cost + Target Profit = Required Sales
Contribution Margin Ratio
$225,000 + $125,000 = $564,516
.62
M5-24
Chapter M5 – Business Decisions Using Cost Behavior
5-41.
a. Fixed Costs: Rent $125
b.
Variable Costs: Cost of Goods Sold ($3/12)
$.25 per unit
c.
Unit Selling Price – Unit Cost = Unit Contribution Margin
$0.75 – $0.25 = $0.50 per unit
d.
(1)
____Total Fixed Cost_____= Breakeven Point in Units
Contribution Margin per Unit
$125 = 250 units
$0.50
e.
(2)
Sales ($0.75 x 250)
Variable Cost ($0.25 x 250)
Contribution Margin
Fixed Cost
Operating Income
$187.50
_62.50
$125.00
125.00
$
0
(1)
Total Fixed Cost + Target Profit = Required Unit Sales
Contribution Margin per Unit
$125 + $50 = 350 units
$0.50
(2)
Sales ($0.75 x 350)
Variable Cost ($0.25 x 350)
Contribution Margin
Fixed Cost
Operating Income
Chapter M5 – Business Decisions Using Cost Behavior
$262.50
_87.50
$175.00
125.00
$ 50.00
M5-25
5-42.
a. Fixed Costs: Rent $90.00
b. Variable Costs: Cost of Goods Sold ($1.00/8) $.125 per unit
c. Unit Selling Price – Unit Cost = Unit Contribution Margin
$0.35 – $0.125 = $0.225 per unit
d.
(1)
_____Total Fixed Cost_____= Breakeven Point in Units
Contribution Margin per Unit
$90_ = 400 units
$0.225
e.
(2)
Sales ($0.35 x 400)
Variable Cost ($0.125 x 400)
Contribution Margin
Fixed Cost
Operating Income
$140.00
_50.00
$ 90.00
90.00
$
0
(1)
Total Fixed Cost + Target Profit = Required Unit Sales
Contribution Margin per Unit
$90 + $180 = 1,200 units
$0.225
(2)
M5-26
Sales ($0.35 x 1,200)
Variable Cost ($0.125 x 1,200)
Contribution Margin
Fixed Cost
Operating Income
$420.00
150.00
$270.00
90.00
$180.00
Chapter M5 – Business Decisions Using Cost Behavior
5-43.
a. Fixed Costs: Rent $48.88
b. Variable Costs: Cost of Goods Sold
$.40 per unit
c. Unit Selling Price – Unit Cost = Unit Contribution Margin
$3.00 – $0.40 = $2.60 per unit
d.
(1)
_____Total Fixed Cost____ = Breakeven Point in Units
Contribution Margin per Unit
$48.88_ = 18.8 units => 19 units
$ 2.60
e.
(2)
Sales ($3.00 x 19)
Variable Cost ($0.40 x 19)
Contribution Margin
Fixed Cost
Operating Income
$57.00
_7.60
$49.40
48.88
$ .62
(1)
Total Fixed Cost + Target Profit = Required Unit Sales
Contribution Margin per Unit
$48.88 + $200 = 95.7 units => 96 units
$2.60
(2)
Sales ($3.00 x 96)
Variable Cost ($0.12 x 80)
Contribution Margin
Fixed Cost
Operating Income
Chapter M5 – Business Decisions Using Cost Behavior
$288.00
38.40
$249.60
48.88
$200.72
M5-27
5-44.
a. Cost per year = Total Cost / Life = $200 / 4 = $50
b. Fixed Cost = $50 + $300 = $350
c. Variable Cost per Unit = $0.15 + $0.20 = $0.35
d.
(1)
___Total Fixed Cost___ = Breakeven Point in Units
Unit Contribution Margin
_ $350 __ = 212 units
$2.00 – $0.35
(2)
Unit Contribution Margin = Contribution Margin Ratio
Unit Selling Price
$2.00 – $0.35 = .825
$2.00
____Total Fixed Cost __ = Breakeven = $350 = $424
Contribution Margin Ratio
Sales
.825
OR
Unit Selling Price x Breakeven Units = Breakeven Sales
$2.00 x
212
= $424
e.
Total Fixed Cost + Target Profit = Required Unit Sales
Contribution Margin per Unit
$350 + $800 = 697 units
$1.65
f.
Total Fixed Cost + Target Profit = Required Sales
Contribution Margin Ratio
$350 + $800 = $1,394
.825
OR
Unit Selling Price x Required Units = Breakeven Sales
$2.00 x
697
= $1,394
M5-28
Chapter M5 – Business Decisions Using Cost Behavior
5-45.
a. Cost per year = Total Cost / Life = $250 / 4 = $62.50
b. Fixed Cost = $62.50 + $500 = $562.50
c. Variable Cost per Unit = $0.75 + $0.50 = $1.25
d.
(1)
___Total Fixed Cost___ = Breakeven Point in Units
Unit Contribution Margin
_ $562.50___ = 322 units
$3.00 – $1.25
(2)
Unit Contribution Margin = Contribution Margin Ratio
Unit Selling Price
$3.00 – $1.25 = .5833
$3.00
____Total Fixed Cost_ = Breakeven = $562.50 = $965
Contribution Margin Ratio
Sales
.5833
OR
Unit Selling Price x Breakeven Units = Breakeven Sales
$3.00 x
322
= $966
e.
Total Fixed Cost + Target Profit = Required Unit Sales
Contribution Margin per Unit
$562.50 + $2,000 = $2,562.50 = 1,465 units
$3.00 – $1.25
$1.75
f.
Total Fixed Cost + Target Profit = Required Sales
Contribution Margin Ratio
$2,562.50 = $4,393
.5833
OR
Unit Selling Price x Required Units = Breakeven Sales
$3.00 x
1,465
= $4,395
Chapter M5 – Business Decisions Using Cost Behavior
M5-29
5-46.
a. Cost per year = Total Cost / Life = $800 / 4 = $200
b. Fixed Cost = $200 + $600 = $800
c. Variable Cost per Unit = $0.65 + $0.25 = $0.90
d.
(1)
___Total Fixed Cost___ = Breakeven Point in Units
Unit Contribution Margin
_ $800__ _ = 1,334 units
$1.50 – $0.90
(2)
Unit Contribution Margin = Contribution Margin Ratio
Unit Selling Price
$1.50 – $0.90 = .40
$1.50
____Total Fixed Cost___ = Breakeven = $800 = $2,000
Contribution Margin Ratio
Sales
.40
OR
Unit Selling Price x Breakeven Units = Breakeven Sales
$1.50 x
1,334
= $2,001
e.
Total Fixed Cost + Target Profit = Required Unit Sales
Contribution Margin per Unit
$800 + $3,000 = $3,800 = 6,334 units
$1.50 – $0.90 $0.60
f.
Total Fixed Cost + Target Profit = Required Sales
Contribution Margin Ratio
$800 + $3,000 = $9,500
.4
OR
Unit Selling Price x Required Units = Breakeven Sales
$1.50 x
6,334
= $9,501
M5-30
Chapter M5 – Business Decisions Using Cost Behavior
5-46. (Continued)
g. Contribution Margin – Fixed Cost = Profit
(.4 x 8,000) – $800
= $2,400
5-47.
a. (1)
Contribution Margin = Contribution Margin Ratio
Sales
1.00 –0.40 –0.05 = 0.55
1.00
____Total Fixed Cost____ = Breakeven Sales
Contribution Margin Ratio
$2,800 + $1,200 = $7,273
.55
(2)
Total Fixed Cost + Target Profit = Required Sales
Contribution Margin Ratio
$4,000 + $2,000 = $10,909
.55
(3)
____Total Fixed Cost____ = Breakeven Sales
Contribution Margin Ratio
$2,600 + $1,200 = $6,909
.55
b.
(1)
Contribution Margin = Contribution Margin Ratio
Sales
1.00 – 0.40 + (.10 x.40) –.05 = .59
1.00
(2)
___Total Fixed Cost___= Breakeven = $4,000 = $6,780
Contribution Margin Ratio
Sales
.59
Chapter M5 – Business Decisions Using Cost Behavior
M5-31
5-48.
a. (1)
Contribution Margin = Contribution Margin Ratio
Sales
1.00 –.30 –.10 = .60
1.00
____Total Fixed Cost____ = Breakeven Sales
Contribution Margin Ratio
$3,286 + $4,200 = $7,486 = $12,477
.6
.6
(2)
Total Fixed Cost + Target Profit = Required Sales
Contribution Margin Ratio
$7,486 + $1,500 = $14,977
.6
(3)
____Total Fixed Cost____ = Breakeven Sales
Contribution Margin Ratio
$2,986 + $4,200 = $7,186 = $11,977
.6
.6
b.
(1)
Contribution Margin = Contribution Margin Ratio
Sales
1.00 –.30 + (.05 x.30) –.10 = .615
1.00
(2)
____Total Fixed Cost____ = Breakeven Sales
Contribution Margin Ratio
$7,486 = $12,172
.615
M5-32
Chapter M5 – Business Decisions Using Cost Behavior
5-49.
a. No variable cost
b.
c.
Fixed cost per month:
Purchase payments
Store rent
Other
Total
$2,900
2,000
1,200
$6,100
Unit Selling Price – Unit Variable Cost = Unit Contribution
Margin
$2.00 – $0 = $2.00
___Total Fixed Cost___ = Breakeven Point in Units
Unit Contribution Margin
$6,100 = 3,050 units
$2.00
d.
Total Fixed Cost + Target Profit = Required Unit Sales
Contribution Margin per Unit
$6,100 + $1,000 = 3,550 units
$2.00
Chapter M5 – Business Decisions Using Cost Behavior
M5-33
5-50.
a. Annual rent = $1,800 x 12 = $21,600
b.
Annual sales salaries = $1,200 x 12 = $14,400
c.
Unit Contribution Margin = Contribution Margin Ratio
Unit Selling Price
$1.00 – $0.55 = .45
$1.00
d.
___Total Fixed Cost___ = Breakeven Point in Units
Unit Contribution Margin
$21,600 + $14,400 = $36,000 = $80,000
.45
.45
e.
Total Fixed Cost + Target Profit = Required Sales
Contribution Margin Ratio
$36,000 + $12,000 = $106,667
.45
M5-34
Chapter M5 – Business Decisions Using Cost Behavior
5-51.
a. Annual rent = $600 x 12 = $7,200
b.
Annual sales salaries = $1,100 x 12 = $13,200
c.
Unit Contribution Margin = Contribution Margin Ratio
Unit Selling Price
$1.00 – $0.45 = .55
$1.00
d.
___Total Fixed Cost___ = Breakeven Point in Units
Unit Contribution Margin
$7,200 + $13,200 = $20,400 = $37,091
.55
.55
e.
Total Fixed Cost + Target Profit = Required Sales
Contribution Margin Ratio
$20,400 + $18,000 = $69,818
.55
Chapter M5 – Business Decisions Using Cost Behavior
M5-35
5-52.
a. Annual rent = $3,400 x 12 = $40,800
b.
Annual sales salaries = $2,800 x 12 = $33,600
c.
Unit Contribution Margin = Contribution Margin Ratio
Unit Selling Price
$1.00 – $0.68= .32
$1.00
d.
___Total Fixed Cost___ = Breakeven Point in Units
Unit Contribution Margin
$40,800 + $33,600 = $74,400 = $232,500
.32
.32
e.
Total Fixed Cost + Target Profit = Required Sales
Contribution Margin Ratio
$74,400 + $36,000 = $69,818
.32
M5-36
Chapter M5 – Business Decisions Using Cost Behavior
5-53.
a. Annual rent = $1,400 x 12 = $16,800
b.
Annual sales salaries = $1,700 x 12 = $20,400
c.
Unit Contribution Margin = Contribution Margin Ratio
Unit Selling Price
$1.00 – $0.52= .48
$1.00
d.
___Total Fixed Cost___ = Breakeven Point in Units
Unit Contribution Margin
$16,800 + $20,400 = $37,200 = $77,500
.48
.48
e.
Total Fixed Cost + Target Profit = Required Sales
Contribution Margin Ratio
$37,200 + $36,000 = $152,500
.48
5-54.
Students’ responses will vary but the reports might include the
following considerations:
The sales price increase of $19 per unit will result in an
increase of $19 in the unit contribution margin. Operating income
will also increase by $19 per unit or $11,400 total (600 x $19).
Therefore, the total operating income for the sale of 600 units
would be $19,140 (last year's profit of $7,740 + the increase of
$11,400). The resulting contribution margin income statement is
as follows:
Chapter M5 – Business Decisions Using Cost Behavior
M5-37
5-54. (Continued)
Sales
Variable Costs
Contribution Margin
Fixed Cost
Operating Income
_Total_
$88,800 (a)
19,660 (b)
$69,140 (c)
50,000
$19,140 (d)
Per Unit
$148.00
32.77
$115.23
(a) 600 x $148
(b) $88,800 – $69,140
(c) $19,140 + $50,000
(d) (600 x $19) + $7,740
The total fixed cost and unit variable cost are assumed to be
unaffected by the price increase. Managers are also assuming
that a price increase of $19 per unit (about 15%) will have no
affect on the unit sales volume. This assumption may be risky
because the customers may be unwilling to pay the increased
price and may seek competitors’ products.
After the price increase:
Breakeven sales in units = $50,000 / $115.23 = 434 units
Required unit sales
for last year's
= ($50,000 + $7,740) / $115.23 = 501
profit
If, after the price increase, sales fall below 501 units, the
company will earn less than they did before the increase. If sales
fall below 434 units, the company will incur a loss. The logical
recommendation would be to make the price increase only if the
risk of sales falling below 501 is considered an acceptable risk by
the company’s management.
M5-38
Chapter M5 – Business Decisions Using Cost Behavior
5-55.
Students’ responses will vary but the reports might include
the following considerations:
The sales price increase of $18 per unit will result in an
increase of $18 in the unit contribution margin. Operating income
will also increase by $18 per unit or $18,000 total (1,000 x $18).
Therefore, the total operating income for sale of 1,000 units would
be $26,000 (last year's profit of $8,000 + the increase of $18,000).
The resulting contribution margin income statement is as follows:
_Total_
Per Unit
Sales
$106,000 (1)
$106
Variable Costs
40,000 (2)
40_
Contribution Margin
$ 66,000 (3)
$ 66
Fixed Cost
40,000
Operating Income
$ 26,000 (4)
(1) 1,000 x $106
(2) $106,000 – $66,000
(3) $40,000 + $26,000
(4) (1,000 x $18) + $8,000
The total fixed cost and unit variable cost are assumed to be
unaffected by the price increase. Managers are also assuming
that a price increase of $18 per unit (about 20%) will have no
affect on the unit sales volume. This assumption may be risky
because the customers may be unwilling to pay the higher cost
and may seek competitors’ products.
After the price increase:
Breakeven sales in units = $40,000 / $66 = 606 units
Required unit sales
for last year's profit = ($40,000 + $8,000) / $66 = 727 units
Chapter M5 – Business Decisions Using Cost Behavior
M5-39
5-55. (Continued)
If, after the price increase, sales fall below 727 units, the
company will earn less than they did before the increase. If sales
fall below 606 units, the company will incur a loss. The logical
recommendation would be to make the price increase only if the
risk of sales falling below 727 is considered an acceptable risk by
the company’s management.
5-56. Students can provide any reasonable amounts in response
to the questions below. The amounts provided in the solution
below are examples only.
a.
b.
M5-40
(1)
Contact the owner of the parking to inquire about rental
costs.
(2)
Example: $100 per month
(3)
Example: $7.00 per hour
(4)
Example: 8 hours per day (11:00 a.m. to 7:00 p.m.)
(5)
8 hours x 26 days x $7 = $1,456
(6)
Example: $2.00
(1)
The variable cost per hot dog will include the cost of
ingredients and variable costs of preparation.
Example: $0.50 per hot dog
(2)
Monthly fixed cost = rent ($100) + wages ($1,456) +
license cost ($42) = $1,598
(3)
Unit sales price
Unit variable cost
Unit contribution margin
$2.00
.50
$1.50
Chapter M5 – Business Decisions Using Cost Behavior
5-56. (Continued)
(4) Contribution margin ratio = $1.50 / $2.00 = 75%
(5)
Variable cost ratio = $0.50 / $2.00 = 25%
(6)
a.
Breakeven units = $1,598 / $1.50 = 1,066
b.
Sales (1,066 x $2.00)
Variable cost (1,066 x $.50)
Contribution margin
Fixed cost
Operating income
a.
Units for target profit = ($1,598 + $300) / $1.50 =
1,266 hot dogs
b.
Sales (1,266 x $2.00)
Variable cost (1,266 x $.50)
Contribution margin
Fixed cost
Operating income
(7)
Chapter M5 – Business Decisions Using Cost Behavior
$2,132
533
$1,599
1,598
$
1
$2,532
633
$1,899
1,598
$ 301
M5-41