Transparency Master 19(4)-1
MIXED COSTS
April................................
May .................................
June ...............................
July.................................
August ...........................
September .....................
Machine
Hours
15,000
17,000
18,000
14,000
20,000
19,000
Power
Costs
$1,950
$2,080
$2,150
$1,900
$2,200
$2,170
Transparency Master 19(4)-2
COST-VOLUME-PROFIT
(CVP) ANALYSIS
Abner Corporation makes a product that sells for $200
per unit. The variable costs to make this product are
$120 per unit. Fixed costs total $500,000 for a year.
Abner currently sells 7,500 units each year.
1. Calculate the number of units that Abner must
sell to break even.
2. Calculate the number of units that Abner must
sell to make $200,000 in profit.
3. Abner can purchase equipment that will automate its production facility. This equipment will
raise Abner's fixed costs to $600,000 per year.
Automation will cause the product's variable
costs to drop to $100 per unit. How many units
will Abner need to sell to make a $200,000 profit
if the factory is automated?
4. Abner estimates that $40,000 of radio advertising
could increase the company's sales by 10%.
Should the company purchase the radio ads?
(Use the original cost data to answer this question; do not include any changes due to factory
automation.)
Transparency Master 19(4)-3
COST-VOLUME-PROFIT
(CVP) ANALYSIS
Solution
Abner Corporation makes a product that sells for $200 per unit. The variable costs to
make this product are $120 per unit. Fixed costs total $500,000 for a year. Abner currently sells 7,500 units each year.
1. Break-even point in units:
$500,000
$80
=
6,250 units
2. Target profit of $200,000:
$500,000 + $200,000
$80
=
8,750 units
$600,000 + $200,000
$100
=
8,000 units
=
$60,000
40,000
$20,000
3. Target profit of $200,000
after automation of factory:
4. Increase in contribution
margin from radio ads:
750 units  $80
Cost of ads:
Increase in profits from ads:
Transparency Master 19(4)-4
WRITING EXERCISE
Would an increase in variable costs per unit
cause a company’s break-even point to increase or decrease? Why?
Would an increase in per-unit selling price
cause a company’s break-even point to increase or decrease? Why?
Transparency Master 19(4)-5
MARGIN OF SAFETY
RGF Manufacturing makes a product that currently
sells for $20 each. The variable costs to make this
product are $12 per unit. Fixed costs total $800,000
per year.
1. How many units must be sold to break even?
2. What will be the company's sales revenue at the
break-even point?
3. Assume that the company's current sales are
$2.6 million (130,000 units) per year. Calculate
the company's margin of safety:
a. in dollars
b. in units
c. as a percentage
4. Assume that one of RGF's major competitors has
a margin of safety of 35%. Which company is
more recession proof: RGF or its competitor?
Transparency Master 19(4)-6
MARGIN OF SAFETY
Solution
RGF Manufacturing makes a product that currently sells for
$20 each. The variable costs to make this product are $12 per
unit. Fixed costs total $800,000 per year.
$800,000
1. Break-even point in units:
= 100,000 units
$8
2. Break-even point in dollars:
100,000 units  $20 = $2,000,000
3. Margin of safety
a. in dollars: $2,600,000 – $2,000,000 = $600,000
b. in units: 130,000 – 100,000 = 30,000 units
($2,600,000 – $2,000,000)
c. as a percentage:
= 23%
$2,600,000
4
RGF's sales may drop 23% before incurring an operating loss. The competitor's sales may drop 35% before
incurring an operating loss. Therefore, the competitor
is more recession proof.
Transparency Master 19(4)-7
INCOME STATEMENT FOR A
MANUFACTURER
Laurens Incorporated began operations this year. The
company manufactured 22,000 units of its product
and sold 20,000 units. Each unit is sold for $100. The
costs to produce these units were as follows:
Manufacturing costs:
Variable ......... $1,100,000 ($50 per unit)
Fixed ..............
330,000 ($15 allocated per unit)
Selling and administrative
expenses:
Variable .........
40,000 ($2 per unit sold)
Fixed ..............
250,000
Prepare an income statement for Laurens Incorporated's first year of operations.
Transparency Master 19(4)-8
INCOME STATEMENT FOR
A MANUFACTURER
Solution
Absorption Costing
Sales .......................................................
Cost of goods sold ($65  20,000) .......
$2,000,000
1,300,000
Gross profit ............................................
Selling and administrative expenses ..
$ 700,000
290,000
Income from operations .......................
$ 410,000
Variable Costing
Sales .......................................................
Variable cost of goods sold
($50  20,000) .....................................
$2,000,000
Manufacturing margin...........................
Variable selling and administrative
expenses ($2  20,000)......................
$1,000,000
Contribution margin ..............................
Fixed costs:
Fixed manufacturing costs............... $330,000
Fixed selling and administrative
expenses ........................................ 250,000
$ 960,000
Income from operations .......................
$ 380,000
1,000,000
40,000
580,000
Transparency Master 19(4)-9
VARIABLE COSTING
Units Sold
20,000
30,000
Sales ........................................................................
Variable cost of goods sold ($50/unit) ..................
Manufacturing margin ............................................
Variable selling and administrative expenses
($2/unit) ..............................................................
Contribution margin ...............................................
Fixed costs:
Fixed manufacturing costs .............................
Fixed selling and administrative expenses ....
Income from operations.........................................
$2,000,000
1,000,000
$1,000,000
$3,000,000
1,500,000
$1,500,000
40,000
$ 960,000
60,000
$1,440,000
$ 330,000
250,000
$ 380,000
330,000
250,000
$ 860,000