======================
Demonstration Problem CVP 1
The Power Tool Division of ABC Hardware sells one product, Jig Saw, and has the following
data for the second quarter:
Units of output
Price per unit
Variable cost per unit
Total fixed costs
1,200 units
$150
90
48,000
Required: Determine
1. Quarterly operating profit when 1,200 units are sold.
2. Break-even volume in units and sales dollars.
3. Contribution margin ratio.
4. Sales dollars and units needed to generate an operating profit of $57,000.
5. Number of units sold that would produce an operating profit of 15% of sales dollars.
======================
Demonstration Problem CVP 2
(Continued from Demonstration Problem CVP 1)
The Power Tool Division of ABC Hardware now faces a tax rate of 30 percent.
Required:
Determine the number of Jig Saws required to generate the after-tax operating profit of
$16,800.
Solution:
After-tax profit = [(P – V)X – F] × (1 – t), or
$16,800 = [($150 - $90)X - $48,000] × (1 – 30%).
X = 1,200 units
======================
Demonstration Problem CVP 3
(Continued from Demonstration Problem CVP 1)
The Power Tool Division of ABC Hardware introduces a second product, Circular Saw, whose
unit price and unit variable cost are $200 and $120, respectively. The total fixed cost is increased
to $68,000. The manager of ABC Hardware estimates that Jig Saws and Circular Saws will sell
in a 3:2 ratio.
Required: Calculate the break-even volume in units using
1. fixed product mix method, and
2. weighted-average contribution margin method.
Solution:
1. According to the product mix, out of every 5 units sold, three will be Jig Saws and two
will be Circular Saws. Let X be the number of such 5-unit packages to break even. Then
the contribution margin from this package will be $60 × 3 + $80 × 2 = $340. The break$68, 000
even point (X) =
= 200 packages. This means that a total of 600 Jig Saws (= 3
$340
× 200 units) and 400 Circular Saws (= 2 × 200 units) have to be sold to break even.
2. Since 60 percent Jig Saws and 40 percent Circular Saws constitute the product mix, the
weighted-average contribution margin per unit = .60 × $60 + .40 × $80 = $68. The break$68, 000
even point for both products =
= 1,000 units. Jig Saws must be sold 600 units
$68
(= .60 × 1,000 units) and Circular Saws 400 units (= .40 × 1,000 units) to break even.
======================