STUDENT SOLUTIONS MANUAL
CHAPTER 7: COST-VOLUME-PROFIT ANALYSIS
EXERCISES
7-28 Make or Buy; Two Machines (20 min)
1.
Machine X
$2Q = $.65Q + $135,000
Q = 100,000
2. cost of using X
=
$.65Q + $135,000
$.35Q
Q
Machine Y
$2Q = $.3Q + $204,000
Q = 120,000
cost of using Y
= $.30Q + $204,000
= $69,000
= 197,143 units
When 197,143 switches are needed, the Calista Company is
indifferent as to which machine to use.
An alternative way to determine the indifference point is:
Fixed cost of Machine Y - Fixed Cost of Machine X
Unit variable cost of X – Unit variable cost of Y
$204,000 - $135,000
.65 - .30
= 197,143
Summary of (1) and (2): If output is less than 100,000, buy the
switches; if output is less than 197,143 units but greater than
100,000, buy and use machine X; if output is greater than 197,143
units, then buy and use machine Y.
Blocher,Stout,Cokins,Chen:Cost Management, 4e
7-1 ©The McGraw-Hill Companies, Inc., 2008
STUDENT SOLUTIONS MANUAL
7-28 (continued)
3.
cost when purchasing from outside supplier:
$2 x 200,000 = $400,000
cost when using machine X:
$135,000 + $.65 (200,000) = $265,000
cost when using machine Y:
$204,000 + $.30 (200,000) = $264,000
When 200,000 switches are needed, it is most profitable to produce
them with machine Y, though the difference is only $1,000.
Blocher,Stout,Cokins,Chen:Cost Management, 4e
7-2 ©The McGraw-Hill Companies, Inc., 2008
STUDENT SOLUTIONS MANUAL
7-30 CVP Analysis (25 min)
1. Sales = variable cost + fixed cost + target operating profit
30,000($65) = 30,000($34) + $465,000 + N
N = $465,000
2. BE units: $65Q = $34Q + $465,000
Q = 15,000 units
3. Operating profit: 35,000($65)-35,000($34)-$465,000-$200,000= N
N = $420,000
(operating profit falls by $45,000, from $465,000 to $420,000
as a result of the plan to increase sales with increased advertising)
4. BE units: $65Q = $34Q + $665,000
Q = 21,452 units
(operating profit is lower, per part 3 above, and breakeven is
also higher)
5. $65Q = $34Q + $665,000 + $465,000
Q = 36,452 units
(to justify the advertising plan, sales would have to rise to at
least 36,452 units, somewhat above the projected 35,000 units)
Blocher,Stout,Cokins,Chen:Cost Management, 4e
7-3 ©The McGraw-Hill Companies, Inc., 2008
STUDENT SOLUTIONS MANUAL
7-32 CVP with Taxes (20 min)
1.
BE units = F + N
p–v
= $75,000 + 0
$5 - $3
2.
BE dollars = F + N
p-v
p
=
= 37,500 units
$75,000 + 0 = 75,000 = $187,500
$5-$3
.4
$5
OR: 37,500 x $5 = $187,500
3.
Q= F+N
p-v
=
4.
pQ = F + N =
p-v
p
5.
Q=
$ 75,000 + $10,000 =
$5 - $3
$75,000 + $8,000
$5 -$3
$5
42,500 units
= 83,000 = $207,500
.4
F + N/(1 - t)
p-v
Q = $75,000+$12,000/(1-.4) = $75,000+$20,000 = 47,500 units
$5 - $3
$2
Using the contribution margin ratio:
pQ = F+N/(1-t) =$75,000+[$12,000/(1-.4)] = $75,000 + $20,000 = $237,500
p-v
p
$5 - $3
$5
.4
OR: 47,500 x $5 = $237,500
Blocher,Stout,Cokins,Chen:Cost Management, 4e
7-4 ©The McGraw-Hill Companies, Inc., 2008
STUDENT SOLUTIONS MANUAL
7-34 Budget Cuts (10 min)
If the budget is reduced by 10%, services will have to decrease by
more than 10% because the fixed costs will not change in the short
term. Since fixed costs do not change, variable costs will have to
decrease by $30,000 = $300,000 x 10%.
Variable costs are budgeted at $300,000 x .6 = $180,000
decrease in variable costs
last year's variable cost budget
$ 30,000
$180,000
= 16.67%
Although the budget was cut by only 10%, the Pharmacy will have to
reduce its services by 16.67%
Blocher,Stout,Cokins,Chen:Cost Management, 4e
7-5 ©The McGraw-Hill Companies, Inc., 2008
STUDENT SOLUTIONS MANUAL
PROBLEMS
7-36 CVP Analysis; Strategy (20 min)
1. BE units =
F+N
p-v
=
$150,000
$30 - $20
BE $ = Fixed costs = Fixed costs
CMR
p-v
p
2.
=
=
15,000 hats
$150,000 =
$30-$20
$30
$450,000
20,000= $150,000 + N
$30 - $20
$200,000= $150,000 + N
operating profit = $50,000
3. Margin of safety = 25,000 – 15,000 = 10,000 hats
Margin of safety ratio = 10,000/25,000 = 40%
4. BE units =
20,000 =
F
p-v
= $150,000 + $82,000
$30 - $15.50
= 16,000
$232,000 + N
$30 - $15.50
N = operating profit = $58,000
5. A key strategic issue is that Frank’s sales staff is a critical success
factor for the business. His knowledgeable and courteous staff help
to bring in and retain customers. If the salary/commissions plan
would alienate his sales staff, the plan could be a big mistake. Frank
should proceed with caution, and be sure that his sales staff will be as
highly motivated under the salary plan as they were under the
commissions plan.
Blocher,Stout,Cokins,Chen:Cost Management, 4e
7-6 ©The McGraw-Hill Companies, Inc., 2008
STUDENT SOLUTIONS MANUAL
7-38 Breakeven Analysis for Multiple Products (25 min)
1.
Weighted-average unit contribution
= ($20 x 80%) + ($45 x 20%) = $25
The break-even point =
$200,000
$25
= 8,000 units
Break-even sales in units:
Product A
Product B
8,000 x 80% = 6,400
8,000 x 20% = 1,600
The following income calculation verifies the break-even point:
Sale revenues:
Product A: 6,400 x $90
Product B: 1,600 x $ 140
Total sales
Less variable cost:
Product A: 6,400 x $ 70
Product B: 1,600 x $95
Total variable costs
Fixed costs
Total costs
Operating profit
$576,000
224,000
800,000
448,000
152,000
600,000
200,000
800,000
-0-
2.The management of the company plans $40,000 target-netprofit:
Fixed expenses + Target net profit
Contribution margin
$200,000 + $40,000 =
$25
9,600 units
Product A = 9,600 x 80% = 7,680 units
Product B = 9,600 x 20% = 1,920
Total
9,600
Blocher,Stout,Cokins,Chen:Cost Management, 4e
7-7 ©The McGraw-Hill Companies, Inc., 2008
STUDENT SOLUTIONS MANUAL
Problem 7-38 (continued)
So to achieve the target-net-profit Hycel has to sell 7,680 units of
Product A and 1,920 units of Product B.
Income Statement to verify the Target-net-profit calculation:
Sale revenues:
Product A: 7,680 x $90
Product B: 1,920 x $140
Total sales
Variable costs:
Product A:
7,680 x $70
Product B:
1,920 x $95
Total variable costs
Fixed costs
Total costs
Operating profit
Blocher,Stout,Cokins,Chen:Cost Management, 4e
$
691,200
268,800
960,000
537,600
182,400
720,000
200,000
920,000
$
40,000
7-8 ©The McGraw-Hill Companies, Inc., 2008
STUDENT SOLUTIONS MANUAL
7-40 CVP Relationships (30 min)
1. Expedia’s profit margin for each room it purchases at 60% of retail and
sells with a 26% markup:
60% x 26%, or 15.6%, of the retail price
Expedia’s profit margin for each room it books and earns commission
for the booking is 10% of retail price
Expedia can earn 5.6% = 15.6% - 10% greater return if it purchases
wholesale rather than accepts a 10% commission.
2.
Let R be the retail price, V be the vacancy rate if the rooms are not sold
to Expedia at wholesale, and N be the number of rooms the hotel is
considering selling. Set the amount received by the hotel without selling
the rooms to Expedia equal to the amount received by selling the rooms
to Expedia.
Number of rooms x occupancy rate x amount received after commission
= discount price paid to Expedia x number of rooms
N x (1-V) x 0.9 x R = 0.6 x R x N
1-V = .06/.09
V = 1/3
3. Solve for the indifference point, where R is the retail price of the room
and D is the discount rate. Expedia’s markup is 26%. Set the amount to
Expedia from reselling the rooms equal the amount from commissions.
Value to Expedia from reselling the rooms = Value to Expedia of
making reservations and getting the 10% commission
.26 x (1 – D) x R = 0.1 x R
D = 61.54%
As long as Expedia receives a discount on purchasing the rooms of 61.54%
or less of retail price, Expedia would be better off purchasing and reselling
the rooms rather than making reservations
Source: Business Week, February 24, 2003, pp 120-2
Blocher,Stout,Cokins,Chen:Cost Management, 4e
7-9 ©The McGraw-Hill Companies, Inc., 2008
STUDENT SOLUTIONS MANUAL
7-42 CVP Analysis in a Professional Service Firm (25 min)
1. If operating profit is to increase the contribution margin of the new
business must be positive.
Y + Revenue from New Work = Variable cost + Fixed cost + profit
Y + $60(800) = $20(800 + 900) + $41,000 + 0
Y = $27,000
where Y is the minimum revenue that must be earned from the county
work in order to insure that operating profit of the firm does not
decrease. Revenue above this level will result in incremental profit.
The average billing rate at the breakeven rate of $27,000 would be
$27,000/900 = $30 per hour. Clearly, the key to the bidding strategy
is the desirability of bringing in 800 hours of new business at the
going billing rate.
2.
$30,000 + $60(X) = $20(900 + X)+$41,000 + 0
X = 725
The managing partner's estimate of 800 hours of new business
leaves a margin of safety of 800 - 725 = 75 hours.
Blocher,Stout,Cokins,Chen:Cost Management, 4e
7-10 ©The McGraw-Hill Companies, Inc., 2008
STUDENT SOLUTIONS MANUAL
7-44 CVP Analysis; Activity-based costing; Taxes (30 min)
1.
Total fixed manufacturing expense = 12 x $60,000 = $720,000
$300X = $10X + ($720,000 + $100,000 + $50,000)
X= $870,000/$290
X= 3,000 units per year
2.
20 unit batch means 6,000/20 = 300 batches per year
Batch level costs = $720,000 x .2 = $144,000
Non-batch costs = $720,000 - $144,000 = $576,000
Cost per batch = $144,000/300 = $480
Cost per unit = $480/20 = $24
Breakeven:
$300X = $10X + 24X + ($576,000 + $100,000 + $50,000)
X= $726,000/$266
X= 2,729 units per year, or 136.5 batches (137 batches,
rounded)
Exact Breakeven
$300X = $10X + ($576,000 + 137 x $480 + $100,000 +
$50,000)
X= $791,760/$290
X= 2,730 units per year
Note that the breakeven for the ABC approach is somewhat smaller
than that of the volume based analysis, because batch level costs of
$480 per batch can be saved if production falls below the budgeted
level of 6,000 units.
3.
Total fixed expenses: $720,000 + ($100,000 x 2) + $50,000 =
$970,000
Target profit per year = $12,000 x 12 = $144,000
Target before tax profit: $144,000/(1 - .4) = $240,000
Q = ($970,000 + $240,000)/$290 = 4,173 units.
Blocher,Stout,Cokins,Chen:Cost Management, 4e
7-11 ©The McGraw-Hill Companies, Inc., 2008
STUDENT SOLUTIONS MANUAL
7-46 CVP Analysis; Sensitivity Analysis; Strategy
1. GoGo Juice’s profit (loss) before tax, from implementing the promotional
coupon with no change in sales volume is ($8,000)
Gasoline
Sales Revenue
Coupons
redeemed
(note 1)
Cost of Sales
(note 2)
Contribution
Margin
Fixed costs
(note 3)
Loss before tax
Food and
beverage
$60,000
Other
Total
$40,000
$200,000
(16,000)
75,000
36,000
20,000
131,000
$9,000
$24,000
$20,000
53,000
$100,000
(16,000)
61,000
$(8,000)
Note 1: Coupons redeemed: total sales of $200,000 x 80% x 10% ($1 per
$10) = $16,000
Note 2: Gasoline cost of sales: $100,000/$2.50 price per gallon = 40,000
gallons
40,000 x $1.875 = $75,000
Note 3: Fixed costs
Labor
$9,000 + $2,500
$11,500
Rent, power, supplies, etc
46,500
Depreciation
2,500
Coupon printing cost
500
Total fixed costs
$61,000
2. The breakeven for GoGo:
Contribution margin ratio = $53,000/$200,000 = 26.5%
Breakeven in dollars = $61,000/.265 = $230,189
Blocher,Stout,Cokins,Chen:Cost Management, 4e
7-12 ©The McGraw-Hill Companies, Inc., 2008
STUDENT SOLUTIONS MANUAL
Problem 7-46 (continued)
3.
Sales revenue ($200,000 x 1.2)
$240,000
Contribution margin ($240,000 x 30%)
Less fixed costs
Profit before tax
72,000
61,000
$11,000
4. Sensitivity analysis is used to deal more effectively with uncertainty or
risk. Sensitivity analysis is a "what-if' type of analysis used to determine the
outcomes if any parameters change from the initial assumptions. For
example, revenues or costs could be changed from the initial assumptions
and a new break-even sales volume calculated. At least three factors that
make sensitivity analysis prevalent in decision making include the following.
 The availability of computers and spreadsheet software has made it very
quick and easy to compute the impact of changing one or more
assumptions in a financial model.
 As the business environment is becoming more dynamic and
competitive, sensitivity analysis provides management with an
understanding of the impact of changes in the environment. The
increased emphasis on productivity , competitive marketplace, changing
consumer demand, shorter product life cycle times, and faster
obsolescence of technology makes sensitivity analysis more widely
used.
 Sensitivity analysis aids management in identifying the key variables and
assumptions, so the variables can be monitored or a decision made to
obtain additional information on them.
Blocher,Stout,Cokins,Chen:Cost Management, 4e
7-13 ©The McGraw-Hill Companies, Inc., 2008
STUDENT SOLUTIONS MANUAL
7-48 CVP Analysis; Commissions; Ethics (50 min)
1.
Breakeven dollars (dollars in thousands)
Y = Variable cost of goods sold + current
fixed costs + fixed cost of hiring +
commissions
Y = .45Y + $6,120 + $1,890 + .10Y
Y = $17,800
Supporting Calculations
Variable cost of goods sold rate:
(dollars in thousands)
$11,700/$26,000 = 45%
Current fixed costs ($ thousands)
Fixed cost of goods sold
Fixed advertising cost
Fixed administrative cost
Fixed interest expense
Total
$2,870
750
1,850
650
$6,120
Fixed cost of hiring ($ thousands)
Sales people (8 x $80)
Travel & entertainment
Manager/secretary
Additional advertising
Total
$ 640
600
150
500
$1,890
2.
Breakeven formula set equal to operating profit:
(dollars in thousands)
Y - .45Y - $6,120 - .23Y = $3,500
Y = $30,063
This is $30,063 - $26,000 = $ 4,063 greater than budgeted sales
Blocher,Stout,Cokins,Chen:Cost Management, 4e
7-14 ©The McGraw-Hill Companies, Inc., 2008
STUDENT SOLUTIONS MANUAL
Problem 7-48 (continued)
3. The general assumptions underlying breakeven analysis that limit
its usefulness include the following:
All costs can be divided into fixed and variable elements.
Variable costs vary proportionally to volume.
Selling prices remain unchanged.
The analysis is done within the relevant range of the cost and
revenue variables
4. Let sales at the indifference point be Y (in 000s).
Total Cost for Current Agents = Total cost for Our Agents
.45Y + .23Y + $6,120 = .45Y + $6,120 + $1,890 + .10Y
.13Y = $1,890
Y = $14,538 (rounded)
Since the point of indifference, $14,538 is less than current sales of
$26,000, the firm would be better off hiring their own agents, because
the relatively low variable cost offsets the relatively high fixed costs of
the new agents when sales are higher than the indifference point.
5. Markowitz should consider the firm’s ethical responsibility to its
shareholders, employees and agents. The new plan would be a
savings for the firm and thus would have an upward effect on stock
price and thus benefit the shareholders. However, the plan would be
a blow to the sales agents, many of whom may be depend on
Marston Corporation for a significant portion (or perhaps all of) their
income. The agents are likely to have alternative job prospects if
Marston lets them go, but there will also be a difficult transition time.
Marston needs to think carefully about the nature and extent of its
responsibility to the sales agents, as part of its overall responsibility to
its constituencies. What is our responsibility to these sales agents
who are not our employees. The shareholders are a prime concern,
but employees and others such as the sales agents must also be
given consideration.
Blocher,Stout,Cokins,Chen:Cost Management, 4e
7-15 ©The McGraw-Hill Companies, Inc., 2008
STUDENT SOLUTIONS MANUAL
7-50 CVP Analysis; Bid Pricing (40 min)
This problem (part 2) can be used to introduce the concepts of
contribution margin decision making, and the irrelevance of fixed
costs for short term pricing decisions. This is covered in Chapter 9.
1. The unit variable cost per blanket is:
The total fixed cost for the order is:
800,000 x $10/4 = $2,000,000
The breakeven price using the firm’s full cost system is $26:
p x 800,000 = $24.00 x 800,000 + $2,000,000
p = $26.5
2. The minimum price per blanket that Deaton Fibers Inc. could bid
without reducing the company's operating profit is $24.00 since the
fixed costs will not change whether or not Deaton takes the order.
Since the fixed costs will not change, they are irrelevant in the
decision.
3. Using the full cost criteria and the maximum allowable return
specified, Deaton Fibers Inc.'s bid price per blanket would be $29.90
calculated as follows.
Relevant costs from Requirement 1
$24.00
Plus: Fixed overhead (.25 hrs. @$10.00/hr.)
2.50
Subtotal
26.50
Allowable return (.2* x $26.50)
5.30
Bid price
$ 31.80
* 12% / (1 - 40%) = before tax return = 20%
Blocher,Stout,Cokins,Chen:Cost Management, 4e
7-16 ©The McGraw-Hill Companies, Inc., 2008
STUDENT SOLUTIONS MANUAL
Problem 7-50 (continued)
4. Strategic actors that Deaton Fibers Inc. should consider before
deciding whether or not to submit a bid at the maximum acceptable
price of $30.00 per blanket include the following.
 If the order is accepted at $30.00 per blanket, there will be a $6.00
contribution per blanket to fixed costs. However, the company
should consider whether or not there are other jobs that would
make a greater contribution.
 Acceptance of the order at a low price could cause problems with
current customers who might demand a similar pricing
arrangement.
Blocher,Stout,Cokins,Chen:Cost Management, 4e
7-17 ©The McGraw-Hill Companies, Inc., 2008
STUDENT SOLUTIONS MANUAL
7-52 CVP Analysis; Strategy (45 min)
1. a. A total of 480 seminar participants is needed for the joint venture
to break even, calculated as follows.
The break-even number of participants equals the fixed costs divided
by the contribution margin per participant
Fixed costs (FC) = $318,000 from GSI + $210,000 from Eastern =
$528,000
Contribution margin (CM) = $1,200 fee - ($47 + $18 + $35) variable
costs = $1,100
Break-even = FC/CM = $528,000/$1,100 = 480 seminar participants
b. A total of 700 seminar participants is needed for the joint venture to
earn a operating profit of $169,400, calculated as follows.
The target number of participants equals the fixed costs plus the
desired operating profit, divided by the contribution margin per
participant. The desired operating profit equals the operating profit
divided by (1 minus the tax rate).
Operating profit (OF) = $169,400/(1 - .30) = $169,400/ .70 =
$242,000
Target participants = (FC + OF)/CM = ($528,000 +
$242,000)/$1,100
= $770,000/$1,100
= 700 participants
2. A minimum of 1,055 participants is needed in order for GSI to
prefer the 40 percent fee option rather than the flat fee, calculated as
follows.
GSI fees for flat fee option =
$9,500 per seminar x 40 seminars = $380,000
GSI fees for 40% of Eastern's profit-before-tax option =
40% x [(contribution margin x number of participants) -fixed
cost) =
.40 x [($1,100 x N) -$210,000)] = $440 x N -$84,000
Blocher,Stout,Cokins,Chen:Cost Management, 4e
7-18 ©The McGraw-Hill Companies, Inc., 2008
STUDENT SOLUTIONS MANUAL
Problem 7-52 (continued)
GSI fees are equal for the two options at the following number of
participants.
$380,000
$464,000
$464,000/$440
= $440 x N - $84,000
= $440 x N
= N = 1054.5 participants (1,055 rounded)
Therefore, GSI will earn more revenue and prefer the 40 percent
option when the number of participants is 1,055 or higher.
3. Some of the strategic and implementation issues facing GSI in this
decision are the following:
 Are the CVP assumptions satisfied? That is, total costs can be
divided into a fixed component and a component that is variable
with respect to volume. Total costs and total revenues have a
linear relationship to volumes within the relevant range. Total fixed
costs, per unit variable cost, and selling price remain constant
within the relevant range. Technology has no impact on cost
relationships or selling prices. All costs and revenues are known
with certainty.
 Alternative uses of capacity? Since the Eastern U seminars would
occupy all GSI’s available capacity, GSI should consider whether
there might be more profitable uses for that capacity before
making this commitment. Would the commitment include an
implied or explicit promise to continue the seminars in future years,
if successful this year? Can GSI expand its capacity quickly and
easily if desired?
 Has GSI considered the uncertainty in the situation? What
happens if the breakeven level of participants is not met? GSI and
Eastern should use various sensitivity analysis methods to assess
the potential impact of this uncertainty on future profits.
 Does the collaboration make sense strategically? Are Eastern and
GSI likely to enhance each other’s reputation and to provide
operating synergies and efficiencies that will make the alliance a
profitable one. For example, if the Eastern University’s academic
reputation might suffer from this alliance, then this should be
considered in the decision.
Blocher,Stout,Cokins,Chen:Cost Management, 4e
7-19 ©The McGraw-Hill Companies, Inc., 2008
STUDENT SOLUTIONS MANUAL
7-54 CVP Analysis; ABC Costing (30 min)
1. If there are 50 units per batch and setup costs are $300 per setup,
then there must be 3,000 batches (150,000/50), and total setup costs
must be $900,000 (3,000 x $300). Thus, the total fixed costs for the
current manufacturing plan must be $900,000 for setups and
$5,100,000 (=$6,000,000 - $900,000) for the remaining fixed costs.
The ABC breakeven can be determined as follows, where the unit
cost of setup is $300/50 = $6:
Breakeven can be determined as follows:
Current Plan
Proposed Plan
Contribution $100-$43.50-$10-$6
= $100-$58.75-$10Margin
$40.50
$6=$25.25
Breakeven
($5,100,000+$1,250,000)
($2,100,000+$1,250,000)
/$40.50 = 156,790 units
/$25.25 =
(or, 3,136 batches)
132,673 units
(or 2,654 batches)
To figure the exact
breakeven, total setup costs To figure the exact
are 3,136 x $300 =
breakeven, total setup
$940,800, and:
costs are 2,654 x $300 =
Q = ($5,100,000 +
$796,200, and:
$940,800 +
Q = ($2,100,000 +
$1,250,000)/($100-43.50796,200 +
10) = 156,792 units
$1,250,000)/31.25=
132,679 units
Note as before that the breakeven for the current manufacturing plan
is above the current operating level of 150,000 units. Also, since the
operating level of 150,000 is based on the assumption of 50 batches
of 3,000 each, to achieve breakeven will require more than 3,000
batches. Thus, breakeven analysis under ABC gives a higher
breakeven number than the volume-based approach; it recognizes a
larger number of setups and therefore larger setup cost ($940,800
versus $900,000).
Blocher,Stout,Cokins,Chen:Cost Management, 4e
7-20 ©The McGraw-Hill Companies, Inc., 2008
STUDENT SOLUTIONS MANUAL
Problem 7-54 (continued)
2. The ABC costing breakeven calculations do not differ much from
that for the volume based calculations in problem 7-53, and they both
point to the same answer -- at the current volume level of
approximately 150,000 units, the proposed manufacturing plan is
preferred.
Blocher,Stout,Cokins,Chen:Cost Management, 4e
7-21 ©The McGraw-Hill Companies, Inc., 2008
STUDENT SOLUTIONS MANUAL
7-56 CVP Analysis (20 min)
Since fixed costs, except for the cost of the lease, will not be affected
by the decision to make or to buy, they are excluded from the
analysis:
Cost to Buy = Cost to Make
$25 x Q = Q x ($10 + $6 + $3) + $34,000
Q = 5,667 brake assemblies
The indifference point is 5,667, meaning that BBC would prefer to
make if volume is expected to be above 5,667, and prefer to buy if
volume is less than 5,667.
The strategic issues facing BBC will certainly affect this decision.
BBC apparently competes on the basis of differentiation because of
their emphasis on quality and their distribution through specialty
shops. The quest for quality might cause them to stick with the
internal manufacturing option, irrespective of the cost differential, to
maintain control over quality. On the other hand, it might be that a
higher quality brake could be obtained from the outside vendor.
Also, BBC should consider the alternative uses of the manufacturing
space. Could this be used to manufacture accessories or other parts
for their bicycles, and thus improve the overall value to the customer?
Blocher,Stout,Cokins,Chen:Cost Management, 4e
7-22 ©The McGraw-Hill Companies, Inc., 2008
STUDENT SOLUTIONS MANUAL
7-58 CVP Analysis (20 min)
1. Based on estimates given, a farmer interested in the production of
hemp would need to receive a price of at least $.55/lb to breakeven
on farming for hemp, as shown in the following analysis.
First, separate the fixed and variable costs.
Variable/400lb
Fixed/acre
Seed
$80.00
Fertilizer
38.15
Chemicals
10.00
Fuel
11.00
Machinery costs
15.00
Crop insurance
6.00
Other costs
7.50
Land taxes
5.50
Licensing fee
15.00
Sampling and
15.00
analytical fees
Drying costs
3.57
Cleaning costs
5.00
Interest
7.44
Total Cost
$147.72
$71.44
From the above:
Variable cost per pound = $147.72/400 = $.3693
Total Fixed Cost = $71.44 x 180 = $12,859.20
Solving for breakeven price per lb (Q), where Q= 180 x 400 = 72,000
pounds for the average size farm:
Revenue = Total operating cost
p x 72,000 = $.3693 x 72,000 + $12,859.20
p = $ .5479
Based on information from: “Industrial Hemp for Manitoba,”
http://www.gov.mb.ca/agriculture/crops/hemp/bko04s00.html).
Blocher,Stout,Cokins,Chen:Cost Management, 4e
7-23 ©The McGraw-Hill Companies, Inc., 2008