Chapter 22: Cost-Volume-Profit
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1
Types of Costs
Helena Company reports the following total costs at two levels of production.
10,000 Units
20,000 Units
$20,000
8,000
17,000
1,000
4,000
3,000
6,000
$40,000
10,000
34,000
2,000
4,000
5,000
6,000
Direct materials
Maintenance
Direct labor
Indirect materials
Depreciation
Utilities
Rent
Classify each cost as variable, fixed, or mixed.
Solution
Direct materials, direct labor, and indirect materials are variable costs.
Depreciation and rent are fixed costs.
Maintenance and utilities are mixed costs.
Related exercise material: BE22-1, BE22-2, BE22-3, E22-1, E22-3, and
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2
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22-1.
Action Plan
✔ Recall that a variable
cost varies in total
directly and proportionately with each
change in activity
level.
✔ Recall that a fixed cost
remains the same in
total with each change
in activity level.
✔ Recall that a mixed
cost changes in total
but not proportionately
with each change in
activity level.
High-Low Method
Byrnes Company accumulates the following data concerning a mixed cost, using units
produced as the activity level.
March
April
May
June
July
Units Produced
Total Cost
9,800
8,500
7,000
7,600
8,100
$14,740
13,250
11,100
12,000
12,460
(a) Compute the variable-cost and fixed-cost elements using the high-low method.
(b) Estimate the total cost if the company produces 8,000 units.
Solution
(a) Variable cost: ($14,740 2 $11,100) 4 (9,800 2 7,000) 5 $1.30 per unit
Fixed cost: $14,740 2 $12,740* 5 $2,000
or $11,100 2 $9,100** 5 $2,000
*$1.30 3 9,800 units
**$1.30 3 7,000 units
(b) Total cost to produce 8,000 units: $2,000 1 $10,400 ($1.30 3 8,000 units) 5 $12,400
Related exercise material: BE22-4, E22-2, and
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22-2.
Action Plan
✔ Determine the highest
and lowest levels of
activity.
✔ Compute variable cost
per unit as Change in
total costs 4 (High 2
low activity level) 5
Variable cost per unit.
✔ Compute fixed cost as
Total cost 2 (Variable
cost per unit 3 Units
produced) 5 Fixed
cost.
D-1
D-2
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3
CVP Income Statement
Ampco Industries produces and sells a cell phone-operated thermostat. Information
regarding the costs and sales of thermostats during September 2017 are provided below.
Unit selling price of thermostat
Unit variable costs
Total monthly fixed costs
Units sold
$85
$32
$190,000
4,000
Prepare a CVP income statement for Ampco Industries for the month of September. Provide
per unit values and total values.
Action Plan
Solution
✔ Provide a heading
with the name of the
company, name of
statement, and period
covered.
✔ Subtract variable costs
from sales to determine
contribution margin.
Subtract fixed costs
from contribution
margin to determine
net income.
✔ Express sales, variable
costs, and contribution
margin on a per unit
basis.
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4
Sales
Variable costs
Total
Per Unit
$340,000
128,000
$85
32
212,000
190,000
$53
Contribution margin
Fixed costs
Net income
Related exercise material: BE22-5, E22-4, and
$ 22,000
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22-3.
Break-Even Analysis
Action Plan
✔ Apply the formula:
AMPCO INDUSTRIES
CVP Income Statement
For the Month Ended September 30, 2017
Sales 2 Variable
costs 2 Fixed costs 5
Net income.
✔ Apply the formula:
Fixed costs 4
Unit contribution
margin 5 Break-even
point in units.
Lombardi Company has a unit selling price of $400, variable costs per unit of $240, and
fixed costs of $180,000. Compute the break-even point in units using (a) a mathematical
equation and (b) unit contribution margin.
Solution
(a) The equation is $400Q 2 $240Q 2 $180,000 5 $0; ($400Q 2 $240Q) 5 $180,000.
The break-even point in units is 1,125. (b) The unit contribution margin is $160 ($400 2
$240). The formula therefore is $180,000 4 $160, and the break-even point in units
is 1,125.
Related exercise material: BE22-6, BE22-7, E22-5, E22-6, E22-7, E22-8, E22-9, E22-10, and
DO IT! 22-4.
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5
D-3
Break-Even, Margin of Safety, and Target Net Income
Zootsuit Inc. makes travel bags that sell for $56 each. For the coming year, management
expects fixed costs to total $320,000 and variable costs to be $42 per unit. Compute the
following: (a) break-even point in dollars using the contribution margin (CM) ratio; (b) the
margin of safety and margin of safety ratio assuming actual sales are $1,382,400; and
(c) the sales dollars required to earn net income of $410,000.
Action Plan
Solution
✔ Apply the formula for
(a) Contribution margin ratio 5 [($56 2 $42) 4 $56] 5 25%
Break-even sales in dollars 5 $320,000 4 25% 5 $1,280,000
(b) Margin of safety 5 $1,382,400 2 $1,280,000 5 $102,400
Margin of safety ratio 5 $102,400 4 $1,382,400 5 7.4%
(c) Required sales in dollars 5 ($320,000 1 $410,000) 4 25% 5 $2,920,000
Related exercise material: BE22-8, BE22-9, BE22-10, E22-11, E22-12, E22-13, and
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22-5.
the break-even point
in dollars.
✔ Apply the formulas for
the margin of safety in
dollars and the margin
of safety ratio.
✔ Apply the formula for
the required sales in
dollars.
D-4
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6
CVP Analysis
Krisanne Company reports the following operating results for the month of June.
KRISANNE COMPANY
CVP Income Statement
For the Month Ended June 30, 2017
Sales (5,000 units)
Variable costs
Contribution margin
Fixed expenses
Net income
Total
Per Unit
$300,000
180,000
$60
36
120,000
100,000
$24
$ 20,000
To increase net income, management is considering reducing the selling price by 10%,
with no changes to unit variable costs or fixed costs. Management is confident that this
change will increase unit sales by 25%.
Using the contribution margin technique, compute the break-even point in units and
dollars and margin of safety in dollars (a) assuming no changes to sales price or costs,
and (b) assuming changes to sales price and volume as described above. (c) Comment on
your findings.
Solution
Action Plan
✔ Apply the formula for
the break-even point
in units.
✔ Apply the formula for
the break-even point
in dollars.
✔ Apply the formula for
the margin of safety in
dollars.
(a) Assuming no changes to sales price or costs:
Break-even point in units 5 4,167 units (rounded) ($100,000 4 $24)
Break-even point in sales dollars 5 $250,000 ($100,000 4 0.40a)
Margin of safety in dollars 5 $50,000 ($300,000 2 $250,000)
a
$24 4 $60
(b) Assuming changes to sales price and volume:
Break-even point in units 5 5,556 units (rounded) ($100,000 4 $18b)
Break-even point in sales dollars 5 $300,000 ($100,000 4 ($18 4 $54c))
Margin of safety in dollars 5 $37,500 ($337,500d 2 $300,000)
b
$60 2 (0.10 3 $60) 2 36 5 $18
$60 2 (0.10 3 $60)
d
5,000 1 (0.25 3 5,000) 5 6,250 units, 6,250 units 3 $54 5 $337,500
c
(c) The increase in the break-even point and the decrease in the margin of safety
indicate that management should not implement the proposed change. The
increase in sales volume will result in contribution margin of $112,500 (6,250 3
$18), which is $7,500 less than the current amount.
Related exercise material: BE22-11, E22-14, and
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22-6.
Exercises
Classify types of costs.
DO IT! 22-1
Amanda Company reports the following total costs at two levels of production.
(LO 1)
Indirect labor
Property taxes
Direct labor
Direct materials
Depreciation
Utilities
Maintenance
5,000 Units
10,000 Units
$ 3,000
7,000
28,000
22,000
4,000
5,000
9,000
$ 6,000
7,000
56,000
44,000
4,000
8,000
11,000
Classify each cost as variable, fixed, or mixed.
DO IT!
DO IT! 22-2
Westerville Company accumulates the following data concerning a mixed
cost, using units produced as the activity level.
Units Produced
Total Cost
10,000
9,000
10,500
8,800
9,500
$18,000
16,650
18,580
16,200
17,100
March
April
May
June
July
D-5
Compute costs using
high-low method and
estimate total cost.
(LO 2)
(a) Compute the variable- and fixed-cost elements using the high-low method.
(b) Estimate the total cost if the company produces 9,200 units.
DO IT! 22-3 Cedar Grove Industries produces and sells a cell phone-operated home security
control. Information regarding the costs and sales of security controls during May 2017
are provided below.
Unit selling price of security control
Unit variable costs
Total monthly fixed costs
Units sold
Prepare CVP income
statement.
(LO 3)
$45
$22
$120,000
8,000
Prepare a CVP income statement for Cedar Grove Industries for the month of May. Provide
per unit values and total values.
DO IT! 22-4 Snow Cap Company has a unit selling price of $250, variable costs per unit
of $170, and fixed costs of $160,000. Compute the break-even point in units using (a) the
mathematical equation and (b) unit contribution margin.
Compute break-even point
in units.
Presto Company makes radios that sell for $30 each. For the coming year,
DO IT! 22-5
management expects fixed costs to total $220,000 and variable costs to be $18 per unit.
Compute break-even point,
margin of safety ratio, and
sales for target net income.
(a) Compute the break-even point in dollars using the contribution margin (CM) ratio.
(b) Compute the margin of safety ratio assuming actual sales are $800,000.
(c) Compute the sales dollars required to earn net income of $140,000.
DO IT! 22-6
Victoria Company reports the following operating results for the month of April.
VICTORIA COMPANY
CVP Income Statement
For the Month Ended April 30, 2017
Sales (9,000 units)
Variable costs
Contribution margin
Fixed expenses
Net income
Total
Per Unit
$450,000
270,000
$50
30
180,000
150,000
$20
$ 30,000
Management is considering the following course of action to increase net income: Reduce
the selling price by 4%, with no changes to unit variable costs or fixed costs. Management
is confident that this change will increase unit sales by 20%.
Using the contribution margin technique, compute the break-even point in units and
dollars and margin of safety in dollars:
(a) Assuming no changes to selling price or costs, and
(b) Assuming changes to sales price and volume as described above.
Comment on your findings.
(LO 4)
(LO 5)
Compute the break-even point
and margin of safety under
different alternatives.
(LO 6)
D-6
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CONTINUING PROBLEMS
EXCEL
TUTORIAL
CURRENT DESIGNS
CD22 Bill Johnson, sales manager, and Diane Buswell, controller, at Current Designs are beginning
to analyze the cost considerations for one of the composite models of the kayak division. They have
provided the following production and operational costs necessary to produce one composite kayak.
Current Designs.xls
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B7
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fx
A
Kevlar®
Resin and supplies
Finishing kit (seat, rudder, ropes, etc.)
Labor
Selling and administrative expenses—variable
Selling and administrative expenses—fixed
Manufacturing overhead—fixed
B
$250 per kayak
$100 per kayak
$170 per kayak
$420 per kayak
$400 per kayak
$119,700 per year
$240,000 per year
C
8
Bill and Diane have asked you to provide a cost-volume-profit analysis, to help them finalize the budget
projections for the upcoming year. Bill has informed you that the selling price of the composite kayak
will be $2,000.
Instructions
(a) Calculate variable costs per unit.
(b) Determine the unit contribution margin.
(c) Using the unit contribution margin, determine the break-even point in units for this product line.
(d) Assume that Current Designs plans to earn $270,600 on this product line. Using the unit contribution margin, calculate the number of units that need to be sold to achieve this goal.
(e) Based on the most recent sales forecast, Current Designs plans to sell 1,000 units of this model.
Using your results from part (c), calculate the margin of safety and the margin of safety ratio.
WATERWAYS
(Note: This is a continuation of the Waterways problem from Chapters 19–21.)
WP22 The Vice President for Sales and Marketing at Waterways Corporation is planning for
production needs to meet sales demand in the coming year. He is also trying to determine
how the company’s profits might be increased in the coming year. This problem asks you to
use cost-volume-profit concepts to help Waterways understand contribution margins of some
of its products and decide whether to mass-produce any of them.
Go to the book’s companion website, www.wiley.com/college/weygandt, to find the remainder
of this problem.