Reference no: EM133049305
Discussion Questions
Q1. What is the meaning of the term unit contribution margin? Contribution to what?
Q2. What are the assumptions of cost-volume-profit (CVP) analysis?
Exercises
Question 1. Territory Ltd sells a single product, an electric drill. The drill sells for $160 per unit. Annual fixed costs are $618,000, and the contribution margin rate is 40%.
Required:
a) What are the variable costs per unit?
b) How many units must the company sell to break even?
c) What is the break-even point in sales dollars?
d) If the company wants to earn a before-tax profit of 115,000, how many units must be sold? What sales dollar level is required? What is the company's safety margin at this sales level?
e) If the company wants to earn a before-tax profit of 20% of sales, how many units must be sold?
Problems
Question 1. Pristine Co has provided the following production and sales information for each pair of its dress shoes:
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Direct materials
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$ 22
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Direct labour
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35
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Variable factory overhead
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15
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Selling price
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180
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Sales commissions
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10% of the selling price
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The fixed costs for the period are $1,345,000.
Required:
a) Calculate the beak-even point.
b) Calculate the number of pairs that must be sold to achieve a profit of $63,000. What is the margin of safety at the sales level?
c) Would it be better to sell 16,000 pairs at a selling price of $180 each or 19,000 pairs at a selling price of $160?
d) If an additional $63,270 is spent on fixed advertising costs, what level of dollar sales must be attained to earn a new profit of $36,000? Assume that there has been no change in the sales price.
e) Assume an income tax rate of 30%. Using the given information, how many pairs of shoes need to be sold to earn an after-tax profit of $37,800?
Question 2. Kipper Ltd sells three models of heaters - the Standard, the Deluxe, and the Pro. Selected information on the rackets is given below:
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Standard
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Deluxe
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Pro
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Sales in units (per annum)
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10 000
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5000
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7000
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Unit selling price
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$50
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$100
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$250
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Variable manufacturing cost per unit
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$20
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$35
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$50
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Variable selling cost per unit
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$4
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$10
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$15
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All sales are made through the company's own retail outlets. The company has the following fixed costs:
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Per annum
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Fixed manufacturing cost
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$250 000
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Fixed selling and administrative costs
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$227 000
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Total
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$477 000
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Required:
a) Calculate the unit contribution margin for each product type.
b) Determine the weighted-average unit contribution margin.
c) Compute the break-even point in units for the company as a whole.
d) Compute the break-even point in units for each product.
e) Determine the total number of units that must be sold to obtain a target profit of $90,000 for the company.