Student’s Name
Institution Affiliation
E 5-1, Bonita’s Company

  • Definition of variable, fixed and mixed costs

Variable costs are expenses that increase with additional production. For example, the direct cost of inventories increased with every additional purchase of stock.
Fixed cost are expenses which do not change with an increase or decrease in the number of commodities produced. An example is the warehouse rent. Whether a business uses 50% or 100% of the warehouse, the rent will be constant.
Mixed cost is an expense that has both characteristics of fixed and variable costs. An example of this cost is salaries to workers who are paid on monthly basis pus commission.

  • Classification of costs

Direct material- Variable cost
Direct Labor- Variable cost
Utilities- Variable costs
Rent- Fixed cost
Maintenance- Mixed cost
Supervisory salaries- Fixed cost
E5-3 Norton Industries

  • Determine the fixed and variable cost using the high low method

June                 $5,500            700 hours
January            $2700,            300 hours
Variance          $ 2800            400 hours (Variable cost $7 per hour)
Fixed cost ($5,500- (700*7) = $600)
Fixed cost $ 600, Variable cost $7 per hour

  • Graph showing behavior and maintenance of cost, showing fixed and variable cost element.

E5-6 PCB Corporation
3,000 Units produced. Utilities and maintenance are mixed costs, fixed portion of costs are $300 and $200 respectively.

  • Identify the variable, fixed, and mixed costs

Direct material- Variable costs
Direct labor-Fixed cost
Utilities- Mixed cost
Property taxes-Fixed cost
Supervisory salaries- Fixed costs
Maintenance- Mixed costs
Depreciation- Variable costs

  • Calculate the expected costs when production is 5000 Units

Production Unites                   3,000
Production cost                       $
Direct material            12,500
Direct labor                             18,000
Utilities                                   3,300
Property taxes                         1,000
Supervisory salaries                 1,900
Maintenance                            1,700
Depreciation                            4,000
Total                                        42,400
E5-7, Memo to Marty Moser on Assumptions used in a CVP Analysis
 
Assumptions in a CVP Analysis
MEMORANDUM
To: Marty Moser
From:
Date: December 7, 2016
Re: Assumptions in a CVP Analysis
Introduction
A CVP analysis is used to determine the breakeven point of costs and volume of goods. This information enables managers to make appropriate decisions on the type of products to manufacture or supply, and the volume that they must sell in order to make a profit. Due to the uncertainty of factors that influence trade, this analysis makes various assumptions, which enable it to make realistic assumptions that are discussed below.
Linear Relationship
This model assumes that there is a linear relationship between the costs and revenue collected. Generally, it makes his assumption by dividing costs into two distinct parts, fixed and variable costs. On the variable costs, it assumes that the cost per unit is a fixed element. In reality, there are aspects such as trade discounts that make the relationships not to be linear.
Volume is the Only Factor That Affects Variable Costs
This model assumes that volume is the only factor that affects costs. In this case, there is an assumption that an increase in volume of variable costs results in a similar increase in cost. Therefore, this analysis ignores elements of productivity and efficiency that may differ depending on volume.
Constant Selling Price
            The CVP analysis also assumes that the selling price of goods and services is constant. To achieve this, it ignores the aspects of trade discount and changes in markets prices of goods and services. Moreover, it also assumes that businesses have a constant sales mix.
Conclusion
            To sum up, it is appropriate for financial analyst to remember that a CVP acts only as an indicator of probable market changes. Due to the many assumptions that it makes, it is prone to giving inaccurate figures. Nonetheless, due to its proven usefulness in making managerial decisions, managers should always use it when making decisions on the amount of products to produce so that they may make profits.
 
E5-10 Style Salon
Facts, Serves 560 clients at an average price of $120. The fixed costs were $21,024 and the Variable costs were 60% of the sales

  • Determine the contribution margin in dollars, per unit, and as a ratio.
  • Using contribution margin, calculate the break-even point in dollars and in units.

Solution

  1. Contribution Margin

Variable cost  0.6*120= $72
Contribution 120-72= $48
Contribution margin in dollars
560*48= $26,880
Contribution margin in dollars = $26,880
Contribution margin in dollars Per Unit
120-72= $48,
Contribution margin in dollars Per Unit= $48
Contribution Margin as a ratio
Selling Price: Contribution
120:48
Contribution margin as a ratio, 5:2

  • Breakeven point

Fixed costs/ Contribution margin per unit
21,024/48= 438 Units
In dollar amounts
438*120= $52,560
Revenues must equal $52,560
E5-11 Spencer Kars

  • Calculate the break-even point in dollars and in number of fares
  • Determine the contribution margin as the break-even point

Facts, 10-passenger vans offer 12 round trips per day,
Fare revenue is $1,500, total revenue is $36,000
Fixed Costs= $18000
Solution

  1. Trips needed to earn $36,000

36,000/1,500= 24 trips
Total variable cost for 24 trips is $9,000
Variable cost per trip 9,000/24= $375
Contribution margin per trip $1,500-$375= $1,125
Break-even point
Total fixed cost/ contribution per trip
Units: 18,000/1,125= 16 trips
Dollars: Trips* Selling cost {16*1500= 240,000}
$ 240,000
b.)  At breakeven point, the contribution margin is equal to the fixed cost. To elaborate, the fixed cost less break-even contribution is equal to zero at this point. Therefore, the contribution margin will be $18,000
E5-14 Naylor Company
Facts, Net income in 2016 is $210,000
Selling price per unit $150
Variable cost per unit $90
Fixed costs $570,000
Company president is required to increase income by $52,000

  • Compute units sold in 2016
  • Units to be sold in 2017 to reach the targeted profit

Solution

  1. Contribution: 150-90= 60

Units required to break-even
570,000/60= 9500
Units to earn $210,000 after break-even
210,000/60= 3,500
Total Units for 2016 income {9500+ 3500= 13,000 Units}
Units sold in 2016: 13,000 Units

  1. Units to be sold in 2017

Target profit: {210,000+ 52,000= 262,000}
Units to earn $262,000 after break-even
262,000/60= 4,367 Units
Units to be sold in 2017 {Break-even units+ Target Profit Units}
9,500+ 4,367= 13,867
2017 sales: 13,867 Units
E6-2: Jose Hebert’s Beauty Salon
Facts: 4000 haircuts. Average price is $30
Fixed costs: $16,800
Variable costs: 75% of sales

  • Determine contribution margin
  • Break-even point in dollars and units
  • Margin of safety in dollars and as a ratio

Solution

  1. Variable cost per unit

30*0.75= 22.5
Contribution margin per unit
30-22.5= $7.5
Contribution margin in dollars for 4000 haircuts
7.5*4,000= $30,000
Contribution margin as a ratio
Selling price: Contribution margin
30:7.5
4:1

  1. Compute breakeven point in dollars and units

Fixed cost/ contribution margin
Units
16800/7.5= 2,240 Units
Dollars
2,240* 30 = 67,200,    $67,200

  1. Margin of safety in dollars and as a ratio

{Current sales level- Breakeven point}/ Current sales Level
[(4,000*30) – 16,800]/ (4,000*30)]
(120,000 – 16,800)/ 120,000
Ratio: 103,200/ 120,000= 0.86           43:50
Dollars: percentage of margin of safety * revenue
0.86*4000*30= 103,200
E6-3 Barnes Company
Facts, August: Sales $325,000 (5000 Units)
Variable costs: $210,000
Fixed costs: $75,000
Alternative actions to increase net income

  • Increase selling price by 10% with no change in total variable costs or sales volume
  • Reduce variable costs to 58% of sales
  • Reduce fixed costs by $15,000

Compute net income earned under each alternative and identify the action with the highest net income?
Solution
Alternative A
Current selling price:
$325,000/ 5000= $65 per unit
Price after increase by 10%
1.1*65= 71.5
Net Income
Total revenue- (Fixed cost + Variable cost)
{(71.5*5,000) – (75,000+210,000)}
357,500-285,000= 72,500
New Income: $72,500
Alternative B
Reduce variable cost to 58% of sales
Sales: $325,000
Variable cost: 0.58* 325,000= 188,500
Net Income
Total revenue- (Fixed cost + Variable cost)
325,000- (188,500+ 72,500)
325,000-261,000= 64,000
Net Income: $64,000
Alternative C
Reduce fixed cost by $15,000
Adjusted fixed cost:
72,500-15,000= 57,500
Net Income
Total revenue- (Fixed cost + Variable cost)
325,000- (210,000+ 75,000)
325,000- 285,000= 40,000
Net Income: $40,000
Alternative A is the best option. It has the highest net income of $72,500
E6-5 Carey Company
Facts, 2016: Sales are 60,000 Units, $1,560,000
Variable cost $900,000, Fixed Cost $500,000
New raw material decreases variable cost by 20% (or $3)
50% of decline to be transferred to customers
5% increase in sales units after reduction in selling price

  1. Prepare CVP income statement assuming changes have not been made, and also assuming changes have been made

Solution
Assuming changes have not been made
Details                                                 $
Sales                                                    1,560,000
Variable Costs                                         900,000
Contribution Margin                              660,000
Fixed Costs                                             500,000
Total Income                                           160,000
 
Assuming changes have been made
Currents sales units: 60,000
Increased sales units: 1.05*60,000= 63,000
Current variable cost for 60,000 Units is $900,000
Current variable cost per unit: 900,000/60,000= 15
Adjusted variable cost: 0.8*15= 12
New total variable cost: 63,000*12= 756,000
Current selling price: 1,560,000/ 60,000= 26
New selling price: $26-1.5= 24.5
Adjusted Total sales: 24.5* 63,000= 1,543,500
 
Details                                                             $
Adjusted Sales                                    1,543,500
Adjusted Variable Costs                        756,000
Contribution Margin                              787,500
Fixed Costs                                             500,000
Total Income                                           287,500
E6-8 Express Delivery
Delivery of mail pouches and standardized delivery boxes {80% of revenue, margin of 20%}
Delivery of non-standardized boxes {20% revenue, 70% contribution margin}
Company believes non-standardized boxes have more opportunities.
Fixed cost is $12,000,000

  1. What is the company’s break-even point in dollars? At break-even, what are the number of sales from each type of service?
  2. If sales mix changes such that 60% is from non-standardized boxes and the remainder is from standardized boxes, what will be the company’s breakeven sales? What is the portion of sales from each unit?

Solution
Part a
Standardized (S): {80% of revenue, margin of 20%}
Non-Standard (NS): {20% revenue, 70% contribution margin}
Weighted contribution of Standard and non-Standard
{(0.8*0.2) + (0.2*0.7)}= 0.3
Contribution margin is 30%
Fixed cost is $12,000,000
At break-even point: Fixed cost=contribution
Therefore, Total Contribution is $12,000,000
Since, contribution margin is 30% of sales, then,
Sales at break-even point: 12,000,000/ 0.3= 36,000,000
Break-even point sales: $36,000,000
Number of sales for each unit
Sales mix
Standardized box and a pouch: (0.8*36,000,000)
Standardized box and a pouch: $28,800,000
Non-Standardized box: (0.2* 36,000,000)
Non-standardized box: $7,200,000
Part b
Standardized (S): {40% of revenue, margin of 20%}
Non-Standard (NS): {60% revenue, 70% contribution margin}
Weighted contribution of Standard and non-Standard
{(0.4*0.2) + (0.6*0.7)}= 0.5
Contribution margin is 50%
Fixed cost is $12,000,000
At break-even point: Fixed cost=contribution
Therefore, Total Contribution is $12,000,000
Since, contribution margin is 50% of sales, then,
Sales at break-even point: 12,000,000/ 0.5= 24,000,000
Break-even point sales: $24,000,000
Number of sales for each unit
Sales mix
Standardized box and a pouch: (0.4*24,000,000)
Standardized box and a pouch: $9,600,000
Non-Standardized box: (0.6* 24,000,000)
Non-standardized box: $14,400,000
E6-10 Personal Electronix

  1. Determine the sales mix and contribution margin ratio

Sales
iPad division {sales, $600,000), iPod division (Sales, $4,00,000) Total ($1,000,000)
iPad division: 600,000/1000,000= 60%
iPod division: 400,000/1000,000= 40%
Contribution
iPad division (contribution 180,000), iPod division (contribution 140,000) Total (320,000)
iPad division: 180,000/320,000= 56.25%
iPod division: 140,000/320,000= 43.75%

  1. Calculate the weighted average contribution margin ratio

iPad (Percentage Sale * Percentage Contribution) + iPod(Percentage Sale * Percentage Contribution)
Weighted contribution margin: (0.6*56.25+ 0.4*43.75)
Weighted contribution margin 51.25%

  1. Calculate the company’s breakeven point in dollars

At breakeven point: fixed cost= total contribution
Total contribution should be $120,000
Total sales at break-even point: 120,000/ 0.5125= 234,146.34

  1. Sales levels for each division at break-even point

iPad Division: 0.6* 234,146.34= $140,487.8
iPod Division: 0.4*234,146.34= $93,658.54