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

- 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

- 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

- 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

- 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

- 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

- 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

- 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

- 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

- What is the company’s break-even point in dollars? At break-even, what are the number of sales from each type of service?
- 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**

- 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%

- 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%

- 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

- 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

** **