Question

AC 204 - Introduction to Accounting II

Chapter 5: Cost-Volume-Profit (CVP) Analysis

CEG Ski Corporation

Total

Per unit

Sales

330,000

$

550

$

Units sold = 600

Variable expenses

165,000

275

Contribution margin

165,000

$

275

$

Fixed expenses

75,000

Net operating income

90,000

$

FOR EACH SITUATION, YOU NEED TO EVALUATE HOW THE CHANGES AFFECT CONTRIBUTION MARGIN AND HOW

THE CHANGES AFFECT FIXED EXPENSES.

Also, increase in fixed costs = decrease to income; decrease in fixed costs = increase to income.

SITUATION 1: CHANGES IN VARIABLE COSTS AND SALES VOLUME (NO CHANGE IN FIXED COSTS):

What is the profit impact if CEG can use higher quality raw materials, thus increasing variable

costs per unit by $15, to generate an increase in unit sales from 600 to 675?

SITUATION 2: CHANGES IN FIXED COSTS AND SALES VOLUME:

What is the profit impact if CEG can increase unit sales from 600 to 700 by increasing the

monthly advertising budget by $15,000?

SITUATION 3: CHANGES IN FIXED COSTS, SALES PRICE AND SALES VOLUME:

What is the profit impact if CEG: (1) cuts its selling price $10 per unit, (2) increases its advertising

budget by $10,000 per month, and (3) increases sales from 600 to 670 units per month?

SITUATION 4: CHANGES IN VARIABLE COSTS, FIXED COSTS AND SALES VOLUME:

What is the profit impact if CEG: (1) pays a $25 sales commission per wakeboard sold instead of

paying salespersons flat salaries that currently total $15,000 per month, and (2) increases unit

sales from 600 to 675 bikes?

SPECIAL SITUATIONS - CHANGE IN SELLING PRICE:

If CEG has an opportunity to sell 130 wakeboards to a wholesaler without disturbing sales to

other customers or fixed expenses, what price would it quote to the wholesaler if it wants to

to increase monthly profits by $5,000?

BREAK EVEN ANALYSIS CALCULATIONS:

TARGET PROFIT ANALYSIS CALCULATIONS:

CEG wants to have profits each month of $120,000. Determine how many wakeboards it must it

sell then and determine target in terms of dollar sales.

MARGIN OF SAFETY:

What is CEG's Margin of Safety for the original set of facts?

A) Margin of safety in dollars = Total sales - break-even sales

B) Margin of safety percentage = Margin of safety in dollars divided by total sales in dollars

OPERATING LEVERAGE:

Degree of operating leverage = contribution margin divided by net operating income

--With an operating leverage of 5, if CEG increases its sales by 10%, income would increase by 50%.

--Higher fixed costs in cost structure = higher operating leverage

Answer 1

	600 units	Per unit
Sales	$       330,000	$        550
Less Variable Expenses	$       165,000	$        275
Contribution Margin	$       165,000	$        275
Less Fixed Expenses	$         75,000
Net Operating Income	$         90,000

Situation 1

	675 units	Per unit
Sales	$       371,250	$        550
Less Variable Expenses	$       195,750	$        290
Contribution Margin	$       175,500	$        260
Less Fixed Expenses	$         75,000
Net Operating Income	$       100,500

Contribution Margin increases by $10500, fixed costs remaining same, net operating income increases by $10500

Situation 2

	700 units	Per unit
Sales	$       385,000	$        550
Less Variable Expenses	$       192,500	$        275
Contribution Margin	$       192,500	$        275
Less Fixed Expenses	$         90,000
Net Operating Income	$       102,500

Contribution Margin increases by $27500, fixed costs increases by $15000, net operating income increases by $12500

Situation 3

	670 units	Per unit
Sales	$       361,800	$        540
Less Variable Expenses	$       184,250	$        275
Contribution Margin	$       177,550	$        265
Less Fixed Expenses	$         85,000
Net Operating Income	$         92,550

Contribution Margin increases by $12550, fixed costs increases by $10000, net operating income increases by $2550

Situation 4

	675 units	Per unit
Sales	$       371,250	$        550
Less Variable Expenses	$       202,500	$        300
Contribution Margin	$       168,750	$        250
Less Fixed Expenses	$         60,000
Net Operating Income	$       108,750

Contribution Margin increases by $3750, fixed costs decreases by $15000, net operating income increases by $18750

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