Question

342 Chapter 7 Cost-Volume-Profit Analysis All applicable Exercises are available with McGraw-Hill's Connect Accounting C C CL ACCOUNTING Exercises Exercise 7-23 Fill in Blanks; Basic CVP Relationships (LO 1,2) Fill in the missing data for each of the following independent cases. Sales Revenue Total Contribution Margin Operating Income - Not Variable Expenses $40,000 ? 40,000 22,000 Fixed Expenses $30,000 ? $ 80,000 Break-Even Sales Revenue $40,000 80,000 $15,000 80,000 ? $50,000 38,000 ? 110,000 ? Exercise 7-24 Pizza Delivery Business Basic CVP Analysis LO 1, 2, 4) Smart Pizza delivers pizzas to the dormitories and apartments near a major university. The company's annual fixed expenses are $40,000. The sales price of a pizza is $10, and it costs the company $6 to make and deliver each pizza. Required: 1. Using the contribution-margin approach, compute the company's break-even point in units (pizzas). 2. What is the contribution-margin ratio? 3. Compute the break-even sales revenue. Use the contribution-margin ratio in your calculation 4. How many pizzas must the company sell to earn a target operating income of $80,000? Use the equation method. Exercise 7-25

Answer 1

Solution to Exercise 7-23 is given below:

Figures in BOLD and ITALICS are the missing figures

Cases	Sales Revenue ($)	Variable Expenses ($)	Total Contribution Margin ($)	Fixed Expenses($)	Operating Income ($)	Break-Even Sales Revenue ($)	Contribution Margin Ratio
1	160000	40000	120000	30000	90000	40000	75.00
2	80000	65000	15000	15000	0	80000	18.75
3	120000	40000	80000	30000	50000	45000	66.67
4	110000	22000	88000	50000	38000	62500	80.00

Solution to Exercise 7-24 is as given below:

Particulars	Amount ($)
Sales Revenue	10 per Pizza
Variable Cost	6 per Pizza
Total Contribution (Sales-Variable Cost)	4 per pizza
Annual Fixed Expenses	40000

1) Computation of Company's Break Even Point (in Units)

Break Even Point (in units)= Fixed Cost / (Sales per unit-Variable Cost per unit)

=40000/(10-6)

=10000 Pizzas

2) Contribution Margin Ratio

The contribution margin ratio is the difference between a company's sales and variable expenses, expressed as a percentage. The total margin generated by an entity represents the total earnings available to pay for fixed expenses and generate a profit. When used on an individual unit sale, the ratio expresses the proportion of profit generated on that specific sale.

To calculate the contribution margin ratio, divide the contribution margin by sales. The contribution margin is calculated by subtracting all variable expenses from sales. The formula is:

(Sales - Variable expenses) ÷ Sales = Contribution margin ratio

3) Computation of Break Even Sales Revenue using Contribution Margin Ratio

Contribution Margin Ratio = (Sales-Variable Expenses) / Sales multiply by 100

=(4/10)X 100

=40%

Break Even Sales Revenue= Fixed Expenses/ Contribution Sales Percentage

=40000/40%

=$100000

4) Computation of Units Sold to earn an Operating Income of $ 80000

Assume x units of Pizzas are sold

Operating Income = Total Contribution Margin - Fixed Expenses

It is given that, 80000 = 4x-40000 (Solving the given equation)

Therefore, x= 30000

Hence, 30000 pizzas must be sold to earn an Operating Income of $80000.