Question

ambridge Business Publishers WHI. Cost Estimation and CVP Analysis Presented are the functional income statements of Regional Distribution Inc. for two recent years: CVP model and how they affect the reliability of the model. Module 16 Cost-Volume-Profit Analysis and Planning LO2, REGIONAL DISTRIBUTION INC. Functional Income Statements For Years Ending December 31, Year 1 and Year 2 Year 1 Year 2 $1,800,000 $1,585,000 Sales. Expenses Cost of goods sold Shipping ...... Sales order processing. Customer relations Depreciation Administrative Before-tax profit Income taxes (20%) $1,350,000 68,500 20,650 55,000 30,000 90,500 $1,188,750 65,250 19,850 48,800 30,000 90,000 (1,614,650) 185,350 (37,070) $ 148,280 (1,442,650) 142,350 (28,470) $ 113,880 Alter-tax profit.. Required 4. Determine Regional Distribution's break-even point in sales dollars. 6. What dollar sales volume is required to earn an after-tax profit of $250,000? Assuming sales of $4,000,000 next year, prepare a budgeted contribution income statement. 4. Discuss the reliability of the calculations in requirements (a–c), including the limitations of the

Answer 1

a. To determine the break-even point, you must first find the contribution margin as a percent of sales and the fixed costs per period. Because there are no taxes at the break-even point, our analysis is based on before-tax information:

Variable costs as a percent of sales	Fixed costs	Break-even point
= (Change in total costs / Change in Sales) = ($1,614,650 - $1,442,650) / ($1,800,000 - $1,585,000) = 0.8	= $1,442,650 - ($1,585,000 * 0.8) = $174,650	= $174,650 / (1 – 0.8) = $873,250

b. Sales volume required to earn an after-tax profit of $250,000:

Required before-tax profit = $250,000/(1 – 0.2) = $312,500

Required sales = ($174,650 + $312,500)/(1 – 0.8) = $2,435,750

c.

Regional Distribution, Inc.

Contribution Income Statement

Sales	4,000,000
Variable costs ($4,000,000 ´ 0.8)	(3,200,000)
Contribution margin	800,000
Fixed costs	(174,650)
Before-tax profits	625,350
Income taxes at 20 percent	(125,070)
After-tax profit	500,280

d. The method used for determining the cost equation for Regional Distribution with the available data was the high-low method, which used only two data points. There was not sufficient information to determine whether those two data points were representative of the larger population of data points. Also, it was not possible to determine the possible effects of inflation on the data from 2010 to 2011. Also, if Regional Distribution has multiple products and or departments that have varying cost structures, using aggregate data for the company as a whole to estimate its costs and break-even point may not produce accurate results. The cost-volume-profit model works best when there is a single cost driver and all costs are either variable or fixed with respect to that cost driver. For that reason, the model is generally more effective for analyzing smaller segments of a business, such as a particular product line.