# CVP ABC Analysis

Chapter 16 9-14

9. What is the basic C-V-P equation? What is a more detailed version of this equation?

10. What is the contribution margin, and why is it important for managers to know the contribution margins of their products?

11. How much will profits increase for every unit sold over the break-even point?

12. What is the major advantage of using C-V-P graphs?

13. When other factors are constant, what is the effect on profits of an increase in fixed costs? Of a decrease in variable costs?

14. What are the limiting assumptions of C-V-P analysis?

16-13, 16-14, and 16-17

16-13 The C-V-P Equation

The company sells lawnmowers for $895 each. The variable cost per lawnmower is $520. The company's monthly fixed costs are $84,500. Using the C-V-P equation, compute the amount of profit the company will have for a month in which the company sells 375 lawnmowers.

16-14 Break-Even Units

The company sells shovels for $27.75 each. The variable cost per shovel is $14.25. The company's monthly fixed costs are $2,538. Compute the number of shovels the company must sell to break even.

16-17 Break Even Sales Revenue

The company has a variable cost ratio of 65% and monthly fixed costs of $91,000. What is the company's break-even point in terms of sales dollars?

Chapter 16: Exercise 16-17 C-V-P Analysis

The Last Outpost is a tourist stop in a western resort community. Kerry Yost, the owner of the shop, sells hand-woven blankets for an average price of $30 per blanket. Kerry buys the blankets from weavers at an average cost of $21. In addition, he has selling expenses of $3 per blanket. Kerry rents the building for $300 per month and pays one employee a fixed salary of $500 per month.

1. Determine the number of blankets Kerry must sell to break even.

2. Determine the number of blankets Kerry must sell to generate a profit of $1,000 per month.

Assume that Kerry can produce and sell his own blankets at a total variable cost of $16 per blanket, but that he would need to hire one additional employee at a monthly salary of $600.

1. Determine the number of blankets Kerry must sell to break even.

2. Determine the number of blankets Kerry must sell to generate a profit of $1,000 per month.

Chapter 22: Exercises 22-2 and 22-3

22-2 Importance of Manufacturing Overhead Allocation

The percentages of product costs comprised by direct materials, direct labor, and manufacturing overhead for three companies are as follows:

Company A Company B Company C

Direct materials 7% 21% 42%

Direct labor 13 42 49

Manufacturing overhead 80 37 9

100% 100% 100%

Based on this information, which of these three companies would probably improve its product costing accuracy most by converting to activity-based costing (ABC)? Explain your answer.

22-3 Product Cost Hierarchy

For the following list of costs, indicate by the appropriate letter which category of activities each cost applies to: unit level (U), batch level (B), product line (P), or facility support (F):

1. Machine fine-tuning adjustment cost (required after the production of each unit)

2. Salary of vice president of finance

3. Machine inspection cost (required after the completion of each day's production)

4. Cost of the external audit firm

5. Direct labor

6. Product testing cost (performed at the start of each day's production)

7. Direct materials

8. Factory security cost

9. Machine straight-line depreciation cost (Generally, machines are dedicated to producing a particular type of product.)

10. Warehousing cost (Each type of product has its own warehouse.)

11. Employee training cost (Training is generally specific to different types of products.)

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#### Solution Preview

9. What is the basic C-V-P equation? What is a more detailed version of this equation?

Sale Price (S) - Variable Cost (V) = Contribution Margin (CM)

The detailed version of this equation is:

Profit = Revenue - Variable cost - Fixed Cost

10. What is the contribution margin, and why is it important for managers to know the contribution margins of their products?

Contribution margin=Sales Price - Variable cost

It is important for managers to know the contribution margin to know which products they should focus on to improve their overall profits. Also, it helps the managers in understanding which products are not performing well and helps them decide how to improve products profitability or remove the product from the portfolio if margins are not attractive for the product.

11. How much will profits increase for every unit sold over the break-even point?

The Profits increase by the amount equal to Contribution margin (SP-VC) for every unit sold over the break even point.

12. What is the major advantage of using C-V-P graphs?

The major advantage of using C-V-P graphs is that it provides managers a bird's eye view of their product performance. This also helps the managers know how much profit they will be able to achieve by selling certain number of products.

13. When other factors are constant, what is the effect on profits of an increase in fixed costs? Of a decrease in variable costs?

? Profits would reduce with increase in fixed costs.

? Profits would increase with decrease in variable costs.

14. What are the limiting assumptions of C-V-P analysis?

? Selling price is constant throughout the ...

#### Solution Summary

This posting provides answers to several questions on CVP Analysis, ABC Analysis and Product Cost Hierarchy questions