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CVP Questions

I need assistance with these three problems regarding a break-even problem solving.


Magic Realm, Inc., has developed a new fantasy board game. The company sold 15,000 games last year at selling price of $20 per game. Fixed costs associated with the game total $182,000 per year, and variable costs are $6 per game. Production of the game is entrusted to a printing contractor. Variable costs consist mostly of a payment to this contractor.

1. Prepare a contribution format income statement for the game last year and compute the degree of operating leverage.
2. Management is confident that the company can sell 18,000 game next year (an increase of 3,000 games, or 20% over last year).
a. The expected percentage increase in net operating income for next year.
b. The expected total dollar net operating income for next year (Do not prepare an income statement: use the degree of operating leverage to compute your answer.)


Olongapo Sports Corporation is the distributor in the Philippines of two premium golf balls- the Flight Dynamic and Sure Shot. Monthly sales and the contribution margin ratios for the two products follow:

Fixed expense total P183, 750 per month. (The currency in the Philippines is the peso, which is denoted by P.)

1. Prepare a contribution format income s statement for the company as a whole. Carry computations to one decimal place.

2. Compute the break-even point for the company based on the current sales mix.

3. If sales in increase by P100,000 a month by how much would you expect net operating income to increase? What are your assumptions?

23- A
Sales Mix; Break-Even Analysis; Margin of Safety
Island Novelties, Inc., of Palau makes two products. Hawaiian Fantasy and Tahitian Joy. Present revenue cost and sales data for the two products follow:

Fixed expense total $475,800 per year. The Republic of Palau uses the U.S. dollar as its currency.

1. Assuming the sales mix given above, do the following:
a. Prepare a contribution format income statement showing both dollar and percent columns for each product and for the company as a whole.
b. Compute the break-even point in dollar for the company as whole and the margin of safety in both dollars and percent.

2. The company has developed a new product to called Samoan Delight. Assume that the company could sell 10,000 units at $45 each. The variable expense would be $36 each. The company's fixed expenses would not change.
a. Prepare another contributions format income statement, including sales of the Samoan Delight (sales of the other two products would not change).
b. Compute the company's new break-even point in dollar and the new margin of safety in both dollars and percent.

3. The president of the company examines your figures and says, There's something strange here. Our fixed costs haven't changed and you show greater total contribution margin if we add the new product, but you also show our break-even point going up. With greater contribution margin, the break-even point should go down, not up. You've made a mistake somewhere." Explain to the president what has happened.

See attached file for full problem description.


Solution Summary

The solution has 3 problems relating to cost volume profit calculations