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Basics of Cost-Volume-Profit (CVP) Analysis

Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $20 per unit. Variable costs are $8 per unit, and fixed costs total $180,000 per year.

Required:

Answer the following independent questions:

1. What is the product's CM ratio?

2. Use the CM ratio to determine the break-even point in sales dollars.

3. Due to an increase in demand, the company estimates that sales will increase by $75,000 during the next year. By how much should net operating income increase (or net loss decrease) assuming that fixed costs do not change?

Solution Preview

1. What is the product's CM ratio?

The contribution margin is the excess of sales revenues over total variable costs. (In other words, the contribution margin is the amount generated by sales, after paying variable costs, to cover fixed costs and return profits.) The contribution margin per unit (C) is the excess of the selling price per unit (P) over the variable cost per unit (V).

In this case,
C=P-V
C=$20-$8
C=$12

The contribution margin ratio (CMR) equals the contribution margin per unit (C) divided by the selling price per unit (P). CMR is the percentage of each ...

Solution Summary

This solution describes how to compute the contribution margin ratio and how to use it to determine the break-even point in sales dollars.

$2.19