# Cost Volume Profit Analysis and Marginal Costing

I need a long explanation (world document)about short term decision analysise(step by step).e.g.break-even, contribution, CPV, limiting factors, relevant cost etc. I need to understand so please include a good example(restaurant,)in Ecxel document as well.

I will greatly approciate it!!!

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I need a long explanation (world document)about short term decision analysise(step by step).e.g. break-even, contribution, CPV, limiting factors, relevant cost etc. I need to understand so please include a good example(restaurant,)in Ecxel document as well.

The contribution margin is computed by subtracting total variable expenses from total revenues, or by subtracting per-unit variable expenses from per-unit revenues. The contribution margin ratio is the contribution margin divided by revenue; this ratio can be computed on either a total amount or a per unit amount.

The contribution margin is used in business to see the total amount that can be used to cover fixed expenses and earn a profit. And, the contribution margin ratio is used to see what portion (percentage) of each sales dollar is available to cover fixed expenses and earn a profit.

Contribution margin is the difference between revenues and total variable expenses. It can be expressed in total dollars or on a percentage basis, called contribution margin ratio.

The contribution margin is very useful in preparing pro-forma income statements, in preparing target net income statements, and in breakeven computations. Identifying potential expenses as either fixed or variable when identified with revenue allows easier "what if" types of analysis. Thus, the contribution margin approach to income determination is useful in simplifying the information to make better and more informed decisions concerning a future business. An example is as follows:

Safford Company

Contribution Income Statement

Month Ended September 30, 2000

Sales $27,000

Variable Expenses 16,200

Contribution Margin $10,800

Fixed Expenses 8,000

Net Income $ 2,800

College Pizza delivers pizzas to the dormitories and apartments near a major state university. The company's annual fixed expenses are $40,000. The sales price of a pizza is $10, and it costs the company $5 to make and deliver each pizza. (In the following exercises, ignore income taxes).

1. Using the contribution-margin approach, compute the company's break even point in units (pizzas).

Break even Point=

= Fixed expenses/ (Contribution Margin per unit)

=40000/ (10-5)

=8000 units

2. What is the contribution-margin ratio?

=Contribution/Sales

=5/10

=50%

3. Compute the break-even sales revenue. Use the contribution-margin ration in your calculation.

= Fixed expenses/ (Contribution Margin Ratio)

=40000/ (50%)

=$80000

4. How many pizzas must the company sell to earn a target net profit of $65,000: Use the equation method.

Total revenue= Total cost + Profit

Let the quantity be x

10x =65000+40000+5x

5x= 115000

x=23000 units

...

#### Solution Summary

This explains the concepts such as Break-even point, Contribution, CVP, limiting factors, relevant cost supported by practical and easy examples

Cost-Volume-Profit Analysis Cost Accounting

Kool-skinz Company manufactures custom-designed skins (covers) for iPods and other portable MP3 devices. Variable costs are $10.80 per custom skin, the price is $18, and fixed costs are $66960.

Required:

1. What is the contribution margin for one custom skin?

2. How many custom skins must Kool-skins Company sell to break even?

3. If Kool Skins Company sells 12000 custom skins, what is the operating income?

4. Calculate the margin of safety in units and in sales revenue if 12000 custom skins are sold.

McDuffy's Inc has developed a chew-proof dog bed-the McTuffie. Fixed costs are $144000 per year. The average price for the McTuffie is $32 and the average variable cost is $24/unit. Currently, McDuffie produces and sells 20000 McTuffies.

Required:

1. How many McTuffies must be sold to break even?

2. If McDuffy wants to earn $46000 in profit, how many McTuffies must be sold? Prepare a variable costing income statement to verify your answer.

3. Supposed that McDuffy would like to lower the break-even units to 12000. The company does not believe that the price or fixed cost can be changed. Calculate the new unit variable cost that would resulting in break-even units of 12000

4. What is McDuffy's current contribution margin and operating income? Calculate the degree of operating leverage (round to two decimal places) if sales increased by 10% next year. What would the percent change in operating income be? What would the new total operating income for next year be?

Sash Melton owns and operates The Green Belt Company (GBC), which produces live plants and flower arrangements to professional offices. Sasha has fixed costs of $2389 per month for office/greenhouse rent, advertising, and a delivery van. Variable costs for the plants, fertilizer, pots, and other supplies aver $25/job. GBC chares $60 per month for the average job.

Required:

1. How many jobs must GBC average each month to break even?

2. What is the operating income for GBC in a month with 65 jobs? With 90 jobs?

3. Sasha faces a tax rate quality to %30. How many jobs must Sasha have per month to earn an after-tax income of $980? (round to nearest whole unit)

4. Suppose that Sasha's fixed costs increase to $2500 per month and she decides to increase the price to $75/job. What is the new break-even point in number of jobs per month? (round to the nearest whole number of jobs)

Sara Pacheco is a sophomore in college and earns a little extra month by making beaded key ring accessories. She sells them on Saturday mornings at the local flea market. Sara charges $5 per unit and has unit variable costs (beads, wire rings, ext.) of $2. Her fixed costs consist of small pliers, a glue gun, etc. which cost her $90/

Required:

1. Calculate Sara's break even units

2. Prepare a profit-volume graph for Sara

3. Prepare a cost-volume-profit graph for Sara.

BB Company produces a variety of breads. The plant manager would like to expand production into sweet rolls as well. The average price of a loaf of bread is $1. Anticipated price for a package of sweet rolls is $1.50. costs for the new level of production are as follows:

Cost driver Unit variable cost Level of cost driver

Loaf of bread 0.65 -

Package of sweet rolls 0.93 -

Setups 300 250

Maintenance hrs 15 3500

Other data:

Total fixed costs (traditional) $185000

Total fixed costs (ABC) 57500

BB believes it can sell 600000 loaves of bread and 200000 packages of sweet rolls in the coming year.

Required:

1. Prepare a contribution-margin-based income statement for the next year. Be sure to show sales and variable costs by product and in total

2. Compute the break-even sales for the company as a whole using conventional analysis.

3. Compute the break0even sales for the company as a hole using activity-based analysis.

4. Compute the break-even units of each product in units. Does it matter whether you use conventional analysis or activity based analysis? Why or why not?

5. Supposed that VV could reduce the setup cost of $100 per setup and could reduce the number of maintenance hrs needed to 1000. How many units of each product must be sold to break even in this case? (round to nearest whole unit)