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# Evaluating Proposals with the help of CVP Analysis

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Phonetronix is a small manufacturer of telephone and communications devices. Recently, company management decided to investigate the profitability of cellular phone production. They have three different proposals to evaluate. Under all the proposals, the fixed costs for the new phone would be \$110,000. Under proposal A, the selling price of the new phone would be \$99 and the variable cost per unit would be \$55. Under proposal B, the selling price of the phone would be \$129 and the variable cost would remain the same.Under proposal C, the selling price would be \$99 and the variable cost would be \$49.

1. What are the break-even points in units and dollars under proposal A?

2. How did the increased selling price under proposal B impact the break-even points in
units and dollars compared to the break-even points calculated under proposal A?

3. Why did the change in variable cost under proposal C not impact the break-even points
in units and dollars as significantly as proposal B did?

#### Solution Preview

Please refer attached file for better clarity of tables and formulas.

Solution:

Proposal A Proposal B Proposal C
Fixed Costs F 110000 110000 110000
Variable cost per unit V 55 55 49
Price per unit P 99 129 99
Contibution Margin (P-V) 44 74 50
CM Ratio (P-V)/P 44.44% 57.36% 50.51%
Breakeven Sales Units=F/CM 2500 1486 2200
Breakeven Sales in ...

#### Solution Summary

Solution explains the steps for evaluating three proposals by CVP analysis.

\$2.19

## Analysis of Managerial Accounting

Need help with this problems.

2-48 CVP and Financial Statements for a Mega-Brand Company
Procter & Gamble Company is a Cincinnati-based company that produces household products under
brand names such as Gillette, Bounty, Crest, Folgers, and Tide. The company's 2006 income statement
showed the following (in millions):

Net sales \$68,222
Costs of products sold \$33,125
Selling, general, and administrative expense \$21,848
Operating income \$13,249

Suppose that the cost of products sold is the only variable cost; selling, general, and administrative expenses are fixed with respect to sales.
Assume that Procter & Gamble had a 10% increase in sales in 2007 and that there was no change in costs except for increases associated with the higher volume of sales.
Compute the predicted 2007 operating income for Procter & Gamble and its percentage increase. Explain why the percentage increase in income differs from the percentage increase in sales.

2-61 CVP in a Modern Manufacturing Environment
A division of Hewlett-Packard Company changed its production operations from one where alarge labor force assembled electronic components to an automated production facility dominated by computer-controlled robots. The change was necessary because of fierce competitive pressures. Improvements in quality, reliability, and flexibility of production schedules were necessary just to match the competition. As a result of the change, variable costs fell and fixed costs increased, as shown in the following assumed budgets:

Expected volume is 600,000 units per month, with each unit selling for \$3.10. Capacity is 800,000
units.
1. Compute the budgeted profit at the expected volume of 600,000 units under both the old and the
new production environments.
2. Compute the budgeted break-even point under both the old and the new production environments.
3. Discuss the effect on profits if volume falls to 500,000 units under both the old and the new production
environments.
4. Discuss the effect on profits if volume increases to 700,000 units under both the old and the new
production environments.
5. Comment on the riskiness of the new operation versus the old operation.

2-65 CVP and Break-Even
Goal: Create an Excel spreadsheet to perform CVP analysis and show the relationship
between price, costs, and break-even points in terms of units and dollars. Use the results to answer questions about your findings.

Scenario: Phonetronix is a small manufacturer of telephone and communications devices. Recently, company management decided to investigate the profitability of cellular phone production. They have three different proposals to evaluate. Under all the proposals, the fixed costs for the new phone would be \$110,000. Under proposal A, the selling price of the new phone would be \$99 and the variable cost per unit would be \$55. Under proposal B, the selling price of the phone would be \$129 and the variable cost would remain the same. Under proposal C, the selling price would be \$99 and the variable cost would be \$49. When you have completed your spreadsheet, answer the following questions:

1. What are the break-even points in units and dollars under proposal A?
2. How did the increased selling price under proposal B impact the break-even points in
units and dollars compared to the break-even points calculated under proposal A?
3. Why did the change in variable cost under proposal C not impact the break-even points in units and dollars as significantly as proposal B did?

Step-by-Step:
1. Open a new Excel spreadsheet.
2. In column A, create a bold-faced heading that contains the following:
Row 1: Chapter 2 Decision Guideline
Row 2: Phonetronix
Row 3: Cost-Volume-Profit (CVP) Analysis
Row 4: Today's Date
3. Merge and center the four heading rows across columns A through D.
4. In Row 7, create the following bold-faced, right-justified column headings:
Column B: Proposal A
Column C: Proposal B
Column D: Proposal C
Note: Adjust cell widths when necessary as you work.
5. In Column A, create the following row headings:
Row 8: Selling price
Row 9: Variable cost
Row 10: Contribution margin
Row 11: Contribution margin ratio
Skip a row
Row 13: Fixed cost
Skip a row
Row 15: Break-even in units
Skip a row
Row 17: Break-even in dollars
6. Use the scenario data to fill in the selling price, variable cost, and fixed cost amounts
for the three proposals.
7. Use the appropriate formulas from this chapter to calculate contribution margin,
contribution margin ratio, break-even in units, and break-even in dollars.
8. Format all amounts as:

9. Change the format of the selling price, contribution margin, fixed cost, and break-even in dollars amounts to display a dollar symbol.
10. Change the format of both contribution margin headings to display as indented:

11. Change the format of the contribution margin amount cells to display a top border,
using the default line style.
Border tab: Icon: Top Border
12. Change the format of the contribution margin ratio amounts to display as a percentage
with two decimal places.
Number tab: Category: Percentage
Decimal places: 2
13. Change the format of all break-even headings and amounts to display as bold-faced.
14. Activate the ability to use heading names in formulas under Tools &#8594; Options:
Calculation tab: Check the box: Accept labels in formulas
15. Replace the cell-based formulas with "word-based" equivalents for each formula used
in Proposal A.
Example: Contribution margin for proposal B would be:
= ('Selling price' 'Proposal B') &#8722; ('Variable cost' 'Proposal B')
Note: The tic marks used in the example help avoid naming errors caused by data having similar titles (i.e., "contribution
margin" and "contribution margin ratio"). The parentheses help clarify groupings.