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# CVP questions

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Can you help me get started with these exercises?

The assignment is below I have included underneath each problem some facts that are known.

---------------
1.) The following information provides the amount of cost incurred in May for the cost items indicated. During May 16,000 units of the firm's single product were manufactured.

Raw Materials........................................................\$83,000
Factory depreciation expense................................81,000
Direct labor............................................................198,400
Production supervisor's salary..............................12,200
Computer rental expense..........................................8,400
Maintenance supplies used.......................................1,600

I know that you must decide which costs will vary and which will be fixed before determining total costs at the June operating level.

A.) How much cost would you expect to be incurred for each of these items during June when 19,200 units of the product are planned for production?
B.) Calculate the average total cost per unit for the 16,000 units manufactured in May. Explain why this figure would not be useful to a manager interested in predicting the cost of producing 19,200 units in June.

2.) CVP relationships

Calculate the missing amounts for each of the following firms:

Units Selling Variable Costs Contribution Fixed Op.
Sold Price per unit Margin Costs Income Loss
FirmA 5600 \$12.00 ?a \$25200 \$20300 ?b

FirmB 16800 ?c \$22.20 ?d 84500 \$43180

FirmC ?e 7.30 3.20 28700 ?f (13500)

FirmD 14160 ?g 55.25 66,552 73250 ?h

3.) Prepare a contribution margin format income statement; answer what-if questions.

Revenues.............................................................................\$160,000
Cost of goods sold (\$16,000+\$3.20/unit).............................80,000
Gross profit..............................................................................80,000
Operation Expenses
Selling (\$4,500 +\$1.40/unit).....................................32,500
Operation income...................................................................20,000

a.) Prepare an income statement in the contribution margin format
b.) Calculate the contribution margin per unit and the contribution margin ratio.
c.) Calculate the firm's operating income (or less) if the volume changed from 20,000 units to
a. 25, 000 units.
b. 11,000 units.
d.) Refer to answer (a) when total revenues were \$160,000. Calculate the firm's operating income (or loss) if unit selling price and variable expenses do not change, and total revenues
a. Increase by \$18,000
b. Decrease by \$12,000

I know that the variable portion of each cost is the part given on a per-unit basis. These are deducted first from sales revenue in determining contribution margin before deducting the fixed costs on a contribution margin approach income statement. Variable cost can be listed separately if that simplifies this.

4.) CVP analysis what-if questions; sales mix issue
Camden Metal Co. makes a single product that sells for \$84.00 per unit. Variable costs are \$54.00 per unit, and fixed costs total \$120,000 per month.

a.) Calculate the number of units that must be sold each month for the firm to break even
b.) Calculate operating income if 5,000 units are sold in a month.
c.) Calculate operating income if the selling price is raised to \$88 per unit, advertising expenditures are increased by \$16,000 per month, and monthly unit sales volume becomes 5,200 units.
d.) Assume that the firm adds another product to its product line and that the new product sells for \$40 per unit, has variable costs of \$28 per unit, and causes fixed expenses in total to increase to \$150,000 per month. Calculate the firm's operating income if 5,000 units of the original product and 3,000 units of the new product are sold each month. For the original product, use the selling price and variable cost data given in the problem statement.
e.) Calculate the firm's operating income if 4,000 units of the original product and 4,000 units of the new product are sold each month.
f.) Explain why operating income is different in parts d and e, even though sales totaled 8,000 units in each case.

I know that when a second product is added in part d, the fixed costs increase to a total of \$150,000. This includes the previous \$120,000 of fixed costs that the firm already has.

5.) HighTech, Inc. and OldTime Co. compete within the same industry and had the following operating results in 2008.
HighTech OldTime

Sales............................................................\$2,100,000 \$2,100,000
Variable expenses...........................................420,000 1,260,000
Contribution margin..................................\$1,680,000 \$840,000
Fixed expenses.............................................1,470,000 630,000
Operating income..........................................\$210,000 \$210,000

a.) Calculate the break-even point for each firm in terms of revenue.
b.) What observations can you draw by examining the break-even point of each firm given that they earned an equal amount of operating income on identical sales volumes in 2008?
c.) Calculate the amount of operating income (or loss) that you would expect each firm to report in 2009 if sales were to
a. Increase by 20%
b. Decrease by 20%
d.) Using the amounts computed in requirement c above, calculate the increase or decrease in the amount of operating income expected in 2009 from the amount reported in 2008.
e.) Explain why an equal percentage increase (or decrease) in sales for each firm would have such differing effects on operating income.
f.) Calculate the ratio of contribution margin to operating income for each firm in 2008.
g.) Multiply the expected increase in sales of 20% for 2009 by the ratio of contribution margin to operating income for 2008 computed in requirement f for each firm.
h.) Multiply your answer in requirement g by the operating income of \$210,000 reported in 2008 for each firm.
i.) Compare your answer in requirement h with your answer in requirement d. What conclusion can you draw about the effects of operating leverage from the steps you performed in requirements f, g, and h?

The things I know is in question f you would divide contribution margin by operating income. Question g you would multiply your answer in f by .2. I also know that when sales volume changes variable cost will to (obviously). I believe that the answers in d and h should be the same you just get them two different ways.

#### Solution Preview

1.) The following information provides the amount of cost incurred in May for the cost items indicated. During May 16,000 units of the firm's single product were manufactured.

Raw Materials........................................................\$83,000
Factory depreciation expense................................81,000
Direct labor............................................................198,400
Production supervisor's salary..............................12,200
Computer rental expense..........................................8,400
Maintenance supplies used.......................................1,600

I know that you must decide which costs will vary and which will be fixed before determining total costs at the June operating level.

A.) How much cost would you expect to be incurred for each of these items during June when 19,200 units of the product are planned for production?

The variable cost would increase with the increase with production while the fixed cost would remain the same. The variable costs would be
Total Per unit
Raw Material 83,000 5.1875
Direct labor 198,400 12.4
Maintenance supplies used 1,600 0.1
Total variable cost 283,000
Rest of the costs would be fixed in nature. The total fixed costs are
Factory depreciation expense 81,000
Production supervisor's salary 12,200
Computer rental expense 8,400
Total fixed cost 101,600

The costs incurred in June with 19,200 units would be
Raw Material 5.1875 X 19,200 = 99,600
Direct labor 12.4 X 19,200 = 238,080
Maintenance supplies used 0.1 X 19,600 = 1,960
The fixed costs would be
Factory depreciation expense 81,000
Production supervisor's salary 12,200
Computer rental expense 8,400

B.) Calculate the average total cost per unit for the 16,000 units manufactured in May. Explain why this figure would not be useful to a manager interested in predicting the cost of producing 19,200 units in June.

The total cost = 283,000+101,600 = 384,600
Average cost per unit = 384,600/16,000 = \$24.0375

This cost is not useful since not all costs are variable. The fixed costs would reduce on a per unit basis as the volume rises and so the average cost in June would be lower and so the average cost per unit for May would not be representative for the costs in June.

2.) CVP relationships

Calculate the missing amounts for each of the following firms:

Units Selling Variable Costs Contribution Fixed Op.
Sold Price per unit Margin Costs Income Loss
FirmA 5600 \$12.00 ?a \$25200 \$20300 ?b

FirmB 16800 ?c \$22.20 ?d 84500 \$43180

FirmC ?e 7.30 3.20 28700 ?f (13500)

FirmD 14160 ?g 55.25 66,552 73250 ?h

Firm A
Variable cost per unit = Total variable cost/number of units
Total variable cost = Revenue - Contribution margin = 5,600 X 12 - 25,200 = 42,000
Variable cost per unit = 42,000/5,600 = \$7.50
Operating income = contribution margin - fixed ...

#### Solution Summary

The solution explains some questions using CVP analysis

\$2.19
Similar Posting

## Using both the Plantwide and the Activity-based costing approach, calculate the unit cost for each product. Direct Labour Hours should be used as the basis for applying overheads.

These 2 questions are proving to be too much for me and I am running short of time!! I really need to see how one would work through these calculations, step by step and then understand why.

Question 1:
The Yandina Manufacturing Company Ltd produced 40,000 lamps in 2008. The following
cost data were obtained from company records:
Annual Amounts\$
120,000
200,000
80,000
120,000
40,000
80,000
Amounts Per unit \$
3.00
5.00
2.00
3.00
1.00
2.00
Direct materials
Direct labour
Revenue sales for 2008 were \$2,500,000 with a selling price per unit of \$62.50.
The company's income tax rate last year was 50 per cent and is expected to remain the
same next year.
Sales in units for 2009 are expected to remain the same. Based on market research,
Yandina anticipates that it with be possible to achieve an increase of 8 per cent in the selling price
in 2009.
All variable costs are budgeted to increase by 5 per cent while fixed costs are estimated to
increase 3 per cent.
Required
1. Calculate the annual contribution margin and the contribution margin per lamp unit for 2008.

2. Using the contribution margin approach, calculate the company's break-even point in units for
2008
3. What is the contribution margin ratio for 2008?

4. Calculate the break-even sales revenue. Use the contribution margin ratio in your calculation
for 2008
5. Using CVP analysis, how many lamps must Yandina Company sell in 2009 to have a net
operating profit after tax (NPAT) of \$1,000,000?)
6. Will the Yandina Company achieve the desired 2009 net operating profit after tax (NPAT) of
\$1,000,000 if sales for 2009 remain at 40,000 lamps (as in 2008)? Explain, briefly in about 25
words, why or why not
7. Explain, in about 100 words, how cost volume profit (CVP) analysis can be used by
management
8. One of the assumptions underlying CVP analysis is a constant sales mix over the relevant
range of activity. What are the other assumptions underlying CVP analysis? Provide your
Page 1 of 2

Questions 2:
The Noosa Bicycle Co Pty Ltd (NBC) manufactures two types of racing bicycles?amateur and
professional. NBC uses the plantwide costing approach to allocate overhead costs to each product
and base the allocation on the direct labour hours used by each product. Currently, the total
overhead costs budgeted for January 2009 is \$14,800. NBC uses the cost plus 20% mark-up
method to establish each product's selling price. Consequently, NBC has set its current selling
price for amateur at \$182.40 and professional at \$255.60.
In recent months, a trend has developed in orders where demand for the professional racing
bicycles has increased by 10% but amateur racing bicycles have decreased by 5%. For example,
NBC sold 210 amateur bicycles and 90 professional bicycles in December 2008. The managing
director is considering reducing the production level of amateur bicycles and possibly, if the
current trend continues, dropping the amateur range. However, you believe that before making a
decision on changing production levels or dropping a product range you need to examine the
accuracy of the current costing system.
You have been engaged as an external consultant. You think that you need to analyse the
information using the activity-based costing method because you believe it will be a better means
to allocate overhead costs to each product. The following information has been provided for
January 2009. The sales forecast figures, monthly costs, and activities reflect the changing trend
in demand for each product:
Budgeted Monthly Sales and Costing Data for January 2009
Product
Amateur
Professional
Quantity of
January Sales
200
100
Direct Material
Costs
\$90
\$120
Component
No. of Parts
10
15
25
Direct Labour
Hours
400
300
Activity
No. of Design
Changes
6
9
15
Direct Labour
cost
\$4,000
\$3,000
Activity
No. of
Setups
5
7
12
Monthly Activity and Component Data for January 2009
Activity
No. of times bicycles
are Handled
20
30
50
Product
Amateur
Professional
Total activities
The total overhead costs based on activities and components for January 2009 were:
Handling\$5,000
No. of parts\$6,500
Design changes\$1,800
Setups\$1,500
Total\$14,800

Required
1. Calculate the unit cost for each product using direct labour hours as the basis for applying