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CVP questions

Can you help me get started with these exercises?

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

Thank you for your help.

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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
Administration ($7,500+$1.00/unit)........................27,500
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

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