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# CVP Problems and Cost Accounting

1. Eastman Kodak Company produces and sells cameras, film, and other imaging products. A condensed 2000 income statement follows (in millions):

Sales \$13,994
Cost of goods sold 8,019
Gross Margin 5,975
Other operating expenses 3,761
Operating income \$2,214

Assume that \$1,800 million of the cost of goods sold is a fixed cost representing depreciation and other production costs that do not change with the volume of production. In addition, \$3,000 million of the other operating expenses is fixed.

1. Compute the total contribution margin for 2000 and the contribution margin percentage. Explain why the contribution margin differs from the gross margin.
2. Suppose that sales for Eastman Kodak were predicted to increase by 10% in 2001 and that the cost behavior was expected to continue in 2001 as it did in 2000. Compute the predicted operating income for 2001. By what percentage did this predicted 2001 operating income exceed the 2000 operating income?
3. What assumptions were necessary to compute the predicted 2001 operating income in requirement 2?

Calculate breakeven and target profit volumes.
Apply critical thinking skills to analyze business situations.

2. Boeing is the largest commercial airplane manufacturer in the world. In 1996, it began development of the 757-300, a 240-passenger plane with a range up to 4,010 miles. First deliveries took place in 1999, at a price of about \$70 million per plane.

Assume that Boeing's annual fixed costs for the 757-300 are \$950 million, and its variable cost per airplane is \$45 million.

1. Compute Boeing's break-even point in number of 757-300 airplanes and in dollars of sales.
2. Suppose Boeing plans to sell forty-two 757-300 airplanes in 2002. Compute Boeing's projected operating profit.
3. Suppose Boeing increased its fixed costs by \$84 million and reduced variable costs per airplane by \$2 million. Compute its operating profit if forty-two 757-300 airplanes are sold. Compute the break-even point. Comment on your results.
4. Ignore requirement 3. Suppose fixed costs do not change, but variable costs increase by 10% before deliveries of 757-300 airplanes begin in 2002. Compute the new break-even point. What strategies might Boeing use to help assure profitable operations in light of increases in variable cost?

Calculate breakeven and target profit volumes.
Apply critical thinking skills to analyze business situations.

#### Solution Preview

Problem 1

Eastman Kodak Company produces and sells cameras, film, and other imaging products. A condensed 2000 income statement follows (in millions):
Sales \$13,994
Cost of goods sold 8,019
Gross Margin 5,975
Other operating expenses 3,761
Operating income \$2,214
Assume that \$1,800 million of the cost of goods sold is a fixed cost representing depreciation and other production costs that do not change with the volume of production. In addition, \$3,000 million of the other operating expenses is fixed.
1. Compute the total contribution margin for 2000 and the contribution margin percentage. Explain why the contribution margin differs from the gross margin.

In order to find the contribution margin, we need to break the costs into fixed and variable. From the given details, in cost of goods sold 1,800 million is fixed and so 6,219 million in variable. In other operating expenses 3,000 million is fixed and so 761 is variable. The total variable costs are 6,219+761=6,980 and the total fixed costs are 1,800+3,000=4,800.
Contribution Margin = Sales - Variable Cost
Contribution Margin = 13,994-6,980=7,014 million
Contribution Margin percentage = Contribution margin/Sales
= 7,014/13,994=50.1%
The contribution margin is the amount left after total variable cost is subtracted from all the ...

#### Solution Summary

The solution has 2 questions relating to cost volume profit calculations and calculates the total contribution margin, contribution margin percentage, variable cost and fixed costs. This solutions are presented in two attached Word documents.

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