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CVP Income statement and Cost Behavior Analysis

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Utech Company bottles and distributes Livit, a diet soft drink. The beverage is sold for 50 cents per 16-ounce bottle to retailers, who charge customers 75 cents per bottle. For the year 2008, management estimates the following revenues and costs.

Net sales $1,800,000 Selling expenses-variable $70,000
Direct materials 430,000 Selling expenses-fixed 65,000
Direct labor 352,000 Administrative expenses-variable 20,000
Manufacturing overhead-variable 316,000 Administrative expenses-fixed 60,000
Manufacturing overhead-fixed 283,000

Hint:
Prepare a CVP income statement, compute break-even point, contribution margin ratio, margin of safety ratio, and sales for target net income.

Instructions
(a) Prepare a CVP income statement for 2008 based on management's estimates.

(b) Compute the break-even point in (1) units and (2) dollars.

(c) Compute the contribution margin ratio and the margin of safety ratio. (Round to full percents.)

(d) Determine the sales dollars required to earn net income of $238,000.

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Solution Summary

The solution explains how to prepare a CVP income statement, calculate breakeven, margin of safety and sales dollars required to earn a desired income

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Cost -volume-profit

The condensed income statement for the Terri and Jerry partnership for 2008 is as follows.

TERRI AND JERRY COMPANY
Income Statement
For the Year Ended December 31, 2008
Sales (200,000 units) $1,200,000
Cost of goods sold 800,000
Gross profit 400,000
Operating expenses
Selling $280,000
Administrative 160,000 440,000
Net loss ($40,000)

A cost behavior analysis indicates that 75% of the cost of goods sold are variable, 50% of the selling expenses are variable, and 25% of the administrative expenses are variable.

Instructions
(Round to nearest unit, dollar, and percentage, where necessary. Use the CVP income statement format in computing profits.)
(a) Compute the break-even point in total sales dollars and in units for 2008.

(b) Terri has proposed a plan to get the partnership "out of the red" and improve its profitability. She feels that the quality of the product could be substantially improved by spending $0.25 more per unit on better raw materials. The selling price per unit could be increased to only $6.25 because of competitive pressures. Terri estimates that sales volume will increase by 30%. What effect would Terri's plan have on the profits and the break-even point in dollars of the partnership? (Round the contribution margin ratio to two decimal places.)

(c) Jerry was a marketing major in college. He believes that sales volume can be increased only by intensive advertising and promotional campaigns. He therefore proposed the following plan as an alternative to Terri's. (1) Increase variable selling expenses to $0.79 per unit, (2) lower the selling price per unit by $0.30, and (3) increase fixed selling expenses by $35,000. Jerry quoted an old marketing research report that said that sales volume would increase by 60% if these changes were made. What effect would Jerry's plan have on the profits and the break-even point in dollars of the partnership?

(d) Which plan should be accepted? Explain your answer.

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