ACC 11.5 Method of CVP analysis

Collins Co. earned a profit of $2,000 in January. The company has estimated that sales will increase by $13,500 in February. Assume that fixed costs for January were $3,000 (and are not expected to change) and the variable cost ratio is 40%. What is the expected profit for the next month?

$10,100 Expected profit: $13,500 - 0.4($13,500) + $2,000 = $10,100

Stanley Company manufactures and sells one product for $200 per unit. The variable costs per unit are $140, and monthly total fixed costs are $7,500. Last month Stanley sold 100 units and expects sales to remain the same for the current month. If fixed costs increase by $1,500, what is the break-even point for the current month?

$30,000 Contribution margin percent: ($200 - $140) / $200 = 30% Break-even point: 0.30x - ($7,500 + $1,500) = 0 x = $30,000

Heyburn Company had the following income statement: Sales revenue (1,000 units) $900,000 Variable costs 440,000 Contribution margin $460,000 Fixed costs 352,000 Net income $108,000 Given this data, Heyburn Company's per-unit contribution margin is:

$460 Contribution margin per-unit: $460,000 / 1,000 = $460

Anderson Corporation sells picture calendars for $10 each. The fixed costs of production are $300,000, and the variable costs are 60% of the selling price. The company desires to make a profit of $120,000. How many calendars must it sell?

105,000 Units needed for target income: $10X - 0.6($10X) - $300,000 = $120,000 X = 105,000

Everclean Company cleans draperies. It charges $90 to clean a full-size drape, and its variable and fixed costs are $55 per drape and $10,000 per year, respectively. Given these data, if Everclean's fixed costs increased to $15,000, how many drapes must the firm clean to earn $60,000?

2,143 Units for target income: $90x - $55x - $15,000 = $60,000 x = 2,143

After the break-even point is reached, a firm that has a per-unit contribution margin of $20 will have a $500 increase in profits when sales increase by:

25 units Sales increase: $500 / $20 = 25 units

Everclean Company cleans draperies. It charges $90 to clean a full-size drape, and its variable and fixed costs are $55 per drape and $10,000 per year, respectively. Given these data, if Everclean's variable costs were reduced to $50 per drape, how many drapes would the firm have to clean to break even?

250 Break-even units: $90x - $50x - $10,000 = 0 x = 250

The excess of sales over variable costs is equal to:

Contribution margin

Increasing the selling price and decreasing sales volume will increase profit if:

Contribution margin increases

As activity level increases within the relevant range, total variable costs usually will:

Increase

As fixed costs increase, the break-even point in units will:

Increase

If a company's total fixed costs decreased by $6,000 and its contribution margin increased by $12,000, net income would:

Increase by $18,000 $6,000 + $12,000 = $18,000 increase in net income

When other factors remain constant, a decrease in sales price:

Increases the number of units needed to earn profits

When other factors remain constant, an increase in variable costs:

Increases the number of units needed to earn profits

The contribution margin minus total fixed costs is equal to:

Net income