P5-2A Prepare a CVP income statement, compute break-even point, contribution margin ratio, margin of safety ratio

and sales for target net income

Jorge Company bottles and distributes B-Lite, 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 2017, management estimates the following revenues

and costs.

Sales

$1,800,000

Selling expenses – variable

$70,000

Direct materials

430,000 Selling expenses – fixed

65,000

Direct labor

360,000 Administrative expenses – variable

20,000

Manufacturing overhead- variable

380,000 Administrative expenses – fixed

60,000

Manufacturing overhead -fixed

280,000

Instructions

(a) Prepare a CVP income statement for 2017 based on management estimates. (show column for total amounts only.)

(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 the nearest full percent.)

(d) Determine the sales dollars required to earn net income of $180,000.

NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" .

(a)

Prepare a CVP income statement for 2017 based on management estimates. (show column for total amounts only.)

JORGE COMPANY

CVP Income Statement (Estimated)

For the Year Ending December 31, 2017

Sales

Variable expenses

Cost of goods sold

Selling expenses

Administrative expenses

Total variable expenses

Contribution margin

Fixed expenses

Cost of goods sold

Selling expenses

Administrative expenses

Total fixed expenses

Net income

(b)

$1,800,000

$1,170,000

135,000

80,000

1,385,000

415,000

280,000

Value

60,000

?

?

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

(b)(1)

Value

Value

?

Fixed costs

Unit contribution margin

Break-even point in units

(b)(2)

Break-even point in units

Unit selling price

Unit variable costs

Unit contribution margin

Value

Value

?

Break-even point in dollars

Break-even point in units

Unit selling price

Break-even point in dollars

Value

Value

?

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

Contribution margin ratio

Unit contribution margin

Unit selling price

Contribution margin ratio

Margin of safety ratio

Total sales

Break-even sales

Margin of safety (dollars)

Total sales

Margin of safety ratio

(d)

Value

Value

?

Value

Value

Value

Value

Value

Determine the sales dollars required to earn net income of $180,000.

Sales dollars required to earn target income

Fixed costs

Value

Target income

Value

Total fixed cost + target income

?

Contribution margin ratio

?

Sales dollars required

?

After you have completed P5-2A, consider the following additional question

1.

Assume that the unit selling price per bottle changed to $0.60 each, and fixed manufacturing costs

increased to $300,000. Show impact of these changes on calculations.

CD5 – EXCEL Tutorial

CURRENT DESIGNS

Bill Johnson, sales manager, and Diane Buswell, controller at Current Designs are beginning to analyze the cost

considerations for one of the composite models of the kayak division. They have provided the following production

and operational costs necessary to produce one composite kayak.

Kevlar®

Resin and supplies

Finishing kit (seat, rudder, ropes, etc.)

Labor

Selling and administrative expenses – variable

Selling and administrative expenses – fixed

Manufacturing overhead – fixed

$250 per kayak

$100 per kayak

$170 per kayak

$420 per kayak

$400 per kayak

$119,000 per year

$240,000 per year

Bill and Diane have asked you to provide a cost-volume-profit analysis, to help them finalize the budget projections for

the upcoming year. Bill has informed you that the selling price of the composite kayak will be $2,000.

Instructions

(a) Calculate variable cost per unit.

(b) Determine the unit contribution margin.

(c ) Using the unit contribution margin, determine the break-even point in units for this product line.

(d) Assume that Current Designs plans to earn $270,000 on this product line. Using the unit contribution

margin, calculate the number of units that need to be sold to achieve this goal.

(e ) Based on the most recent sales forecast, Current Design plans to sell 1,000 units of this model.

Using your results from part (c ), calculate the margin of safety and the margin of safety ratio.

NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" .

(a) Calculate variable cost per unit.

Kevlar®

Resin and supplies

Finishing kit (seat, rudder, ropes, etc.)

Labor

Selling and administrative expenses – variable

Total variable costs per unit

Value

Value

Value

Value

Value

?

(b) Determine the unit contribution margin.

Unit selling price

Unit variable cost

Unit contribution margin

Value

?

?

(c ) Using the unit contribution margin, determine the break-even point in units for this product line.

Selling and administrative expenses – fixed

Manufacturing overhead – fixed

Total fixed costs (a)

Unit contribution margin (b)

Break-even points (units) (a ÷ b)

Value

Value

?

Value

?

(d) Assume that Current Designs plans to earn $270,000 on this product line. Using the unit contribution

margin, calculate the number of units that need to be sold to achieve this goal.

Total fixed costs

Target net income

Total fixed costs + target net income (a)

Unit contribution margin (b)

Units need to be sold (a ÷ b)

Value

Value

?

Value

?

(e ) Based on the most recent sales forecast, Current Design plans to sell 1,000 units of this model.

Using your results from part (c ), calculate the margin of safety and the margin of safety ratio.

Margin of safety

Actual (expected) sales

Break-even sales

Margin of safety (dollars)

Value

Value

?

Margin of safety ratio

Margin of safety (dollars) (a)

Actual (expected) sales (b)

Margin of safety ratio (a ÷ b)

Value

Value

?

After you have completed CD-5, consider the following additional question

1. Assume that the unit selling price per kayak changed to $2,200 each, and fixed manufacturing overhead

increased to $360,000. Show impact of these changes on calculations.

E6-3 Compute net income under different alternatives

Barnes Company reports the following operating results for the month of August: sales $325,000

(units 5,000); variable costs $210,000; and fixed costs $75,000. Management is considering the following

independent courses of action to increase net income.

1.

Increase selling price by 10% with no change in total variable costs or sales volume.

2.

Reduce variable costs to 58% of sales.

3.

Reduce fixed costs by $15,000.

Instructions

Compute the net income to be earned under each alternative. Which course of action will produce the

highest net income?

NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" .

1.

Increase selling price by 10% with no change in total variable costs or sales volume.

Current selling price

New selling price

(Round to nearest cent)

?

?

Total sales

Less: variable costs

Contribution margin

Less: fixed costs

Net income

2.

3.

?

?

?

Value

?

Reduce variable costs to 58% of sales.

Total Sales

Less: variable costs

Contribution margin

Less: fixed costs

Net income

Value

Value

?

Value

?

Reduce fixed costs by $15,000.

Total Sales

Less: variable costs

Contribution margin

Less: fixed costs

Net income

Value

Value

?

Value

?

After you have completed E6-3, consider the following additional questions.

1.

Assume that unit selling price increased 5% with no change in total variable costs or sales volume.

2.

Assume variable costs decreased to 53% of sales.

3.

Assume that fixed costs increased by $20,000.

Which course of action will produce the highest net income?

CD6 EXCEL Tutorial

CURRENT DESIGNS

Current Designs manufactures two different types of kayak, rotomolded kayaks and composite kayaks.

The following information is available for each product line.

Sales price/unit

Variable costs/unit

Rotomolded

$950

$570

Composite

$2,000

$1,340

The company’s fixed costs are $820,000. An analysis of the sales mix identifies that rotomolded kayaks

make up 80% of the total units sold.

Instructions

(a) Determine the weighted-average unit contribution margin for Current Designs.

(b) Determine the break-even points in units for Current Designs and identify how many units of each

type of kayak will be sold at the break-even point. (Round to the nearest whole number.)

(c ) Assume that the sales mix changes, and rotomolded kayaks now make up 70% of total units sold.

Calculate the total number of units that would need to be sold to earn a net income of $2,000,000

and identify how many units of each type of kayak will be sold at this level of income. (Round to the

nearest whole number.)

(d) Assume that Current Designs will have sales of $3,000,000 with two-thirds of the sales dollars in

rotomolded kayaks and one-third of the sales dollars in composite kayaks. Assuming $660,000 of fixed

costs are allocated to the rotomolded kayaks and $160,000 to the composite kayaks, prepare a CVP

income statement for each product line.

(e ) Using the information in part (d), calculate the degree of operating leverage for each product line and

interpret your findings. (Round to two decimal places.)

(a) Determine the weighted-average unit contribution margin for Current Designs.

Sales price/unit

Variable costs/unit

Unit Contribution margin (UCM)

Product mix

Weighted Average UCM

Rotomolded

Kayaks

Value

Value

?

Value

?

+

Composite

Kayaks

Value

Value

?

Value

?

?

(b) Determine the break-even points in units for Current Designs and identify how many units of each

type of kayak will be sold at the break-even point. (Round to the nearest whole number.)

Fixed costs

Weighted Average UCM

Breakeven units

Breakeven unit distribution

Value

Value

?

Rotomolded

Kayaks

?

Composite

Kayaks

?

(c ) Assume that the sales mix changes, and rotomolded kayaks now make up 70% of total units sold.

Calculate the total number of units that would need to be sold to earn a net income of $2,000,000

and identify how many units of each type of kayak will be sold at this level of income. (Round to the

nearest whole number.)

Target net income in units:

Sales price/unit

Variable costs/unit

Unit Contribution margin (UCM)

Product mix

Weighted Average UCM

Rotomolded

Kayaks

Value

Value

?

Value

?

Required sales in units:

Total fixed costs

Target net income

Total required sales (dollars)

Weighted Average UCM

Required sales in units

Value

Value

?

?

?

+

Composite

Kayaks

Value

Value

?

Value

?

?

Value

Value

?

?

?

(d) Assume that Current Designs will have sales of $3,000,000 with two-thirds of the sales dollars in

rotomolded kayaks and one-third of the sales dollars in composite kayaks. Assuming $660,000 of fixed

costs are allocated to the rotomolded kayaks and $160,000 to the composite kayaks, prepare a CVP

income statement for each product line.

Sales

Variable Costs

Contribution Margin

Fixed Costs

Net Income

Rotomolded

Kayaks

Value

Value

?

Value

?

Composite

Kayaks

Value

Value

?

Value

?

(e ) Using the information in part (d), calculate the degree of operating leverage for each product line and

interpret your findings. (Round to two decimal places.)

Rotomolded

Kayaks

Contribution Margin (a)

Value

Value

Net Income (b)

Degree of Operating Leverage (a ÷ b

?

Composite

Kayaks

Value

Value

?

Interpretation of findings:

After you have completed CD6, consider the following additional question.

1. Assume that variable cost per unit for the rotomolded kayak and composite kayak changed to $610 and

$1,400 respectively. Show impact of these changes on each of the scenarios provided.

P7-3A Determine if product should be sold or processed further.

Thompson Industrial Products Inc. (TIPI) is a diversified industrial-cleaner processing company. The company’s Dargar plant

produces two products: a table cleaner and a floor cleaner from a common set of chemical inputs (CDG). Each week 900,000

ounces of chemical input are processed at a cost of $210,000 into 600,000 ounces of floor cleaner and 300,000 ounces of table

cleaner. The floor cleaner has no market value until it is converted into a polish with the trade name FloorShine. The additional

processing costs for this conversion amount to $240,000.

FloorShine sells at $20 per 30-ounce bottle. The table cleaner can be sold for $17 per 25-ounce bottle. However, the table

cleaner can be converted into two other products by adding 300,000 ounces of another compound (TCP) to the 300,000 ounces

of table cleaner. This joint process will yield 300,000 ounces each of table stain remover (TSR) and table polish (TP). The

additional processing costs for this process amounts to $100,000. Both table products can be sold for $14 per $25-ounce bottle.

The company decided not to process the table cleaner into TSR and TP based on the following analysis.

Production in ounces

Revenue

Costs:

CDG costs

TCP costs

Total costs

Weekly gross profit

Table

Cleaner

300,000

$204,000

70000*

0

70,000

$134,000

Process Further

Table Stain

Table

Remover (TSR)

Polish (TP)

300,000

300,000

$168,000

$168,000

52,500

50,000

102,500

$65,500

52,500

50,000

102,500

$65,500

Total

$336,000

105,000 **

100,000

205,000

$131,000

*If table cleaner is not processed further, it is allocated 1/3 of the $210,000 of CDG cost, which is equal to 1/3 of the

total physical output.

** If table cleaner is processed further, total physical output is 1,200,000 ounces. TSR and TP combined account for

50% of the total physical output and are each allocated 25% of the CDG cost.

Instructions

(a)

Determine if management made the correct decision to not process the table cleaner further by doing the following.

(1) Calculate the company’s total weekly gross profit assuming the table cleaner is not processed further.

(2) Calculate the company’s total weekly gross profit assuming the table cleaner is processed further.

(3) Compare the resulting net incomes and comment on management’s decision.

(b)

Compare the resulting net incomes and comment on management’s decision.

NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" .

(a)

Determine if management made the correct decision to not process the table cleaner further by doing the following.

(1) Calculate the company’s total weekly gross profit assuming the table cleaner is not processed further.

Table Cleaner Not Processed Further

Sales:

FloorShine

Table cleaner

Total Revenue

Costs:

CDG

Additional costs of FloorShine

Total costs

Gross profit

(a)

?

?

?

Value

Value

?

?

Determine if management made the correct decision to not process the table cleaner further by doing the following.

(2) Calculate the company’s total weekly gross profit assuming the table cleaner is processed further.

Table Cleaner Processed Further

Sales:

FloorShine

Table Stain Remover

Table Polish

Total Revenue

Costs:

CDG

Additional costs of FloorShine

TCP

Total costs

Gross profit

(a)

Value

Value

Value

?

Value

Value

Value

?

?

Determine if management made the correct decision to not process the table cleaner further by doing the following.

(3) Compare the resulting net incomes and comment on management’s decision.

Response:

(b)

Compare the resulting net incomes and comment on management’s decision.

Incremental revenue

Incremental costs

Total

Don’t Process

Table Cleaner

Further

Value

Value

?

Process

Table Cleaner

Further

Value

Value

?

Net Income

Increase

(Decrease)

Value

Value

?

Response:

1.

After you have completed P7-3A, consider the following additional question.

Assume that the selling price of the two table products after further processing changed to $13

for each 25-ounce bottle and the cost of TCP compound to further process changed to $120,000.

How do these changes impact the decision to process or not process further?

CD7 EXCEL Tutorial

CURRENT DESIGNS

Current Designs faces a number of important decisions that require incremental analysis. Consider each

of the following situations independently.

Situation 1

Recently, Mike Cichanowski, owner and CEO of Current Designs, received a phone call from the president

of a brewing company. He was calling to inquire about the possibility of Current Designs producing "floating

coolers" for a promotion his company was planning. These coolers resemble a kayak but are about one-third

the size. They are used to float food and beverages while paddling down the river on a weekend leisure trip.

The company would be interest in purchasing 100 coolers for the upcoming summer. It is willing to pay $250

per cooler. The brewing company would pick up the coolers upon completion of the order.

Mike met with Diane Buswell, controller, to identify how much it would cost Current Designs to produce

the coolers. After careful analysis, the following costs were identified.

Direct materials

Direct labor

$80/unit

$60/unit

Variable overhead

Fixed overhead

$20/unit

$1,000

Current Designs would be able to modify an existing mold to produce the coolers. The cost of these

modifications would be approximately $2,000.

Instructions

(a) Prepare an incremental analysis to determine whether Current Designs should accept this special order to

produce the coolers.

(b) Discuss additonal factors that Mike and Diane should consider if Current Designs is currently operating at

full capacity.

Situation 2

Current Designs is always working to identify ways to increase efficiency while becoming more environmentally

conscious. During a recent brainstorming session, one employee suggested to Diane Buswell, controller, that the

company should consider replacing the current rotomold oven as a way to realize savings from reduced energy

consumption. The oven operates on natural gas, using 17,000 therms of natural gas for an entire year. A new,

energy-efficient rotomold oven would operate on 15,000 therms of natural gas for an entire year. After seeking out

price quotes from a few suppliers, Diane determined that it would cost approximately $250,000 to purchase a new,

energy-efficient rotomold oven. She determines that the expected useful life of the new oven would be 10 years, and

it would have no salvage value at the end of its useful life. Current Designs would be able to sell the current oven for

$10,000

Instructions

(a) Prepare an incremental analysis to determine if Current Designs should purchase the new rotomold oven,

assuming that the average price for natural gas over the next 10 years will be $0.65 per therm.

(b) Diane is concerned that natural gas prices might increase at a faster rate over the next 10 years. If the company

projects that the average natural gas price of the next 10 years could be as high as $0.85 per therm, discuss

how that might change your conclusion in (a).

Situation 3

One of Current Designs’ competitive advantages is found in the ingenuity of its owners and CEO, Mike Cichanowski. His

involvement in the design of kayak molds and production techniques has led to Current Designs being recognized as an

industry leader in the design and production of kayaks. This ingenuity was evident in an improved design of one of the

most important component of a kayak, the seat. The "Revolution Seating System" is one-of-a-kind, rotating axis seat

that gives unmatched, full contact, under-leg support. It is quickly adjustable with a lever-lock system that allows for a

customizable seat position that maximizes comfort for the rider.

Having just designed the "Revolution Seating System", Current Designs must now decide whether to produce the seats

internally or buy them from an outside supplier. The costs for Current Designs to produce the seats are as follows.

Direct materials

Variable overhead

$20/unit

$12/unit

Direct labor

Fixed overhead

$15/unit

$20,000

Current Designs will need to produce 3,000 seats this year; 25% of the fixed overhead will be avoided if the seats are

purchased from an outside vendor. After soliciting prices from outside suppliers, the company determined that it will

cost $50 to purchase a seat from an outside vendor.

Instructions

(a) Prepare an incremental analysis showing whether Current Designs should make or buy the "Revolution Seating

System."

(b) Would your answer in (a) change if the productive capacity released by not making the seats could be used to

produce income of $20,000?

NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" .

Situation 1

(a) Prepare an incremental analysis to determine whether Current Designs should accept this special order to

produce the coolers.

Net Income

Reject Order

Accept Order

Increase (Decrease)

Revenues

Value

?

Value

Costs

Net income

Value

?

Value

?

?

?

Response:

(b)

Discuss additonal factors that Mike and Diane should consider if Current Designs is currently operating at

full capacity.

Response:

Situation 2

(a)

Prepare an incremental analysis to determine if Current Designs should purchase the new rotomold oven,

assuming that the average price for natural gas over the next 10 years will be $0.65 per therm.

Variable mfg. costs

New oven costs

Proceed from

scrapping old oven

Total

Retain Oven

?

Value

Replace Oven

?

Value

Net Income

Increase

(Decrease)

?

?

Value

Value

?

?

?

?

Response:

(b)

Diane is concerned that natural gas prices might increase at a faster rate over the next 10 years. If the company

projects that the average natural gas price of the next 10 years could be as high as $0.85 per therm, discuss

how that might change your conclusion in (a).

Variable mfg. costs

New oven costs

Proceed from

scrapping old oven

Total

Retain Oven

?

Replace Oven

?

Net Income

Increase

(Decrease)

?

Value

Value

?

Value

Value

?

?

?

?

Response:

Situation 3

(a) Prepare an incremental analysis showing whether Current Designs should make or buy the "Revolution Seating

System."

Net Income

Make

?

Buy

Value

(Decrease)

Value

Direct labor

?

Value

Value

Variable mfg. costs

?

Value

Value

Fixed mfg. costs

Value

?

?

Purchase price

Value

?

?

?

?

?

Direct materials

Total annual cost

Response:

(b)

Would your answer in (a) change if the productive capacity released by not making the seats could be used to

produce income of $20,000?

Total annual cost

Make

Value

Buy

Value

Net Income

Increase

(Decrease)

Value

Opportunity cost

Value

Value

Value

?

?

?

Total cost

Response:

After you have completed CD7, consider the following additional questions.

1.

Assume in situation 1, the unit selling price changed to $195, fixed overhead changed to $1,800 and

the cost of modifications changed to $3,000. Show the impact of these changes on decision to accept or

reject the special order.

2.

Assume in situation 2, the purchase price of the new oven changed to $100,000. Would this change

the decision to retain or replace the oven?

3.

Assume in situation 3, that the estimated number of seats to be produced changed to 3,500 and the cost to purchase

one seat from an outside supplier changed to $55. Should Current Designs make or buy the seats?

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