Demonstrate your understanding of CVP analysis.
Price and cost data per month are as follows: Sales Price per unit
(current monthly sales volume is 120,000 units)
$20.00
Variable costs per unit:
Direct Materials
$5.10
Direct Labor
$6.20
Variable Manufacturing Overhead
$2.80
Variable Selling and administrative expenses
$1.90
Total Variable Costs per unit
$16.00
Monthly fixed expenses:
Fixed Manufacturing Overhead
$185,600.00
Fixed Selling and administrative expenses
$274,400.00
Total Fixed Expenses
$460,000.00
Requirements – Please answer your questions by showing your work. For example
1. Please answer the following three questions by creating a contribution margin statement formatted like the review problem at the bottom of page 94.
ie. (this is the example of the format like you see on page 94) TOTAL
Per Unit
Percent of Sales
Sales (xx,000 units)
$x,xxx,000
$xx.00
100%
Variable Expenses
Xxx,xxx
xx.00
Xx%
etc
a. What is the company’s contribution margin per unit?
b. What is the contribution margin percentage?
c. What is the total contribution margin?
2. What would the company’s monthly operating income be if it sold 130,000 units?
(You are required to create the Contribution format Income Statement to receive full credit)
3. What would the company’s monthly operating income be if it had sales of $3,000,000?
(You must show an entire CM income statement to demonstrate how your arrive at the operating income)
4. Please answer the following two questions using the FORMULA METHOD (page 85 & 86)
a. What is the break-even point in unit sales?
b. What is the breakeven point in sales dollars?
5. How many units would the company have to sell to earn a target monthly profit of $260,000? (You must write the formula on your answer first and then show the amounts in the computation; you may figure out what page to find this formula)
6. Management is currently in contract negotiations with the labor union. If the negotiations fail, direct labor costs will increase by 15% and fixed costs will increase by $15,000 per month. If these costs increase, how many units will the company have to sell each month to break even? (HINT: first, CM format chart like #1 with the new amounts, then compute the BE in units like you did in 4.a) Please show your work
Return to the original data for the rest of the questions.
7. What is the company’s current operating leverage factor? (round to two decimal places and show your work)
8. If sales volume increases by 5%, by what percentage will operating income increase? (please re-recreate the CM format income statement like in #1, only with the new amounts, and then compute the percentage of change to the operating income; HINT: percentage of change is computed by taking the CHANGE in Op Inc / ORIGINAL Op Inc.
9. Please show the formula you are using to solve the following two questions.
a. What is the firm’s current margin of safety in sales dollars?
b. What is its margin of safety as a percentage of sales?
