6 Sep 2022

58

Cost-Volume-Profit Analysis: How to Do CVP Analysis

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The following data are available for a product manufactured and sold by Logan Company: Compute the following: (a) Contribution margin per unit: $ 84 

(b) Number of units that must be sold to break-even: 5,572 units 

(c) Dollar sales volume to produce income of $864,000 before taxes: $ 3,363,636 

Computations: 

Contribution margin: This is the profit earned for each unit sold. 

Contribution margin per unit = sales price per unit – variable cost per unit = $ 212 - $ 128 = $ 84 

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Break-even point: This is the point where the position of an organization is such that it neither incurs loss nor generates any profit. 

Break-even (in units) = Fixed cost / contribution margin per unit = $ 468,000 / $84 = 5,572 units 

Contribution margin ratio = Contribution margin per unit / sales price per unit * 100 

= $84/ $212* 100 

= 39.6% 

Dollar sales value = ( Fixed cost + Desired income before taxes) / contribution margin ratio 

= ($468,000 + $ 864,000) / 39.6% 

= $ 3,363,636 

2. Incremental analysis 

Information regarding current operations of the Farrell Corporation is given below: A proposed addition to Farrell’s factory is estimated by the sales manager to increase sales by a maximum of $750,000. The company’s accountants have determined that the proposed addition will add $320,000 to fixed costs each year. Variable costs are expected to be at the same percentage as they currently are before the proposed addition. 

(a) Explain why the existing $310,000 of fixed costs is a sunk cost while the $320,000 of fixed costs associated with the proposed addition is an out-of-pocket cost. Fixed cost dealing with the current operation is a sunk cost since irrespective of the proposed addition, the cost will not change while the other cost is an incremental cost that is associated with the project. 

(b) Calculate by how much the proposed addition will either increase or reduce operating income. Show all work. 

Particulars  Current  Proposed  Difference 
Sales              950,000.00        1,700,000.00           750,000.00 
Less Variable Costs            (450,000.00)          (805,263.16)         (355,263.16) 
Contribution              500,000.00            894,736.84           394,736.84 
Fixed Costs            (310,000.00)          (630,000.00)         (320,000.00) 
Income              190,000.00            264,736.84             74,736.84 

Operating income will increase by 74,736.84. 

3. Responsibility income statement-preparation 

GAMELAND VILLAGE 

Segments 

Income Statement by Product Lines 

For the Month Ended April 30, 20__ 

 
  Gameland Village  Software    Video Games 
  Dollars  Dollars  Dollars 
Sales  600000  100.00%  400000  100.00%  200000  100.00% 
Variable Costs  (372000)  (62.00)%  (260000)  (65.00)%  (112000)  (56.00)% 
Contribution margin  228000  38.00%  140000  35.00%  88000  44.00% 
Tracable fixed cost  (36000)  (6.00)%  (20000)  (5.00)%  (16000)  (8.00)% 
Departmental margins  192000  32.00%  120000  30.00%  72000  36 
Common fixed cost  (42000)  (7.00)%    0.00%    0.00% 
Income from operations  150000  25.00%         

4. Standard cost system labor variance 

The following computations of March labor variances for Sam’s Supply Company are incomplete. The missing items are labeled (a) through (d). 

Labor rate variance = 4,800 hours  [ (a) – $8.50] = $350 favorable Labor efficiency variance = (b)  [ (c) – 5,000 hours] = $ (d) 

On the appropriately labeled line, identify each missing item by name (a through c) and show the missing value (a through d). Show supporting computations in the space provided. 

(a) = $ 8.5729 

(b) $ 8.5729 

(c) 4,800 hours 

(d) = $ 1,714.58 F 

(e) During March, the supervisor left for vacation without arranging for a replacement. Which variances would have been most affected by this situation? The labor efficiency variance (when one assumes that the supervisor is on paid vacation) 

Computation: 

4,800 hours ´ [(a) – $8.50] = $350 favorable 

(a-8.50) = .0729 

a = 8.5729 

Standard rate = a = 8.5729 

b = Standard rate = 8.5729 

c = Actual hours = 4800 

Labor efficiency variance = (b) ´ [(c) – 5,000 hours] 

LEV = 8.5729(4800-5000) 

LEV =1714.58 F = d 5. Capital budgeting 

Flynn Corporation is debating whether to purchase a new computerized production system. The system will cost $450,000, and have an estimated 10-year life with a salvage value of $70,000. The estimated operating results from the new production system are as follows: All revenue and expenses other than depreciation will be received and paid in cash. Compute the following for this proposal: 

(a) Annual net cash flow: $ 95,000 

(b) Payback period: 4.7 years 

(c) Return on average investment: 25.33

(d) Net present value, discounted at an annual rate of 6% (present value of $1 due in 10 years, discounted at 6%, is 0.558; present value of $1 received annually for 10 years, discounted at 6%, is 7.360): $ 249,200 

Computation 

Annual net cash flow = Depreciation + Incremental net income = $38,000 + $57,000 = $ 95,000 

Payback period = Project cost/ Annual net cash flow = 450,000 / 95,000 = 4.7 years 

Average Return on Investment = Incremental net income / (project cost /2) 

= $57,000 / ($ 45,000 /2) 

Net present value = (Annual net cash flow * discounting factors) - project cost 

= $95,000 * 7.36 - $450,000/2 

= 249,200 

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StudyBounty. (2023, September 15). Cost-Volume-Profit Analysis: How to Do CVP Analysis.
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