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BUSN 9117 - Management and Cost Accounting

Phuong Giang Nguyen
ID: 2225141

TUTORIAL QUESTION WEEK 3

Edmonds et al 8e Chapter 3: E3-3A, E3-5A, E3.7A, E3-8A, E3-15A, P3-23A excluding part h

Exercise 3-3A Contribution margin ratio

Santiago Company incurs annual fixed costs of $66,000. Variable costs for Santiago’s product
are $34 per unit, and the sales price is $50 per unit. Santiago desires to earn an annual profit of
$34,000.
Required
Use the contribution margin ratio approach to determine the sales volume in dollars and units
required to earn the desired profit.

FC = $66,000
VC/unit = $34/unit
Sales price = $50/unit => Revenue = 50N (N: sales volume in quantity)
Desired profit = $34,000

Contribution margin ratio (CMR) = CMu/Sales price = (Sales price – VC)/ Sales price
= (50 – 34)/50 = 0.32
Sales volume (Dollar) = (FC + Desired profit)/CMR = (66,000 + 34,000)/0.32 = $ 312,500
Sales volume (unit) = Sales volume / sales price = $ 312,500 / $50 = 6,250 units
Exercise 3-5A Contribution margin per unit approach for break-even and desired profit
Information concerning a product produced by Hansen Company appears here:
Sales price per unit $180
Variable cost per unit $100
Total annual fixed manufacturing and operating costs $720,000
Required
Determine the following:
a. Contribution margin per unit.
CMu = Sales price per unit – Variable cost per unit = $180 - $100 = $80
b. Number of units that Hansen must sell to break even.
Break-even point unit = FC / CMu = $720,000 / $80 = 9,000
c. Sales level in units that Hansen must reach to earn a profit of $240,000.
Sales volume in unit = (FC + Desired sales) / CMu = (720,000 + 240,000) / 80 = 12,000
Exercise 3-7A Cost-volume-profit relationship
Stone Corporation is a manufacturing company that makes small electric motors it sells for $45
per unit. The variable costs of production are $25 per motor, and annual fixed costs of
production are $800,000.
Required
a. How many units of product must Stone make and sell to break even?
Sales price = $45
VC = $25 => CMu = Sales price – VC= 45 – 25 = $20
FC = $800,000
Break-even point = FC / CMu = $800,000 /$20 = 40,000 units

b. How many units of product must Stone make and sell to earn a $120,000 profit?
Sales volume in unit = (FC + desired profit )/CMu = ($800,000 + 120,000) /$20 = 46,000 units

c. The marketing manager believes that sales would increase dramatically if the price were
reduced to $40 per unit. How many units of product must Stone make and sell to earn a
$160,000 profit, if the sales price is set at $40 per unit?
New price = $40 => New CMu = Sales price – VC= 40 – 25 = $15
Desired profit = $160,000
=> Sales volume in unit = (FC + desired profit )/CMu = ($800,000 + 160,000) /$15 = 64,000 units
Exercise 3-8A Target costing
The marketing manager of Griffin Corporation has determined that a market exists for a
telephone with a sales price of $36 per unit. The production manager estimates the annual
fixed costs of producing between 40,000 and 80,000 telephones would be $450,000.
Required
Assume that Griffin desires to earn a $150,000 profit from the phone sales. How much can
Griffin afford to spend on variable cost per unit if production and sales equal 50,000 phones?
Sales price = $36
FC = $450,000 (40,000 – 80,000)
Desired profit = $150,000
Sales volume in unit = 50,000
VC = X per unit => MCu = Sales price – VC = 36 – X
Net profit = Revenue – VC – FC
150,000 = 36 * 50,000 – 50,000 * X – 450,000 => X = 24
So variable cost per unit that Griffin can afford to spend on if production and sales equal 50,000
phones is $24/unit
Exercise 3-15A Multiple product break-even analysis
Riku Company manufactures two products. The budgeted per-unit contribution margin for each
product follows:

Riku expects to incur annual fixed costs of $540,000. The relative sales mix of the products is 70
percent for Super and 30 percent for Supreme.
Required
a. Determine the total number of products (units of Super and Supreme combined) Riku must
sell to break even.
FC = $540,000

Weighted average CMu = 30 * 0.7 + 50 * 0.3 = $36

Break-even point:

Sales volume in unit = FC / Weighted average Cmu = $540,000 / $36 = 15,000 unit

b. How many units each of Super and Supreme must Riku sell to break even?
Sales volume in unit of Super = 15,000 * 0.7 = 10,500 unit

Sales volume in unit of Supreme = 15,000 * 0.3 = 4,500 unit

Problem 3-23A Comprehensive CVP analysis
Trevino Company makes and sells products with variable costs of $24 each. Trevino incurs
annual fixed costs of $315,000. The current sales price is $87.
Required
The following requirements are interdependent. For example, the $252,000 desired profit
introduced in Requirement c also applies to subsequent requirements. Likewise, the $80 sales
price introduced in Requirement d applies to the subsequent requirements.
a. Determine the contribution margin per unit.
VC = $24/unit
FC = $315,000
Sale price = $87/unit
CMu = Sales price – VC/unit = $87 – 24 = $63

b. Determine the break-even point in units and in dollars. Confirm your answer by preparing an
in-come statement using the contribution margin format.
Break-even point in unit = FC / CMu = $315,000 / $63 = 5,000 unit
Break-even point in dollar = 5,000 * $87 = $435,000
Revenue (5,000*$87) $435,000
Less: Variable cost (5,000*$24) ($120,000)
Contribution Margin $315,000
Less: Fixed cost ($315,000)
Net profit 0

c. Suppose that Trevino desires to earn a $252,000 profit. Determine the sales volume in units
and dollars required to earn the desired profit. Confirm your answer by preparing an income
statement using the contribution margin format.
Desired profit = $252,000
Sales Revenue in unit = (FC + Desired profit)/ MCu = ($315,000 + $252,000)/ $63 = 9,000
Sales Revenue in dollar = 9,000 * $87 = $783,000
Revenue (9,000*$87) $783,000
Less: Variable cost (9,000*$24) ($216,000)
Contribution Margin $567,000
Less: Fixed cost ($315,000)
Net profit 252,000

d. If the sales price drops to $80 per unit, what level of sales is required to earn the desired
profit? Express your answer in units and dollars. Confirm your answer by preparing an income
statement using the contribution margin format.
Sale price = $80/unit => CMu = Sales price – VC/unit = $80 – 24 = $56
Sales Revenue in unit = (FC + Desired profit)/ MCu = ($315,000 + $252,000)/ $56 = 10,125
Sales Revenue in dollar = 10,125 * $80 = $810,000
 Revenue (10,125*$80) $810,000
Less: Variable cost (10,125*$24) ($243,000)
Contribution Margin $567,000
Less: Fixed cost ($315,000)
Net profit 252,000

e. If fixed costs drop to $280,000, what level of sales is required to earn the desired profit?
Express your answer in units and dollars. Confirm your answer by preparing an income
statement using the contribution margin format.
FC = $280,000
Sales Revenue in unit = (FC + Desired profit)/ MCu = ($280,000 + $252,000)/ $56 = 9,500 units
Sales Revenue in dollar = 9,500 * $80 = $760,000
Revenue (9,500*$80) $760,000
Less: Variable cost (9,500*$24) ($228,000)
Contribution Margin $532,000
Less: Fixed cost ($280,000)
Net profit 252,000

f. If variable cost rises to $30 per unit, what level of sales is required to earn the desired profit?
Ex-press your answer in units and dollars. Confirm your answer by preparing an income
statement using the contribution margin format.
VC = $30/unit => CMu = Sales price – VC/unit = $80 – 30 = $50
Sales Revenue in unit = (FC + Desired profit)/ MCu = ($280,000 + $252,000)/ $50 = 10,640
Sales Revenue in dollar = 10,640 * $80 = $851,200
Revenue (10,640*$80) $851,200
Less: Variable cost (10,640*$30) ($319,200)
Contribution Margin $532,000
Less: Fixed cost ($280,000)
Net profit 252,000

g. Assume that Trevino concludes that it can sell 10,000 units of product for $80 each. Recall
that variable costs are $30 each and fixed costs are $280,000. Compute the margin of safety in
units and dollars and as a percentage.
FC = $280,000
VC = $30/unit => CMu = Sales price – VC/unit = $80 – 30 = $50
Sales price = $80/unit
Break-even point in unit = FC / MCu = $280,000 / $50 = 5,600
Break-even point in dollar = 5,600 * $80 = $448,000
MoS (unit) = 10,000 – 5,600 = 4,400
MoS ($) = 4,400 * 80 = 352,000
MoS (%) = (Budget sales – Break-even sales)/Budget sales = (10,000 – 5,600) /10,000 = 0.44