Question

1. How is profit indicated on a cost-volume-profit graph?

2. Wuntch Products sold 100,000 units last year for $2.00 each. Variable costs per unit were $0.30 for direct materials, $0.50 for direct labor, and $0.30 for variable overhead. Fixed costs were $60,000 in manufacturing overhead and $40,000 in nonmanufacturing costs.

a. What is the total contribution margin?

b. What is the unit contribution margin?

c. What is the contribution margin ratio?

d. If sales increase by 20,000 units, by how much will profits increase?

3. Huntzberger Products sells a product for $75. Variable costs per unit are $50, and monthly fixed costs are $75,000. Answer the following questions.
   
   a. What is the break-even point in units?

b. What unit sales would be required to earn a target profit of $200,000?

c. Assume they achieve the level of sales required in part b, what is the degree of operating leverage?

e. If sales decrease by 30% from that level, by what percentage will profits decrease?

Answer 1

1.

a. Contirbution margin Per unit = Sales revenue - Variable COsts per unit

= 2 - 0.30 - 0.50 - 0.30 = 0.90 per unit

Total Contribution margin = Total Sales units * Contribution margin per unit = 100000*0.90 = 90000

b. Unit Contribution margin = 0.90 per unit (Computed above)

c. Contribution margin ratio = Contribution Margin / Sales = 0.90/2 = 45%

d. Profits will be increase by the contribution amount = 20000*0.90 = 18000

2.

a. Breakeven point in units = Fixed Cost / Contribution per unit = 75000/25 = 3000 units

b. Required sales unit = (Desired Profit + Fixed Cost) / Contribution per untit = 275000 / 25 = 11000 units

c. Degree of Operating leverage = Contribution marhin / Operating income = 11000*25 / 200000 = 1.375

d. Revised sales units = 11000*0.70 = 7700 units

Profit @ 7700 units = 7700*25-75000 = 117500

% Change in the profit = (200000-117500)/200000 = 41.25% decrease