Question

1. CVP Analysis; Break-even point, margin of safety: Davies’ Violins, Ltd, produces and sells a single product, violins, whose selling price is $175.00 per unit and whose variable cost is $62.00 per unit. The company's fixed expense is $15,430 per month. The current volume of sales is 200 violins per month.

1. Determine the monthly total contribution margin at the current volume of sales.
2. Determine the monthly net income (loss) at the current volume of sales.
3. Determine the monthly break-even point:

1. In units (round your answer up to the nearest whole unit)
2. In sales dollars (round your answer to the nearest cent (i.e. 2 decimal places)

4. What is the company’s margin of safety:
   1. In units
   2. In sales dollars
5. Assume the company's monthly target profit is $31,000.
   1. Determine the unit sales needed to attain this target profit. Round your answer up to the nearest whole unit.
   2. Determine the dollar sales needed to attain this target profit. Round your answer up to the nearest whole unit.

2. CVP analysis; break even: K-9’s Companions, Inc. operates a chain of pet supply stores that carry many styles of dog beds that are all sold at the same price.   The following data pertains to K-9’s Companions and is typical of the company’s many outlets:

		Per dog bed
Selling price		$	46.00
Variable expenses (per unit):
Product costs (DM, DL, MOH)		$	23.50
Selling and admin costs			4.75
			Per month:
Fixed expenses (monthly amounts):
Advertising		$	10,500
Rent			3,100
Administrative Salaries			27,250

1. What is K-9’s Companions monthly break-even point in both unit sales and dollar sales?   Round your unit sales answer up to the nearest whole unit. Round your dollar sales answer to the nearest cent (i.e. two decimal places).
2. If 2,000 dog beds are sold in a month, what would be K-9’s Companion’s monthly net operating income (loss)?
3. If 2,800 dog beds are sold in a month, what would be K-9’s Companion’s monthly net operating income (loss)?
4. Suppose the current sales volume is 2,800 dog beds per month. The company is considering using higher quality materials in the manufacturing process of its dog beds. This switch in materials quality will increase DM costs by $0.45 per unit. The firm plans to advertise this change in materials to customers, which will increase advertising costs by $2,700 per month, but the firm also expects that this advertising campaign will increase sales volume by 150 dog beds per month.
   1. What would be the effect of these changes on the number of units needed to break even?
   2. What would be the effect of these changes on current net income per month?
   3. Based on your answers, should the firm make this change? Why or why not? Briefly explain your answer.

Answer 1

1
a.	Total contribution margin=current volume of sales*Contribution margin per unit
	Contribution margin per unit=Selling price-Variable cost=175-62=$ 113 per unit
	Total contribution margin=200*113=$ 22600
b.	Net income=Total contribution margin-Fixed expense=22600-15430==$ 7170
c.	Break-even point in units=Fixed expense/Contribution margin per unit=15430/113=136.55=137 units
	Break-even point in sales $=Fixed expense/Contribution margin ratio
	Contribution margin ratio=Contribution margin per unit/Selling price=113/175=0.645714
	Break-even point in sales $=15430/0.645714=$ 23896.03
a.	Margin of safety in units=Actual sales in units-Break even sales in units=200-137=63 units
	Margin of safety in sales $=Actual sales in $-Break even sales in $=(200*175)-23896=35000-23896=$ 11104
b.	Unit sales needed to attain this target profit=(Fixed expense+Target profit)/Contribution margin per unit=(15430+31000)/113=411
	$ sales needed to attain this target profit=(Fixed expense+Target profit)/Contribution margin ratio=(15430+31000)/0.645714=$ 71905
2
a.	Break-even point in units=Fixed expense/Contribution margin per unit
	Fixed expenses:
				$
	Advertising			10500
	Rent			3100
	Administrative salaries			27250
	Total			40850
	Contribution margin per unit:
				$	$
	Selling price				46
	Less: Variable expenses
	Product costs			23.5
	Selling and admin costs			4.75	28.25
	Contribution margin per unit:				17.75
	Break-even point in units=40850/17.75=2302
	Break-even point in sales $=Fixed expense/Contribution margin ratio
	Contribution margin ratio=Contribution margin per unit/Selling price=17.75/46=0.38587
	Break-even point in sales $=40850/0.38587=$ 105864.7
b.	Net operating income=Total contribution margin-Fixed expense
	Total contribution margin=current volume of sales*Contribution margin per unit=2000*17.75=$ 35500
	Net operating income (loss)=35500-40850=$-5350
c.	Net operating income=Total contribution margin-Fixed expense
	Total contribution margin=current volume of sales*Contribution margin per unit=2800*17.75=$ 49700
	Net operating income (loss)=49700-40850=$ 8850
d.
i.	Break-even point in units=Fixed expense/Contribution margin per unit
	Fixed expenses:
				$
	Advertising	(10500+2700)		13200
	Rent			3100
	Administrative salaries			27250
	Total			43550
	Contribution margin per unit:
				$	$
	Selling price				46
	Less: Variable expenses
	Product costs		(23.5+0.45)	23.95
	Selling and admin costs			4.75	28.7
	Contribution margin per unit:				17.3
	Break-even point in units=43550/17.3=2518
ii.	Net income=Total contribution margin-Fixed expense
	Total contribution margin=current volume of sales*Contribution margin per unit=(2800+150)*17.3=$ 51035
	Net operating income (loss)=51035-43550=$ 7485
iii.	Firm should not make the change
	Since net income decreased by $ 1365 (8850-7485)