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.

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

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

- What is the company’s margin of safety:
- In units
- In sales dollars

- Assume the company's monthly target profit is $31,000.
- Determine the unit sales needed to attain this target profit. Round your answer up to the nearest whole unit.
- 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 |
||||

- 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).
- If 2,000 dog beds are sold in a month, what would be K-9’s Companion’s monthly net operating income (loss)?
- If 2,800 dog beds are sold in a month, what would be K-9’s Companion’s monthly net operating income (loss)?
- 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.
- What would be the effect of these changes on the number of units needed to break even?
- What would be the effect of these changes on current net income per month?
- 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) |

The Atlantic Company sells a product with a break-even point of
6,475 sales units. The variable cost is $94 per unit, and fixed
costs are $375,550.
Determine the unit sales price. Round answer to nearest whole
number.
$
Determine the break-even points in sales units if the company
desires a target profit of $96,454. Round answer to the nearest
whole number.
units

1.
Margin of Safety
a. If Canace Company, with a break-even point
at $423,400 of sales, has actual sales of $580,000, what is the
margin of safety expressed (1) in dollars and (2) as a percentage
of sales? Round the percentage to the nearest whole number.
1. $
2. %
b. If the margin of safety for Canace Company
was 25%, fixed costs were $1,537,500, and variable costs were 75%
of sales, what was the amount of actual sales (dollars)?...

CHAPTER 6 HOMEWORK
Exercise 6-18 Break-Even and Target Profit Analysis; Margin of
Safety; CM Ratio [LO6-1, LO6-3, LO6-5, LO6-6, LO6-7]
Menlo Company distributes a single product. The company’s sales
and expenses for last month follow:
Total
Per Unit
Sales
$
318,000
$
20
Variable expenses
222,600
14
Contribution margin
95,400
$
6
Fixed expenses
72,600
Net operating income
$
22,800
Required:
1. What is the monthly break-even point in unit sales and in
dollar sales?
2. Without resorting to computations,...

BREAK-EVEN ANALYSIS
The Warren Watch Company sells watches for $28, fixed costs are
$195,000, and variable costs are $13 per watch.
What is the firm's gain or loss at sales of 8,000
watches? Enter loss (if any) as negative value. Round your answer
to the nearest cent.
$
What is the firm's gain or loss at sales of 19,000 watches?
Enter loss (if any) as negative value. Round your answer to the
nearest cent.
$
What is the break-even point...

BREAK-EVEN ANALYSIS
The Warren Watch Company sells watches for $25, fixed costs are
$105,000, and variable costs are $14 per watch.
What is the firm's gain or loss at sales of 6,000 watches?
Enter loss (if any) as negative value. Round your answer to the
nearest cent.
$
What is the firm's gain or loss at sales of 20,000 watches? Enter
loss (if any) as negative value. Round your answer to the nearest
cent.
$
What is the break-even point...

BREAK-EVEN ANALYSIS
The Warren Watch Company sells watches for $26, fixed costs are
$150,000, and variable costs are $12 per watch.
What is the firm's gain or loss at sales of 7,000 watches?
Enter loss (if any) as negative value. Round your answer to the
nearest cent.
$
What is the firm's gain or loss at sales of 17,000 watches? Enter
loss (if any) as negative value. Round your answer to the nearest
cent.
$
What is the break-even point...

Exercise 5-18 Break-Even and Target Profit Analysis; Margin of
Safety; CM Ratio [LO5-1, LO5-3, LO5-5, LO5-6, LO5-7]
Menlo Company distributes a single product. The company’s sales
and expenses for last month follow:
Total
Per Unit
Sales
$
312,000
$
20
Variable expenses
218,400
14
Contribution margin
93,600
$
6
Fixed expenses
73,200
Net operating income
$
20,400
Required:
1. What is the monthly break-even point in unit sales and in
dollar sales?
2. Without resorting to computations, what is the...

3. Sales mix and CVP Analysis: Goalie’s Ball,
Inc. produces and sells two different types of soccer goals: basic
and premium. Monthly information regarding the two types of goals
are shown below:
Basic
Premium
Total
Sales
$
1,080,000
$720,000
$1,800,000
Variable costs
$315,400
$294,100
$609,500
Fixed expenses are $517,250 per month in total for the
company.
Determine the sales mix for the two products
Determine the contribution margin ratio for each of the two
products (round your decimal answer to...

Break-Even Units, Contribution Margin Ratio, Margin of
Safety
Khumbu Company's projected profit for the coming year is as
follows:
Total
Per Unit
Sales
$3,331,250
$41.00
Total variable cost
999,375
12.30
Contribution
margin
$ 2,331,875
$ 28.7
Total fixed cost
1,009,369
Operating income
$ 1,322,506
Required:
1. Compute the break-even point in units. If
required, round your answer to nearest whole value.
units
2. How many units must be sold to earn a profit
of $240,000? If required, round your answer...

Break-Even Units, Contribution Margin Ratio, Margin of
Safety
Khumbu Company's projected profit for the coming year is as
follows:
Total
Per Unit
Sales
$2,030,000
$40.00
Total variable cost
568,400
11.20
Contribution margin
$ 1,461,600
$ 28.8
Total fixed cost
539,980
Operating income
$ 921,620
Required:
1. Compute the break-even point in units. If
required, round your answer to nearest whole value.
units
2. How many units must be sold to earn a profit
of $240,000? If required, round your answer...

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