accounting

accounting

Lecture 3: Cost-Volume-Profit Relationships

Lecturer: Xuandai Danny Nguyen

Exercise 3-1 (20 minutes)

1. The new income statement would be:



Total
Per Unit

Sales (8,050 units)
$209,300
$26.00

Variable expenses
 144,900
 18.00

Contribution margin
64,400
$ 8.00

Fixed expenses
  56,000


Net operating income
$  8,400


You can get the same net operating income using the following approach.


Original net operating income
$8,000

Change in contribution margin
(50 units × $8.00 per unit)
    400

New net operating income
$8,400


2. The new income statement would be:



Total
Per Unit

Sales (7,950 units)
$206,700
$26.00

Variable expenses
 143,100
 18.00

Contribution margin
63,600
$ 8.00

Fixed expenses
  56,000


Net operating income
$  7,600


You can get the same net operating income using the following approach.


Original net operating income
$8,000

Change in contribution margin
(-50 units × $8.00 per unit)
   (400)

New net operating income
$7,600




3. The new income statement would be:



Total
Per Unit

Sales (7,000 units)
$182,000
$26.00

Variable expenses
 126,000
 18.00

Contribution margin
56,000
$ 8.00

Fixed expenses
  56,000


Net operating income
$        0






Note: This is the company's break-even point.

Exercise 3-2 (30 minutes)
1. The CVP graph can be plotted using the three steps outlined in the text. The graph appears on the next page.

Step 1. Draw a line parallel to the volume axis to represent the total fixed expense. For this company, the total fixed expense is $12,000.

Step 2. Choose some volume of sales and plot the point representing total expenses (fixed and variable) at the activity level you have selected. We’ll use the sales level of 2,000 units.


Fixed expenses
$12,000

Variable expenses (2,000 units × $24 per unit)
 48,000

Total expense...

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