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...