EXCEL Application Exercise, CVP and Break-Even, on p. 89

EApplicatin Exercise

2-65 CVP and Break-Even

Goal: Create an Excel spreadsheet to perform CVP analysis and show the relationship between price, costs, and break-even points in terms of units and dollars. Use the results to answer questions about your findings.

Scenario: Phonetronix is a small manufacturer of telephone and communications devices. Recently, company management decided to investigate the profitability of cellular phone production. They have three different proposals to evaluate. Under all the proposals, the fixed costs for the new phone would be $110,000. Under proposal A, the selling price of the new phone would be $99 and the variable cost per unit would be $55. Under proposal B, the selling price of the phone would be $129 and the variable cost would remain the same.

Under proposal C, the selling price would be $99 and the variable cost would be $49.

When you have completed your spreadsheet, answer the following questions:

1. What are the break-even points in units and dollars under proposal A?

2. How did the increased selling price under proposal B impact the break-even points in

units and dollars compared to the break-even points calculated under proposal A?

3. Why did the change in variable cost under proposal C not impact the break-even points in units and dollars as significantly as proposal B did?

Step-by-Step:

1. Open a new Excel spreadsheet.

2. In column A, create a bold-faced heading that contains the following:

Row 1: Chapter 2 Decision Guideline

Row 2: Phonetronix

Row 3: Cost-Volume-Profit (CVP) Analysis

Row 4: Todays Date

3. Merge and center the four heading rows across columns A through D.

4. In Row 7, create the following bold-faced, right-justified column headings:

Column B: Proposal A

Column C: Proposal B

Column D: Proposal C

Note: Adjust cell widths when necessary as you work.

5. In Column A, create the following row headings:

Row 8: Selling price

Row 9: Variable cost

Row 10: Contribution margin

Row 11: Contribution margin ratio

Skip a row

Row 13: Fixed cost

Skip a row

Row 15: Break-even in units

Skip a row

Row 17: Break-even in dollars

6. Use the scenario data to fill in the selling price, variable cost, and fixed cost amounts

for the three proposals.

7. Use the appropriate formulas from this chapter to calculate contribution margin,

contribution margin ratio, break-even in units, and break-even in dollars.

8. Format all amounts as:

Number tab: Category: Currency

Decimal places: 0

Symbol: None

Negative numbers: Red with parenthesis

9. Change the format of the selling price, contribution margin, fixed cost, and break-even in dollars amounts to display a dollar symbol.

10. Change the format of both contribution margin headings to display as indented:

Alignment tab: Horizontal: Left (Indent)

Indent: 1

11. Change the format of the contribution margin amount cells to display a top border, using the default line style.

Border tab: Icon: Top Border

12. Change the format of the contribution margin ratio amounts to display as a percentagewith two decimal places.

Number tab: Category: Percentage

Decimal places: 2

13. Change the format of all break-even headings and amounts to display as bold-faced.

14. Activate the ability to use heading names in formulas under Tools ? Options:

Calculation tab: Check the box: Accept labels in formulas

15. Replace the cell-based formulas with word-based equivalents for each formula used in Proposal A.

Example: Contribution margin for proposal B would be:

= (Selling price Proposal B) - (Variable cost Proposal B)

Note: The tic marks used in the example help avoid naming errors caused by data having similar titles (i.e., contribution margin and contribution margin ratio). The parentheses help clarify groupings.

Help: Ask the Answer Wizard about Name cells in a workbook.

Select Learn about labels and names in formulas from the right-hand panel.

16. Save your work to a disk, and print a copy for your files.