Mastery Problem: Contribution Margin, Cost-Volume-Profit Analysis and Break-Even Point (Overview)

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Fixed, Variable and Mixed Costs

An appreciation of cost behavior is needed in order for management to understand and predict profitability as the costs of material, labor and other operating expenses and levels of production and sales change. It's important to review the cost behavior of fixed, variable and mixed costs before contribution margins, cost-volume-profit analysis, and break-even points.

1. In the table below, Have-A-Seat Inc. has outlined many of the costs associated with producing office chairs. With respect to the production and sale of office chairs, classify each cost as fixed, mixed, or variable.

a. Pressure-molded plastic for chair frames		Fixed CostMixed CostVariable Cost
b. Pension cost: $0.50 per employee hour on the job		Fixed CostMixed CostVariable Cost
c. Insurance premiums for inventory: $2,100 per month plus $0.01 for each dollar of inventory over $2 million		Fixed CostMixed CostVariable Cost
d. Property taxes: $120,000 per year for the factory building and land		Fixed CostMixed CostVariable Cost

2. Variable costs per unit

increasedecreasestay the same

with changes in the level of activity, while fixed costs per unit

increasedecreasestay the same

as the number of units increases and

increasedecreasestay the same

as the number of units decreases.

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Contribution Margin Income Statement

A contribution margin income statement organizes costs by behavior (variable or fixed), rather than by function (operating, selling, or administrative). The contribution margin is the difference between sales and

gross profitvariable expensesfixed expensesoperating income

.

Byron Manufacturing has one product that sells for $24.00 per unit. The company estimates fixed costs at $6,000, direct materials at $4.00 per unit, direct labor at $5.00 per unit, and variable overhead costs at $3.00 per unit.

Fill in the contribution margin income statement when 730 units are sold:

Byron Manufacturing Contribution Margin Income Statement
Sales	$fill in the blank 8cb062f55039061_2
Less: Variable costsFixed costs	fill in the blank 8cb062f55039061_4
Contribution margin	$fill in the blank 8cb062f55039061_5
Less: Variable costsFixed costs	fill in the blank 8cb062f55039061_7
Operating income	$fill in the blank 8cb062f55039061_8

Calculate Byron Manufacturing's per unit contribution margin : $fill in the blank 8cb062f55039061_9.

The contribution margin ratio is

5%15%35%50%

.

Calculating the Break-even Point:

The break-even point in sales dollars is $fill in the blank 8cb062f55039061_11 which is a break-even point in units of fill in the blank 8cb062f55039061_12 units.

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CVP Analysis using a chart:

The cost-volume-profit chart for Byron Manufacturing is shown. Use the graph to complete the sentences given below.

Byron Manufacturing reaches its break-even level of activity when it sells

200400500600

units and generates

$5,000$10,000$12,000$15,000

in revenue, because at this level of activity the firm's revenue

is greater thanis less thanequals

its total cost. In addition, you can determine from the chart that Byron Manufacturing's fixed costs are

$5,000$6,000$10,000$12,000

and its price per unit is

$.04$10.00$24.00$30.00

and variable cost per unit is

$.04$10.00$12.00$24.00

.

If fixed costs increase, what will happen to the break-even point?

The break-even point will increase.The break-even point will decrease.

If the price per unit decreases, what will happen to the break-even point?

The break-even point will increase.The break-even point will decrease.

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CVP analysis is used to analyze the effects of changes in selling prices, costs and volume on profits. It is also used to determine target profit, the margin of safety, operating leverage, product mix and choosing among marketing strategies and others.

Suppose Byron management has a target operating income of $3,000. Assume the same costs as above and the sell price remains at $24 per unit. How many units does Byron need to sell to meet this goal?

fill in the blank 034177ffd027fef_1 units

What is Byron's margin of safety in sales and in units when Byron sells 730 units?

Margin of safety in sales $fill in the blank 034177ffd027fef_2 Margin of safety in units fill in the blank 034177ffd027fef_3 units

What is the degree of operating leverage when 730 units are sold? If required, round your answer to two decimal places.

fill in the blank 034177ffd027fef_4