# Cost Volume Profit

Vin Diesel owns the Fredonia Barber Shop. He employs four barbers and pays each a base rate of \$1,250 per month. One of the barbers serves as the manager and receives an extra \$500 per month. In addition to the base rate, each barber also receives a commission of \$4.50 per haircut.

Other costs are as follows

 Advertising \$200 per month Rent \$1,100 per month Barber supplies \$0.30 per haircut Utilities \$175 per month plus \$0.20 per haircut Magazines \$25 per month

Vin currently charges \$10 per haircut

### Instructions

1. Determine the variable costs per haircut and the total monthly fixed costs.
2. Compute the break-even point in units and dollars.
3. Prepare a CVP graph, assuming a maximum of 1,800 haircuts in a month. Use increments of 300 haircuts on the horizontal axis and \$3,000 on the vertical axis.
4. Determine net income, assuming 1,600 haircuts are given in a month.

Jorge Company bottles and distributes B-Lite, a diet soft drink. The beverage is sold for 50 cents per 16-ounce bottle to retailers, who charge customers 75 cents per bottle. For the year 2023, management estimates the following revenues and costs.
 Sales \$1,800,000 Selling expenses-variable \$70,000 Direct materials 430,000 Selling expenses-fixed 65,000 Direct labor 360,000 Administrative expenses-variable 20,000 Manufacturing overhead-variable 380,000 Administrative expenses-fixed 60,000 Manufacturing overhead-fixed 280,000

### Instructions

1. Prepare a CVP income statement for 2023 based on management's estimates. (Show column for total amounts only)
2. Compute the break-even point in (1) units and (2) dollars.
3. Compute the contribution margin ratio and the margin of safety ratio. (Round to nearest full percent.).
4. Determine the sales dollars required to earn net income of \$180,000.

Tanek Corp.'s sales slumped badly in 2020. For the first time in its history, operated at a loss. The company's income statement showed the following results from selling 500,000 units of product: sales \$2,5oo,000 total cost and expenses \$2,600,000, and net loss \$100,000. cost and expenses consisted of the amount shown below.

Management is considering the following independent alternative for 2021.

1. Increase unit selling price 20% with no change in costs, expenses, and sales volume.
2. Change the compensation of salespersons from fixed annual salaries totaling \$150,000 to total salaries of \$60,000 plus a 5% commission on sales

### Instructions

1. Compute the current break-even point in dollars for 2020
2. Compute the break-even point in dollars under each of the alternative courses of action. (Round all ratios to nearest full percent.) Which course of action do you recommend?

Mary Willis is the advertising manager for Bargain shoe Store. She is currently working on a major promotional campaign. Her ideas include the installation of a new lighting system and increased display space that will and \$24,000 in fixed costs to the \$270,000 currently spent. In addition, Mary is proposing that a 5% price decrease will produce a 20% increase in sales volume. Variable costs will remain at \$24 per pair of shoes. Management is impressed with Mary's ideas but concerned about the effects that these changes will have on the break even point and the margin of safety.

### Instructions

1. Compute the current break-even point in units, and compare it to the break-even point in units if Mary's ideas area used.
2. Compute the margin of safety ratio for current operations and after Mary's changes introduced. (Round to nearest full percent.)
3. Prepare a CVP income statement for current operations and after Mary's changes are introduced (Show column for total amounts only.) Would you make use changes suggested

Viejol Corporation has collected the following information after its first year of sales. Sales were \$1,600,000 on 1oo,000 units, selling expenses \$250,000, direct materials \$490,000, direct labor \$290,000, administrative expenses \$270,000, and manufacturing overhead \$380,000. Top management has asked you to do a CVP analysis so that it can make plans for the coming year. It has projected that units sale increase by 10% net year.

### Instructions

1. Compute (1) the contribution margin for the current year and the projected year, and (2) the fixed costs for the current year. (Assume that fixed costs will remain the same in the projected year.
2. Compute the break-even point in units, and sales dollars for the current year.
3. The company has a target net income of \$200,000. What is the required sales in dollars for the company to meet its target?
4. If the company meets its target net income number, by what percentage could its sales fall before it is operating at a loss? That is, what is its margin of safety ratio?

Jackson Company produces plastic that is used for injection-molding applications such as gears for small motors. In 2020 the first year of operations, Jackson produced 4,000 tons of plastic and sold 3,500 tons. In 2020, the production and sales results were exactly reversed. In each year the selling price per ton was \$2,000, variable manufacturing costs were 15% of the sales price of units produced, variable selling expenses were 10% of the selling price of units sold, fixed manufacturing costs were \$800,000, and fixed administrative expenses were \$500,000.

Bonita Company manufactures a single product. Annual production costs incurred in the manufacturing process are shown below for two levels of production.

The controller of Norton Industries has collected the following monthly expense data for use in analyzing the cost behavior of maintenance costs.

 Month Total Maintenance Costs Total Machine Hours January \$2,700 300 February 3,000 350 March 3,600 500 April 4,500 690 May 3,200 400 June 5,500 700

### Instructions

1. Determine the fixed and variable cost components using the high-low method.
2. Prepare a graph showing the behavior of maintenance costs, and identify the fixed and variable cost elements. Use 100-hour increments and \$1,000 cost increments

Family Furniture Corporation incurred the following costs.
1. Wood used in the production of furniture.
2. Fuel used in delivery trucks.
3. Straight-line depreciation on factory building.
4. Screws used in the production of furniture.
5. Sales staff salaries.
6. Sales commissions.
7. Property taxes.
8. Insurance on buildings.
9. Hourly wages of furniture craftsmen
10. Salaries of factory supervisors.
11. Utilities expense.
12. Telephone bill

### Instructions

Identify the costs above as variable, fixed, or mixed.

Marty Moser wants Moser Company to use CVP analysis to study the effects of changes in costs and volume on the company. Marty has heard that certain assumptions must be valid in order for CVP analysis to be useful.

### Instructions

-------- Prepare a memo to Marty Moser concerning the assumptions that underline CVP analysis.