3-20 Once a company exceeds its breakeven level, operating income can be calculated by multiplying: a. The sales price by unit sales in excess of breakeven units. b. Unit sales by the difference between the sales price and fixed cost per unit. c. The contribution margin ratio by the difference between unit sales and breakeven sales. d. The contribution margin per unit by the difference between unit sales and breakeven sales.
3-20 Once a company exceeds its breakeven level, operating income can be calculated by multiplying:
a. The sales price by unit sales in excess of breakeven units.
b. Unit sales by the difference between the sales price and fixed cost per unit.
c. The contribution margin ratio by the difference between unit sales and breakeven sales.
d. The contribution margin per unit by the difference between unit sales and breakeven sales.
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Exercises
3-21 CVP computations. Fill in the blanks for each of the following independent cases.
Case Revenues
Variable
Costs Fixed Costs Total Costs
Operating
Income
Contribution
Margin Percentage
a. $600 $ 800 $1,600
b. $2,500 $200 $ 900
c. $ 500 $300 $ 500
d. $1,200 $200 25%
3-22 CVP computations. Garrett Manufacturing sold 410,000 units of its product for $68 per unit in 2017.
Variable cost per unit is $60, and total fixed costs are $1,640,000.
1. Calculate (a) contribution margin and (b) operating income.
2. Garrett’s current manufacturing process is labor intensive. Kate Schoenen, Garrett’s production manager,
has proposed investing in state-of-the-art manufacturing equipment, which will increase the annual
fixed costs to $5,330,000. The variable costs are expected to decrease to $54 per unit. Garrett expects
to maintain the same sales volume and selling price next year. How would acceptance of Schoenen’s
proposal affect your answers to (a) and (b) in requirement 1?
3. Should Garrett accept Schoenen’s proposal? Explain.
3-23 CVP analysis, changing revenues and costs. Sunset Travel Agency specializes in flights between
Toronto and Jamaica. It books passengers on Hamilton Air. Sunset’s fixed costs are $23,500 per month.
Hamilton Air charges passengers $1,500 per round-trip ticket.
Calculate the number of tickets Sunset must sell each month to (a) break even and (b) make a target operating
income of $10,000 per month in each of the following independent cases.
1. Sunset’s variable costs are $43 per ticket. Hamilton Air pays Sunset 6% commission on ticket price.
2. Sunset’s variable costs are $40 per ticket. Hamilton Air pays Sunset 6% commission on ticket price.
3. Sunset’s variable costs are $40 per ticket. Hamilton Air pays $60 fixed commission per ticket to Sunset.
Comment on the results.
4. Sunset’s variable costs are $40 per ticket. It receives $60 commission per ticket from Hamilton Air. It
charges its customers a delivery fee of $5 per ticket. Comment on the results.
3-24 CVP exercises. The Deli-Sub Shop owns and operates six stores in and around Minneapolis. You
are given the following corporate budget data for next year:
Revenues $11,000,000
Fixed costs $ 3,000,000
Variable costs $ 7,500,000
Variable costs change based on the number of subs sold.
Compute the budgeted operating income for each of the following deviations from the original budget data.
(Consider each case independently.)
1. A 10% increase in contribution margin, holding revenues constant
2. A 10% decrease in contribution margin, holding revenues constant
3. A 5% increase in fixed costs
4. A 5% decrease in fixed costs
5. A 5% increase in units sold
6. A 5% decrease in units sold
7. A 10% increase in fixed costs and a 10% increase in units sold
8. A 5% increase in fixed costs and a 5% decrease in variable costs
9. Which of these alternatives yields the highest budgeted operating income? Explain why this is the
case.
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