1.
Introduction:
CVP analysis: It refers to Cost-Volume- Proft analysis. It is an essential tool to analyze the effect on the net operating profit due to changes in sales volume and product costs.
The CM ratios; break-even points in balls, degree of operating leverage considering last year’s sales level.
1.
Answer to Problem 2.20P
The CM ratio is 40%; break-even point in balls is 21000 balls; and the degree of operating leverage is 3.33.
Explanation of Solution
Given information:
Sale of balls= 30000 units
Selling price per unit= $25
Variable expenses=$15 per ball. It is 60% of direct labor cost.
Sales of 30000 balls = $750000
Variable expenses = $450000
Contribution margin = $300000
Fixed expenses = $210000
Net operating income= $90000
- Let us now calculate the CM ratio and the break-even point in balls.
Calculation of CM ratio:
CM ratio is nothing but a contribution margin ratio. It is obtained by contribution margin by sales and the amount derived has to be multiplied by 100.
Calculation of break-even point in balls:
The following formula can be used for the calculation of break-even point.
b: Let us now calculate the degree of operating leverage.
Therefore, the CM ratio is 40%; break-even point in balls is 21000 balls ; and the degree of operating leverage is 3.33.
2.
Introduction:
CVP analysis: It refers to Cost-Volume- Proft analysis. It is an essential tool to analyze the effect on the net operating profit due to changes in sales volume and product costs.
The CM ratio and break-even point in balls when there is an increase of $3 in Variable expenses.
2.
Answer to Problem 2.20P
The CM ratio is 28% and break-even point in balls is 30000 balls when there is an increase of $3 in Variable expenses.
Explanation of Solution
Given information:
Sale of balls= 30000 units
Selling price per unit= $25
Variable expenses=$15 per ball. It is 60% of direct labor cost.
Sales of 30000 balls = $750000
Variable expenses = $450000
Contribution margin = $300000
Fixed expenses = $210000
Net operating income= $90000
Calculation of contribution margin ratio:
We are informed that there is an increase in the variable expense by $3.
So the variable cost per ball
To calculate the contribution margin, we require a total variable cost.
By using this value, we will calculate the contribution margin first.
Since we have derived the required values, let us now calculate the contribution margin.
Calculation of break-even point in balls:
The following formula can be used for calculation of break-even point.
Therefore, the CM ratio is 28% and the break-even point in balls is 30000 balls when there is an increase of $3 in Variable expenses.
3.
Introduction:
CVP analysis: It refers to Cost-Volume- Proft analysis. It is an essential tool to analyze the effect on the net operating profit due to changes in sales volume and product costs.
The number of balls to be sold to earn a net operating profit of $90000 when there is a change in variable expenses.
3.
Answer to Problem 2.20P
The number of units to be sold to earn a target profit of $90000 will be 42857 units.
Explanation of Solution
Given information:
Sale of balls= 30000 units
Selling price per unit= $25
Variable expenses=$18 per ball.
Sales of 30000 balls = $750000
Variable expenses = $540000
Contribution margin = $210000
Fixed expenses = $210000
Net operating income= $90000
To know the expected sales units we have to use the following formula:
Therefore, the number of units to be sold to earn a target profit of $90000 will be 42857 units.
4.
Introduction:
CVP analysis: It refers to Cost-Volume- Proft analysis. It is an essential tool to analyze the effect on the net operating profit due to changes in sales volume and product costs.
The selling price per ball to cover the increased labor costs.
4.
Answer to Problem 2.20P
The revised selling price will be $30.
Explanation of Solution
Given information:
Sale of balls= 30000 units
Selling price per unit= $25
Variable expenses=$18 per ball.
Sales of 30000 balls = $750000
Variable expenses = $450000
Contribution margin = $300000
Fixed expenses = $210000
Net operating income= $90000
We are asked to calculate the revised selling price which will help the company to cover the increased labor cost.
Initially, the variable cost per ball was $15. Then the price was modified to $18. If the same price of $15 is used for calculations, there will be a huge loss on labor cost which will remain unaccounted. So, a revised selling price is very essential to cover the increased labor cost. The following formula can be used:
Note: Since, the revised selling price to be calculated is for per unit, all the values taken will be per unit only
Therefore the revised selling price will be $30.
5
Introduction:
CVP analysis: It refers to Cost-Volume- Proft analysis. It is an essential tool to analyze the effect on the net operating profit due to changes in sales volume and product costs.
The Company’s new CM ratio and the break-even point in balls if a new plant is built.
5
Answer to Problem 2.20P
The CM ratio is 64% and break-even point in balls is 26250 balls when there is a decrease of 40$ in variable cost and increase in fixed cost.
Explanation of Solution
Given information:
Sale of balls= 30000 units
Selling price per unit= $25
Variable expenses=$18 per ball.
Sales of 30000 balls = $750000
Variable expenses = $450000
Contribution margin = $300000
Fixed expenses = $210000
Net operating income= $90000
Additional information:
The variable expenses are going to reduce by 40%
The fixed expenses are going to double.
Calculation of contribution margin ratio:
We are informed that there is a decrease in the variable expense by 40%.
So, variable cost=
Variable cost per unit
Therefore, the revised variable price per unit is $9.
To calculate the contribution margin, we require total variable cost.
By using this value, we will calculate the contribution margin first.
Since we have derived the required values, let us now calculate the contribution margin.
Calculation of break-even point in balls:
We are informed that the fixed expenses have doubled.
So, the revised fixed expense will be
By using the value of fixed expense, let us calculate the break-even point. The following formula can be used for the calculation of the break-even point.
Therefore, the CM ratio is 64% and the break-even point in balls is 26250 balls when there is a decrease of 40$ in variable cost and an increase in fixed cost.
6a.
Introduction:
CVP analysis: It refers to Cost-Volume- Proft analysis. It is an essential tool to analyze the effect on the net operating profit due to changes in sales volume and product costs.
The number of balls sold to earn a net operating income of $90000 if a new plant is built.
6a.
Answer to Problem 2.20P
The number of units to be sold to earn a target profit of $90000 will be 31857 units.
Explanation of Solution
Given information:
Sale of balls= 30000 units
Selling price per unit= $25
Variable expenses=$9 per ball.
Sales of 30000 balls = $750000
Contribution margin = $480000
Fixed expenses = $420000
Net operating income= $90000
To know the expected sales units we have to use the following formula:
Therefore, the number of units to be sold to earn a target profit of $90000 will be 31857 units.
6b.
Introduction:
CVP analysis: It refers to Cost-Volume- Proft analysis. It is an essential tool to analyze the effect on the net operating profit due to changes in sales volume and product costs.
To prepare: The contribution format income statement and calculate the degree of operating leverage.
6b.
Answer to Problem 2.20P
The degree of operating leverage is 8.
Explanation of Solution
Given information:
Sale of balls= 30000 units
Selling price per unit= $25
Variable expenses=$9 per ball.
Sales of 30000 balls = $750000
Contribution margin = $480000
Fixed expenses = $420000
Let us prepare a contribution statement to know the net operating income.
| Particulars | Amount in $ |
| Sales | |
| Less Variable cost | |
| Contribution margin | $480000 |
| Less Fixed expenses | $420000 |
| Net operating profit | $60000 |
By using this value of net operating profit, we will calculate the degree of operating leverage.
Therefore, the degree of operating leverage is 8.
6c.
Introduction:
CVP analysis: It refers to Cost-Volume- Proft analysis. It is an essential tool to analyze the effect on the net operating profit due to changes in sales volume and product costs.
To analyze: Whether the decision of reconstructing the new plant is good or bad.
6c.
Answer to Problem 2.20P
The decision of reconstructing the new plant is not good.
Explanation of Solution
When we consider the net operating income earned using the previous plan, it was $90000. After the construction of a new plant, there have been many changes in the costs. The available cost has reduced by 40% and the fixed cost has doubled. This change in costs has resulted in a reduction of net operating profit and amounted to $60000. So, according to my opinion, the choice of construction of a new plant was not good and it reduced the net operating income of the company.
The decision of reconstructing the new plant is not good.
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Chapter 2 Solutions
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