Chapter 21, Problem E21.37E

To determine

1)

Introduction:

Contribution Margin:

• Contribution Margin refers to the excess of Sales revenues over variable and fixed costs. Since it contributes to the overall profitability of the business it is referred to as contribution margin.

• Variable costs refer to the costs of manufacture that have a direct co-relation with the volume of the goods manufactured, i.e. the costs increase with an increase in the goods produced. Examples are costs of direct material and direct labor.

• Fixed costs refer to the costs of manufacture that have an inverse co-relation with the volume of the goods manufactured, i.e. the costs decrease with an increase in the goods produced. Examples are costs of factory rent, depreciation on plant and equipment

$\text{Contribution per unit = Sales price per unit -}\text{}\text{}\text{ Variable Costs per unit}$

Breakeven Point:

• Breakeven point is the monetary value of sales or number of units of sales where the contribution equals the fixed costs and the profit / loss is zero.

• Breakeven point is considered as the minimum sales needed to sustain a business without incurring losses.

$\begin{array}{l}\text{Breakeven point (Units) = Fixed Cost / Contribution Per Unit}\\ \\ \text{Breakeven point (Value) = Sales Price per unit x Breakeven Point (units)}\end{array}$

a) Breakeven point with no change in information

b) Breakeven point with $250 reduced sales price

c) Breakeven point with $100 reduced variable costs

d) Breakeven point with $122,500 of fixed costs

To determine

2)

Introduction:

Contribution Margin:

• Contribution Margin refers to the excess of Sales revenues over variable and fixed costs. Since it contributes to the overall profitability of the business it is referred to as contribution margin.

• Variable costs refer to the costs of manufacture that have a direct co-relation with the volume of the goods manufactured, i.e. the costs increase with an increase in the goods produced. Examples are costs of direct material and direct labor.

• Fixed costs refer to the costs of manufacture that have an inverse co-relation with the volume of the goods manufactured, i.e. the costs decrease with an increase in the goods produced. Examples are costs of factory rent, depreciation on plant and equipment

$\text{Contribution per unit = Sales price per unit -}\text{}\text{}\text{ Variable Costs per unit}$

Breakeven Point:

• Breakeven point is the monetary value of sales or number of units of sales where the contribution equals the fixed costs and the profit / loss is zero.

• Breakeven point is considered as the minimum sales needed to sustain a business without incurring losses.

$\begin{array}{l}\text{Breakeven point (Units) = Fixed Cost / Contribution Per Unit}\\ \\ \text{Breakeven point (Value) = Sales Price per unit x Breakeven Point (units)}\end{array}$

Sensitivity Analysis:

• Sensitivity Analysis is a study of the proportionate changes in the output of a calculation in response to a corresponding change in the inputs of the calculation.

• For instance, if contribution margin and breakeven point are analyzed, the changes in contribution margin and breakeven point corresponding to changes in the values of sales price, variable costs and fixed costs would be studied under sensitivity analysis.

• The objective of sensitivity analysis is to determine which factor of input has the greatest impact on the output and use appropriate controls to track and monitor such inputs.

• Impact of $250 reduced sales price on Contribution Margin and Breakeven point

• Impact of $100 reduced variable costs on Contribution Margin and Breakeven point

• Impact of $122,500 of fixed costs on Contribution Margin and Breakeven point