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This presentation includes:

Exercises 3-19, 3-20, 3-24

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Exercise 3-19

CVP exercises The Super Donut owns and operates six doughnut outlets in and around Kansas City.You are given the following corporate budget data for next year:

Revenues $10,000,000Fixed costs $ 1,800,000Variable costs $ 8,000,000

Variable costs change with respect to the number of doughnuts sold.

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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 constant2. A 10% decrease in contribution margin,

holding revenues constant

G stands for given

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3. A 5% increase in fixed costs4. A 5% decrease in fixed costs

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5. An 8% increase in units sold6. An 8% decrease in units sold

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7. A 10% increase in fixed costs and a 10% increase in units sold8. A 5% increase in fixed costs and a 5% decrease in variable costs

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Exercise 3-20

CVP exercises The Doral Company manufactures and sells pens. Currently, 5,000,000 units are sold per year at $0.50 per unit. Fixed costs are $900,000 per year. Variable costs are $0.30 per unit.Consider each case separately.

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1a. What is the current annual operating income?

[Units sold (Selling price – Variable costs)] – Fixed costs = Operating income

[5,000,000 ($0.50 – $0.30)] – $900,000 = $100,000

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1b. What is the present breakeven point in revenues?Fixed costs /Contribution margin per unit = Breakeven units$900,000÷ [($0.50 – $0.30)] = 4,500,000 units

Breakeven units × Selling price = Breakeven revenues4,500,000 units × $0.50 per unit = $2,250,000 or:

contribution margin ratio= selling price – variable costsselling price

= $0.50-$0.30 = 0.400.50

Fixed costs ÷contribution margin ratio = breakeven revenues$900,000 ÷ 0.40 = $2,250,000

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2. Compute the new operating income for each of the following changes:a. A $0.04 per unit increase in variable costs5,000 ($0.50-$0.34)-$900,000 = $(100,000)

b. A 10% increase in fixed costs and a 10% increase in units sold5,000,000 (1.1) ($0.50 – $0.30)] – [$900,000 (1.1)] = $110,000

c. A 20% decrease in fixed costs, a 20% decrease in selling price, a 10% decrease in variable cost per unit, and a 40% increase in units sold[5,000,000 (1.4) ($0.40 – $0.27)] – [$900,000 (0.8)] = $190,000

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3. Compute the new breakeven point in units for each of the following changes:

a. A 10% increase in fixed costs$900,000 (1.1) ÷ ($0.50 – $0.30)=4,950,000 units

b. A 10% increase in selling price and a$20,000 increase in fixed costs($900,000 + $20,000) ÷ ($0.55 – $0.30) =3,680,000 units

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Exercise 3-24

CVP analysis, margin of safety Suppose Lattin Corp.’s breakeven point is revenues of $1,500,000. Fixed costs are $600,000.

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1. Compute the contribution margin percentage.

Breakeven point revenues = Fixed costs

Contribution margin percentage

Contribution margin percentage = $600,000 = 0.40 or 40%

1,500,000

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2. Compute the selling price if variable costs are $15 per unit.

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3. Suppose 80,000 units are sold. Compute the margin of safety in units and dollars.