Chapter 18: 14DQ (page 832)
In cost-volume-profit analysis, what is the estimated profit at the break-even point?
Answer
At the break-even point estimated profit is equal to $0.
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Define and explain the contribution margin ratio.
How is cost-volume-profit analysis useful?
Patriot Co. manufactures and sells three products: red, white, and blue. Their unit selling prices are red, \(20; white, \)35; and blue, \(65. The per unit variable costs to manufacture and sell these products are red, \)12; white, \(22; and blue, \)50. Their sales mix is reflected in a ratio of 5:4:2 (red:white:blue). Annual fixed costs shared by all three products are \(250,000. One type of raw material has been used to manufacture all three products. The company has developed a new material of equal quality for less cost. The new material would reduce variable costs per unit as follows: red, by \)6; white, by \(12; and blue, by \)10. However, the new material requires new equipment, which will increase annual fixed costs by $50,000. (Round answers to whole composite units.)
Required
1. If the company continues to use the old material, determine its break-even point in both sales units and sales dollars of each individual product.
2. If the company uses the new material, determine its new break-even point in both sales units and sales dollars of each individual product.
Analysis Component
3. What insight does this analysis offer management for long-term planning?
Listed here are four series of separate costs measured at various volume levels. Examine each series and identify whether it is best described as a fixed, variable, step-wise, or curvilinear cost. (It can help to graph each cost series.)
Volume (units) | Series 1 | Series 2 | Series 3 | Series 4 |
0 | \(0 | \)450 | \(800 | \)100 |
100 | 800 | 450 | 800 | 105 |
200 | 1,600 | 450 | 800 | 120 |
300 | 2,400 | 450 | 1,600 | 145 |
400 | 3,200 | 450 | 1,600 | 190 |
500 | 4,000 | 450 | 2,400 | 250 |
600 | 4,800 | 450 | 2,400 | 320 |
Zhao Co. has fixed costs of \(354,000. Its single product sells for \)175 per unit, and variable costs are $116 per unit. The company expects sales of 10,000 units. Prepare a contribution margin income statement for the year ended December 31, 2017.
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