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CVP Analysis Answer Key Independent Learning

The document contains financial information and calculations for two companies, Aqua Gear and Yard Bird. For Aqua Gear, it calculates break-even points in units and dollars based on contribution margin. It also analyzes the effects of potential changes to pricing and expenses. For Yard Bird, it calculates total sales, costs, contribution margin and break-even point in units for different product types. It also determines the unit levels needed to achieve given earnings targets.

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Carla Garcia
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126 views2 pages

CVP Analysis Answer Key Independent Learning

The document contains financial information and calculations for two companies, Aqua Gear and Yard Bird. For Aqua Gear, it calculates break-even points in units and dollars based on contribution margin. It also analyzes the effects of potential changes to pricing and expenses. For Yard Bird, it calculates total sales, costs, contribution margin and break-even point in units for different product types. It also determines the unit levels needed to achieve given earnings targets.

Uploaded by

Carla Garcia
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Aqua Gear

a. Total variable cost = $28 + $12 + $8 = $48


Contribution margin per unit = $70 $48 = $22 per unit
Contribution margin ratio = $22 ÷ $70 = 31.4% (rounded)
Total fixed costs = $10,000 + $24,000 = $34,000
Break-even point in units = $34,000 ÷ $22 per unit = 1,545 units (rounded)
Break-even point in dollars = $34,000 ÷ 0.314 = $108,280 (rounded)

b. ($40,000 + $34,000) ÷ 0.314 = $235,669 (rounded)


($235,669 ÷ $70) = 3,367 units (rounded)

c. Convert after-tax earnings to pre-tax earnings: $40,000 ÷ (1 0.40) = $66,667


Required sales = ($66,667 + $34,000) ÷ 0.314 = $320,596 (rounded)
$320,596 ÷ $70 = 4,580 units (rounded)

d. Convert the after-tax rate of earnings to a pre-tax rate of earnings:


[20% ÷ (1 0.40)] = 33.33%
Because the CM% is only 31.4%, no level of sales would generate net income
equal to, on a pre-tax basis, 33.33% of sales.

e. Variable cost savings (5,000 × $6.00) $ 30,000


Additional fixed costs (40,000)
Decrease in profit $(10,000)
The company should not buy the new sewing machine.

f. Existing CM per unit = $22


CM under proposal = ($70 × 0.90) $48 = $15
Total CM under proposal (3,000 × 1.30 × $15) $ 58,500
Existing CM (3,000 × $22) (66,000)
Change in CM $ (7,500)
Change in fixed costs (10,000)
Change in net earnings before taxes $ (17,500)

No, these two changes should not be made because they would lower pre-tax
profits by $17,500 relative to existing levels.
Yard Bird

a. Total sales price per bag:


Commercial ($5,600 × 1) $5,600
Residential ($1,800 × 3) 5,400 $11,000
Total variable costs per bag:
Commercial ($3,800 × 1) $3,800
Residential ($1,000 × 3) 3,000 (6,800)
Total contribution margin $ 4,200
Break-even point in units = $8,400,000 ÷ $4,200 = 2,000 bags
Commercial: 2,000 × 1 = 2,000 mowers
Residential: 2,000 × 3 = 6,000 mowers

b. ($8,400,000 + $1,260,000) ÷ $4,200 = 2,300 bags


Commercial: 2,300 × 1 = 2,300 mowers
Residential: 2,300 × 3 = 6,900 mowers

c. Pre-tax equivalent of $1,008,000 after-tax = $1,008,000 ÷ (1 0.40) = $1,680,000


($8,400,000 + $1,680,000) ÷ $4,200 = 2,400 bags
Commercial: 2,400 × 1 = 2,400 mowers
Residential: 2,400 × 3 = 7,200 mowers

d. Let X = number of bags that must be sold to produce pre-tax earnings


equaling 12 percent of sales revenue, then:
$4,200X $8,400,000 = 0.12($11,000X)
X = 2,917 bags (rounded)
Commercial: 2,917 × 1 = 2,917 mowers
Residential: 2,917 × 3 = 8,751 mowers

e. Convert the after-tax return to a pre-tax rate of return:


0.08 ÷ (1 0.40) = 13% (rounded)
$4,200X $8,400,000 = 0.13($11,000X)
X = 3,032 bags (rounded)
Commercial: 3,032 × 1 = 3,032 mowers

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