CVP ANALYSIS

Company XYZ manufactures and sells widgets. The selling price per widget is 20.
Variable costs are 8 per widget, and fixed costs total 10,000 per month.

1. Calculate the contribution margin per widget.

2. Determine the breakeven point in units and dollars.
3. Calculate the sales needed to achieve a target monthly profit of 5,000.

Solution:

1. Contribution Margin per Widget:

Contribution Margin = Selling Price per unit - Variable Cost per unit

Contribution Margin = 20 - 8 = 12 per widget

2. Breakeven Point:

Breakeven Point (in units) = Fixed Costs / Contribution Margin per unit

Breakeven Point (in units) = 10,000 / 12 = 833.33 units

Since we can't sell a fraction of a widget, we round up to the nearest whole number:

Breakeven Point (in units) = 834 units

Breakeven Point (in dollars) = Breakeven Point (in units) * Selling Price per unit

Breakeven Point (in dollars) = 834 units * 20 = 16,680

3. Sales Needed for Target Profit:

Target Profit = Fixed Costs + Target Profit / Contribution Margin per unit

Target Profit = 10,000 + 5,000 / 12 = 10,000 + 416.67 = 10,416.67

Sales Needed for Target Profit = Target Profit / Selling Price per unit

Sales Needed for Target Profit = 10,416.67 / 20 = 520.83 units

Again, rounding up to the nearest whole number:

Sales Needed for Target Profit = 521 units

Therefore, the company needs to sell 521 units to achieve a monthly profit of 5,000.
 Adding and Dropping

Company ABC is considering adding a new product line or dropping an existing product
line. Current information for the existing product line (Product A) is as follows:

 Selling Price per unit: 30

 Variable Cost per unit: 15
 Fixed Costs allocated to Product A: 20,000 per month
 Current sales volume of Product A: 2,000 units per month

The new product line (Product B) under consideration has the following expected data:

 Selling Price per unit: 25

 Variable Cost per unit: 10
 Expected Fixed Costs for Product B: 15,000 per month
 Expected sales volume for Product B: 1,500 units per month

1. Calculate the contribution margin and contribution margin ratio for each product.
2. Determine the impact on total profitability if Product A is dropped and Product B
is introduced.
3. Analyze the breakeven points for both Product A and Product B.

Solution:

1. Contribution Margin and Contribution Margin Ratio:

For Product A: Contribution Margin per unit = Selling Price per unit - Variable Cost per
unit Contribution Margin per unit = 30 - 15 = 15

Contribution Margin Ratio = (Contribution Margin per unit / Selling Price per unit) * 100
Contribution Margin Ratio = (15 / 30) * 100 = 50%

For Product B: Contribution Margin per unit = Selling Price per unit - Variable Cost per
unit Contribution Margin per unit = 25 - 10 = 15

Contribution Margin Ratio = (Contribution Margin per unit / Selling Price per unit) * 100
Contribution Margin Ratio = (15 / 25) * 100 = 60%

2. Impact on Total Profitability:

Current Situation (with Product A):

Total Revenue from Product A = Sales volume * Selling Price per unit Total Revenue
from Product A = 2,000 units * 30 = 60,000

Total Variable Costs for Product A = Sales volume * Variable Cost per unit Total
Variable Costs for Product A = 2,000 units * 15 = 30,000

Contribution Margin from Product A = Total Revenue - Total Variable Costs

Contribution Margin from Product A = 60,000 - 30,000 = 30,000
Total Profit (before fixed costs) = Contribution Margin - Fixed Costs Total Profit (before
fixed costs) = 30,000 - 20,000 = 10,000

If Product A is dropped and Product B is introduced:

Total Revenue from Product B = Sales volume * Selling Price per unit Total Revenue
from Product B = 1,500 units * 25 = 37,500

Total Variable Costs for Product B = Sales volume * Variable Cost per unit Total
Variable Costs for Product B = 1,500 units * 10 = 15,000

Contribution Margin from Product B = Total Revenue - Total Variable Costs

Contribution Margin from Product B = 37,500 - 15,000 = 22,500

Total Profit (before fixed costs) = Contribution Margin - Fixed Costs Total Profit (before
fixed costs) = 22,500 - 15,000 = 7,500

Impact on Total Profitability:

Profit with Product A: 10,000 Profit with Product B: 7,500

Impact on Total Profitability = Profit with Product B - Profit with Product A Impact on
Total Profitability = 7,500 - 10,000 = -2,500

Introducing Product B while dropping Product A would decrease total profitability by

2,500 per month.

3. Breakeven Analysis:

For Product A:

Breakeven Point (in units) = Fixed Costs / Contribution Margin per unit Breakeven Point
(in units) = 20,000 / 15 = 1,333.33 units

For Product B:

Breakeven Point (in units) = Fixed Costs / Contribution Margin per unit Breakeven Point
(in units) = 15,000 / 15 = 1,000 units

Summary:

 Product A has a lower contribution margin ratio (50%) compared to Product B

(60%).
 Dropping Product A in favor of introducing Product B would reduce total
profitability by 2,500 per month.
 The breakeven point for Product B (1,000 units) is lower than that of Product A
(1,333.33 units), indicating Product B may be more profitable once it reaches its
breakeven point.

This analysis helps in making informed decisions about whether to add a new product
(Product B) and drop an existing product (Product A) based on their financial impacts
and breakeven points.
 Make or buy decision

Company XYZ is considering whether to make or buy a component used in its

manufacturing process. The cost data for making the component internally is as follows:

 Direct Materials: 20 per unit

 Direct Labor: 15 per unit
 Variable Overhead: 5 per unit
 Fixed Overhead (allocated): 10,000 per month for the production facility,
producing 1,000 units of the component

An external supplier offers to sell the same component for 50 per unit.

1. Calculate the total cost per unit of making the component internally.
2. Determine the total cost of buying the component from the external supplier.
3. Analyze whether Company XYZ should make or buy the component based on
cost considerations.

Solution:

1. Total Cost of Making Internally:

Total Cost per unit = Direct Materials + Direct Labor + Variable Overhead + (Fixed
Overhead / Number of units produced)

Total Cost per unit = 20 + 15 + 5 + (10,000 / 1,000) = 20 + 15 + 5 + 10 = 50 per unit

2. Total Cost of Buying Externally:

Cost per unit from external supplier = 50 per unit

3. Make or Buy Decision:

To decide whether to make or buy, we compare the total costs:

 Total Cost to Make Internally: 50 per unit

 Cost to Buy Externally: 50 per unit

Since the cost to make internally (50 per unit) is equal to the cost to buy externally (50
per unit), the decision is typically based on factors beyond cost alone, such as quality
control, lead times, strategic considerations, and available capacity.

Additional Considerations:

 Quality: If the internal production ensures better quality control or customization

that might tilt the decision towards making.
 Capacity: If internal production capacity is underutilized or if there are excess
resources, making internally might be preferred to utilize these resources
effectively.
 Strategic Importance: Making internally may align better with long-term
strategic goals or vertical integration strategies.
 Risk: Dependency on external suppliers may introduce risks such as supply
chain disruptions or quality issues.
 Special order

Company ABC manufactures and sells widgets at a regular selling price of 50 per unit.
The variable cost per unit is $30, and fixed costs amount to 20,000 per month.
Company ABC receives a special order from a new customer for 500 widgets at a price
of $35 per unit. Accepting the special order would not affect regular sales or the
company's ongoing operations.

1. Calculate the contribution margin per unit for the regular sales.
2. Determine the impact on total profit if the special order is accepted.
3. Analyze whether Company ABC should accept the special order based on
financial considerations.

Solution:

1. Contribution Margin per Unit for Regular Sales:

Contribution Margin per unit = Selling Price per unit - Variable Cost per unit

Contribution Margin per unit = 50 - 30 = 20 per unit

2. Impact on Total Profit if Special Order is accepted:

Current Situation (without special order):

Total Revenue from regular sales = Sales volume * Selling Price per unit Assume
typical sales volume is 1,000 units per month:

Total Revenue = 1,000 units * 50 = 50,000

Total Variable Costs = Sales volume * Variable Cost per unit Total Variable Costs =
1,000 units * 30 = 30,000

Contribution Margin = Total Revenue - Total Variable Costs Contribution Margin =

50,000 - 30,000 = 20,000

Total Profit (before fixed costs) = Contribution Margin - Fixed Costs Total Profit (before
fixed costs) = 20,000 - 20,000 = 0

With Special Order:

Special Order Revenue = Units in special order * Price per unit Special Order Revenue
= 500 units * 35 = 17,500

Variable Costs for Special Order = Units in special order * Variable Cost per unit
Variable Costs for Special Order = 500 units * 30 = 15,000

Contribution Margin from Special Order = Special Order Revenue - Variable Costs
Contribution Margin from Special Order = 17,500 - 15,000 = 2,500

Total Profit (before fixed costs) with Special Order = Total Profit from regular sales +
Contribution Margin from Special Order Total Profit (before fixed costs) with Special
Order = 0 + 2,500 = 2,500
3. Analysis:

To decide whether to accept the special order, we compare the incremental profit (or
contribution) from the special order to the current situation.

 Incremental Contribution from Special Order: 2,500

 Regular Monthly Fixed Costs: 20,000

Since the special order contributes positively to total profit (2,500), Company ABC
should accept the special order.

Additional Considerations:

 Capacity Utilization: Ensure that accepting the special order doesn’t strain
production capacity needed for regular orders.
 Long-Term Implications: Evaluate whether accepting the special order could
lead to future business or strategic benefits.
 Quality and Reputation: Consider the impact on product quality and company
reputation when fulfilling special orders at lower prices.

JOINT PRODUCT

Company XYZ manufactures two joint products, Product A and Product B, from a
common raw material. The joint production process incurs total costs of 50,000 and
produces 10,000 units of Product A and 5,000 units of Product B. Product A can be
sold for 8 per unit, and Product B can be sold for 12 per unit.

1. Calculate the joint production cost allocated to each product using the physical
unit’s method.
2. Determine the joint cost allocated to each product using the sales value at split-
off method.
3. Analyze whether the company should process further beyond the split-off point
based on additional processing costs and incremental revenues.

Solution:

1. Physical Units Method:

First, calculate the joint cost per unit using the physical unit’s method:

Total Joint Production Cost = 50,000

Total Units Produced (Product A + Product B) = 10,000 units + 5,000 units = 15,000
units

Joint Cost per unit = Total Joint Production Cost / Total Units Produced Joint Cost per
unit = 50,000 / 15,000 units = 3.33 per unit

Now, allocate the joint cost to each product based on their respective production
quantities:
For Product A: Joint Cost allocated to Product A = Joint Cost per unit * Units of
Product A Joint Cost allocated to Product A = 3.33 * 10,000 units = 33300

For Product B: Joint Cost allocated to Product B = Joint Cost per unit * Units of
Product B Joint Cost allocated to Product B = 3.33 * 5,000 units = 16,650

2. Sales Value at Split-Off Method:

Calculate the joint cost allocation using the sales value at split-off method, based on the
relative sales values of each product at the split-off point:

Total Sales Value at Split-Off = (Units of Product A * Selling Price per unit) + (Units of
Product B * Selling Price per unit) Total Sales Value at Split-Off = (10,000 units * 8) +
(5,000 units * 12) Total Sales Value at Split-Off = 80,000 + 60,000 = 140,000

Allocate joint costs based on the proportion of each product's sales value to the total
sales value:

For Product A: Joint Cost allocated to Product A = Total Joint Cost * (Sales Value of
Product A / Total Sales Value) Joint Cost allocated to Product A = 50,000 * (80,000 /
140,000) = 50,000 * 0.5714 = 28,570

For Product B: Joint Cost allocated to Product B = Total Joint Cost * (Sales Value of
Product B / Total Sales Value) Joint Cost allocated to Product B = 50,000 * (60,000 /
140,000) = 50,000 * 0.4286 = 21,430

3. Further Processing Decision:

To decide whether further processing beyond the split-off point is financially viable,
consider additional processing costs and incremental revenues:

 Additional Processing Costs: Calculate the costs involved in further

processing each product to its final form or higher-value products.
 Incremental Revenues: Estimate the additional revenues that can be generated
from selling the products at their final stage.

Compare the incremental revenues from further processing with the additional
processing costs to determine whether it's beneficial to process further.

In this example, Company XYZ should analyze whether further processing Product A or
Product B into higher-value products yields higher profits than selling them at split-off.
Factors such as market demand, production capabilities, and cost considerations
should guide this decision-making process.
 ABC Costing

Company XYZ manufactures two products, Product X and Product Y. The company
has identified three activities that consume resources: machining, assembly, and
inspection. The following information is available for each activity and product:

Machining Activity:

 Total machining costs: 50,000

 Activity driver: Machine hours
 Product X: 2,000 machine hours
 Product Y: 1,000 machine hours

Assembly Activity:

 Total assembly costs: 30,000

 Activity driver: Labor hours
 Product X: 1,000 labor hours
 Product Y: 2,000 labor hours

Inspection Activity:

 Total inspection costs: 20,000

 Activity driver: Number of inspections
 Product X: 500 inspections
 Product Y: 1,500 inspections

Calculate the total cost per unit for Product X and Product Y using ABC costing.

Solution:

Step 1: Allocate costs to activities based on activity drivers:

Machining Activity:

 Cost per machine hour = Total machining costs / Total machine hours
 Cost per machine hour = 50,000 / (2,000 machine hours for X + 1,000
machine hours for Y)
 Cost per machine hour = 50,000 / 3,000 machine hours
 Cost per machine hour = 16.67 per machine hour

Allocate machining costs:

 Product X: 2,000 machine hours * 16.67 per machine hour = 33340

 Product Y: 1,000 machine hours * 16.67 per machine hour = 16670

Assembly Activity:

 Cost per labor hour = Total assembly costs / Total labor hours
 Cost per labor hour = 30,000 / (1,000 labor hours for X + 2,000 labor
hours for Y)
 Cost per labor hour = 30,000 / 3,000 labor hours
 Cost per labor hour = 10 per labor hour
 Allocate assembly costs:

 Product X: 1,000 labor hours * 10 per labor hour = 10,000

 Product Y: 2,000 labor hours * 10 per labor hour = 20,000

Inspection Activity:

 Cost per inspection = Total inspection costs / Total number of inspections

 Cost per inspection = 20,000 / (500 inspections for X + 1,500 inspections
for Y)
 Cost per inspection = 20,000 / 2,000 inspections
 Cost per inspection = 10 per inspection

Allocate inspection costs:

 Product X: 500 inspections * 10 per inspection = 5,000

 Product Y: 1,500 inspections * 10 per inspection = 15,000

Step 2: Calculate total cost per unit for each product:

Total cost per unit = Direct materials + Direct labor + Overhead allocated based on ABC

For Product X:

 Direct materials: X
 Direct labor: X