Chapter 9

Cost-Volume-Profit Analysis

Concept Questions

1. (LO 1—Traditional vs. contribution margin income statements)

Traditional income statements emphasize cost function, whereas contribution

margin income statements emphasize cost behavior.

2. (LO 1—Basic contribution margin)

Contribution margin will not change because a change in fixed cost does not
affect contribution margin. Students may note that the break-even point will
decrease.

3. (LO 1—Basic contribution margin)

Contribution margin is the sales price per unit minus all variable production and
selling costs per unit. One might also consider contribution margin to be total
sales minus total variable costs. Contribution margin (ratio) can also be
expressed as a percentage of the sales price.

4. (LO 2—Basic contribution margin)

Assuming no change in fixed costs, a decrease in contribution margin will result

in the same decrease in operating profit.

5. (LO 3—Basic break-even analysis)

The break-even point in units is equal to total fixed costs divided by the
contribution margin per unit. The break-even point in sales dollars is equal to the
total fixed costs divided by the contribution margin ratio.

6. (LO 3—Basic break-even analysis)

A company can decrease its break-even point by decreasing fixed costs and/or
increasing contribution margin (i.e., increasing sales price or decreasing variable
costs).

7. (LO 4—Income tax effects in CVP analysis)

If a company wants to compute an after-tax profit, then the company has to

“gross up” the sales necessary to earn a desired after-tax amount. This is
accomplished by dividing the desired after-tax profit by “1 – tax rate.”
8. (LO 5—Break-even point and operating leverage)

As a company nears the break-even point and its income is close to zero, the
operating leverage will increase dramatically. Accordingly, increases in sales will
result in large percentage increases in income.

Brief Exercises
1. (LO 1—Contribution margin)

a. contribution margin
b. net income
c. gross profit
d. increase
e. contribution margin ratio
f. variable costs
g. decrease, fixed costs

2. (LO2—What-if analysis)

Current With changes

Sales Rs.4,00,00,000 Rs.3,84,00,000
Less: Variable costs 2,80,00,000 2,80,00,000
Contribution margin 1,20,00,000 1,04,00,000
Less: Fixed costs 87,50,000 89,00,000
Net operating income Rs. 32,50,000 15,00,000

Thus, the new net operating income will be Rs.15,00,000 after the owner’s
changes are made.

3. (LO 3—Break-even analysis)

BE (units) =

BE (units) =

4. (LO4—Target Profit Analysis)

 In order to earn a before-tax profit of Rs.15,00,000, the nursery must sell 100,000
flowers:

Flowers to reach target income =

=
= 100,000

5. (LO5—Operating leverage)

Operating leverage = Contribution margin/net operating income

Operating leverage = Rs.2,50,00,000/Rs.125,00,000

Operating leverage = 2

6. (LO 2—CVP: The impact on income)

Increasing the sales price by 40 percent (to ₹2,450) without changing variable
costs increases contribution margin to ₹1,400 (₹2,450 – ₹1,050) from ₹700
(₹1,750– ₹1,050). If the contribution margin per unit doubles, sales can decline
by half before net income is affected.

7. (LO 2—CVP: What-if analysis)

A contribution margin ratio of 30 percent will increase net income by ₹7,50,000

when sales increase by ₹25,00,000 (from ₹2,50,00,000 to ₹2,75,00,000). For
every dollar change in sales, contribution margin (and net income) will increase
or decrease by the contribution margin ratio multiplied by the increase or
decrease in sales dollars.

8. (LO 2—What-if decisions with changing fixed costs)

This problem can be solved using contribution margin ratio or operating leverage.
Walker’s contribution margin ratio is 40 percent (₹1,20,00,000/₹3,00,00,000). If
sales increase by 5 percent or ₹15,00,000, contribution margin will increase by
₹6,00,000. All other things being equal, this would increase income by
₹6,00,000. However, advertising (a fixed cost) increases by ₹5,00,000 so the net
change in income is only ₹1,00,000.

Using operating leverage, Walker’s current operating leverage is 6 (₹1,20,00,000

contribution margin/₹20,00,000 income). Absent any other changes, if sales
increase by 5 percent, Walker’s income would increase by 6  5%, or 30
 percent. This would increase income by ₹6,00,000. However, advertising (a fixed
cost) increases by ₹5,00,000, so the net change in income is only ₹1,00,000.

9. (LO 2 and 5—Operating leverage)

A.
Operating leverage =

Operating leverage =

B. Old CM  (1 + 30%) = New CM

1,50,00,000  (1 + 30%) = 1,95,00,000

Contribution margin – Fixed costs = Net income

1,95,00,000– 75,00,000 = ₹1,20,00,000

10. (LO 3—Break-even analysis)

At the break-even point: Sales – Variable costs – Fixed costs = ₹0

If x = sales price per meal,

1,000x – 1,000 (₹500 variable cost) – ₹12,50,000 fixed cost = ₹0

1,000x – ₹5,00,000 – 12,50,000 = ₹0
1,000x – ₹17,50,000 = ₹0
1,000x = ₹17,50,000

x = ₹1,750

11. (LO 3—Break-even analysis)

The company must sell an additional 1,000 logs if fixed costs increase by
₹6,00,000. With a contribution margin of ₹600 per log, each additional unit sold
will increase income by ₹600. Consequently, if fixed costs increase by
₹6,00,000, sales must increase by 1,000 logs (₹6,00,000/600 CM per unit).

Students may also want to calculate the old and new break-even points to solve
this problem. The old break-even point is 9,000 logs (₹54,00,000/₹600) and the
new break-even point is 10,000 units (₹60,00,000/₹600).
12 (LO 3—Break-even analysis: Multi-product environment)

Calculating the break-even point with multiple products requires first calculating
the weighted average contribution margin:

Glide Magic Slide Magic

Selling price ₹800.00 ₹600.00
Variable costs (400.00) (450.00)
Contribution margin ₹ 400.00 ₹ 150.00
 Weight  0.6  0.4
Weighted-average CM per unit ₹ 240. ₹ 60

Total weighted-average CM = ₹240 + ₹60 = ₹300.00

BE (units) =

BE (units) =

13. (LO 3—Break-even analysis: Multi-product environment)

Calculating the break-even point with multiple products requires first calculating
the weighted average contribution margin:

Green Compost
Selling price ₹800.00 ₹600.00
Variable costs (500.00) (400.00)
Contribution margin ₹ 300.00 ₹ 200.00
 Weight  0.5  0.5
Weighted-average CM per unit ₹ 150.00 ₹ 100.00

Total weighted-average CM = ₹150.00 + ₹100.00 = ₹250.00

BE (units) =

BE (units) = (Green and

Compost)
 Since 50 percent of total units sold are Green, then the company should sell
3,500 units (7,000  50%) of Green to break even.

14. (LO 4—Sales to reach after-tax profit)

Sales volume to reach after-tax profit =

Sales volume to reach after-tax profit =

Sales volume to reach after-tax profit = 9,500 units

Check:
Sales (₹1,500  9,500) ₹ 1,42,50,000
Variable costs (₹500  9,500) 47,50,000
Contribution margin ₹ 95,00,000
Fixed costs (75,00,000)
Before-tax profit ₹ 20,00,000
Income tax (40%  ₹20,00,000) (8,00,000)
Net income ₹ 12,00,000

15. (LO 4—Target profit analysis)

In order to earn an after-tax profit of ₹30,00,000, Kingman must earn a before-tax

profit of ₹50,00,000 [₹30,00,000/(1 – Tax rate)], or 30,00,000/0.6.

Consequently, Kingman must sell 32,000 fire extinguishers in order to earn a

target before-tax profit of ₹50,00,000

Units to reach target net income =

=
= 32,000
Problems

16. (LO 1 and 3—Multi-product break-even analysis)

A. The weighted-average contribution margin per unit is ₹130 per unit (see
below). If fixed costs are ₹1,30,00,000, the break-even point will be
100,000 total units.

Citronella DEET Mean Green

Selling price ₹550.00 ₹750.00 ₹850.00
Variable costs (300.00) (600.00) (800.00)
Contribution margin ₹ 250.00 ₹ 150.00 ₹ 50.00
 Weight  0.2  0.4  0.4
Weighted-average CM per unit ₹ 50.00 ₹ 60 ₹ 20

Total weighted-average CM = ₹50.00 + ₹60 + ₹20 = ₹130

BE (units) =

BE (units) =

B.
Citronella DEET Mean Green
Weight 0.2 0.4 0.4
 Total units  100,000  100,000  100,000
Total units to be sold 20,000 40,000 40,000

C. One way to reduce the break-even point is to sell more Citronella. Since it
has the highest contribution margin per unit, increasing its sales will
increase the overall weighted average contribution margin. Of course,
reducing fixed and variable costs or increasing the sales price of the
products would also decrease the break-even point.

17. (LO 1, 2, and 3—CVP: What-if analysis)

A.
BE (units) =

BE (units) =
 * Calculation of CM per ton:
Sales ₹25,00,00,000
Less: Variable costs
DM (7,50,00,000)
VOH (1,00,00,000)
VS&A (25,00,000)
CM ₹16,25,00,000
÷ units ÷ 25,000
CM per ton ₹ 6,500

B. The contribution margin ratio is 0.65 (₹16,25,00,000/₹25,00,00,000)

C. The company should increase its advertising. Increasing sales by

₹1,00,00,000 will increase contribution margin by ₹65,00,000. If fixed costs
(advertising) increase by ₹50,00,000, net income will increase by
₹15,00,000.

18. (LO 1, 2, and 3—CVP and break-even analysis)

A. With the sales mix at 25 percent plastic frames (5,00,000/20,00,000) and

75 percent metal frames (15,00,000/20,00,000), the break-even point is
35,000 units (₹6,12,50,000/₹1,750 weighted-average CM).

Plastic Frames Metal Frames

Contribution margin ₹1,000.00 ₹2,000.00
 % of sales  25%  75%
Weighted-average CM ₹ 250.00 ₹1,500.00

B. If the direct material costs for plastic frames is reduced by ₹500, the CM
for plastic frames increases to ₹1,500. Assuming the same sales mix as in
part A, the new weighted-average CM is ₹1,875. Consequently, the break-
even point is reduced to 33,000 units (₹6,18,75,000/₹1,875).

Plastic Frames Metal Frames

Contribution margin ₹1,500.00 ₹2,000.00
 % of sales  25%  75%
Weighted-average CM ₹ 375 ₹1,500.00

C. Changing the sales mix to 35 percent plastic frames and 65 percent metal
frames changes the weighted-average CM per unit to ₹1,650.00. The new
 break-even point would be 34,000 frames (₹5,61,00,000 fixed
costs/₹1,650.00 weighted-average CM per unit).

Plastic Frames Metal Frames

Contribution margin ₹1,000.00 ₹2,000.00
 % of sales  35%  65%
Weighted-average CM ₹ 350.00 ₹1,300.00

19. (LO1, 2, and 3—Decision focus: Basic CVP and break-even analysis)

A. In order to earn Rs.15,00,000 of target profit (Rs.50,00,000  0.30), the

sales price must be Rs.550.00 per unit.

Sales – VC – FC = Income
If sales = (10,000 units  sales price),
Variable costs = Rs.25,00,000 (10,000 units  Rs250 per unit),
Fixed costs = Rs.15,00,000 (10,000 units  Rs.150 per unit), and
Net operating income = Rs.15,00,000 (Rs. 50,00,000  30%), then

10,000 units (SP) – Rs.25,00,000 – Rs.15,00,000 = Rs.15,00,000

10,000 (SP) – 40,00,000 = 15,00,000
10,000 (SP) = 55,00,000
SP = Rs.55,00,000/10,000 units = Rs.550 per unit

B. Assuming a sales price of Rs.550 per unit, we find that the CM is Rs.300
per unit. If total fixed costs remain at Rs.15,00,000, the break-even point is
5,000 units (Rs.15,00,000/Rs.300).

C. Increasing the return to 35 percent (income of Rs.17,50,000) would

require increasing the sales price to Rs.575, reducing variable costs by
Rs.25 per unit or reducing fixed costs by Rs.2,50,000.

20. (LO 1, 2, and 3—Break-even and target profit)

A.
BE (units) =

BE (units) =

B.
 Sales volume (units) to reach target profit =

Sales volume (units) to reach target profit =

Sales volume (units) to reach target profit = 6,300 units

C. Sales (7,000  ₹3,750) ₹2,62,50,000

Variable costs (7,000  ₹1,250) 87,50,000
Contribution margin ₹1,75,00,000
Fixed costs 1,50,00,000
Net income ₹ 25,00,000

More simply, if the company breaks-even at 6,000 units, increasing sales

by 1,000 units (to 7,000) will increase net income by ₹25,00,000 (1,000 
₹2,500 CM per unit).

D. If the sales price decreases by 20 percent to ₹3,000, the new contribution

margin will be ₹1,750 and the break-even point will be 8,572 units
(rounded) (₹1,50,00,000/₹1,750).

E. If variable costs decrease by 40 percent to ₹750 (and the sales price is

unchanged), the new contribution margin will be ₹3,000 and the break-
even point will be 5,000 units (₹1,50,00,000/₹3,000).

F. If fixed costs increase by ₹25,00,000 to ₹1,75,00,000, the break-even

point will be 7,000 units (₹1,75,00,000/₹2,500).

21 CVP: What- if Analysis LO2

Schedule Showing Current Contribution Margin Ratio

Rs. Rs.
Selling price per unit 270
Deduct: Variable cost per unit
Material 120
Labor 30
Overhead 12
------ 162
------
Contribution margin per unit 108
 ------
*
Total contribution (Rs. 108 15,000 ) 1,620,000
Deduct: Fixed cost 1,400,000
--------------
Profit 220,000
--------------
Contribution Margin ratio (Rs.108/Rs.270) 40%
* (Rs.4, 050,000/Rs.270)

Schedule Showing New Selling Price in the Forthcoming Year Maintaining the Current
Contribution Margin Ratio
Variable cost per unit Rs. Rs.
Material (Rs. 120 1.075) 129.00
Labor (Rs.30 1.03) 33.00
Variable overhead (Rs.12 1.05) 12.60
--------- 174.60
Selling price per unit (174.60/0.60) 291.00
Contribution per unit (Rs.291-Rs.174.60) 116.40

Schedule Showing the Number of Units to be Sold in the Forthcoming Year to Maintain
Profit at the Current Year Level

Rs.
Current Year Profit 220,000
Add: Fixed cost (Rs.1, 400,000 1.03) 1, 442,000
--------------
Required amount of total contribution 1, 662,000
Number of units to be sold (Rs. 1, 662,000/ Rs.116.40) 17,422

22. Multi-Product Break-Even Analysis LO1, 3

Product A B
Contribution per unit (Rs.) 1 2
Proportion of sales quantity (%) 2/3 1/3
Proportionate contribution per unit 2/3 2/3
Composite contribution per unit = Rs.4/3
Overall break-even point =

=
= 150,000 units
Product-wise break-up of overall break-even quantity:
Product A = 150,000 units*2/3 = 100,000 units
Product B = 150,000 units*1/3 = 50,000 units

23. Multi-Product Break-Even Analysis LO1, 3

Product P E
Selling price per unit (Rs.) 10 12
Deduct: Variable cost per unit (Rs.) 5 10
Contribution per unit (Rs.) 5 2

1. Sales ratio 4:3

Weighted contribution per group of seven products = (Rs.5*4+Rs.2*3) =Rs.26
Fixed cost = Rs.561, 600
Group break-even point (in units) = Rs.561,600/Rs.26 = 21,600
Weighted price per group of seven products = (Rs.10*4+Rs.12*3) =Rs.76
Group break-even sales (Rs.) = 21,600* Rs.76 = Rs.1,641,600
Break –even production in units:
Product P: 21,600*4 = 86,400 units
Product Q: 21,600*3= 64,800 units

2. Sales ratio 4:4

Weighted contribution per group of seven products = (Rs.5*4+Rs.2*4) =Rs.28
Fixed cost = Rs.561, 600
Group break-even point (in units) = Rs.561,600/Rs.28 = 20,057
Weighted price per group of seven products = (Rs.10*4+Rs.12*4) =Rs.88
Group break-even sales (Rs.) = 20,057* Rs.88 = Rs.1,765,016
Break –even production in units:
Product P: 20,057*4 = 80,228 units
Product Q: 20,057*4= 80,228 units
3. Product mix of 4:3 is better as the contribution per unit is higher Rs.3.71 (Rs.26/7) against
Rs.3.50 (Rs.28/8) from the product mix of 4:4.

24. Multi-Product Break-Even Analysis LO1, 3

Calcutta Company Ltd.

Calculation of Overall Break-even Point
Ace Utility Luxury Supreme Total
Sales Mix 33-1/3% 41-2/3% 16-2/3% 8-1/3% 100%
Rs. Rs. Rs. Rs. Rs.
Sales 200,000 250,000 100,000 50,000 600,000
Deduct: Operating costs 120,000 170,000 80,000 20,000 390,000
------------ ----------- ----------- ---------- ----------
Contribution margin 80,000 80,000 20,000 30,000 210,000
------------ ----------- ----------- ---------- ----------
P/V ratio = (Rs.210, 000/Rs.600, 000)*100 =35%
Overall break even sales = Fixed cost/P/V rato
= Rs.159, 000/35%
= Rs.454, 286

Calculation of New Overall Break-even Point with Revised Sales Mix

Ace Utility Luxury Supreme Total
Sales Mix 25% 40% 30% 5% 100%
Rs. Rs. Rs. Rs. Rs.
Sales 150,000 240,000 180,000 30,000 600,000
Deduct: Operating costs 90,000 163,200 144,000 12,000 409,200
------------ ----------- ----------- ---------- ----------
Contribution margin 60,000 76,800 36,000 18,000 190,800
------------ ----------- ----------- ---------- ----------
P/V ratio = (Rs.190, 800/Rs.600, 000)*100 =31.8%
Overall break even sales = Fixed cost/P/V rato
= Rs.159, 000/31.8%
= Rs.500, 000

25. CVP and Break-Even Analysis

Schedule Showing Annual Break-Even Units for each of the PTO’s Plants
Mumbai Plant Pune Plant
Selling price per unit (Rs.) 150.00 150.00
Deduct:
Variable manufacturing cost per unit (Rs.) 72.00 88.00
Commission per unit (Rs) 7.50 7.50
Variable general and administrative expenses per unit (Rs) 6.50 6.50
-------- ---------
Contribution per unit (Rs.) 64.00 48.00
Fixed cost (Rs) (see working note) 4,704,000 2,265,600
Annual break-even (units) Fixed cost/ Contribution per unit 73,500 47,200

Working Note:
Total fixed cost based on a normal year of 240 working days
Mumbai Plant Pune Plant
Production rate per day (units) 400 320
Number of days 240 240
Total production (units) in 240 days 96,000 76,800
Fixed manufacturing cost per unit (Rs.) 30 15
Total fixed manufacturing cost (Rs.) 2,880,000 1,152,000
Add: Fixed general and administrative expenses (Rs.)
(96,000*19; 76,800*14) 1,824,000 1,113,600
Total Fixed cost (Rs.) 4,704,000 2,265,600
 Operating Income Statement (with each plant producing 96,000 units)
Mumbai Plant Pune Plant
Normal capacity (units) [400units*240 days; 320units*240 days] 96,000 76,800
Full capacity (units) [400 units*300 days; 320 units*300 days] 120,000 96,000
Sales Revenue (96,000 units @Rs.150 each) 14,400,000 14,400,000
Deduct:
Variable manufacturing cost [96000 units*Rs.72;
96,000 units * (Rs.88+Rs.8)] 6,912,000 9,216,000
Commission (Rs.) [96,000 units*Rs.7.50] 720,000 720,000
Variable general and administrative expenses [96,000
units *Rs.6.50] 624,000 624000
Contribution margin (Rs.) 6,144,000 3,840,000
Deduct: Fixed cost (Rs.) 4,704,000 2,265,600
Operating income (Rs.) 1,440,000 1,574,400
Total operating income of both the plants= Rs.1, 440, 000+Rs.1, 574, 400
= Rs. 3,014,400
Note: It is assumed that the increase in the variable cost applies to all the units produced.

Under the optimum production plant the capacity of the Mumbai plant will be utilized fully as it
has a lower variable cost compared to the Pune Plant. The Mumbai plant will, therefore, produce
120,000 units and the Pune plant will produce 72,000 units

Operating Income Statement (under optimum production plan)

Mumbai Plant Pune Plant
Production (units) 120,000 72,000
Sales Revenue (@Rs.150 each) (Rs.) 18,000,000 10,800,000
Deduct:
Variable manufacturing cost [120,000 units*Rs.72+
Rs. 3; 72,000 units * Rs.88] 9,000,000 6,336,000
Commission @ Rs.7.50 (Rs.) 900,000 540,000
Variable general and administrative expenses (@
Rs.6.50) (Rs.) 780,000 468,000
Contribution margin (Rs.) 7,320,000 3,456,000
Deduct: Fixed cost (Rs.) 4,704,000 2,265,600
Operating income (Rs.) 2,616,000 1,190,400
Total operating income of both the plants= Rs.2, 616,000+Rs.1,190,400
= Rs. 3,806,400
Note: It is assumed that the increase in the variable cost applies to all the units produced.

26. (LO1, 2, 3, and 4—Decision focus: Break-even and target profit)

A.
BE (Rs.) =
 BE (Rs.) =

BE (Rs.) = Rs.10,00,00,000

*The contribution margin ratio of 0.35 is equal to the contribution margin of

Rs.5,25,00,000 divided by sales of Rs.15,00,00,000. The contribution margin is equal to
sales of Rs.15,00,00,000 minus variable expenses of Rs.9,75,00,000.

B. If ZIA wants to generate net income of Rs.3,50,00,000, the company must

increase its sales to Rs.20,00,00,000:

Sales volume (Rs.) to reach target profit =

Sales volume (Rs.) to reach target profit =

Sales volume (Rs.) to reach target profit = Rs.20,00,00,000

27. (LO4—Decision focus: Multiproduct break-even analysis)

A. The weighted-average contribution margin per unit is Rs.480. If fixed costs

are Rs.1,50,00,000, the break-even point will be 31,250 total units, as the
following analysis shows:

Daily Mud Face

Wash Mask Cleanser
Selling price Rs.600 Rs.1,000 700
Variable costs (100) (400) (300)
Contribution margin 500 600 400
 Weight  0.4  0.2  0.4
Weighted-average CM per unit 200 120 160

Total weighted-average CM = Rs.200 + 120+ 160 = Rs.480

 BE (units)

BE (units)

B.
Face
Daily Wash Mud Mask Cleanser
Weight 0.4 0.2 0.4
 Total units  31,250  31,250  31,250
Total units to be sold 12,500 6,250 12,500

C. One way to reduce the break-even point is to sell more Mud Mask.
Because it has the highest contribution margin per unit, increasing its
sales will increase the overall weighted-average contribution margin.
Of course, reducing fixed and variable costs or increasing the sales price
of the products would also decrease the break-even point.

28. Break-even point (in units)= 60% of sales units = 21,600 units
Break-even point (in sales value) = 21,600 x `.300 = `64,80,000

(a) Break-even sales = Fixed cost/ PV Ratio, or

` 64,80,000)= Fixed cost/30% or
Fixed cost =`19,44,000

(b) Sales `108,00,000

Contribution = `108,00,000 x 30% = ` 32,40,000
Profit = Contribution – Fixed cost = `32,40,000-`19,44,000 = `12,96,000

(c) Contribution per unit = 30% of `.300 =`90

Target contribution = Fixed cost + Target profit = ` 19,44,000 +`16,47,000 =` 35,91,000

No. of units =`35,91,000/`90 = 39900 units

(d) Let the desired sales value be ` X. Profit of 20% on sales,

or 0.20 X. Then

X = (`19,44,000 + 0.20 X)/30%

0.30 X-0.20 X =`.19,44,000
or 0.10 X = Rs.19,44,000
X =`1,94,40,000
No. of units= `1,94,40,000/`.300 =64800 units
(e) If Break even point is to be brought down by 3,600 units, then the Break-even point will be
21,600-3,600 =18,000 units

Fixed cost = `19,44,000

Contribution margin per unit = `19,44,00/18,000 =`108
Selling price per unit = Contribution margin per unit/PV ratio = `108/30% = `360

29. (i) Present Level:

Weighted average contribution per unit

(6,000 x 50 +4,000 x 40)/(6,000+4,000) = `46 per unit

BEP= 92,000/46 = 2,000 units; X=1,200 units Y=800 units

(ii) Minimum units for incremental level:

Next 1,000 units of X get contribution of `50x 1,000 = `50,000

Next 1,000 units of X or Y, contribution of `40 x 1,000 = `40,000
Remaining contribution `95,000-`90,000 = `5,000
Additional 125 units of X or Y will give a contribution of `5,000
Total 2,125 units will be required to recover incremental fixed cost of `95,000
Two alternative combinations are possible:

X- 2,000 units and Y-125 units, or

X-1,000 units and Y-1,125 units

(iii) Optimal Profit- best mix for proposed increase of 4,000 (8,000) units

Produce 2,000 units of X and 2000 units of Y

Produce 4,000 units of X and 4000 units of Y

Contribution –X = 9000 x `50+ 1,000 x `40 = ` 4,90,000

Contribution –Y = 4000 x `40 = ` 1,60,000
Total contribution = ` 6,50,000
Average contribution per unit Rs. 6,50,000/18,000 = `36.11
Maximum profits (`) 6,50,000-1,87,000 = `4,63,000

30.

`
Revenue per trip 8,000
Less: Variable Cost
Train fare 3,400
Meals per child 600
Craft materials 1,200
Total Variable Cost 5,200
Contribution per child 2,800

Step Fixed Cost

Room rent per trip (1,520/4) 380

Local transport (2,400/6) 400
Total step fixed cost 780

Net Contribution (2,800-780= `.2,020)

Relevant Range = 5,05,000/2020=250

At 250 Students

General fixed cost 5,05,000

Room rent 63*1,520 95,760
Transportation 42*2,400 1,00,800
Total fixed cost 7,01,560
Gross contribution 250*2,800 7,00,000
Loss (1,560)

BEP= 250 +1,560/2,800 = 250.56. Hence the minimum students will be 251

At251 Students

General fixed cost 5,05,000

Room rent 63*1,520 95,760
Transportation 42* 2,400 1,00,800
Total fixed cost 7,01,560
Gross contribution 251*2,800 7,02,800
Profit 1,240

Cases

31. (LO1, 2, and 4—CVP analysis: Target profit with constraints)

A. Current annual fixed costs = Rs.20,00,00,000, calculated as follows:

20%  Annual fixed costs = Target profit

20%  Annual fixed costs = Rs.4,00,00,000
Annual fixed costs = Rs.4,00,00,000/0.20 = Rs.20,00,00,000
 However, if production is greater than 40,000 gallons, fixed costs must be
increased by Rs.50 million.

B. With a selling price of Rs.10,000, the Morey Division must sell 40,000
units to reach its target profit objective:

Units to reach target net income

If the selling price is reduced to Rs.9,000, sales must increase to 60,000

units.

If the selling price is reduced to Rs.9,000, the calculation gets a little

more difficult. The contribution margin is reduced to Rs.5,000 per unit
(Rs.9,000 sales price –Rs.4,000 variable costs). All else being equal, this
would increase the break-even point to 48,000 units
(Rs.24,00,00,000/Rs.5,000 CM per unit). However, when production is
greater than 40,000 units, fixed costs increase by Rs.5,00,00,000 (to
Rs.25,00,00,000). In addition, the target profit increases to Rs.5,00,00,000
(Rs.25,00,00,000  20 percent). The new break-even point is, therefore,
60,000 units:

x = Rs.25,00,00,000 + Rs.5,00,00,000 = 60,000 gallons

Rs.9,000 – Rs.4,000

C.

Moore, Inc.
Income Statement (Pro Forma)

Sales [(40,000  Rs.10,000) + (24,000  Rs.9,000)] Rs.61,60,00,000

Cost of goods sold:
[(60,000  Rs.4,000) + (4,000  Rs.3,000)] 25,20,00,000
Gross margin Rs. 36,40,00,000
Fixed costs (Rs.20,00,00,000 + Rs.5,00,00,000) 25,00,00,000
Net operating income Rs. 11,40,00,000

Target net profit equals Rs5,00,00,000 (Rs.25,00,00,000  0.20).

Endreson’s decision will achieve the Morey Division’s profit objective.
32. (LO1, 2, 3, and 4—Break-even and target profit analysis)

A. Given the break-even point of 100 jets and the contribution margin per jet
of Rs.500 million (Rs.8750 million sales price less Rs.8,250 million cost),
the fixed costs must have been Rs.50 billion.

FC/Rs.50,00,00,000 = 100 jets

FC = Rs.50,00,00,00,000

B. Sales (80  Rs.8,75,00,00,000) Rs.7,00,00,00,00,000

Variable costs (80  8,25,00,00,000) 6,60,00,00,00,000
Contribution margin 40,00,00,00,000
Fixed costs 50,00,00,00,000
Net loss (10,00,00,00,000)

C. First, calculate the CM needed per jet:

(Fixed costs + Target profit)/80 jets = Contribution margin per jet

(50,00,00,00,000 + (80  Rs.50,00,00,000))/80 jets

90,00,00,00,000/80 = Rs.1,12,50,00,000

Then: Variable costs per jet + Needed CM = Sales price per jet

Rs.8,25,00,00,000 + Rs.1,12,50,00,000 = Rs.9,37,50,00,000

D. Over the years, the companies have made Rs.66 billion of income on
sales of the jet.

Sales (232  Rs.875,00,00,000) Rs.20,30,00,00,00,000

Variable costs (232  8,25,00,00,000) 19,14,00,00,00,000
Contribution margin 1,16,00,00,00,000
Fixed costs 50,00,00,00,000
Net income 66,00,00,00,000