EXERCISES

Ex. 1
In 2020, Green Company had a break-even point of $800,000 based on a selling price of $10
per unit and fixed costs of $240,000. In 2021, the selling price and variable costs per unit did
not change, but the break-even point increased to $900,000.
Instructions
(a) Compute the variable cost per unit and the contribution margin ratio for 2020.
(b) Using the contribution margin ratio, compute the increase in fixed costs for 2021.
Solution Ex. 1
(a) Fixed Costs $240,000
Unit contribution margin = ———————————— =
————————
Break-even Sales in units ($800,000 ÷ $10)

$240,000
= ———— = $3.00
80,000

Variable cost per unit = $10 – $3 = $7

Contribution margin ratio = $3 ÷ $10 = 30%

(b) Fixed costs = Break-even Sales × CM Ratio

= $900,000 × 30% = $270,000
Therefore, fixed costs increased $30,000 ($270,000 – $240,000).

Ex. 2
The income statement for Baxter Company for 2020 appears below.
BAXTER COMPANY
Income Statement
For the Year Ended December 31, 2020
—————————————————————————————————————
—————
Sales (40,000 units)........................................................................................ $1,000,000
Variable expenses.......................................................................................... 700,000
Contribution margin....................................................................................... 300,000
Fixed expenses............................................................................................... 330,000
Net income (loss)........................................................................................... $ (30,000)

Instructions
Answer the following independent questions and show computations using the contribution
margin technique to support your answers:
1. What was the company's break-even point in sales dollars in 2020?
2. How many additional units would the company have had to sell in 2021 in order to earn
net income of $30,000?
3. If the company is able to reduce variable costs by $2.50 per unit in 2021 and other costs
and unit revenues remain unchanged, how many units will the company have to sell in
order to earn a net income of $35,000?
Solution Ex. 2
1. $330,000
———— = $1,100,000
30%

2. $330,000 + $30,000
————————— = $1,200,000 Total sales needed.
30%

$1,200,000
————— =48,000 total units to be sold
$25
40,000 actual units sold
8,000 additional units to be sold

Note: Required sales in units can be obtained directly by dividing fixed costs plus
profit by contribution margin per unit:
($330,000 + $30,000) ÷ ($25 – $17.50) = 48,000 units

3. 2020 Variable cost per unit = $17.50 ($700,000 ÷ 40,000 units)

Variable cost reduction = 2.50
2021 Variable cost per unit $15.00

Expected contribution margin $10 ($25 – $15)

$330,000 + $35,000
————————— = 36,500 units
$10

Ex. 3
Rush Company developed the following information for its product:
Per Unit
Sales price $90
Variable cost 54
Contribution margin $36

Total fixed costs $1,080,000

Instructions
Answer the following independent questions and show computations using the contribution
margin technique to support your answers.
1. How many units must be sold to break even?
2. What is the total sales that must be generated for the company to earn a profit of $60,000?
3. If the company is presently selling 45,000 units, but plans to spend an additional
$108,000 on an advertising program, how many additional units must the company sell to
earn the same net income it is now making?
4. Using the original data in the problem, compute a new break-even point in units if the
unit sales price is increased 20%, unit variable cost is increased by 10%, and total fixed
costs are increased by $135,000.

Solution Ex. 3
1. $1,080,000
————— = 30,000 units must be sold to break even.
$36

2. Contribution margin ratio = 40% ($36 ÷ $90).

$1,080,000 + $60,000
—————————— = $2,850,000 total sales
.40
3. $108,000
———— = 3,000 additional units
$36
4. New sales price $108.00 ($90 × 1.20)
New variable cost 59.40 ($54 × 1.10)
New contribution margin $ 48.60
New total fixed costs $1,215,000 ($1,080,000 + $135,000)
$1,215,000
————— = 25,000 units is the new break-even point.
48.60

Ex. 4
Santa's Toys Manufacturing's sales slumped badly in 2023 due to so many people purchasing
gifts online. The company's income statement showed the following results from selling
500,000 units of product: net sales $2,125,000; total costs and expenses $2,500,000; and net
loss $375,000. Costs and expenses consisted of the following:
Total Variable Fixed
Cost of goods sold $2,000,000 $1,300,000 $ 700,000
Selling expenses 200,000 50,000 150,000
Administrative expenses 300,000 150,000 150,000
$2,500,000 $1,500,000 $1,000,000
Management is considering the following alternative for 2024:
Purchase new automated equipment that will change the proportion between variable
and fixed expenses sold to 45% variable and 55% fixed.
Instructions
(a) Compute the break-even point in dollars for 2023.
(b) Compute the break-even point in dollars under the alternative course of action.

Solutipn EX 4
(a) Selling price = $2,125,000 ÷ 500,000 = $4.25 per unit
Variable cost per unit = $1,500,000  500,000 = $3 per unit
Sales – Variable cost – Fixed cost = 0
 $4.25X – $3.00X – $1,000,000 = 0
Break-even point in units = 800,000 units ($1,000,000 ÷ $1.25)
Break-even point in dollars = 800,000 × $4.25 = $3,400,000

(b) New variable cost per unit = (45% × $2,500,000) ÷ 500,000 =

$2.25 per unit
$4.25X – $2.25X – ($2,500,000 × 55%) = 0
New break-even point in units = 687,500 units ($1,375,000 ÷
$2)
New break-even point in dollars = 687,500 × $4.25 =
$2,921,875
Ex. 5
Keller Company estimates that variable costs will be 60% of sales and fixed costs will total
$1,920,000. The selling price of the product is $10, and 600,000 units will be sold.
Instructions
Using the mathematical equation,
(a) Compute the break-even point in units and dollars.
(b) Compute the margin of safety in dollars and as a ratio.
(c) Compute net income.

Solution EX 5
(a) Break-even sales in units
$10X = $6X + $1,920,000
$4X = $1,920,000
X = 480,000 units
Break-even point in dollars
X = .4X + $1,920,000
.4X = $1,920,000
X = $4,800,000

(b) Margin of safety in dollars

$6,000,000 – $4,800,000 = $1,200,000
Margin of safety ratio
$1,200,000 ÷ $6,000,000 = 20%

(c) Net Income

Sales $6,000,000
Variable Costs (3,600,000)
Fixed Costs (1,920,000)
Net Income $ 480,000
Ex. 6
Wayman Company developed the following information for the product it sells:

Sales price $50 per unit

Variable cost of goods sold $23 per unit
Fixed cost of goods sold $800,000
Variable selling expense 10% of sales price
Variable administrative expense $2.00 per unit
Fixed selling expense $400,000
Fixed administrative expense $300,000
For the year ended December 31, 2023, Wayman Company produced and sold 100,000 units
of product.
Instructions
(a) Prepare a CVP income statement for Wayman Company for 2023.
(b) What was the company's break-even point in units in 2023? Use the contribution
margin technique.
(c) What was the company's margin of safety in dollars in 2023?
Solution EX 6
(a) WAYMAN COMPANY
Income Statement
For the Year Ended December 31, 2023
—————————————————————————————————————
——
Sales............................................................................................. $5,000,000
Variable expenses
Cost of goods sold................................................................. $2,300,000
Administrative...................................................................... 200,000
Selling expenses.................................................................... 500,000
Total variable expenses........................................................ 3,000,000
Contribution margin.................................................................. 2,000,000
Fixed expenses
Cost of goods sold................................................................. 800,000
Selling.................................................................................... 400,000
Administrative...................................................................... 300,000
Total fixed expenses............................................................. 1,500,000
Net income.................................................................................. $ 500,000
(b) Break-even point was 75,000 units in 2008.
Variable costs per unit Contribution margin per unit
Cost of goods sold $23 Sales price $50
Administrative 2 Variable cost 30
Selling 5 Contribution margin $20
$30
$1,500,000 ÷ $20 = 75,000 units to break even.
(c) Margin of safety in dollars was $1,250,000
Actual sales $5,000,000
Break-even sales (75,000 × $50) 3,750,000
 Margin of safety $1,250,000
Ex. 7
Sports Fanatic earned net income of $100,000 during 2023. The company wants to earn net
income of $40,000 more during 2024. The company's fixed costs are expected to be $84,000,
and variable costs are expected to be 30% of sales.
Instructions
(a) Determine the required sales to meet the target net income during 2024.
(b) Fill in the dollar amounts for the summary income statement for 2024 below, based on
your answer to part (a).
Sales revenue $
Variable costs
Contribution margin
Fixed costs
Net income $

Solution EX 7
(a)70%X – $84,000 = $140,000
Required sales = $320,000 ($224,000 ÷ .70)

(b)Sales revenue $320,000

Variable costs ($320,000 ×.30) 96,000
Contribution margin 224,000
Fixed costs 84,000
Net income $140,000
Ex. 8
Down Company has a unit selling price of $500, variable cost per unit of $300, and fixed
costs of $220,000.
Instructions Compute the break-even point in units and in sales dollars.

Solution EX 8
$500X – $300X – $220,000 = 0
Break-even point in units = X = 1,100 units
($220,000 ÷ $200)
Break-even point in dollars = 1,100 units × $500 =
$550,000
Ex. 9
Alley Company makes student book bags that sell for $20 each. For the coming year,
management expects fixed costs to be $240,000. Variable costs are $15 per unit.
Instructions
(a) Compute break-even sales in dollars using the mathematical equation.
(b) Compute break-even sales using the contribution margin ratio.
(c) Compute margin of safety ratio assuming actual sales are $1,200,000.
(d) Compute the sales required to earn net income of $120,000, using the mathematical
equation.
Solution EX 9
(a) Break-even Sales = Variable Costs + Fixed Costs
X = .75X + $240,000
.25X = $240,000
X = $960,000

(b) Contribution Margin per Unit = Unit Selling Price – Unit Variable Cost
CM = $20 – $15 = $5

Contribution Margin per Unit

Contribution Margin Ratio = —————————————
Unit Selling Price

CM Ratio = $5 ÷ $20 = 25%

Fixed Costs
Break-even Sales = ————————————
Contribution Margin Ratio

= $240,000 ÷ 25% = $960,000

(c) Sales $1,200,000

Less: Break-even Sales 960,000
Margin of Safety $ 240,000

Margin of Safety
Margin of Safety Ratio = ———————
Actual Sales

= $240,000 ÷ $1,200,000 = 20%

(d) Required Sales = Variable Costs + Fixed Costs + Targeted Net Income
X = .75X + $240,000 + $120,000
.25X = $360,000
X = $1,440,000
Ex. 10
Sayler Company earned net income of $350,000 last year. This year it wants to earn net
income of $400,000. The company's fixed costs are expected to be $300,000, and variable
costs are expected to be 60% of sales.
Instructions
(a) Determine the required sales to meet the target net income of $400,000 using the
mathematical equation.
(b) Using a CVP income statement format, prove your answer.
 Solution EX 10
(a) Sales = Variable Cost + Fixed Cost + Target Net Income

X = .60X + $300,000 + $400,000

.40X = $700,000
X = $1,750,000

Required Sales are $1,750,000.

(b) Sales $1,750,000

Variable costs 1,050,000
Contribution margin 700,000
Fixed costs 300,000
Target net income $ 400,000
Ex. 11
Quiltworks Company reported actual sales of $2,000,000, and fixed costs of $450,000. The
contribution margin ratio is 30%.
Instructions Compute the margin of safety in dollars and the margin of safety ratio.
Solution EX 11 (7 min.)
Break-even point in dollars: $450,000 ÷ 30% = $1,500,000
Margin of safety in dollars: $2,000,000 – $1,500,000 = $500,000
Margin of safety ratio: $500,000 ÷ $2,000,000 = 25%

4.Graber and Johnson, Attorney's at Law, recently opened a law practice in the Northwest. Their goal is to generate a
monthly net income of $10,000. They have initially set their billing rate at $150 per hour. Their billable hours in
the first month of operations (January) were 150 and in the second month of operations (February), 175 billable
hours. The costs incurred at these levels for January and February are given below.

150 billable hours 175 billable hours

Salaries:
Mr. Graber $10,000.00 $10,000.00
Ms. Johnson 10,000.00 10,000.00
Legal Secretary 4,000.00 4,000.00

Depreciation (Furniture) 500.00 500.00

Supplies 450.00 525.00
Rent 1,000.00 1,000.00
Utilities 412.00 449.50
Total cost $26,362.00 $26,474.50
Required:
A. Classify each cost as fixed, variable, or mixed using billable hours as the driver.
B. Use the high-low method to separate mixed costs into their fixed and variable components.
C. Compute the net income/loss for January and February.
D. If they expect to average 200 billable hours each month what do they need to set as a billing rate
per hour to achieve their goal of generating $10,000 of monthly net income? Show your
calculations.

ANS:

A. Fixed:
Salaries
Depreciation
 Rent

Variable:
Supplies

Mixed:
Utilities

B. ($449.50  $412)/(175  150) = $1.50 per billable hour

$449.50  ($1.50  175) = $187 fixed utility cost

C. January February
Revenues: (150  $150) $22,500.00 $26,250.00
Less: Costs 26,362.00 26,474.50
Net Income <$3,862.00> <$224.50>

D. Total costs at a 200 billable hour level:

Salaries: $24,000
Depreciation 500
Rent 1,000
Supplies (200  $3.00) 600
Utilities [$187 + ($1.50  200)] 487
$26,587

Add: desired net income $10,000

$36,587
Divide by 200 billable hours 200
Necessary billing rate $182.94

5. Below are the overhead costs and labor hours for Smith & Co.
Month Overhead Cost # of labor hours
January $ 9,640 490
February $ 12,680 680
March $ 11,080 580
April $ 11,720 620
May $ 13,000 700
June $ 10,120 520
July $ 8,840 440
August $ 6,600 300

Required: Using the high-low method:

1.) Calculate the fixed cost of overhead.
2.) Calculate the variable rate per labor hour.
3.) Construct the cost formula for total overhead cost.
4.) The company is estimating that in September the labor hours will be 600. How much should they estimate to
have in total overhead cost for September?

ANS:

high cost-low cost

high hours-low
hours
 13,000-6,600 = 6,400 $16 variable
= rate
700-300 400

High point
Fixed cost = total cost - (variable rate x labor hours)
13000 - (16 x 700) $1,800 fixed amount

Low point
6,600 - (16 x 300) $1,800 fixed amount

Cost formula
Total cost = $1,800 + ($16 x labor
hours)

4.) September = 600 labor hours

Total cost = $1,800 + ($16 x 600)
Total cost = $11,400

6. The controller at Speedy Delivery wants to break-out the cost of deliveries into fixed and variable components
so that they will be better able to predict costs for next year. Below are the delivery cost incurred each month
and the number of deliveries.

Month Delivery Cost # of deliveries

January $2,176.00 105
February $2,272.00 110
March $1,926.40 92
April $1,696.00 80
May $1,600.00 75
June $2,752.00 135
July $3,616.00 180
August $1,849.60 88
September $1,676.80 79
October $ 3,808.00 190
November $ 3,961.60 198
December $ 4,000.00 200

Required: Using the high-low method:

1.) Calculate the fixed cost of overhead.
2.) Calculate the variable rate per labor hour.
3.) Construct the cost formula for total overhead cost.
4.) The company is estimating that in January the number of deliveries will be 125. How much should they
estimate to have in total delivery costs for January?

ANS:
$4,000-1,600/200-75 = $19.20 variable rate
 High point:
4,000-(200 x 19.20) = $160 fixed cost

Low point:
1,600-(75 x 19.20) = $160 fixed cost

Cost formula:
Total cost = $160 + ($19.20 x no. of deliveries)

Total delivery cost for January:

Total cost = 160 + (19.20 x 125)
Total cost = $2,560
7. The following six months of data were collected on electricity cost and the number of machine hours in a
factory.

Electricity Machine
Month cost hours
June $25,160 4,500
July 26,170 4,810
August 27,250 5,120
September 26,680 5,010
October 27,950 5,430
November 27,500 5,190

Required:
A. Using the high-low method compute the variable rate for the electricity cost.
B. Using the high-low method compute the fixed cost of electricity.
C. Estimate the total electricity cost to be incurred in December if 5,300 machine hours are
incurred.

ANS:

A. ($27,950  $25,160)/(5,430  4,500) = $3.00 per machine hour

B. $27,950  ($3.00  5,430) = $11,660

C. $27,560 = $11,660 + ($3.00  5,300)

Ex. 2
Vid-saver, Inc. has five activity cost pools and two products (a budget tape rewinder and a
deluxe tape rewinder). Information is presented below:

Cost Drivers by Product

Activity Cost Pool Cost Driver Est. Overhead Budget Deluxe
Ordering and Receiving Orders $ 110,000 600 400
Machine Setup Setups 297,000 500 400
Machining Machine hours 1,000,000 150,000 100,000
Assembly Parts 1,200,000 1,200,000 800,000
Inspection Inspections 300,000 550 450

Instructions
Compute the overhead cost per unit for each product. Production is 700,000 units of Budget
and 200,000 units of Deluxe. Round your answer to the nearest cent.

Solution Ex. 2
Activity Cost Pool Est. Overhead ÷ Total Est. Activity = Overhead Rate
Ordering & Receiving $ 110,000 1,000 orders $110/order
Machine Setup 297,000 900 setups $330/setup
Machining 1,000,000 250,000 mach. hours $4/machine hour
Assembly 1,200,000 2,000,000 parts $.60/part
Inspection 300,000 1,000 inspections $300/inspection

Budget Deluxe
Cost Cost Cost Cost
Activity Cost Pool Driver × Rate = Assigned Driver × Rate =
Assigned
Ordering & Receiving 600 $110 $ 66,000 400 $110 $ 44,000
Machine Setup 500 330 165,000 400 330 132,000
Machining 150,000 4 600,000 100,000 4 400,000
Assembly 1,200,000 .60 720,000 800,000 .60 480,000
Inspection 550 300 165,000 450 300 135,000
$1,716,000 $1,191,000
÷ 700,000 ÷ 200,000
$2.45 per unit $5.96 per
unit

Ex. 3
Ami Reed owns a small department store in a metropolitan area. For twenty years, the
accountant has applied overhead to the various departments—Women's Apparel, Men's
Apparel, Cosmetics, Housewares, Shoes, and Electronics—based on the basis of employee
hours worked. Ami Reed 's daughter, who is an accounting student at a local university, has
suggested her mother should consider using activity-based costing (ABC). In an attempt to
implement ABC, Ami Reed and her daughter have identified the following activities.

Instructions
Determine a cost driver for each of the activities listed below.
Cost Pool Cost Driver
a. Placing orders ______________________________
b. Stocking merchandise ______________________________
c. Waiting on customers ______________________________
d. Janitorial and Maintenance ______________________________
e. Training employees ______________________________
f. Administrative ______________________________
g. Advertising and Marketing ______________________________
h. Accounting and Legal Services ______________________________
i. Wrapping packages ______________________________

Solution Ex. 3
Cost Pool Cost Driver
a. Placing orders number of orders; volume of individual orders
b. Stocking merchandise number of orders; dollar volume of orders
c. Waiting on customers number of customers; dollar volume of sales
d. Janitorial and Maintenance square feet occupied; traffic through area
e. Training employees total number of employees; number of new
employees
f. Administrative number of employees; dollar volume of business
g. Advertising and Marketing number of ad campaigns
h. Accounting and Legal Services dollar volume of sales
i. Wrapping packages number of packages

Ex. 4
A list of possible cost drivers is presented below:

Code Code
A Engineering hours D Number of subassemblies
B Setups E Boxes
C Machine hours F Orders

Instructions
For each of the following activity cost pools, select the most appropriate cost driver:

Code Cost Pool

_____ 1. Machine setup

_____ 2. Ordering and receiving

_____ 3. Packaging and shipping

_____ 4. Engineering design

_____ 5. Machining

_____ 6. Assembly

Solution Ex. 4
1. B 4. A
2. F 5. C
3. E 6. D

Ex. 5
Identify appropriate cost drivers for the following activity cost pools:
1. Human resources
2. Security
3. Receiving
4. Data processing

Solution Ex. 5
1. Number of employees, number of hires
2. Square footage
3. Shipments received; pounds received
4. Lines printed, CPU minutes, storage units
Ex. 6
Holiday Favorites manufactures a wide variety of holiday and seasonal decorative items.
Holiday’s activity-based costing overhead rates are:
Purchasing $350 per order
Storing $2 per square foot/days
Machining $100 per machine hour
Supervision $5 per direct labor hour

The Haunted House project involved three purchase orders, 4,000 square feet/days, 60
machine hours, and 30 direct labor hours. The cost of direct materials on the job was $19,000
and the direct labor rate is $30 per hour.

Instructions
Determine the total cost of the Haunted House project.

Solution Ex. 6
Direct materials $19,000
Direct labor (30 × $30) 900
Factory overhead
 Purchasing (3 × $350) $1,050
Storing (4,000 × $2) 8,000
Machining (60 × $100) 6,000
Supervision (30 × $5) 150 15,200
Total cost $35,100

Ex. 7
Label the following costs as value-adding (VA) or non-value-adding (NVA):
____ 1. Engineering design
____ 2. Machine repair
____ 3. Inventory storage
____ 4. Machining
____ 5. Assembly
____ 6. Painting
____ 7. Inspections
____ 8. Packaging

Solution Ex. 7
1. VA 5. VA
2. NVA 6. VA
3. NVA 7. NVA
4. VA 8. VA

Ex. 8
Borke and Falvery is a law firm that uses activity-based costing. Classify these activities as
value-added or non-value-added:
________________ 1. Taking appointments
________________ 2. Reception
________________ 3. Meeting with clients
________________ 4. Bookkeeping
________________ 5. Court time
________________ 6. Meeting with opposing attorneys
________________ 7. Billing
________________ 8. Advertising
Solution Ex. 8
1. Non-value-added 5. Value-added
2. Non-value-added 6. Value-added
3. Value-added 7. Non-value-added
4. Non-value-added 8. Non-value-added

Ex. 9
Tim Taylor Tool Company manufactures small tools. Classify each of the following activity
costs of the tool company as either unit level, batch level, product level, or facility level:
________________ 1. Plant management
________________ 2. Drilling
________________ 3. Painting
________________ 4. Machine setups
________________ 5. Product design
________________ 6. Cutting
________________ 7. Inspection
________________ 8. Inventory management

Solution 1 Ex. 9
1. Facility 5. Product
2. Unit 6. Unit
3. Unit 7. Batch
4. Batch 8. Product

Ex. 10
Brewer & Carr, PSC is an architectural firm that uses activity-based costing. The three
activity cost pools used by Brewer & Carr are: Salaries and Wages, Travel Expense, and
Plan Reproduction Expense. The firm has provided the following information concerning
activity and costs:
Salaries and wages $360,000
Travel expense 100,000
Plan reproduction expense 120,000
Total $580,000

Activity Cost Pools

Project Business
Assignment Development Other
Salaries and wages 60% 30% 10%
Travel expense 40% 40% 20%
Plan reproduction expense 35% 40% 25%
Instructions
Calculate the total cost to be allocated to the (a) Project Assignment, (b) Business
Development, and (c) Other activity cost pools.

Solution Ex. 10
Activity Cost Pools
(a) (b) (c)
Project Business
Assignment Development Other Total
Salaries and wages $216,000 $108,000 $36,000 $360,000
Travel expense 40,000 40,000 20,000 100,000
Plan reproduction expense 42,000 48,000 30,000 120,000
Total $298,000 $196,000 $86,000 $580,000