...Chapter Three 3 Fundamentals of Cost-Volume-Profit Analysis Orientation P A R T 1 LEARNING OBJECTIVES Preparing and Organizing Yourself After reading this chapter, you should be able to: for Success in College L.O.1 Use cost-volume-profit (CVP) analysis to analyze decisions. L.O.2 Understand the effect of cost structure on decisions. L.O.3 Use Microsoft Excel to perform CVP analysis. L.O.4 Incorporate taxes, multiple products, and alternative cost structures into the CVP analysis. L.O.5 Understand the assumptions and limitations of CVP analysis. C H A P T E R S I N P A R T O N E 1 2 Making Yourself Successful in College Approaching College Reading and Developing a College-Level Vocabulary Approaching College Assignments: Reading Textbooks and Following Directions 3 ✓ Related Resources See pages 000 to 000 of the Annotated Instructor’s Edition for general suggestions related to the chapters in Part One. 1 cor50782_ch01_001-072.indd 1 10/5/09 11:09:2 P A R T I opened U-Develop because I love photography and I wanted to own my own business. I now get to spend most of my day working with employees and customers making sure that the photos they take are the best they can be. It also gives me a chance to encourage younger people who have an interest in photography, because I work with many of the school groups and after-school clubs here in town. That’s the fun part of the job. But I also have to think about the financial side of the business. I need a systematic way to understand...
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...Case 6-33 (90 minutes) 1. a. Before the income statement can be completed, we need to estimate the company’s revenues and expenses for the month. The first step is to compute the sales for the month in both units and dollars. Sales in units would be: 90,000 units (August sales) ÷ 1.20 = 75,000 units sold in July. To determine the sales in dollars, we must integrate the break-even point, the margin of safety in dollars, and the margin of safety percentage. The computations are: [pic] [pic] If the margin of safety in dollars is 25% of total sales, then the break-even point in dollars must be 75% of total sales. Therefore, total sales would be: [pic] The selling price per unit would be: $1,350,000 total sales ÷ 75,000 units = $18 per unit. The second step is to determine the total contribution margin for the month of July. This can be done by using the operating leverage concept. Note that a 20% increase in sales has resulted in an 80% increase in net operating income between July and August: [pic] Case 6-33 (continued) Since the net operating income for August increased by 80% when sales increased by 20%, the degree of operating leverage for July must be 4. Therefore, total contribution margin for July must have been: 4 × $135,000 = $540,000. With this figure, July’s income statement can be completed by inserting known data and...
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...CHAPTER 7 Cost-Volume-Profit Analysis ANSWERS TO REVIEW QUESTIONS 7-1 a. In the contribution-margin approach, the break-even point in units is calculated using the following formula: [pic] b. In the equation approach, the following profit equation is used: |[pic] |fixed expenses |[pic] | This equation is solved for the sales volume in units. c. In the graphical approach, sales revenue and total expenses are graphed. The break-even point occurs at the intersection of the total revenue and total expense lines. 7-2 The term unit contribution margin refers to the contribution that each unit of sales makes toward covering fixed expenses and earning a profit. The unit contribution margin is defined as the sales price minus the unit variable expense. 7-3 In addition to the break-even point, a CVP graph shows the impact on total expenses, total revenue, and profit when sales volume changes. The graph shows the sales volume required to earn a particular target net profit. The firm's profit and loss areas are also indicated on a CVP graph. 7-4 The safety margin is the amount by which budgeted sales revenue exceeds break-even sales revenue. 7-5 An increase in the fixed expenses of any enterprise will increase its break-even point. In a travel agency, more clients must be served before the fixed expenses are covered...
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...Case 4-33: Cost Structure; Target Profit and Break Even Analysis Question 1: Compute Pittman Company’s break-even point in sales dollars for next year assuming: a. The agents’ commission remains unchanged at 15% $12,000,000 in sales is needed to break even while employing an outside sales force with commissions of 15% of sales. b. The agents’ commission rate is increased to 20% $13,714,286 in sales is needed to break even while employing an outside sales force with commissions of 20% of sales. c. The company employs its own sales force. $15,000,000 in sales is needed to break even while employing the company's own sales force with commissions of 7.5% of sales. Before Pittman Company’s break-even point in sales can be determined, we must initially “reformat” the provided Budgeted Income Statement for the Year Ended December 31 (for the next year) to reflect a Contribution Income Statement format. The reason for this application is to separate the Variable and Fixed costs associated in selling telecommunications equipment to derive pertinent data needed to determine break even sales. The restructuring of each Income Statement may be found in Appendix A of this report. Reformatting the Income Statement allows us to determine first, the Contribution Margin. The Contribution Margin is significant in determining Break-even point whether by the number of units to break even or the number of sales dollars needed to break-even. After determining the Contribution...
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...Virgin Mobile USA: Pricing for the Very First Time Company Background Introduction Case Background Issue of Concern Market Research Analysis All Options Theory Application Calculation Virgin Response Conclusion Recommendations Inviting Questions 2 Introduction Analysis Conclusion Company Background • Virgin, a leading branded venture capital organization, is one of the world's most recognized and respected brands. • Conceived in 1970 by Sir Richard Branson, the Virgin Group has gone on to grow very successful business in sectors ranging from mobile telephony, to transportation, travel, financial services, leisure, music, holidays, publishing and retailing. • Virgin has created more than 200 branded companies worldwide, employing approximately 50,000 people, in 29 countries. Case Background Issue of Concern [Source: company website Available from: http://www.virgin.com/AboutVirgin/WhatWeAreAbout/WhatWeAreAbout.aspx] 3 Introduction Analysis Conclusion Company Background Case Background Issue of Concern 4 Introduction Analysis Conclusion Company Background Case Background Issue of Concern Sir Richard Charles Nicholas Branson (born 18 July 1950), is an English entrepreneur, best known for his Virgin brand, a banner that encompasses a variety of business organizations. The name Virgin was chosen because a female friend involved in setting down the initial record shop commented that there...
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...Fundamentals of Cost Accounting 3e William N. Lanen University of Michigan Shannon W. Anderson Rice University Michael W. Maher University of California at Davis FUNDAMENTALS OF COST ACCOUNTING Published by McGraw-Hill/Irwin, a business unit of The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, NY, 10020. Copyright © 2011, 2008, 2006 by The McGraw-Hill Companies, Inc. All rights reserved. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of The McGraw-Hill Companies, Inc., including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning. Some ancillaries, including electronic and print components, may not be available to customers outside the United States. This book is printed on acid-free paper. 1 2 3 4 5 6 7 8 9 0 WVR/WVR 1 0 9 8 7 6 5 4 3 2 1 0 ISBN MHID 978-0-07-352711-6 0-07-352711-4 Vice president and editor-in-chief: Brent Gordon Editorial director: Stewart Mattson Publisher: Tim Vertovec Director of development: Ann Torbert Development editor: Emily A. Hatteberg Vice president and director of marketing: Robin J. Zwettler Marketing director: Sankha Basu Marketing manager: Kathleen Klehr Vice president of editing, design and production: Sesha Bolisetty Senior project manager: Susanne Riedell Senior production supervisor: Debra R. Sylvester Interior designer:...
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...CHAPTER 19 Cost-Volume-Profit Analysis: Additional Issues ASSIGNMENT CLASSIFICATION TABLE Brief Exercises 1, 2, 3, 4, 5, 6 A Problems 1A, 2A B Problems 1B, 2B Study Objectives 1. Describe the essential features of a cost-volume-profit income statement. Apply basic CVP concepts. Questions 1, 2, 3, 4 Do It! 1 Exercises 2. 2, 4, 5, 6 1, 2, 3, 4, 5, 6 7, 8, 9, 10 11, 15 2 1, 2, 3, 4, 5 6, 7, 8, 9, 10 11, 12, 13 1A, 2A, 4A, 6A 4A 1B, 2B, 4B, 6B 4B 3. Explain the term sales mix and its effects on break-even sales. Determine sales mix when a company has limited resources. Understand how operating leverage affects profitability. Explain the difference between absorption costing and variable costing. Discuss net income effects under absorption costing versus variable costing. Discuss the merits of absorption versus variable costing for management decision making. 7, 8, 9 3 4. 10, 11 4 3A 3B 5. 12, 13, 14, 15, 16 17 12, 13, 14 14, 15, 16 5A, 6A 5B, 6B *6. 16, 17, 18 17, 18, 19 7A, 8A 7B, 8B *7. 19, 20, 21, 22 19 18 7A, 8A 7B, 8B *8. 18 8A 8B Copyright © 2011 John Wiley & Sons, Inc. Kimmel, Accounting, 4/e, Solutions Manual (For Instructor Use Only) 19-1 ASSIGNMENT CHARACTERISTICS TABLE Problem Number 1A 2A Description Compute break-even point under alternative courses of action. Compute break-even point and margin of safety ratio, and prepare a CVP...
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...iPad Prospects After the Kindle Fire: 65% Market Share and Most of the Profits par4par“But, in comparison with the iPad, the Kindle Fire has a 33 percent smaller display, no cameras, no 3G wireless, less memory and only two-finger multi-touc [...] 2 comments, 1 called-out + Comment now par4par “But, in comparison with the iPad, the Kindle Fire has a 33 percent smaller display, no cameras, no 3G wireless, less memory and only two-finger multi-touc [...] Amazon CEO Jeff Bezos introduces the Kindle Fire (Image by AFP/Getty Images via @daylife) Jeff Bezos unveiled the $199 Kindle Fire this morning with great fanfare, but a closer look should disappoint those looking for an iPad killer. The Kindle Fire is poised to nibble at Apple’s market share. But this low-cost and under-powered tablet is more likely to suffocate its Android-based brethren than the iPad and actually should cement Apple’s dominance of the general-purpose tablet market. On the plus side, the Kindle Fire has a custom Amazon user interface that supports tight integration with Amazon’s content and media apps. It also includes one month’s free subscription to Amazon Prime (a $6.58 value!), which includes free 2-day shipping and some free streaming video access. In short, at $199, the Kindle Fire is an attractive Amazon shopping and content consumption device. But, in comparison with the iPad, the Kindle Fire has a 33 percent smaller display, no cameras, no 3G wireless, less memory and only two-finger...
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...from tons of help, advice, and resources. • Present your plan with confidence, with automatic charts and graphs corresponding to your financial data. Click here to redeem your $20 Business Plan Pro credit today! Cover Page [pic] This sample business plan has been made available to users of Business Plan Pro®, business planning software published by Palo Alto Software. Names, locations and numbers may have been changed, and substantial portions of text may have been omitted from the original plan to preserve confidentiality and proprietary information. You are welcome to use this plan as a starting point to create your own, but you do not have permission to reproduce, resell, publish, distribute or even copy this plan as it exists here. Requests for reprints, academic use, and other dissemination of this sample plan should be emailed to the marketing department of Palo Alto Software at marketing@paloalto.com. For product information visit our Website: www.paloalto.com or call: 1-800-229-7526. Copyright © Palo Alto Software, Inc., 1995-2009 All rights reserved. Legal Page Confidentiality Agreement The undersigned reader...
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...CASE EXAMINATION EmRen Publishing Incorporated MAY 2013 © 2014 The Society of Management Accountants of Canada. All rights reserved. ®/™ Registered Trade-Marks/Trade-Marks are owned by The Society of Management Accountants of Canada. No part of this document may be reproduced in any form without the permission of the copyright holder. May 2013 Case Examination TABLE OF CONTENTS May 2013 Case Examination Page Case Question: Backgrounder ................................................................................... 1 Additional Information ..................................................................... 15 General Comments on Performance ....................................................... 30 Steps for Approaching Business and Corporate Strategy ........................ 41 Marker Assessment Guide ....................................................................... 48 Solution Notes for Markers....................................................................... 58 Sample Response – Successful Attempt #1 ............................................ 79 Sample Response – Successful Attempt #2 .......................................... 111 Sample Response – Unsuccessful Attempt ........................................... 152 May 2013 Case Examination May 2013 Case Examination Backgrounder The background information relating to the Case Examination (Backgrounder) is provided to candidates in advance of the examination date. The...
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...CHAPTER 9 Break-Even Point and Cost-Volume-Profit Analysis QUESTIONS 1. The variable costing income statement classifies costs by the way they behave. Variable costs are deducted from revenues to determine contribution margin and then fixed costs are deducted from contribution margin to determine operating profit. Break-even analysis involves a study of fixed costs, variable costs and revenues to determine the volume at which total costs equal total revenues. Hence, variable costing provides the variable and fixed cost classification needed to compute break-even. The absorption costing income statement uses a functional classification--manufacturing and nonmanufacturing costs--to compute gross profit and then operating income respectively. A functional classification requires cost to be classified based on the reason it was incurred, i.e., selling, administrative, or production. This classification does not separate variable from fixed costs and is therefore not useful in computing breakeven. 2. The break-even point is the starting point for CVP analysis because before a company can earn profits, it must first cover all of its variable and fixed costs; the point at which all costs are just covered is the break-even point. The formula approach requires solving for the exact break-even using the following algebraic equation: R(X)– V(X) – FC = 0; where R is revenue per unit, X is volume, V is variable cost per unit, and FC is fixed cost. The graph...
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...| | | In determining the shape of the cost-output relationship only ____ depreciation is relevant.Answer | | | | | Selected Answer: | usage | Correct Answer: | usage | | | | | * Question 2 5 out of 5 points | | | George Webb Restaurant collects on the average $5 per customer at its breakfast & lunch diner. Its variable cost per customer averages $3, and its annual fixed cost is $40,000. If George Webb wants to make a profit of $20,000 per year at the diner, it will have to serve__________ customers per year.Answer | | | | | Selected Answer: | 30,000 customers | Correct Answer: | 30,000 customers | | | | | | | * Question 3 5 out of 5 points | | | The short-run cost function is:Answer | | | | | Selected Answer: | relevant to decisions in which one or more inputs to the production process are fixed | Correct Answer: | relevant to decisions in which one or more inputs to the production process are fixed | | | | | * Question 4 5 out of 5 points | | | Which of the following is not an assumption of the linear breakeven model:Answer | | | | | Selected Answer: | decreasing variable cost per unit | Correct Answer: | decreasing variable cost per unit | | | | | | | * Question 5 0 out of 5 points | | | Under asymmetric information,Answer | | | | | Selected Answer: | sellers make profits in excess of competitive returns | Correct Answer: | at...
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.....8 Introduction ......................................................................................................................................... 8 Entrepreneurs ..................................................................................................................................... 9 Motives for starting a business ........................................................................................................... 9 Downsides of starting a business ..................................................................................................... 10 Risk and reward ................................................................................................................................ 10 Opportunity cost...
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...ch03.qxd 9/27/04 4:06 PM Page 86 CHAPTER Q1 Q2 Q3 Q4 Q5 Q6 Cost-Volume-Profit Analysis In Brief Managers need to estimate future revenues, costs, and profits to help them plan and monitor operations. They use cost-volume-profit (CVP) analysis to identify the levels of operating activity needed to avoid losses, achieve targeted profits, plan future operations, and monitor organizational performance. Managers also analyze operational risk as they choose an appropriate cost structure. This Chapter Addresses the Following Questions: What is cost-volume-profit (CVP) analysis, and how is it used for decision making? How are CVP calculations performed for a single product? How are CVP calculations performed for multiple products? What is the breakeven point? What assumptions and limitations should managers consider when using CVP analysis? How are margin of safety and operating leverage used to assess operational risk? ch03.qxd 9/27/04 4:06 PM Page 87 COLECO: FAULTY FORECASTS n the early 1980s, personal computers were still somewhat a novelty. At that time, Coleco manufactured a small computer called Adam. In addition, it sold Colecovision games for home computers. Coleco marketed Adam and its computer games heavily, hoping in 1982 for a hot seller during the Christmas and holiday gift season. However, Adam and Colecovision did not sell well. Coleco found itself close to bankruptcy. Then in 1983 Coleco purchased the license to manufacture Cabbage Patch Dolls. It began production...
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...Group 8 CONTENTS 1) Introduction | 3-4 | 2) Decision Analysis * Buy or lease decision * Aircraft configuration decision * Pricing decision | 4-7 | 3) Cost AnalysisVariable cost * Commission expense * Fuel cost * Employee costFixed cost * Aircraft leasing cost and depreciation * Landing and navigation cost * Interest expense | 7-9 | 4) Other Recommendation * Transform into low fixed cost structure * Lowering the currency related cost * Practice divisional profitability analysis * Join alliance * Practice grid routing system | 9-12 | 5) Reference | 13-15 | 6) Appendix * Estimation used by the relevant cost analysis * Estimation used by the sales mix analysis * Forecast Operation | 16-17 | 1. Introduction We are going to investigate Kingfisher Airlines (KFA) for in-depth analysis, which would integrate management accounting topics with cost behavior, sales mix, buy or lease decision and pricing decision making. Kingfisher Airlines was an Indian full-service airline established in 2003{1}. It started commercial operations, involving domestic and international flights, on 9 May 2005. On one hand, it was nominated by Skytrax as a world 5-Star Airline for the 2010 ranking period because of its excellent product and service quality{2}. On the other hand, Kingfisher Airlines had not made profit since starting operations in 2005, so it tried to reduce cost{3}. For example, from 10 April 2012, Kingfisher Airlines had suspended...
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