Question

CHAPTER 7:Cost-volume-profit (CVP) analysis

EXPLAIN OR GIVE EXAMPLE OF THE FOLLOWING LO

1. Calculate target income volume and sales revenue [S7-4, P7-63]
2. Compute weighted average contribution margin per unit [S7-7]
3. Calculate margin of safety in units, dollars and percentages [E7-34, P7-63]

Answer 1

EXAMPLE

Selling price per unit = $20

Variable cost per unit = $10

Fixed costs = $70,000

Target income = $500,000

Calculate target income volume and sales revenue

Contribution margin per unit = Selling price per unit - Variable cost per unit

= $20 - $10

= $10

Contribution margin percentage = Contribution margin per unit / Selling price per unit

= $10 / $20

= 0.5

Target income volume = (Fixed costs + Target income) / Contribution margin per unit

= ($70,000 + $500,000) / $10

= 57,000 units

Target sales revenue = (Fixed costs + Target income) / Contribution margin percentage

= ($70,000 + $500,000) / 0.5

= $1,140,000

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EXAMPLE

	Product A	Product B
Selling price per unit	$50	$70
Variable costs per unit	$20	$25
Units sold	4,000	6,000

Compute weighted average contribution margin per unit

Contribution margin per unit = Selling price per unit - Variable costs per unit

	Product A	Product B
Contribution margin per unit	$30 ($50-$20)	$45 ($70-$25)

Weighted average contribution margin per unit = (Product A contribution margin per unit * Sales mix) + (Product B contribution margin per unit * Sales mix)

= ($30 * 4,000/10,000) + ($45 * 6,000/10,000)

= $39

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EXAMPLE

Selling price per unit = $20

Variable cost per unit = $10

Fixed costs = $70,000

Sales in units = 10,000

Calculate margin of safety in units, dollars and percentages

Contribution margin per unit = Selling price per unit - Variable cost per unit

= $20 - $10

= $10

Break-even units = Fixed costs / Contribution margin per unit

= $70,000 / $10

= 7,000 units

Margin of safety units = Sales in units - Break-even units

= 10,000 - 7,000

= 3,000

Margin of safety in dollars = 3,000 units * Selling price per unit

= 3,000 * $20

= $60,000

Margin of safety percentages = Margin of safety / Sales

= 3,000 / 10,000

= 0.3