chapter 20 cost-volume-profit analysis demonstration problems © 2016 pearson education, ltd. 20-1
TRANSCRIPT
Chapter 20
Cost-Volume-Profit Analysis
Demonstration Problems
© 2016 Pearson Education, Ltd. 20-1
Demonstration of E20-23
For its top managers, Jackson Company formats its income statement as follows:
JACKSON COMPANYIncome Statement
For the Month Ended April 30, 2016
Sales Revenue $ 300,000Variable Costs 135,000Contribution Margin 165,000Fixed Costs 130,000
Operating Income $ 35,000
Jackson’s relevant range is between sales of $200,000 and $450,000.
Requirements
1. Calculate the contribution margin ratio.
2. Prepare two contribution margin income statements: one at the $200,000 sales level and one at the $450,000 sales level. (Hint: The proportion of each sales dollar that goes toward variable costs is constant within the relevant range.)
© 2016 Pearson Education, Ltd. 20-2
Contribution margin ratio =
Requirement 1: Calculate the contribution margin ratio.
Demonstration of E20-23
© 2016 Pearson Education, Ltd. 20-3
Contribution margin ratio =Contribution marginNet sales revenue
Requirement 1: Calculate the contribution margin ratio.
Demonstration of E20-23
© 2016 Pearson Education, Ltd. 20-4
Contribution margin ratio =Contribution marginNet sales revenue
=$165,000$300,000
Requirement 1: Calculate the contribution margin ratio.
Demonstration of E20-23
© 2016 Pearson Education, Ltd. 20-5
Contribution margin ratio =Contribution marginNet sales revenue
=$165,000$300,000
= 55%
Requirement 1: Calculate the contribution margin ratio.
Demonstration of E20-23
© 2016 Pearson Education, Ltd. 20-6
Requirement 2: Prepare two contribution margin income statements: one at the $200,000 sales level and one at the $450,000 sales level. (Hint: The proportion of each sales dollar that goes toward variable costs is constant within the relevant range.)
JACKSON COMPANYIncome Statement
Demonstration of E20-23
© 2016 Pearson Education, Ltd. 20-7
Requirement 2: Prepare two contribution margin income statements: one at the $200,000 sales level and one at the $450,000 sales level. (Hint: The proportion of each sales dollar that goes toward variable costs is constant within the relevant range.)
JACKSON COMPANYIncome Statement
Sales Revenue $ 200,000
Demonstration of E20-23
© 2016 Pearson Education, Ltd. 20-8
If the contribution margin ratio is 55% (that is, contribution margin is 55% of sales), then variable costs must be 45% of sales.
Requirement 2: Prepare two contribution margin income statements: one at the $200,000 sales level and one at the $450,000 sales level. (Hint: The proportion of each sales dollar that goes toward variable costs is constant within the relevant range.)
JACKSON COMPANYIncome Statement
Sales Revenue $ 200,000
Variable Costs (45% of sales) 90,000
Demonstration of E20-23
© 2016 Pearson Education, Ltd. 20-9
If the contribution margin ratio is 55% (that is, contribution margin is 55% of sales), then variable costs must be 45% of sales.
Requirement 2: Prepare two contribution margin income statements: one at the $200,000 sales level and one at the $450,000 sales level. (Hint: The proportion of each sales dollar that goes toward variable costs is constant within the relevant range.)
JACKSON COMPANYIncome Statement
Sales Revenue $ 200,000
Variable Costs (45% of sales) 90,000
Contribution Margin 110,000
Demonstration of E20-23
© 2016 Pearson Education, Ltd. 20-10
If the contribution margin ratio is 55% (that is, contribution margin is 55% of sales), then variable costs must be 45% of sales.
Requirement 2: Prepare two contribution margin income statements: one at the $200,000 sales level and one at the $450,000 sales level. (Hint: The proportion of each sales dollar that goes toward variable costs is constant within the relevant range.)
JACKSON COMPANYIncome Statement
Sales Revenue $ 200,000
Variable Costs (45% of sales) 90,000
Contribution Margin 110,000
Fixed Costs 130,000
Demonstration of E20-23
© 2016 Pearson Education, Ltd. 20-11
If the contribution margin ratio is 55% (that is, contribution margin is 55% of sales), then variable costs must be 45% of sales.
Requirement 2: Prepare two contribution margin income statements: one at the $200,000 sales level and one at the $450,000 sales level. (Hint: The proportion of each sales dollar that goes toward variable costs is constant within the relevant range.)
JACKSON COMPANYIncome Statement
Sales Revenue $ 200,000
Variable Costs (45% of sales) 90,000
Contribution Margin 110,000
Fixed Costs 130,000
Operating Income (Loss) $ (20,000)
Demonstration of E20-23
© 2016 Pearson Education, Ltd. 20-12
Requirement 2: Prepare two contribution margin income statements: one at the $200,000 sales level and one at the $450,000 sales level. (Hint: The proportion of each sales dollar that goes toward variable costs is constant within the relevant range.)
JACKSON COMPANYIncome Statement
Sales Revenue $ 450,000
If the contribution margin ratio is 55% (that is, contribution margin is 55% of sales), then variable costs must be 45% of sales.
Demonstration of E20-23
© 2016 Pearson Education, Ltd. 20-13
Requirement 2: Prepare two contribution margin income statements: one at the $200,000 sales level and one at the $450,000 sales level. (Hint: The proportion of each sales dollar that goes toward variable costs is constant within the relevant range.)
JACKSON COMPANYIncome Statement
Sales Revenue $ 450,000
Variable Costs (45% of sales) 202,500
If the contribution margin ratio is 55% (that is, contribution margin is 55% of sales), then variable costs must be 45% of sales.
Demonstration of E20-23
© 2016 Pearson Education, Ltd. 20-14
Requirement 2: Prepare two contribution margin income statements: one at the $200,000 sales level and one at the $450,000 sales level. (Hint: The proportion of each sales dollar that goes toward variable costs is constant within the relevant range.)
JACKSON COMPANYIncome Statement
Sales Revenue $ 450,000
Variable Costs (45% of sales) 202,500
Contribution Margin 247,500
If the contribution margin ratio is 55% (that is, contribution margin is 55% of sales), then variable costs must be 45% of sales.
Demonstration of E20-23
© 2016 Pearson Education, Ltd. 20-15
Requirement 2: Prepare two contribution margin income statements: one at the $200,000 sales level and one at the $450,000 sales level. (Hint: The proportion of each sales dollar that goes toward variable costs is constant within the relevant range.)
JACKSON COMPANYIncome Statement
Sales Revenue $ 450,000
Variable Costs (45% of sales) 202,500
Contribution Margin 247,500
Fixed Costs 130,000
If the contribution margin ratio is 55% (that is, contribution margin is 55% of sales), then variable costs must be 45% of sales.
Demonstration of E20-23
© 2016 Pearson Education, Ltd. 20-16
If the contribution margin ratio is 55% (that is, contribution margin is 55% of sales), then variable costs must be 45% of sales.
Requirement 2: Prepare two contribution margin income statements: one at the $200,000 sales level and one at the $450,000 sales level. (Hint: The proportion of each sales dollar that goes toward variable costs is constant within the relevant range.)
JACKSON COMPANYIncome Statement
Sales Revenue $ 450,000
Variable Costs (45% of sales) 202,500
Contribution Margin 247,500
Fixed Costs 130,000
Operating Income (Loss) $ 117,500
Demonstration of E20-23
© 2016 Pearson Education, Ltd. 20-17
Demonstration of E20-38
Mack Company has a monthly target profit of $7,350. Variable costs are 65% of sales, and monthly fixed costs are $3,150.
Requirements
1. Compute the monthly margin of safety in dollars if the shop achieves its income goal.
2. Express Mack Company’s margin of safety as a percentage of target sales.
© 2016 Pearson Education, Ltd. 20-18
Requirement 1: Compute the monthly margin of safety in dollars if the company achieves its income goal.
Required sales in dollars for break-even =
Demonstration of E20-38
© 2016 Pearson Education, Ltd. 20-19
Requirement 1: Compute the monthly margin of safety in dollars if the company achieves its income goal.
Required sales in dollars for break-even =Fixed costs + Target profitContribution margin ratio
Demonstration of E20-38
© 2016 Pearson Education, Ltd. 20-20
Requirement 1: Compute the monthly margin of safety in dollars if the company achieves its income goal.
If variable costs are 65% of sales, then the contribution margin ratio must be 35% of sales.
Required sales in dollars for break-even =Fixed costs + Target profitContribution margin ratio
Demonstration of E20-38
© 2016 Pearson Education, Ltd. 20-21
Requirement 1: Compute the monthly margin of safety in dollars if the company achieves its income goal.
If variable costs are 65% of sales, then the contribution margin ratio must be 35% of sales.
Required sales in dollars for break-even =Fixed costs + Target profitContribution margin ratio
=$3,150 + $0 35%
Demonstration of E20-38
© 2016 Pearson Education, Ltd. 20-22
Requirement 1: Compute the monthly margin of safety in dollars if the company achieves its income goal.
If variable costs are 65% of sales, then the contribution margin ratio must be 35% of sales.
Required sales in dollars for break-even =Fixed costs + Target profitContribution margin ratio
=$3,150 + $0 35%
= $9,000
Demonstration of E20-38
© 2016 Pearson Education, Ltd. 20-23
Required sales in dollars for target profit =Fixed costs + Target profitContribution margin ratio
Requirement 1: Compute the monthly margin of safety in dollars if the company achieves its income goal.
If variable costs are 65% of sales, then the contribution margin ratio must be 35% of sales.
Demonstration of E20-38
© 2016 Pearson Education, Ltd. 20-24
Required sales in dollars for target profit =Fixed costs + Target profitContribution margin ratio
=$3,150 + $7,350 35%
Requirement 1: Compute the monthly margin of safety in dollars if the company achieves its income goal.
If variable costs are 65% of sales, then the contribution margin ratio must be 35% of sales.
Demonstration of E20-38
© 2016 Pearson Education, Ltd. 20-25
Required sales in dollars for target profit =Fixed costs + Target profitContribution margin ratio
=$3,150 + $7,350 35%
= $30,000
Requirement 1: Compute the monthly margin of safety in dollars if the company achieves its income goal.
If variable costs are 65% of sales, then the contribution margin ratio must be 35% of sales.
Demonstration of E20-38
© 2016 Pearson Education, Ltd. 20-26
Requirement 1: Compute the monthly margin of safety in dollars if the company achieves its income goal.
Margin of safety in dollars =
Demonstration of E20-38
© 2016 Pearson Education, Ltd. 20-27
Requirement 1: Compute the monthly margin of safety in dollars if the company achieves its income goal.
Margin of safety in dollars = Expected sales – Break-even sales
Demonstration of E20-38
© 2016 Pearson Education, Ltd. 20-28
Requirement 1: Compute the monthly margin of safety in dollars if the company achieves its income goal.
Margin of safety in dollars = Expected sales – Break-even sales
= $30,000 – $9,000
Demonstration of E20-38
© 2016 Pearson Education, Ltd. 20-29
Requirement 1: Compute the monthly margin of safety in dollars if the company achieves its income goal.
Margin of safety in dollars = Expected sales – Break-even sales
= $30,000 – $9,000
= $21,000
Demonstration of E20-38
© 2016 Pearson Education, Ltd. 20-30
Requirement 2: Express Mack Company's margin of safety as a percentage of target sales.
Margin of safety ratio =
Demonstration of E20-38
© 2016 Pearson Education, Ltd. 20-31
Requirement 2: Express Mack Company's margin of safety as a percentage of target sales.
Margin of safety ratio =Margin of safety in dollars Expected sales in dollars
Demonstration of E20-38
© 2016 Pearson Education, Ltd. 20-32
Requirement 2: Express Mack Company's margin of safety as a percentage of target sales.
Margin of safety ratio =Margin of safety in dollars Expected sales in dollars
=$21,000$30,000
Demonstration of E20-38
© 2016 Pearson Education, Ltd. 20-33
Requirement 2: Express Mack Company’s margin of safety as a percentage of target sales.
Margin of safety ratio =Margin of safety in dollars Expected sales in dollars
=$21,000$30,000
= 70%
Demonstration of E20-38
© 2016 Pearson Education, Ltd. 20-34