Ehrlich Enterprises prepared the following contribution format income statement based on a sales volume of 3,000 units (the relevant range of production is 1,000 units to 5,000 units): Contribution Margin Income Statement Sales $ 48,000 Variable expenses 30,000 Contribution margin 18,000 Fixed expenses 10,000 Net operating Income $ 8,000 Required: Show all calculations! (Answer each question independently and always refer to the original data unless instructed otherwise. Round all uneven answers to 2 decimal places.) What is the contribution margin per unit? What is the contribution margin ratio? What is the variable expense ratio? If sales decline to 1,300 units, what would be the net operating income (loss)? If the selling price increases by $3 per unit and the sales volume decreases by 100 units, what would be the net operating income? What is the break-even point in unit sales? What is the break-even point in dollar sales? How many units must be sold to achieve a target profit of $7,000? What is the margin of safety in dollars? If fixed costs increase by 12%, what will be the new breakeven point in units? What is the degree of operating leverage? Using the degree of operating leverage, what is the estimated percent increase in net operating income of a 15% increase in sales?
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
Ehrlich Enterprises prepared the following contribution format income statement based on a sales volume of 3,000 units (the relevant range of production is 1,000 units to 5,000 units):
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Contribution Margin Income Statement |
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Sales |
$ 48,000 |
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Variable expenses |
30,000 |
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Contribution margin |
18,000 |
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Fixed expenses |
10,000 |
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Net operating Income |
$ 8,000 |
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Required: Show all calculations!
(Answer each question independently and always refer to the original data unless instructed otherwise. Round all uneven answers to 2 decimal places.)
- What is the contribution margin per unit?
- What is the contribution margin ratio?
- What is the variable expense ratio?
- If sales decline to 1,300 units, what would be the net operating income (loss)?
- If the selling price increases by $3 per unit and the sales volume decreases by 100 units, what would be the net operating income?
- What is the break-even point in unit sales?
- What is the break-even point in dollar sales?
- How many units must be sold to achieve a target profit of $7,000?
- What is the margin of safety in dollars?
- If fixed costs increase by 12%, what will be the new breakeven point in units?
- What is the degree of operating leverage?
- Using the degree of operating leverage, what is the estimated percent increase in net operating income of a 15% increase in sales?
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