CHAPTER 21
COST BEHAVIOR AND COST-VOLUME-PROFIT ANALYSIS
DISCUSSION QUESTIONS
1. Total variable costs change in proportion to changes in the level of activity. Unit variable
costs remain the same regardless of the level of activity.
2. a. Variable costs
b. Variable costs
3. Total fixed cost remains the same regardless of changes in the level of activity. Fixed cost per unit
decreases as the activity level increases and increases as the activity level decreases.
4. Mixed costs are costs that have characteristics of both a variable and a fixed cost. The high-low
method uses the highest and lowest activity levels and their related costs to estimate the variable
cost per unit and the fixed cost. The total fixed cost does not change with changes in activity level.
Thus, the difference in the total cost between the highest and lowest levels of activity is the change
in the total variable cost. Dividing this difference by the difference in activity level is an estimate
of the variable cost per unit. The fixed cost is then estimated by subtracting the total variable costs
from the total costs for the level of activity.
5. a. No impact on the contribution margin.
b. Income from operations would decrease.
6. A high contribution margin ratio, coupled with idle capacity, indicates a potential for increased
income from operations if additional sales can be made. A large percentage of each additional
sales dollar would be available, after providing for variable costs, to cover promotion efforts
and to increase income from operations. Thus, a substantial sales promotion campaign should
be considered in order to expand sales to maximum capacity and to take advantage of the low
ratio of variable costs to sales.
7. Decreases in unit variable costs, such as a decrease in the unit cost of direct materials, will
decrease the break-even point.
8. Austin Company had lower fixed costs and a higher percentage of variable costs to sales than
did Hill Company. Such a situation resulted in a lower break-even point for Austin Company.
9. The individual products are treated as components of one overall enterprise product. These
components are weighted by the sales mix percentages when determining the contribution
margin. Therefore, the sales mix affects the contribution margin and thus the break-even
point.
10. Operating leverage measures the relationship between a company’s contribution margin
and income from operations. The difference between contribution margin and income from
operations is fixed costs. Thus, companies with high fixed costs will normally have a high
operating leverage. Low operating leverage is normal for companies that are labor intensive,
such as professional service companies, which have low fixed costs.
It is computed as follows:
Contribution Margin
Operating Leverage =
Income from Operations
21-1
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
, CHAPTER 21 Cost Behavior and Cost-Volume-Profit
Analysis
PRACTICE EXERCISES
PE 21–1A
a. $23 per unit = ($700,000 – $240,000) ÷ (30,000 units – 10,000 units)
b. $10,000 = $700,000 – ($23 × 30,000 units), or $240,000 – ($23 × 10,000 units)
PE 21–1B
a. $50 per unit = ($440,000 – $300,000) ÷ (5,500 units – 2,700 units)
b. $165,000 = $440,000 – ($50 × 5,500 units), or $300,000 – ($50 × 2,700 units)
PE 21–2A
a. 37.5% = ($80 – $50) ÷ $80, or ($480,000 – $300,000) ÷ $480,000
b. $30 per unit = $80 – $50
c. Sales………………………………… $480,000 (6,000 units × $80 per unit)
Variable costs……………………… 300,000 (6,000 units × $50 per unit)
Contribution margin……………… $180,000 (6,000 units × $30 per unit)
Fixed costs………………………… 50,000
Income from operations………… $130,000
PE 21–
a. 20% = ($30 – $24) ÷ $30, or ($660,000 – $528,000) ÷ $660,000 2B
b. $6 per unit = $30 – $24
c. Sales……………………………………… $660,000 (22,000 units × $30 per unit)
Variable costs…………………………… 528,000 (22,000 units × $24 per unit)
Contribution margin…………………… $132,000 (22,000 units × $6 per unit)
Fixed costs……………………………… 40,000
Income from operations……………… $ 92,000
21-2
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
, CHAPTER 21 Cost Behavior and Cost-Volume-Profit
Analysis
PE 21–3A
a. 1,500 units = $45,000 ÷ ($90 – $60)
b. 900 units = $45,000 ÷ ($110 – $60)
PE 21–3B
a. 1,600 units = $48,000 ÷ ($75 – $45)
b. 960 units = $48,000 ÷ ($95 – $45)
PE 21–4A
a. 1,000 units = $25,000 ÷ ($80 – $55)
b. 1,800 units = ($25,000 + $20,000) ÷ ($80 – $55)
PE 21–4B
a. 5,000 units = $200,000 ÷ ($150 – $110)
b. 6,250 units = ($200,000 + $50,000) ÷ ($150 – $110)
PE 21–5A
Unit selling price of E: [($150 × 0.70) + ($100 × 0.30)] = $135.00
Unit variable cost of E: [($100 × 0.70) + ($75 × 0.30)] = 92.50
Unit contribution margin of E: $ 42.50
Break-Even Sales (units) = 12,000 units = $510,000 ÷ $42.50
Break-Even Sales (units) for AA = 12,000 units of E × 70% = 8,400 units of Product AA
Break-Even Sales (units) for BB = 12,000 units of E × 30% = 3,600 units of Product BB
PE 21–5B
Unit selling price of E: [($50 × 0.40) + ($60 × 0.60)] = $56.00
Unit variable cost of E: [($35 × 0.40) + ($30 × 0.60)] = 32.00
Unit contribution margin of E: $24.00
Break-Even Sales (units) = 4,375 units = $105,000 ÷ $24.00
Break-Even Sales (units) for QQ = 4,375 units of E × 40% = 1,750 units of Product QQ
Break-Even Sales (units) for ZZ = 4,375 units of E × 60% = 2,625 units of Product ZZ
21-3
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
, CHAPTER 21 Cost Behavior and Cost-Volume-Profit
Analysis
PE 21–6A
Contribution Margin $160,000
Operating Leverage = = = 2
Income from Operations $80,000
PE 21–6B
Contribution Margin $450,000
Operating Leverage = = = 1.5
Income from Operations $300,000
PE 21–7A
Sales – Sales at Break-Even Point
Margin of Safety = Sales
Margin of Safety = ($1,200,000 – $960,000) ÷ $1,200,000 = 20%
PE 21–7B
Sales – Sales at Break-Even Point
Margin of Safety = Sales
Margin of Safety = ($550,000 – $385,000) ÷ $550,000 = 30%
21-4
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
COST BEHAVIOR AND COST-VOLUME-PROFIT ANALYSIS
DISCUSSION QUESTIONS
1. Total variable costs change in proportion to changes in the level of activity. Unit variable
costs remain the same regardless of the level of activity.
2. a. Variable costs
b. Variable costs
3. Total fixed cost remains the same regardless of changes in the level of activity. Fixed cost per unit
decreases as the activity level increases and increases as the activity level decreases.
4. Mixed costs are costs that have characteristics of both a variable and a fixed cost. The high-low
method uses the highest and lowest activity levels and their related costs to estimate the variable
cost per unit and the fixed cost. The total fixed cost does not change with changes in activity level.
Thus, the difference in the total cost between the highest and lowest levels of activity is the change
in the total variable cost. Dividing this difference by the difference in activity level is an estimate
of the variable cost per unit. The fixed cost is then estimated by subtracting the total variable costs
from the total costs for the level of activity.
5. a. No impact on the contribution margin.
b. Income from operations would decrease.
6. A high contribution margin ratio, coupled with idle capacity, indicates a potential for increased
income from operations if additional sales can be made. A large percentage of each additional
sales dollar would be available, after providing for variable costs, to cover promotion efforts
and to increase income from operations. Thus, a substantial sales promotion campaign should
be considered in order to expand sales to maximum capacity and to take advantage of the low
ratio of variable costs to sales.
7. Decreases in unit variable costs, such as a decrease in the unit cost of direct materials, will
decrease the break-even point.
8. Austin Company had lower fixed costs and a higher percentage of variable costs to sales than
did Hill Company. Such a situation resulted in a lower break-even point for Austin Company.
9. The individual products are treated as components of one overall enterprise product. These
components are weighted by the sales mix percentages when determining the contribution
margin. Therefore, the sales mix affects the contribution margin and thus the break-even
point.
10. Operating leverage measures the relationship between a company’s contribution margin
and income from operations. The difference between contribution margin and income from
operations is fixed costs. Thus, companies with high fixed costs will normally have a high
operating leverage. Low operating leverage is normal for companies that are labor intensive,
such as professional service companies, which have low fixed costs.
It is computed as follows:
Contribution Margin
Operating Leverage =
Income from Operations
21-1
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
, CHAPTER 21 Cost Behavior and Cost-Volume-Profit
Analysis
PRACTICE EXERCISES
PE 21–1A
a. $23 per unit = ($700,000 – $240,000) ÷ (30,000 units – 10,000 units)
b. $10,000 = $700,000 – ($23 × 30,000 units), or $240,000 – ($23 × 10,000 units)
PE 21–1B
a. $50 per unit = ($440,000 – $300,000) ÷ (5,500 units – 2,700 units)
b. $165,000 = $440,000 – ($50 × 5,500 units), or $300,000 – ($50 × 2,700 units)
PE 21–2A
a. 37.5% = ($80 – $50) ÷ $80, or ($480,000 – $300,000) ÷ $480,000
b. $30 per unit = $80 – $50
c. Sales………………………………… $480,000 (6,000 units × $80 per unit)
Variable costs……………………… 300,000 (6,000 units × $50 per unit)
Contribution margin……………… $180,000 (6,000 units × $30 per unit)
Fixed costs………………………… 50,000
Income from operations………… $130,000
PE 21–
a. 20% = ($30 – $24) ÷ $30, or ($660,000 – $528,000) ÷ $660,000 2B
b. $6 per unit = $30 – $24
c. Sales……………………………………… $660,000 (22,000 units × $30 per unit)
Variable costs…………………………… 528,000 (22,000 units × $24 per unit)
Contribution margin…………………… $132,000 (22,000 units × $6 per unit)
Fixed costs……………………………… 40,000
Income from operations……………… $ 92,000
21-2
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
, CHAPTER 21 Cost Behavior and Cost-Volume-Profit
Analysis
PE 21–3A
a. 1,500 units = $45,000 ÷ ($90 – $60)
b. 900 units = $45,000 ÷ ($110 – $60)
PE 21–3B
a. 1,600 units = $48,000 ÷ ($75 – $45)
b. 960 units = $48,000 ÷ ($95 – $45)
PE 21–4A
a. 1,000 units = $25,000 ÷ ($80 – $55)
b. 1,800 units = ($25,000 + $20,000) ÷ ($80 – $55)
PE 21–4B
a. 5,000 units = $200,000 ÷ ($150 – $110)
b. 6,250 units = ($200,000 + $50,000) ÷ ($150 – $110)
PE 21–5A
Unit selling price of E: [($150 × 0.70) + ($100 × 0.30)] = $135.00
Unit variable cost of E: [($100 × 0.70) + ($75 × 0.30)] = 92.50
Unit contribution margin of E: $ 42.50
Break-Even Sales (units) = 12,000 units = $510,000 ÷ $42.50
Break-Even Sales (units) for AA = 12,000 units of E × 70% = 8,400 units of Product AA
Break-Even Sales (units) for BB = 12,000 units of E × 30% = 3,600 units of Product BB
PE 21–5B
Unit selling price of E: [($50 × 0.40) + ($60 × 0.60)] = $56.00
Unit variable cost of E: [($35 × 0.40) + ($30 × 0.60)] = 32.00
Unit contribution margin of E: $24.00
Break-Even Sales (units) = 4,375 units = $105,000 ÷ $24.00
Break-Even Sales (units) for QQ = 4,375 units of E × 40% = 1,750 units of Product QQ
Break-Even Sales (units) for ZZ = 4,375 units of E × 60% = 2,625 units of Product ZZ
21-3
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
, CHAPTER 21 Cost Behavior and Cost-Volume-Profit
Analysis
PE 21–6A
Contribution Margin $160,000
Operating Leverage = = = 2
Income from Operations $80,000
PE 21–6B
Contribution Margin $450,000
Operating Leverage = = = 1.5
Income from Operations $300,000
PE 21–7A
Sales – Sales at Break-Even Point
Margin of Safety = Sales
Margin of Safety = ($1,200,000 – $960,000) ÷ $1,200,000 = 20%
PE 21–7B
Sales – Sales at Break-Even Point
Margin of Safety = Sales
Margin of Safety = ($550,000 – $385,000) ÷ $550,000 = 30%
21-4
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
