Accounting Business Reporting for Decision Making

CHAPTER 10 Cost–volume–profit analysis 447

Required

Show your understanding of basic CVP analysis by finding the missing numbers.

SOLUTION TO 10.1

Selling

price/unit

Variable

costs/unit Units sold

Contribution

margin (total) Fixed costs Profit (loss)

$ 40

55

44

104

100

$ 20

25

22

75

60

5 000

1 000

5 000

2 500

1 000

$ 100 000

30 000

110 000

72 500

40 000

$ 60 000

30 000

115 000

28 000

60 000

$ 40 000

0

(5 000

44 500

(20 000

)

)

The answers could also have been determined by preparing a statement of profit or loss. Using the

first table (row 1) above:

Sales (5000 × $40)

Less: Variable costs

Contribution margin

Fixed costs

Profit

$200 000 (given)

Not given

Not given

60 000 (given)

40 000 (given)

To calculate contribution margin we would need to add fixed costs and profit. Why would we

do this? Because we know that contribution margin is equal to fixed costs in the first instance,

with any additional contributing towards profits. Therefore, the contribution margin is $100 000

($60 000 + $40 000). To calculate the variable costs we know that sales less contribution margin

are equal to variable costs. In our example, if sales are $200 000 with a contribution margin of

$100 000 then variable costs are $100 000, and given that 5000 units were sold, the variable cost

per unit is $20 ($100 000/5000 units).

10.2 Sigrid Enterprises operates a single-product entity. Data relating to the product for 2016 are as follows.

Annual volume

Selling price per unit

Variable manufacturing cost per unit

Annual fixed manufacturing costs

Variable marketing and distribution costs per unit

Annual fixed non-manufacturing costs

$

32 000

50

18

320 000

12

160 000

units

Required

a. Calculate total fixed costs and total variable costs per unit.

b. Calculate the break-even units for 2016.

c. Changes in marketing strategy are planned for 2017. This would increase variable marketing

and distribution costs by $4 per unit, and reduce fixed non-manufacturing costs by $60 000 per

year. Calculate the break-even units for 2017 under the new marketing strategy.

SOLUTION TO 10.2

a. Costs per unit

Total fixed costs

Annual fixed manufacturing costs

Annual fixed non-manufacturing costs

$ 320 000

160 000

$ 480 000

Total variable costs per unit

Variable manufacturing cost

Variable marketing and distribution

$ 18

12

$ 30