1. Cost-Volume-Profit Analysis
Chapter 21
Cost-Volume-Profit Analysis
Demonstration Problems
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2. For the Month Ended March 31, 2016
For its top managers, Global Travel formats its income statement as follows:
Global Travel
Income Statement
For the Month Ended March 31, 2016
Sales Revenue
$ 318,500
Variable Costs
111,475
Contribution Margin
207,025
Fixed Costs
175,000
Operating Income
$ 32,025
Jackson’s relevant range is between sales of $250,000 and $360,000.
Requirements
Calculate the contribution margin ratio.
Prepare two contribution margin income statements: one at the $250,000 sales level and one at the $360,000 sales level. (Hint: The proportion of each sales dollar that goes toward variable costs is constant within the relevant range.)
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3. E21-31 Requirement 1: Calculate the contribution margin ratio.=
© 2016 Pearson Education, Inc.

4. E21-31 Requirement 1: Calculate the contribution margin ratio.=
Contribution margin
Net sales revenue
© 2016 Pearson Education, Inc.

5. E21-31 Requirement 1: Calculate the contribution margin ratio.=
Contribution margin
Net sales revenue
$207,025
$318,500
© 2016 Pearson Education, Inc.

6. E21-31 Requirement 1: Calculate the contribution margin ratio.=
Contribution margin
Net sales revenue
$207,025
$318,500
65%
© 2016 Pearson Education, Inc.

7. © 2016 Pearson Education, Inc.
Requirement 2: Prepare two contribution margin income statements: one at the $250,000 sales level and one at the $360,000 sales level. (Hint: The proportion of each sales dollar that goes toward variable costs is constant within the relevant range.)
Global Travel
Income Statement
© 2016 Pearson Education, Inc.

8. © 2016 Pearson Education, Inc.
Requirement 2: Prepare two contribution margin income statements: one at the $250,000 sales level and one at the $360,000 sales level. (Hint: The proportion of each sales dollar that goes toward variable costs is constant within the relevant range.)
Global Travel
Income Statement
Sales Revenue
$ 250,000
© 2016 Pearson Education, Inc.

9. © 2016 Pearson Education, Inc.
Requirement 2: Prepare two contribution margin income statements: one at the $250,000 sales level and one at the $360,000 sales level. (Hint: The proportion of each sales dollar that goes toward variable costs is constant within the relevant range.)
Global Travel
Income Statement
Sales Revenue
$ 250,000
Variable Costs (35% of sales)
87,500
If the contribution margin ratio is 65% (that is, contribution margin is 65% of sales), then variable costs must be 35% of sales.
© 2016 Pearson Education, Inc.

10. © 2016 Pearson Education, Inc.
Requirement 2: Prepare two contribution margin income statements: one at the $250,000 sales level and one at the $360,000 sales level. (Hint: The proportion of each sales dollar that goes toward variable costs is constant within the relevant range.)
Global Travel
Income Statement
Sales Revenue
$ 250,000
Variable Costs (35% of sales)
87,500
Contribution Margin
162,500
If the contribution margin ratio is 65% (that is, contribution margin is 65% of sales), then variable costs must be 35% of sales.
© 2016 Pearson Education, Inc.

11. © 2016 Pearson Education, Inc.
Requirement 2: Prepare two contribution margin income statements: one at the $250,000 sales level and one at the $360,000 sales level. (Hint: The proportion of each sales dollar that goes toward variable costs is constant within the relevant range.)
Global Travel
Income Statement
Sales Revenue
$ 250,000
Variable Costs (35% of sales)
87,500
Contribution Margin
162,500
Fixed Costs
175,000
If the contribution margin ratio is 65% (that is, contribution margin is 65% of sales), then variable costs must be 35% of sales.
© 2016 Pearson Education, Inc.

12. © 2016 Pearson Education, Inc.
Requirement 2: Prepare two contribution margin income statements: one at the $250,000 sales level and one at the $360,000 sales level. (Hint: The proportion of each sales dollar that goes toward variable costs is constant within the relevant range.)
Global Travel
Income Statement
Sales Revenue
$ 250,000
Variable Costs (35% of sales)
87,500
Contribution Margin
162,500
Fixed Costs
175,000
Operating Income (Loss)
$ (12,500)
If the contribution margin ratio is 65% (that is, contribution margin is 65% of sales), then variable costs must be 35% of sales.
© 2016 Pearson Education, Inc.

13. © 2016 Pearson Education, Inc.
Requirement 2: Prepare two contribution margin income statements: one at the $250,000 sales level and one at the $360,000 sales level. (Hint: The proportion of each sales dollar that goes toward variable costs is constant within the relevant range.)
Global Travel
Income Statement
Sales Revenue
$ 360,000
If the contribution margin ratio is 65% (that is, contribution margin is 65% of sales), then variable costs must be 35% of sales.
© 2016 Pearson Education, Inc.

14. © 2016 Pearson Education, Inc.
Requirement 2: Prepare two contribution margin income statements: one at the $250,000 sales level and one at the $360,000 sales level. (Hint: The proportion of each sales dollar that goes toward variable costs is constant within the relevant range.)
Global Travel
Income Statement
Sales Revenue
$ 360,000
Variable Costs (35% of sales)
126,000
If the contribution margin ratio is 65% (that is, contribution margin is 65% of sales), then variable costs must be 35% of sales.
© 2016 Pearson Education, Inc.

15. © 2016 Pearson Education, Inc.
Requirement 2: Prepare two contribution margin income statements: one at the $250,000 sales level and one at the $360,000 sales level. (Hint: The proportion of each sales dollar that goes toward variable costs is constant within the relevant range.)
Global Travel
Income Statement
Sales Revenue
$ 360,000
Variable Costs (35% of sales)
126,000
Contribution Margin
234,000
If the contribution margin ratio is 65% (that is, contribution margin is 65% of sales), then variable costs must be 35% of sales.
© 2016 Pearson Education, Inc.

16. © 2016 Pearson Education, Inc.
Requirement 2: Prepare two contribution margin income statements: one at the $250,000 sales level and one at the $360,000 sales level. (Hint: The proportion of each sales dollar that goes toward variable costs is constant within the relevant range.)
Global Travel
Income Statement
Sales Revenue
$ 360,000
Variable Costs (35% of sales)
126,000
Contribution Margin
234,000
Fixed Costs
175,000
If the contribution margin ratio is 65% (that is, contribution margin is 65% of sales), then variable costs must be 35% of sales.
© 2016 Pearson Education, Inc.

17. © 2016 Pearson Education, Inc.
Requirement 2: Prepare two contribution margin income statements: one at the $250,000 sales level and one at the $360,000 sales level. (Hint: The proportion of each sales dollar that goes toward variable costs is constant within the relevant range.)
Global Travel
Income Statement
Sales Revenue
$ 360,000
Variable Costs (35% of sales)
126,000
Contribution Margin
234,000
Fixed Costs
175,000
Operating Income (Loss)
$ 59,000
If the contribution margin ratio is 65% (that is, contribution margin is 65% of sales), then variable costs must be 35% of sales.
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18. © 2016 Pearson Education, Inc.
Ricky's Repair Shop has a monthly target profit of $17,000. Variable costs are 60% of sales, and monthly fixed costs are $8,000.
Requirements
Compute the monthly margin of safety in dollars if the shop achieves its income goal.
Express Ricky's margin of safety as a percentage of target sales.
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19. © 2016 Pearson Education, Inc.
Requirement 1: Compute the monthly margin of safety in dollars if the company achieves its income goal.
Required sales in dollars for break-even =
© 2016 Pearson Education, Inc.

20. © 2016 Pearson Education, Inc.
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 profit
Contribution margin ratio
© 2016 Pearson Education, Inc.

21. © 2016 Pearson Education, Inc.
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 profit
Contribution margin ratio
If variable costs are 60% of sales, then the contribution margin ratio must be 40% of sales.
© 2016 Pearson Education, Inc.

22. © 2016 Pearson Education, Inc.
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 profit
Contribution margin ratio
$8,000 + $0
40%
If variable costs are 60% of sales, then the contribution margin ratio must be 40% of sales.
© 2016 Pearson Education, Inc.

23. © 2016 Pearson Education, Inc.
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 profit
Contribution margin ratio
$8,000 + $0
40%
$20,000
If variable costs are 60% of sales, then the contribution margin ratio must be 40% of sales.
© 2016 Pearson Education, Inc.

24. © 2016 Pearson Education, Inc.
Requirement 1: Compute the monthly margin of safety in dollars if the company achieves its income goal.
Required sales in dollars for target profit =
Fixed costs + Target profit
Contribution margin ratio
If variable costs are 60% of sales, then the contribution margin ratio must be 40% of sales.
© 2016 Pearson Education, Inc.

25. © 2016 Pearson Education, Inc.
Requirement 1: Compute the monthly margin of safety in dollars if the company achieves its income goal.
Required sales in dollars for target profit =
Fixed costs + Target profit
Contribution margin ratio
$8,000 + $17,000
40%
If variable costs are 60% of sales, then the contribution margin ratio must be 40% of sales.
© 2016 Pearson Education, Inc.

26. © 2016 Pearson Education, Inc.
Requirement 1: Compute the monthly margin of safety in dollars if the company achieves its income goal.
Required sales in dollars for target profit =
Fixed costs + Target profit
Contribution margin ratio
$8,000 + $17,000
40%
$62,500
If variable costs are 60% of sales, then the contribution margin ratio must be 40% of sales.
© 2016 Pearson Education, Inc.

27. E21-38
Requirement 1: Compute the monthly margin of safety in dollars if the company achieves its income goal.
Margin of safety in dollars =
© 2016 Pearson Education, Inc.

28. E21-38
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
© 2016 Pearson Education, Inc.

29. E21-38
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
$62,500 – $20,000
© 2016 Pearson Education, Inc.

30. E21-38
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
$62,500 – $20,000
$42,500
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31. © 2016 Pearson Education, Inc.
Requirement 2: Express Ricky's margin of safety as a percentage of target sales.
Margin of safety ratio =
© 2016 Pearson Education, Inc.

32. © 2016 Pearson Education, Inc.
Requirement 2: Express Ricky's margin of safety as a percentage of target sales.
Margin of safety ratio =
Margin of safety in dollars
Expected sales in dollars
© 2016 Pearson Education, Inc.

33. © 2016 Pearson Education, Inc.
Requirement 2: Express Ricky's margin of safety as a percentage of target sales.
Margin of safety ratio =
Margin of safety in dollars
Expected sales in dollars
$42,500
$62,500
© 2016 Pearson Education, Inc.

34. © 2016 Pearson Education, Inc.
Requirement 2: Express Ricky's margin of safety as a percentage of target sales.
Margin of safety ratio =
Margin of safety in dollars
Expected sales in dollars
$42,500
$62,500
68%
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35. © 2016 Pearson Education, Inc.
End of Chapter 21
© 2016 Pearson Education, Inc.