Chapter 20 Cost-Volume-Profit Analysis Demonstration Problems © 2016 Pearson Education, Ltd.

For the Month Ended April 30, 2016 Demonstration of E20-23 For its top managers, Jackson Company formats its income statement as follows: JACKSON COMPANY Income Statement For the Month Ended April 30, 2016 Sales Revenue $ 300,000 Variable Costs 135,000 Contribution Margin 165,000 Fixed 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.

Demonstration of E20-23 Requirement 1: Calculate the contribution margin ratio. Contribution margin ratio = © 2016 Pearson Education, Ltd.

Demonstration of E20-23 Requirement 1: Calculate the contribution margin ratio. Contribution margin ratio = Contribution margin Net sales revenue © 2016 Pearson Education, Ltd.

Demonstration of E20-23 Requirement 1: Calculate the contribution margin ratio. Contribution margin ratio = Contribution margin Net sales revenue $165,000 $300,000 © 2016 Pearson Education, Ltd.

Demonstration of E20-23 Requirement 1: Calculate the contribution margin ratio. Contribution margin ratio = Contribution margin Net sales revenue $165,000 $300,000 55% © 2016 Pearson Education, Ltd.

© 2016 Pearson Education, Ltd. Demonstration of E20-23 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 COMPANY Income Statement © 2016 Pearson Education, Ltd.

© 2016 Pearson Education, Ltd. Demonstration of E20-23 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 COMPANY Income Statement Sales Revenue $ 200,000 © 2016 Pearson Education, Ltd.

© 2016 Pearson Education, Ltd. Demonstration of E20-23 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 COMPANY Income Statement Sales Revenue $ 200,000 Variable Costs (45% of sales) 90,000 If the contribution margin ratio is 55% (that is, contribution margin is 55% of sales), then variable costs must be 45% of sales. © 2016 Pearson Education, Ltd.

© 2016 Pearson Education, Ltd. Demonstration of E20-23 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 COMPANY Income Statement Sales Revenue $ 200,000 Variable Costs (45% of sales) 90,000 Contribution Margin 110,000 If the contribution margin ratio is 55% (that is, contribution margin is 55% of sales), then variable costs must be 45% of sales. © 2016 Pearson Education, Ltd.

© 2016 Pearson Education, Ltd. Demonstration of E20-23 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 COMPANY Income Statement Sales Revenue $ 200,000 Variable Costs (45% of sales) 90,000 Contribution Margin 110,000 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. © 2016 Pearson Education, Ltd.

© 2016 Pearson Education, Ltd. Demonstration of E20-23 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 COMPANY Income 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) If the contribution margin ratio is 55% (that is, contribution margin is 55% of sales), then variable costs must be 45% of sales. © 2016 Pearson Education, Ltd.

© 2016 Pearson Education, Ltd. Demonstration of E20-23 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 COMPANY Income 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. © 2016 Pearson Education, Ltd.

© 2016 Pearson Education, Ltd. Demonstration of E20-23 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 COMPANY Income 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. © 2016 Pearson Education, Ltd.

© 2016 Pearson Education, Ltd. Demonstration of E20-23 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 COMPANY Income 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. © 2016 Pearson Education, Ltd.

© 2016 Pearson Education, Ltd. Demonstration of E20-23 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 COMPANY Income 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. © 2016 Pearson Education, Ltd.

© 2016 Pearson Education, Ltd. Demonstration of E20-23 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 COMPANY Income 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 If the contribution margin ratio is 55% (that is, contribution margin is 55% of sales), then variable costs must be 45% of sales. © 2016 Pearson Education, Ltd.

© 2016 Pearson Education, Ltd. 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.

© 2016 Pearson Education, Ltd. Demonstration of E20-38 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, Ltd.

© 2016 Pearson Education, Ltd. Demonstration of E20-38 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, Ltd.

© 2016 Pearson Education, Ltd. Demonstration of E20-38 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 65% of sales, then the contribution margin ratio must be 35% of sales. © 2016 Pearson Education, Ltd.

© 2016 Pearson Education, Ltd. Demonstration of E20-38 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 $3,150 + $0 35% If variable costs are 65% of sales, then the contribution margin ratio must be 35% of sales. © 2016 Pearson Education, Ltd.

© 2016 Pearson Education, Ltd. Demonstration of E20-38 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 $3,150 + $0 35% $9,000 If variable costs are 65% of sales, then the contribution margin ratio must be 35% of sales. © 2016 Pearson Education, Ltd.

© 2016 Pearson Education, Ltd. Demonstration of E20-38 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 65% of sales, then the contribution margin ratio must be 35% of sales. © 2016 Pearson Education, Ltd.

© 2016 Pearson Education, Ltd. Demonstration of E20-38 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 $3,150 + $7,350 35% If variable costs are 65% of sales, then the contribution margin ratio must be 35% of sales. © 2016 Pearson Education, Ltd.

© 2016 Pearson Education, Ltd. Demonstration of E20-38 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 $3,150 + $7,350 35% $30,000 If variable costs are 65% of sales, then the contribution margin ratio must be 35% of sales. © 2016 Pearson Education, Ltd.

Demonstration of E20-38 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, Ltd.

Demonstration of E20-38 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, Ltd.

Demonstration of E20-38 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 $30,000 – $9,000 © 2016 Pearson Education, Ltd.

Demonstration of E20-38 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 $30,000 – $9,000 $21,000 © 2016 Pearson Education, Ltd.

© 2016 Pearson Education, Ltd. Demonstration of E20-38 Requirement 2: Express Mack Company's margin of safety as a percentage of target sales. Margin of safety ratio = © 2016 Pearson Education, Ltd.

© 2016 Pearson Education, Ltd. Demonstration of E20-38 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 © 2016 Pearson Education, Ltd.

© 2016 Pearson Education, Ltd. Demonstration of E20-38 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 © 2016 Pearson Education, Ltd.

© 2016 Pearson Education, Ltd. Demonstration of E20-38 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% © 2016 Pearson Education, Ltd.