Unit #3 Introduction to CVP Analysis

Unit #3

Introduction to CVP Analysis

1.
Below is a list of costs.
Classify each of them as variable, fixed, or mixed (a combination of variable
and fixed components).
a. Cost of raw materials used in producing a firm’s products.
b. Property taxes.
c. Wages of sales staff paid on a salary plus commission basis.
d. Wages of hourly paid production-line workers.
e. Site licence for software.
f. Leasing costs for a delivery truck ($600 per month plus $0.40
per km).
g. Packaging materials for products.
h. Property insurance

2.
Sarah is considering the start-up of a residential cleaning
business. She can buy a used car for $8000. She has a friend who will work for
her. Based on her research, Sarah believes she can charge $90 to clean an
average-sized family home. Sarah expects most of her clients will be local, and
estimates that the round-trip driving distance associated with each job will
average 10 km. She has estimated the following expenses:
Unit #3Introduction to CVP Analysis
a. Classify the costs
into two categories—fixed costs and variable costs.
b. Determine values
for FC, the (total) monthly fixed costs, and VC, the
variable costs per home.
3.
Dynacan Ltd. manufactured 10,000 units of product last year and
identified the following manufacturing and overhead costs. (V denotes “variable
cost” and F denotes “fixed cost.”)
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If unit variable costs and fixed costs remain unchanged,
calculate the total cost to produce 9700 units this year.

Revenue
and Cost Function Approach to CVP Analysis

1.
Toys-4-U manufactures a toy
that it sells for $30 each. The variable cost per toy is $10 and the fixed
costs for this product line are $100,000 per year.
a. What is the break-even point in units?
b. What is the break-even sales revenue?

2.
Huntsville Office Supplies
(HOS) is evaluating the profitability of leasing a photocopier for its
customers to use on a self-serve basis at 10¢ per copy. The copier may be
leased for $300 per month plus 1.5¢ per copy on a full-service contract. HOS
can purchase paper at $5 per 500-sheet ream. Toner costs $100 per bottle, which
in normal use will last for 5000 pages. HOS is allowing for additional costs
(including electricity) of 0.5¢ per copy.
a. How many copies per month must be sold in order to break even?
b. What will be the increase in monthly profit for each 1000 copies
sold above the break-even point?

3.
A farmer is trying to
decide whether to rent his neighbour’s land to grow additional hay for sale to
feedlots at $180 per delivered tonne. The land can be rented at $400 per
hectare for the season. Cultivation and planting will cost $600 per hectare;
spraying and fertilizer will cost $450 per hectare. It will cost $42 per tonne
to cut, condition, and bale the hay, and $24 per tonne to transport it to the
feedlots.
a. How many tonnes per hectare must be produced to break even?
b. What is the profit or loss at the $180 per tonne price if the
crop yield is:
1. (i)15 tonnes per hectare?
2. (ii)10 tonnes per hectare?
c. What is the new break-even tonnage if the selling price is
increased to $190 per tonne?

4.
A sporting goods
manufacturer lost $400,000 on sales of $3 million in a year during the last
recession. The production lines operated at only 60% of capacity during the
year. Variable costs represent one-third of the sales dollars.
a. At what percent of capacity must the firm operate in order to
break even?
b. What would its net income be at 80% of capacity?
c. What dollar sales would generate a net income of $700,000?
d. How much does each additional dollar of sales increase the net
income?
e. How much does every $1 increase in fixed costs raise the
break-even sales?

Contribution Margin Approach to CVP Analysis

1. Toys-4-U manufactures a toy that it sells for $30 each. The
variable cost per toy is $10 and the fixed costs for this product line are
$100,000 per year.
a. What is the break-even point in units?
b. What is the break-even sales revenue?

2. A small manufacturing operation can produce up to 250 units per
week of a product that it sells for $20 per unit. The variable cost per unit is
$12, and the fixed cost per week is $1200.
a. How many units must the business sell per week to break even?
b. Determine the firm’s weekly profit or loss if it sells:
1. (i)120 units per week
2. (ii)250 units per week
c. At what level of sales will the net income be $400 per week?

3. Huntsville Office Supplies (HOS) is evaluating the profitability
of leasing a photocopier for its customers to use on a self-serve basis at 10¢
per copy. The copier may be leased for $300 per month plus 1.5¢ per copy on a
full-service contract. HOS can purchase paper at $5 per 500-sheet ream. Toner
costs $100 per bottle, which in normal use will last for 5000 pages. HOS is allowing
for additional costs (including electricity) of 0.5¢ per copy.
a. How many copies per month must be sold in order to break even?
b. What will be the increase in monthly profit for each 1000 copies
sold above the break-even point?

4. A farmer is trying to decide whether to rent his neighbour’s
land to grow additional hay for sale to feedlots at $180 per delivered tonne.
The land can be rented at $400 per hectare for the season. Cultivation and
planting will cost $600 per hectare; spraying and fertilizer will cost $450 per
hectare. It will cost $42 per tonne to cut, condition, and bale the hay, and
$24 per tonne to transport it to the feedlots.
a. How many tonnes per hectare must be produced to break even?
b. What is the profit or loss at the $180 per tonne price if the
crop yield is:
1. (i)15 tonnes per hectare?
2. (ii)10 tonnes per hectare?
c. What is the new break-even tonnage if the selling price is
increased to $190 per tonne?