CVP: EXERCISES AND PROBLEMS

In business, the break-even point is either the amount of sales (in dollars) that you need to make or the number of items you need to
sell to just break-even (no profit or loss-you just recoup your costs). If you sell less than this point, you will lose money and if you
sell more, you will make a profit.
Below are two simple examples of how to calculate a break- even point. At the end of this benchmark you will use your income
statement to calculate a break-even point for your business.
Think of this very simple example: It costs you $250 to run your new lawn care business per month. If you charge $25 per lawn,
you need to mow ten lawns each month to break-even. Ten lawns is your break -even point. Once you mow your eleventh lawn, you
start making profit.
1. Appalachian Herbal Essentials
Break-even Analysis
For Month Ended June 30, 2010
Fixed Costs (Operating Expenses) $ 962
Variable Costs (Cost of Goods Sold) 3,680
Break-even in Sales = Fixed Costs + Variable Costs = $4,642
Appalachian Herbal needs to sell $4,642 in June to cover costs for the month of June.
2. Seeing a need for childcare in her community, Sue decided to launch her own daycare service. Her service needed to be
affordable, so she decided to watch each child for $12 a day. After doing her homework, Sue came up with the following financial
information:
Selling Price (per child per day)
$12
Fixed Operating Expenses (per month)
Insurance
400
Rent
200
Total Fixed Operating Expenses
$600
Variable Costs per child
$4
2 Meals (b. fast and lunch) @ $1.50 / meal = $3.00
2 Snacks @ $0.5 / snack
= $1.00
a) What is the unit Contribution Margin?
Contribution Margin (per child) = Selling Price Variable Cost; $12.00 4.00 = $8.00 per child
b) The month of June has 20 workdays, Monday through Friday for four weeks. How many children will Sue need to take care of
just to break-even in her new business?
Break-even formula: = Fixed Operating Expenses Contribution Margin per child
= $600 ($12.00 - $4.00);
= $600 $8.00
= 75 children in June
Since there are 20 working days June, Sue must watch 75 20 = 3.75 kids! Or four children every day.
Company sells lightweight tables. One table is sold for $45. Variable and fixed cost data is given below:
Variable cost
$18 per unit
Fixed Cost
$540,000 per year
Required:
a. Calculate Contribution Margin ratio (CM ratio) of the product.
b. Using CM ratio, calculate break- even point in dollars.
c. During the year, the company sold 24,000 lightweight tables.
(a) If sales is increased by 15% next year, how much should net operating income increase
a. CM ratio:

Selling price-variable cost = $45 18

Selling price
45

b. Break even sales:

Fixed Cost
CM Ratio

= $540,000
.60

=27
45

= .60 or 60%

= $900,000 BES

c. Sales variable cost = Contribution Margin:

(24,000 units x $45) (24,000 units x $18) = 648,000
Contribution Margin Fixed cost = Net operating income;
$648,000 540,000 = 108,000

Break-even Point (Quiz) True/false questions

1.

Fixed Expenses do not change in total when there is a modest change in sales.

2.

An example of a fixed expense would be a 5% sales commission.

3.

Property taxes and rent are often fixed expenses.

4.

Variable expenses change in total as volume changes.

5.

An example of a variable expense is an office manager's monthly salary.

6.

A retailer's cost of goods sold is an example of a variable expense.

7.

Contribution margin is defined as sales (or revenues) minus variable expenses.

8.

Break-even point is the point where revenues equal the total of all expenses including the cost of goods sold.

9.

The break-even point in dollars is equal to the total of the fixed expenses divided by the contribution margin per unit.

10. If a company requires a profit of $30,000 (instead of breaking even), the $30,000 should be combined with the fixed
expenses in order to compute the point at which the company will earn $30,000.
11. If a company has mixed expenses, the fixed component can be combined with the company's fixed expenses and the
variable component can be combined with the company's variable expenses.
12. Decreasing a company's fixed expenses should reduce the break-even point.
13. The contribution margin per unit is the selling price per unit minus the fixed expenses per unit.
14. Break-even analysis is useful for companies that sell products, but it is not useful for companies that provide services.

Use this information to answer questions 15 through 17:

Selling price per unit
$17
Fixed Expenses:
Selling and Administrative
$130,000
Interest Expense
10,000
Variable Expenses:
Cost of Goods Sold
$4.00
Selling and Administrative
3.00
15. What is the company's contribution margin?

$10

16. What is the break-even point in units?

10,000

$13

$14
14,000

20,000

17. If the company wants to earn a profit of $42,000 instead of breaking even, how many units must the company sell?
14,000
18,200
26,000
Use this information to answer questions 18 through 20:
Fixed Expenses: Rent
$24,000
Salaries
40,000
Depreciation
13,000
Variable Expenses: Cost of Goods Sold
Supplies
Commissions

58% of sales
7% of sales
5% of sales

18. What is the company's contribution margin ratio?

30%

70%

19. What is the break-even point in dollars?

$77,000

Cannot Be Determined
$110,000

$256,667

20. If the company wants to earn a profit of $35,000 instead of breaking even, what is the amount of sales or revenue dollars
the company must achieve?
$112,000
$145,000
$373,333
3. The following summarized data is reported by the manufacturer of a single product:
Unit selling price

P10.00

Unit variable cost

6.00

Annual Fixed Cost

640,000

Annual operating capacity 300,000 units

Required: Using CM approach, compute break even point in terms of: a) unit sales, b) Peso sales volume, c) percentage of
operating capacity.
a) Break even point in unit sales:

__FC__
Unit CM

b) break even in peso sales

__FC__
CM ratio

=640,000 = 640,000
10 6
=640,000

=160,000 units

4
= 640,000

(106)10

=1,600,000 pesos

.4

(or multiply BE units of 160,000 by selling price of P10)

c) Break even point in units as %age of operating capacity: BE point in units
Operating Capacity

= 160,000 =53.33%
300,000

4. Making use of the CM approach to determine sales volume

The Labrador Corporation manufactures and sells a single product. The following summarized data pertains to its product:
Unit selling price

P10.00

Unit variable cost

6.00

Fixed Expenses

P400,000

Required: Compute total peso sales needed to earn:

a) net income before income taxes of P80,000

b) net income after taxes of P140,000 (assume an income tax rate of 30%)
c) Net income before income taxes equal to 20% of sales.(?)
Solution: Unit CM = selling price-variable cost;

P10.00-6.00 = P4.00

CM ratio= Unit CM/unit selling price = 4/10

= 40%

a) Peso sales to earn net income before taxes of P80,000 = Fixed cost+TNI =400,000+80,000 =480,000 = P1,200,000
CM ratio

.40

.40

b) peso sales to earn NI after taxes of P140,000 = FC + 140,000/.7 = 400,000+200,000 = 600,000

(assume income tax rate of 30%)

.4

c) Peso sales to earn NI before income taxes

equal to 20% of sales

FC
.4-.2

.4
400,000

= P1,500,000

.4
= P2,000,000

.2

5. Following is the contribution margin income statement of a single product company:

Total
per unit
Sales
$1,200,000
$80
Variable Expenses
840,000
56
Contribution Margin
360,000
24
Fixed Expenses
300,000
Net operating Income
$60,000
Required:1. Calculate break-even point in units and dollars.
2. What is the contribution margin at break-even point?
3. Compute the number of units to be sold to earn a profit of $36,000.
4. Compute the margin of safety using original data.
5. Compute CM ratio. Compute the expected increase in monthly net operating if sales increase by $160,000 and fixed
expenses do not change.
1. BE in units and dollars:
FC/unit CM = 300,000/24 =12,500 units
*$80, selling price = $1,000,000
2. CM at break even point - $300,000
(break even sales = 300,000/.30 = 1,000,000)
3. Units to be sold to earn profit of $36,000 = FC + TP
=300,000+36,000 = 336,000 = 14,000
Unit cm
24
24
4. Margin of Safety=Actual (or budgeted sales) Break even sales:
= 1,200,000-1,000,000 = 200,000
200,000/1,200,000 = 16.67%
5. CM ratio = CM/sales = 360,000/1,200,000, (or 24/80) = 30%
Budgeted increase in sales of $160,000 x CM ratio of 30% = $48,000
1,200,000 + 160,000 = 1,360,000
840,000
= 952,000

FC
Net Oprtg Inc.

360,000

408,000

300,000

300,000

60,000

108,000

6. Mel and Hat opened a food store called soup Nutsy. For $6 per serving, Soup Nutsy offers 12 homemade soups each day such as
sherry crab and Thai coconut shrimp. Mel and Hat reported that in their first year of operation, they netted $210,000 on sales of
$700,000. They report that it costs about $2 per serving to make the soup. So, their variable expenses ratio is one third (2/6) of
selling price. If so, what are their fixed expenses? What is the break even sales? What is the amount and ratio of margin of safety?
(FC=256,666.67; BES = 385,000)
Break even sales: = FC/unit CM
Sales=FC+VC+profit

256,666.67/(6-2) = 256,666.67/4 = 385,000

700,000=FC + 700,000 x 1/3 + 210,000

margin of safety=Actual sales break even sales

FC = 700,000-233,333.33 +210,000
FC = 256,666.67

= 700,000-385,000 = 315,000 margin of safety

Margin of safety ratio = margin of safety

=315,000

Actual or budgeted sales 700,000 = 45%

1. Gilley, Inc., sells a single product. The company's most recent income statement is given below.
Sales (4,000 units)
$120,000
Less variable expenses
(68,000)
Contribution margin
52,000
Less fixed expenses
(40,000)
Net income
$ 12,000
Required:
a. Contribution margin per unit is $ _______________ per unit
b. If sales are doubled to $240,000,total variable costs will equal $ ________
c. If sales are doubled to $240,000,total fixed costs will equal $ _______________
[Link] 10 more units are sold, profits (CM) will increase by$ _______________
e. Compute how many units must be sold to break even. # _______________
f. Compute how many units must be sold to achieve profits of $20,000. # _______________
Answer:
a. (Selling price/ unit: 120,000/4,000 = $30; variable cost: 68,000/4,000= 17.) Contribution margin per unit: $30 $17 = $13
b. $68,000 x 2 = $136,000
c. $40,000
d. Contribution margin of $13 x 10 units = $130
e. Fixed costs of $40,000 / Contribution margin per unit $13 = 3,077 units
f. (Fixed costs of $40,000 + Profits $20,000) / CM per unit $13 = 4,616 units
Beta company imports blouses from Pakistan and sells them to customers in Washington, USA at a profit. Salespersons are paid basic
salary plus a decent commission on sales made by them. Data is given below:
Selling price per blouse
$80.00
Variable expenses per blouse:
Cost of blouse per invoice
36.00
Sales Commission
14.00
Total
50.00
Annual Fixed Expenses:
Rent
$160,000
Salaries
140,000
Marketing
300,000
600,000
Required:
1. Compute the number of units to be sold to break-even.
2. If the manage is also paid a commission of $6 blouse, what will be the effect on break-even point?
3. As an alternative to (3) above, company is thinking to pay $6 commission to manager on each blouse sold in excess of breakeven point. What will be the effect of these changes on the net operating income or loss of the Company if 23,500 blouses are
sold in a year?
4.

Refer to the original data. What will be the break-even point of the company if commission is entirely eliminated and salaries are
increased by $214,000? Should the company make this change?

Solution:
(1) Break-even point:

Fixed expenses
CM per unit

= $600,000
= 20,000 units
30
Or 20,000 units $80 = $1,600,000

(2) Break-even point if manager is also paid a commission of $6 per blouse sold:
The payment of a commission of $6 to manager will decrease the unit CM and increase the number of units to be sold to break-even.
$600,000
= 25,000 units or $2,000,000 in sales to break-even .
$24
(4) Effect on net operating income or loss if manager is paid a commission of $6 per blouse sold after break-even point:
Sales (23,500 x $80)
$1,880,000
Less; Variable Expenses
1,175,000
Contribution margin
705,000
Less mgrs commission (23,500-20,000) x 6
21,000
684,000
Less: Fixed Expenses
600,000
Net Operating Income
84,000
(5) Break-even point after elimination of commission and increase in salaries:
$600,000 + 214,000
($80-36)

= 18,500 units,

(18,500 $80 = $1,480,000)

With the new system, Beta company will start making profits after selling $18,500 units but with the old system company needs to sell
20,000 units before making any profit. The change should, therefore, be implemented
In its budget for next month, McGwire Company has sales revenues of $500,000, variable costs of $350,000, and fixed costs of $135,000.
a. Compute contribution margin percentage.
b. Compute total sales revenues needed to break even.
c. Compute total revenues needed to achieve a target operating income of $45,000.
d. Compute total revenues needed to achieve a target net income of $48,000, assuming income tax rate of 25%
a. CM percentage = ($500,000 $350,000) $500,000 =$150,000 $500,000 = 30%
(Note, variable costs as a percentage of revenues = $350,000 $500,000 = 70%)
b. Breakeven point sales revenue =

Fixed Cost
CM percentage

= $135,000 = $450,000
.30

c. Let X = Total revenues needed to achieve target operating income of $45,000