Cost-Volume-Profit Analysis Chapter 21 Cost-Volume-Profit Analysis Demonstration Problems © 2016 Pearson Education, Inc.

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.) © 2016 Pearson Education, Inc.

E21-31 Requirement 1: Calculate the contribution margin ratio. = © 2016 Pearson Education, Inc.

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

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

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

© 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.

© 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.

© 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.

© 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.

© 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.

© 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.

© 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.

© 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.

© 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.

© 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.

© 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. © 2016 Pearson Education, Inc.

© 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. © 2016 Pearson Education, Inc.

© 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.

© 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.

© 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.

© 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.

© 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.

© 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.

© 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.

© 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.

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.

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.

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.

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 © 2016 Pearson Education, Inc.

© 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.

© 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.

© 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.

© 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% © 2016 Pearson Education, Inc.

© 2016 Pearson Education, Inc. End of Chapter 21 © 2016 Pearson Education, Inc.