1. Chapter 20 Cost-Volume-Profit Analysis
Demonstration
Problems
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2. 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.

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

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

5. 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.

6. 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.

7. © 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.

8. © 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.

9. © 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.

10. © 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.

11. © 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.

12. © 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.

13. © 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.

14. © 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.

15. © 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.

16. © 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.

17. © 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.

18. © 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.

19. © 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.

20. © 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.

21. © 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.

22. © 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.

23. © 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.

24. © 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.

25. © 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.

26. © 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.

27. 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.

28. 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.

29. 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.

30. 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.

31. © 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.

32. © 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.

33. © 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.

34. © 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.