EXERCISE 5–1 Preparing a Contribution Format Income Statement [LO1] Wheeler Corporation’s

most recent income statement follows:

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Total Per Unit

Sales (8,000 units) ............................... $208,000 $26.00

Variable expenses ................................ 144,000 18.00

Contribution margin ............................. 64,000 $ 8.00

Fixed expenses .................................... 56,000

Net operating income .......................... $ 8,000

Required:

Prepare a new contribution format income statement under each of the following conditions
(consider each case independently):

1. The sales volume increases by 50 units.

2. The sales volume declines by 50 units.

3. The sales volume is 7,000 units.

EXERCISE 5–2 Prepare a Cost-Volume-Profit (CVP) Graph [LO2]

Katara Enterprises distributes a single product whose selling price is $36 and whose variable expense
is $24 per unit. The company’s monthly fixed expense is $12,000.

Required: 1. Prepare a cost-volume-profit graph for the company up to a sales level of 2,000 units.

2. Estimate the company’s break-even point in unit sales using your cost-volume-profit graph.

EXERCISE 5–3 Prepare a Profit Graph [LO2]

Capricio Enterprises distributes a single product whose selling price is $19 and whose variable
expense is $15 per unit. The company’s fixed expense is $12,000 per month.

Required:

1. Prepare a profit graph for the company up to a sales level of 4,000 units.

2. Estimate the company’s break-even point in unit sales using your profit graph.

EXERCISE 5–4 Computing and Using the CM Ratio [LO3]

Last month when Harrison Creations, Inc., sold 40,000 units, total sales were $300,000, total variable
expenses were $240,000, and fixed expenses were $45,000.

Required: 1. What is the company’s contribution margin (CM) ratio?

2. Estimate the change in the company’s net operating income if it were to increase its total sales by
$1,500.
EXERCISE 5–5 Changes in Variable Costs, Fixed Costs, Selling Price, and Sales Volume [LO4]

Data for Herron Corporation are shown below:

Per Unit Percent of Sales

Selling price .................................... $75 100%

Variable expenses .......................... 45 60%

Contribution margin ........................ $30 40%

Fixed expenses are $75,000 per month and the company is selling 3,000 units per month.

Required:

1. The marketing manager believes that an $8,000 increase in the monthly advertising budget would
increase monthly sales by $15,000. Should the advertising budget be increased?

2. Refer to the original data. Management is considering using higher-quality components that
would increase the variable cost by $3 per unit. The marketing manager believes that the higher-
quality product would increase sales by 15% per month. Should the higher-quality components be
used?
EXERCISE 5–11 Break-Even Analysis; Target Profit; Margin of Safety; CM Ratio [LO1, LO3, LO5, LO6,
LO7]

Pringle Company distributes a single product. The company’s sales and expenses for a recent month
follow: Total Per Unit

Sales ............................................ $600,000 $40

Variable expenses ....................... 420,000 28

Contribution margin ..................... 180,000 $12 Fixed expenses ............................ 150,000

Net operating income .................. $ 30,000

Required: 1. What is the monthly break-even point in units sold and in sales dollars?

2. Without resorting to computations, what is the total contribution margin at the break-even
point?

3. How many units would have to be sold each month to earn a target profit of $18,000? Use the
formula method. Verify your answer by preparing a contribution format income statement at the
target level of sales.

4. Refer to the original data. Compute the company’s margin of safety in both dollar and percentage
terms.

5. What is the company’s CM ratio? If monthly sales increase by $80,000 and there is no change in
fixed expenses, by how much would you expect monthly net operating income to increase?

EXERCISE 5–13 Break-Even Analysis and CVP Graphing [LO2, LO4, LO6] Chi Omega Sorority is
planning its annual Riverboat Extravaganza. The Extravaganza committee has assembled the
following expected costs for the event:

Dinner (per person) .......................................... $7

Favors and program (per person) ...................... $3

Band ............................................................... $1,500

Tickets and advertising ..................................... $700

Riverboat rental ................................................ $4,800

Floorshow and strolling entertainers .................... $1,000

The committee members would like to charge $30 per person for the evening’s activities.

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Required:

1. Compute the break-even point for the Extravaganza (in terms of the number of persons that must
attend).
2. Assume that only 250 persons attended the Extravaganza last year. If the same number attend this
year, what price per ticket must be charged to break even?

3. Refer to the original data ($30 ticket price per person). Prepare a CVP graph for the Extravaganza
from zero tickets up to 600 tickets sold.

PROBLEM 5–19A Basic CVP Analysis; Graphing [LO1, LO2, LO4, LO6]

Shirts Unlimited operates a chain of shirt stores that carry many styles of shirts that are all sold at
the same price. To encourage sales personnel to be aggressive in their sales efforts, the company
pays a substantial sales commission on each shirt sold. Sales personnel also receive a small base
salary. The following worksheet contains cost and revenue data for Store 36. These data are typical
of the company’s many outlets:

Per Shift Selling price .................................... $ 40.00

Variable expenses: Invoice cost ................................. $ 18.00

Sales commission ....................... 7.00

Total variable expenses .......... $ 25.00

Annual Fixed expenses: Rent ............................................ $ 80,000

Advertising .................................. 150,000

Salaries ....................................... 70,000

Total fixed expenses ................. $300,000

The company has asked you, as a member of its planning group, to assist in some basic analysis of its
stores and company policies.

Required:

1. Calculate the annual break-even point in dollar sales and in unit sales for Store 36.

2. Prepare a CVP graph showing cost and revenue data for Store 36 from zero shirts up to 30,000
shirts sold each year. Clearly indicate the break-even point on the graph.

3. If 19,000 shirts are sold in a year, what would be Store 36’s net operating income or loss?

4. The company is considering paying the store manager of Store 36 an incentive commission of $3
per shirt (in addition to the salespersons’ commissions). If this change is made, what will be the new
break-even point in dollar sales and in unit sales?

5. Refer to the original data. As an alternative to (4) above, the company is considering paying the
store manager a $3 commission on each shirt sold in excess of the break-even point. If this change is
made, what will be the store’s net operating income or loss if 23,500 shirts are sold in a year?

6. Refer to the original data. The company is considering eliminating sales commissions entirely in
its stores and increasing fixed salaries by $107,000 annually. a. If this change is made, what will be
the new break-even point in dollar sales and in unit sales in Store 36? b. Would you recommend that
the change be made? Explain.