Cost-Volume-Profit Analysis

Suppose you have hired an accountant who just graduated from college. The accountant presents you with the following list of costs.

Cost Description	Classification	Quantity
Direct material	fixed cost	$2
Supplies production area	variable cost	$1
Direct labor	fixed cost	$15
Rental of the production plant	fixed cost	$4,000
Salary of the president of the company	variable cost	$80,000
Production supervisor salary	variable cost	$30,000
Depreciation of production machines (linear method/years)	fixed cost	$1,000
Sales building insurance	fixed cost	$2,000
Attorney salary	fixed cost	$3,000
Seller commissions (per unit)	variable cost	$2

The company currently sells 10,000 units for $100 each.

1. Determine whether the accountant correctly classified the costs. Costs should be classified as variable and fixed. If they are not classified correctly, then indicate the correct classification.

2. Determine:

1. Tie point in units
2. Tie point in dollars
3. Marginal contribution per unit
4. The marginal contribution percentage
5. Safety margin in units
6. Margin of safety in dollars
7. Operating income

3. The accountant understands that they will be able to increase operating income by $2,000,000 if the company makes the following changes:

1. sells 20,000 units
2. reduces the selling price by 10%
3. increases advertising cost by $20,000

4. Determine and check if the counter analysis is correct.

To resolve the issue, consider the following:

1. The straight-line depreciation method, using the number of years of useful life, reflects an equal portion for all periods.
2. To answer question #1 and #2, you can use the following formulas.

Procedure:

Contribution Margin (percentage) = (Revenue - Variable Costs) / Revenue.

Contribution Margin (dollars) = (Revenue - Variable Costs)

Break-Even Point (Units) = Fixed Costs (Revenue per Unit - Variable Cost per Unit).

Break-Even point (sales dollars) = Fixed Costs Contribution Margin.

Safety Margin (Percentage) = (current sales level - breakeven point) / current sales level X 100

Safety Margin (dollars) (Safety Margin in percentage = (current sales level - breakeven point dollars)

Recommendation:

• Use a spreadsheet to determine what is required in questions #1 and #2: measure the impact of the suggested changes and determine operating income.
• Use the marginal contribution format.
• Do not take into consideration the tax impact.