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COST-VOLUME-PROFIT

Profit = Sales – Costs

= Sales – (Variable Costs + Fixed Costs)

= Sales – Variable Costs – Fixed Costs

Profit + Fixed Costs = Sales – Variable Costs

Profit + Fixed Costs = Units Sold X (Unit Sales Price – Unit Variable Cost)

The Basic Profit Equation

The Problem

Delgado Food Services Company operates and services soft drink vending machines located in:

• Restaurants• Gas stations• Factories

The machines are rented from the manufacturer. Delgado also rent the space occupied by its machines.

The Problem

Elements of Cost Total

Machine rental: 40 machines @ $ 43.50 $ 1,740

Space rental: 40 location @ $ 28.80 1,152Part-time wages to service the additional 40 machines

1,908

Other fixed costs 200

Total monthly fixed costs $ 5,000

Fixed Monthly Expenses

The Problem

Other Data

Elements of Cost Per Unit Per $ 100 of SalesSelling price $ 1.00 100%Cost of snack 0.80 80%Contribution margin $ 0.20 20%

The Problem

Requirement

1. What is the monthly break-even point in number of units and in dollar sales?

2. If 36,000 units were sold, what would be the company’s net income?

3. If the space rental cost were doubled, what would be the monthly break-even point in number of units and in dollar sales?

The Problem

Requirement

4. If, in addition to the fixed rent, Delgado Food Services Company paid the vending machine manufacturer 2 cent per unit sold, what would be the monthly break-even point in number of units and in dollar sales? Refer to the original data.

5. If, in addition to the fixed rent, Delgado paid the machine manufacturer 4 cent for each unit sold in excess of the break-even point, what would the new net income be if 36,000 units were sold? Refer to the original data.

The Solution

Contribution Margin (CM)

Unit CM = Sales – Variable Expenses = $ 1.00 - $ 0.80 = $ 0.20

In the case of Delgado Food and Services Company, the CM can be computed as follows:

The Solution

Contribution Margin (CM) Ratio

CM Ratio = Total CMTotal Sales

= $7,200 $36,000 = 20%

For, Delgado Food and Services Company, the computations are:

The Solution

If 36,000 units were sold, what would be the company’s net income?

Elements of Cost Total Per Unit Percent of SalesSales (36,000 units) @ $ 1.00 $ 36,000.00 $ 1.00 100%

Variable expenses (cost of snack) @ $ 0.80 28,800.00 0.80 80%

CM 7,200.00 $ 0.20 20%Fixed expenses 5,000.00 Net operating income $ 2,200.00

The Solution

What is the monthly break-even point in number of units in sales?

Unit sales to break-even = Fixed expensesUnit CM

= $ 5,000.00 $ 0.20 = 25,000

In the case of Delgado Food and Services Company, the break-even point can be computed as follows:

The Solution

What is the monthly break-even point in dollar sales?

In the case of Delgado Food and Services Company, the break-even point can be computed as follows:

Dollar sales to break-even = Fixed expensesCM Ratio

= $ 5,000.00 0.20 = $ 25,000

The Solution

If the space rental cost were doubled, what would be the monthly break-even point in number of units in sales?

Elements of Cost TotalMachine rental: 40 machines @ $ 43.50 $ 1,740Space rental: 40 location @ $ (28.80 X 2) = $ 57.60 2,304Part-time wages to service the additional 40 machines 1,908Other fixed costs 200Total monthly fixed costs $ 6,152

If the space rental cost were doubled, fixed monthly expenses of Delgado Food and Services Company would be as follows:

The Solution

Unit sales to break-even = Fixed expensesUnit CM

= $ 6,152.00 $ 0.20 = 30,760

In that case the break-even point of Delgado Food and Services Company can be computed as follows:

The Solution

If the space rental cost were doubled, what would be the monthly break-even point in dollar sales?

Dollar sales to break-even = Fixed expensesCM Ratio

= $ 6,152.00 0.20 = $ 30,760

In that case the break-even point of Delgado Food and Services Company can be computed as follows:

The Solution If, in addition to the fixed rent, Delgado Food Services Company

paid the vending machine manufacturer 2 cent per unit sold, what would be the monthly break-even point in number of units in sales? Refer to the original data.

New Unit CM = Sales – Variable Expenses

= Sales – (Cost of Snacks @ $ 0.80 + Payment

to Manufacturer @ $ 0.02) = $ 1 - $ 0.82 = $ 0.18

If, Delgado Food Services Company paid the vending machine manufacturer 2 cent per unit sold, the new CM would be:

The Solution

Unit sales to break-even = Fixed expensesUnit CM

= $ 5,000.00 $ 0.18 = 27,778

In that case the new break-even point of Delgado Food and Services Company can be computed as follows:

The Solution If, in addition to the fixed rent, Delgado Food Services

Company paid the vending machine manufacturer 2 cent per unit sold, what would be the monthly break-even point in dollar sales? Refer to the original data.

CM Ratio = Unit CMUnit selling price

= $0.18 $1 = 18%

If, Delgado Food Services Company paid the vending machine manufacturer 2 cent per unit sold, the new CM Ratio would be:

The Solution

Dollar sales to break-even = Fixed expensesUnit CM

= $ 5,000.00 0.18 = $ 27,778

In that case the break-even point of Delgado Food and Services Company can be computed as follows:

The Solution If, in addition to the fixed rent, Delgado paid the machine manufacturer

4 cent for each unit sold in excess of the break-even point, what would the new net income be if 36,000 units were sold? Refer to the original data.

Variable expenses = Cost of snack @ $0.80 for 36,000 units + Payment to Manufacturer @ $ 0.04 for (36,000 – 25,000) units

= Cost of snack @ $0.80 for 36,000 units + Payment

to Manufacturer @ $ 0.04 for 11,000 units = $ (28,800.00 + 440) = $ 29,240

If, in addition to the fixed rent, Delgado paid the machine manufacturer 4 cent for each unit sold in excess of the break-even point, the new variable expenses would be:

The Solution

Elements of Cost TotalSales (36,000 units) @ $ 1.00 $ 36,000.00Variable expenses (cost of snack @ $0.80 for 36,000 units + Payment to Manufacturer @ $ 0.04 for 11,000 units)

29,240.00

CM 6,760.00Fixed expenses 5,000.00Net operating income $ 1,760.00

Therefore the new contribution income statement of Delgado Food and Services Company for selling 36,000 units of soft drinks would be:

END