Page 857 - Accounting Principles (A Business Perspective)

21. Cost-volume-profit analysis

Go to the company's most recent financial statements and review the statement of income. What additional
information, if any, would you need to perform cost-volume-profit analysis? Why is this information excluded from
Wal-Mart Corporation's income statement?

Answers to self-test
True-false
False. The high-low method is less precise than the scatter diagram because it requires only two data points in
the computation.

False. The break-even point can also be expressed in units produced or sold.
False. Total contribution margin is the amount by which revenue exceeds variable costs of producing that
revenue.
False. Margin of safety = Current sales - Break-even sales.
True. Dollars of sales are used as the measure of volume when a company has many different products.
Multiple-choice
c. Electricity is a mixed cost.
d. Step costs have all of these characteristics—a fixed component, costs increase, and constancy over a relevant
range for a step.

Fix costs
c. BE dollars=
Contribution margin ratio
USD 10– USD 6
Contribution margin ratio = =0.40
USD10
USD20,000
BE dollars = =USD50,000
0.40
a. Contribution margin = Selling price – Variable costs
= USD 20 – USD 6 = USD 14
Fix costs
d. BE units=
Contribution margin per unit
USD28,000
BE units=
USD14 perunit
= 2,000
d. All of these are assumptions—prices and costs remain constant through the relevant range, product mix is

known, and costs can be accurately classified into fixed and variable components.

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