Chapter 7 Accounting

CHAPTER 7- Break-Even Point(must equal to ZERO)- Cost Volume Profit Analysis

University Pizza delivers pizzas to the dormitories and apartments near a major state university. The company’s annual fixed expenses are $54,000. The sales price of a pizza is $10, and it costs the company $6 to make and deliver each pizza. (ignore income tax).

1. Using the contribution-margin approach, complete the company’s break-even point in units (pizzas). Using the contribution approach.

Sales Price- Variable expenses= $10 - $6= $4

Fixed Expenses / Unit Contribution= 54,000 = 13,500 (Revenue break-even)

$4

2. What is the contribution-margin ratio?

Sales price – variable expense= $10- $6= $4

Contribution margin per unit / variable expense= $4 = .4

$10

CM Ratio= 100% - 60%= 40%

3. Compute the break-even sales revenue. Use the contribution margin approach ratio in your calculation.

Fixed Expenses / CM Ratio = 54,000 =$135,000 (Sales Revenue)

.4

Or

Break-Even Point (x) Sales Price= 135,000 (x) $10= $135,000

Or

Sales Price – variable expenses= $10 - $6= .4

Sales Price $10

4. How many pizzas must the company sell to earn a target net profit of $60,000? Use the equation method.

Sales Price-x(-) Variable Expense-x (-) Fixed Expense= net profit

10X (-) 6X (-) 54,000=60,000

+54,000 +54,000

4X = 114,000 =

4 4 28,500 per pizza

Overlook Inn is a small bed-and-breakfast inn located in the Great Smoky Mountains of Tennessee. The charge is $50 per person for one night’s lodging and a full breakfast in the morning. The retired couple who own and manage the inn estimate that the variable expenses per person is $20. This includes such expenses as food, maid service, and utilities. The inn’s fixed expenses total $42,000 per year. The inn can accommodate 10 guests each night.

1. Contribution margin per unit of service (a unit of service is one night’s lodging for one guest.)

Contribution margin per unit of...