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Garrison Chapter 5: Acoustic Concepts cost-volume-profit analysis

ToolBreak-Even and Pricing
SourceGarrison, R. H., Noreen, E. W., and Brewer, P. C. (2015). Managerial Accounting, 15th ed. McGraw-Hill Education, New York. Chapter 5, Acoustic Concepts.
LevelUndergraduate

Problem

Acoustic Concepts sells a speaker for $250 that costs $150 in variable expenses, with fixed expenses of $35,000 a month; the current volume is 400 speakers. Find the contribution margin and its ratio, the break-even point in units and sales dollars, the volume for a target profit of $40,000, the margin of safety and the degree of operating leverage, and the effect of a 10 % change in each input.

Inputs to Enter

  • Single-product CVP (default): fixed costs 35,000, variable cost 150, selling price 250, volume 400, target profit 40,000, sensitivity 10 %
Open the Break-Even and Pricing tool (loaded with this example)

Answers

  • Unit CM $100, CM ratio 40 %, variable expense ratio 60 %; break-even 350 speakers or $87,500
  • At 400 speakers: sales $100,000, variable expenses $60,000, total CM $40,000, net operating income $5,000
  • Target profit $40,000: 750 speakers, $187,500 sales; margin of safety $12,500 = 12.5 % = 50 speakers
  • Degree of operating leverage 40,000/5,000 = 8; 10 % more volume gives +80 % income ($9,000)
  • Sensitivity: price ±10 % → $15,000 / −$5,000; variable cost +10 % → −$1,000; fixed +10 % → $1,500

Notes

The tool's default inputs are this example; press Submit. The chapter's what-if cases (advertising +$10,000 at 520 speakers → $7,000, etc.) follow by changing the inputs.

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