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Cost-Volume-Profit (CVP) Analysis and Managerial Decision Making: A Case Study of Trace Company

Financial analysis focusing on break-even points and profit planning for management decisions

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    Cost - Volume - Profit (CVP) Analysis and Managerial Decision Making: A Case Study of Trace Company Problem 1: Trace Company is a manufacturer and has the following costs from the production and sale of 480,000 CD sets for the year ended December 31, 2010. The CD sets sell for $4.50 each. The company has a 25% combined federal and state income tax rate. Trace has a plant production capacity of 600,000 CD sets. Cost Item: Total Cost: Variable Manufacturing Costs: Plastic for CD sets $43,200 Wages for assembly workers $600,000 Labeling $86,400 Variable Selling Costs: Sales commissions $48,000 Fixed Manufacturing Costs: Factory rent $100,000 Factory cleaning service $75,000 Factory machinery depreciation $125,000 Fixed Selling & Administrative Costs: Office equipment lease $120,000 Systems staff salaries $600,000 Admin management salaries $300,000 Required: a. Prepare an absorption (traditional) costing pre - tax income statement for Trace for the year 2010. Solution: Sales Revenue (480,000 x $4.50) $2 , 160 , 000 Less: Cost of goods sold $1,029,600 Gross Profit $1,130,400 Less: Selling and administrative costs $1,068,000 Pre - tax income $62,400 Cost of goods sold = Total Variable Manufacturing Costs + Fixed Manufacturing Costs = ($43,200 + $600,000 + $86,400) + ($100,000 + $75,000 + $125,000) = $1,029,600 b. Prepare a variable (contribution margin) costing pre - tax income statement for Trace for the year 2010. Solution:

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    Sales Revenue (480,000 x $4.50) $2,160,000 Less: Variable expenses $777,600 Contribution margin $1,382,400 Less: Fixed expenses $1,320 ,000 Pre - tax income $62,400 Variable expenses = Total Variable Manufacturing Costs + Variable Selling Costs: = ($43,200 + $600,000 + $86,400) + $48,000 = $777,600 c. Compare the pre - tax income produced in ‘a’ and ‘b’ above. Was the pre - tax income the same or different? Explain why you obtained the results you did. Answer: The pre - tax income statement is same under both the methods, the difference is o nly in the manner of presentation. d. Would your pre - tax income answers obtained in ‘a - b - c’ above change if production had been 500,000 units instead of 480,000? Why or why not? If so, by how much would it change? Solution: a) Sales Revenue (500,000 x $4.50) $2,250,000 Less: Cost of goods sold $1,029,600 Gross Profit $1,220,400 Less: Selling and administrative costs $1,068,000 Pre - tax income $152,400 Cost of goods sold = Total Variable Manufacturing Costs + Fixed Manufacturing Costs = ($43,200 + $600,000 + $86,400) + ($100,000 + $75,000 + $125,000) = $1,029,600 Selling and administrative costs = Fixed Selling and administrative costs + Variable Selling and administrative costs = ($120,000 + $600,000 + $300,000) + $48,000 = $1,068,000 b)

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