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Chapter 20: Q20RQ (page 1119)
What is sensitivity analysis? How do managers use this tool?
Answer
A sensitivity analysis is a 鈥渨hat if鈥� technique.
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Crandall Company sells flags with team logos. Crandall has fixed costs of \(583,200 per year plus variable costs of \)4.80 per flag. Each flag sells for \(12.00.
Requirements
1. Use the equation approach to compute the number of flags Crandall must sell each year to break even.
2. Use the contribution margin ratio approach to compute the dollar sales Crandall needs to earn \)33,000 in operating income for 2018. (Round the contribution margin ratio to two decimal places.)
3. Prepare Crandall鈥檚 contribution margin income statement for the year ended December 31, 2018, for sales of 70,000 flags. (Round your final answers up to the next whole number.)
4. The company is considering an expansion that will increase fixed costs by 21% and variable costs by $0.60 per flag. Compute the new breakeven point in units and in dollars. Should Crandall undertake the expansion? Give your reasoning. (Round your final answers up to the next whole number.)
Computing margin of safety
Robbie鈥檚 Repair Shop has a monthly target profit of \(31,000. Variable costs are 20%of sales, and monthly fixed costs are \)19,000.
Requirements
1. Compute the monthly margin of safety in dollars if the shop achieves its income goal.
2. Express Robbie鈥檚 margin of safety as a percentage of target sales.
3. Why would Robbie鈥檚 management want to know the shop鈥檚 margin of safety?
Question: Use the following information to complete Short Exercises S20-10 through S20-15.
Funday Park competes with Cool World by providing a variety of rides. Funday Park sells tickets at \(70 per person as a one-day entrance fee. Variable costs are \)42 per person, and fixed costs are $170,800 per month.
S20-10 Computing contribution margin per unit, breakeven point in sales units
Compute the contribution margin per unit and the number of tickets Funday Park must sell to break even. Perform a numerical proof to show that your answer is correct.
What is cost-volume-profit analysis?
What are the CVP assumptions?
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