MA15-41. Cost Estimation and CVPAnalysis (LO2, 3, 4) Presented are the 2012 and
ID: 2469048 • Letter: M
Question
MA15-41. Cost Estimation and CVPAnalysis (LO2, 3, 4) Presented are the 2012 and 2013 functional income statements of Regional Distribution, Inc.: REGIONAL DISTRIBUTION, INC Functional Income Statements For Years Ending December 31, 2012 and 2013 2012 2013 $5,520,000 $5,000,000 Expenses $3,750,000 200,000 50,000 100,000 ....80,000 250,000 Depreciation . .. 80,000 250,000 (4,857,900) 662,100 (264,840) (4,430,000) Before-tax profit.. 570,000 (228,000) After-tax profit . $ 397,260 $ 342,000 Required a. Determine Regional Distribution's break-even point in sales dollars. b. What dollar sales volume is required to earn an after-tax profit of $480,000? c. Assuming budgeted 2014 sales of $6,000,000, prepare a 2014 contribution income statement d Discuss the reliability of the calculations in requirements a-c, including the limitations of the CVP model and how they affect the reliability of the modelExplanation / Answer
a. To determine the break-even point, you must first find the contribution margin as a percent of sales and the fixed costs per period. Because there are no taxes at the break-even point, our analysis is based on before-tax information:
Variable costs as a percent of sales =
Change in total costs = $4,857,900 - $4,430,000 = 0.823
Change in Sales $5,520,000 - $5,000,000
Fixed costs = $4,430,000 - ($5,000,000 ´ 0.823) = $315,000
Break-even point = $315,000 / (1 – 0.823) = $1,779,661
b. Sales volume required to earn an after-tax profit of $480,000:
Required before-tax profit = $480,000/(1 – 0.40) = $800,000
Required sales = ($315,000 + $800,000)/(1 – 0.823) = $6,299,435
c. Regional Distribution, Inc.
Contribution Income Statement
For the Year 2012
Sales $6,000,000
Variable costs ($6,000,000 ´ 0.823) (4,938,000)
Contribution margin 1,062,000
Fixed costs (315,000)
Before-tax profits 747,000
Income taxes at 40 percent (298,800)
After-tax profit $ 448,200
d. The method used for determining the cost equation for Regional Distribution with the available data was the high-low method, which used only two data points. There was not sufficient information to determine whether those two data points were representative of the larger population of data points. Also, it was not possible to determine the possible effects of inflation on the data from 2010 to 2011. Also, if Regional Distribution has multiple products and or departments that have varying cost structures, using aggregate data for the company as a whole to estimate its costs and break-even point may not produce accurate results. The cost-volume-profit model works best when there is a single cost driver and all costs are either variable or fixed with respect to that cost driver. For that reason, the model is generally more effective for analyzing smaller segments of a business, such as a particular product line.
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