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Understanding Cost-Volume-Profit Analysis: Solutions to Common Practice Problems

This guide explores key aspects of Cost-Volume-Profit (CVP) analysis through practice problems and their solutions. We delve into the contribution margin calculations, fixed and variable costs, and the reasoning behind a business operating at a loss. Detailed examples illustrate how planned output and labor capacity affect profit margins. Additionally, we discuss decisions regarding making versus buying products, highlighting factors that may limit production capabilities. Find clear solutions and methodologies to enhance your understanding of CVP analysis effectively.

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Understanding Cost-Volume-Profit Analysis: Solutions to Common Practice Problems

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  1. Cost-Volume-Profit Analysis Practice Problems With Solutions

  2. 9.4 Solution

  3. Another way to answer this question is to note that the contribution of this product = TR – Variable Cost (only) = $100 - $60 = $40, is positive. This is also the difference between Fixed Costs ($50) and operating loss ($10) Question: Why would a business operate at a loss? Answer: Because if they don’t sell anything, they will lose their fixed costs of $50, which is more than their operating loss of $10!

  4. Planned Output “Cost per Unit” implies variable cost! “capacity” = maximum amount!

  5. Solution Procedure

  6. This is extra profit per hour of machine time! = 5/0.5

  7. Problem 9.5 Solution (cont.)

  8. This implies that it takes skilled labor 6/12 = ½ hour to make product X. Equivalently, skilled labor can make 2 product X’s per hour.

  9. * It only takes ½ hour for skilled labor to make one product X! Contribution per one unit of X 1/Units of X per hour Regular Salary + Overtime (OT)

  10. Make or Buy Question * Note that it is cheaper to make products C and D than to buy them…… … but there may be limiting factors!

  11. Problem 9.7 (cont.) Limiting Factor?

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