Introduction
If you’re studying managerial accounting, you’ve probably come across Problem 5-4 Application (LO9, LO10, LO11) on page 150—a commonly assigned exercise designed to test your understanding of cost behavior, contribution margin analysis, and cost-volume-profit relationships. These learning objectives (LOs) are key to making sound business decisions using financial data.
This blog post will break down the problem, walk you through the learning outcomes it targets, and explain how to solve it step by step. Whether you’re a student tackling this for a class or a professional brushing up on concepts, this guide will help you decode and apply the solution confidently.
Understanding the Learning Objectives (LO9, LO10, LO11)
LO9: Analyze Cost Behavior Using Contribution Format Income Statements
This objective focuses on how fixed and variable costs behave in relation to changes in activity level. A contribution margin income statement separates variable from fixed costs, offering clearer insight into how profits shift with sales volume.
According to AccountingCoach, the contribution margin format is more useful for internal decision-making compared to traditional income statements.
LO10: Use Cost-Volume-Profit (CVP) Analysis to Evaluate Business Options
CVP analysis helps determine how changes in costs and volume affect a company’s profit. You’ll explore breakeven points, target profits, and safety margins—all essential tools for management.
For more on CVP analysis, check out this explanation from Corporate Finance Institute.
LO11: Apply What-If Analysis to Evaluate Business Scenarios
This outcome encourages experimentation with variables like sales price, volume, or cost structures to see how different scenarios affect profitability. Excel’s built-in tools or manual recalculations are often used here.
Breaking Down Problem 5-4 (From Page 150)
Let’s take a common version of the problem, which usually involves a company—say, Blue Ridge Bicycles—that sells bikes and must analyze its cost structure and profitability.
The given data might look like this:
- Selling Price per Unit: $500
- Variable Cost per Unit: $300
- Fixed Costs per Month: $60,000
- Units Sold: 400
Step 1: Prepare a Contribution Margin Income Statement
Start by calculating Total Sales, Variable Costs, and Contribution Margin:
- Sales = 400 units × $500 = $200,000
- Variable Costs = 400 × $300 = $120,000
- Contribution Margin = $200,000 – $120,000 = $80,000
- Net Operating Income = $80,000 – $60,000 = $20,000
This format reveals how much revenue is left after covering variable costs—money that can then go toward fixed costs and profit.
Step 2: Compute the Breakeven Point (LO10)
To find the breakeven point in units:
Breakeven Units = Fixed Costs / Contribution Margin per Unit
= $60,000 / ($500 – $300)
= $60,000 / $200
= 300 units
That means Blue Ridge Bicycles must sell at least 300 bikes to cover all costs and break even.
Step 3: Perform What-If Analysis (LO11)
What if the price per bike drops to $450?
- New Contribution Margin = $450 – $300 = $150
- New Breakeven Point = $60,000 / $150 = 400 units
So, a $50 drop in price requires selling 100 more bikes just to break even—this can guide pricing decisions and marketing strategy.
Want to simulate more scenarios like this? Try using templates or tools available from Investopedia to make your calculations dynamic and easier to track.
Common Mistakes to Avoid
- Using traditional income statement format: It won’t show cost behavior or contribution margin, which is critical for decision-making.
- Incorrectly classifying costs: Be clear on what’s variable vs. fixed. Labor, for example, could be either depending on context.
- Ignoring sensitivity to changes: Even small changes in price or volume can greatly affect your breakeven point or margin.
Key Takeaways from Problem 5-4
- Contribution margin analysis offers a clearer picture of operational efficiency
- CVP analysis is essential for breakeven and target profit decisions
- What-if analysis equips you to adapt to real-world uncertainties
- Applying these tools can support better pricing, budgeting, and planning
According to Harvard Business Review, data-driven decision-making—rooted in concepts like these—gives businesses a competitive edge in dynamic markets.
The 5-4 Application Problem (LO9, LO10, LO11), p. 150 isn’t just a textbook drill—it’s a real-world skill builder. By understanding cost structures, analyzing break-even points, and simulating scenarios, you’re learning how to make smarter financial decisions. These tools are foundational not just in accounting but in management and entrepreneurship.