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Cost-Volume-Profit Analysis
ANSWERS TO REVIEW QUESTIONS
7-1
Break-even point
fixed expenses
unit contribution margin
0
in units expense
in units expenses
sales price
The term unit contribution margin refers to the contribution that each unit of sales
makes toward covering fixed expenses and earning a profit. The unit contribution
margin is defined as the sales price minus the unit variable expense.
7-3
In addition to the break-even point, a CVP graph shows the impact on total expenses,
total revenue, and profit when sales volume changes. The graph shows the sales
volume required to earn a particular target net profit. The firm's profit and loss areas
are also indicated on a CVP graph.
7-4
The safety margin is the amount by which budgeted sales revenue exceeds breakeven sales revenue.
7-5
An increase in the fixed expenses of any enterprise will increase its break-even point.
In a travel agency, more clients must be served before the fixed expenses are
covered by the agency's service fees.
7-6
A decrease in the variable expense per pound of oysters results in an increase in the
contribution margin per pound. This will reduce the company's break-even sales
volume.
McGraw-Hill/Irwin
Managerial Accounting, 9/e Global Edition
7-7
The president is correct. A price increase results in a higher unit contribution margin.
An increase in the unit contribution margin causes the break-even point to decline.
The financial vice president's reasoning is flawed. Even though the break-even
point will be lower, the price increase will not necessarily reduce the likelihood of a
loss. Customers will probably be less likely to buy the product at a higher price.
Thus, the firm may be less likely to meet the lower break-even point (at a high price)
than the higher break-even point (at a low price).
7-8
When the sales price and unit variable cost increase by the same amount, the unit
contribution margin remains unchanged. Therefore, the firm's break-even point
remains the same.
7-9
The fixed annual donation will offset some of the museum's fixed expenses. The
reduction in net fixed expenses will reduce the museum's break-even point.
7-10
A profit-volume graph shows the profit to be earned at each level of sales volume.
7-11
7-12
McGraw-Hill/Irwin
7-2
7-13
The gross margin is defined as sales revenue minus all variable and fixed
manufacturing expenses. The total contribution margin is defined as sales revenue
minus all variable expenses, including manufacturing, selling, and administrative
expenses.
7-14
East Company, which is highly automated, will have a cost structure dominated by
fixed costs. West Company's cost structure will include a larger proportion of
variable costs than East Company's cost structure.
A firm's operating leverage factor, at a particular sales volume, is defined as its
total contribution margin divided by its operating income. Since East Company has
proportionately higher fixed costs, it will have a proportionately higher total
contribution margin. Therefore, East Company's operating leverage factor will be
higher.
7-15
When sales volume increases, Company X will have a higher percentage increase in
operating than Company Y. Company X's higher proportion of fixed costs gives the
firm a higher operating leverage factor. The company's percentage increase in
operating income can be found by multiplying the percentage increase in sales
volume by the firm's operating leverage factor.
7-16
The sales mix of a multiproduct organization is the relative proportion of sales of its
products.
The weighted-average unit contribution margin is the average of the unit
contribution margins for a firm's several products, with each product's contribution
margin weighted by the relative proportion of that product's sales.
7-17
The car rental agency's sales mix is the relative proportion of its rental business
associated with each of the three types of automobiles: subcompact, compact, and
full-size. In a multi-product CVP analysis, the sales mix is assumed to be constant
over the relevant range of activity.
7-18
McGraw-Hill/Irwin
Managerial Accounting, 9/e Global Edition
7-19
7-20
The low-price company must have a larger sales volume than the high-price
company. By spreading its fixed expense across a larger sales volume, the low-price
firm can afford to charge a lower price and still earn the same profit as the high-price
company. Suppose, for example, that companies A and B have the following
expenses, sales prices, sales volumes, and profits.
Company A
Sales revenue:
350 units at $10 ..............................................
100 units at $20 ..............................................
Variable expenses:
350 units at $6 ................................................
100 units at $6 ................................................
Contribution margin.............................................
Fixed expenses ....................................................
Operating Profit ....................................................
Company B
$3,500
$2,000
2,100
$1,400
1,000
$ 400
600
$1,400
1,000
$ 400
7-21
The statement makes three assertions, but only two of them are true. Thus the
statement is false. A company with an advanced manufacturing environment
typically will have a larger proportion of fixed costs in its cost structure. This will
result in a higher break-even point and greater operating leverage. However, the
firm's higher break-even point will result in a reduced safety margin.
7-22
McGraw-Hill/Irwin
7-4
SOLUTIONS TO EXERCISES
EXERCISE 7-23 (25 MINUTES)
1
2
3
4
Sales
Revenue
$160,000a
80,000
120,000
110,000
Variable
Expenses
$40,000
65,000
40,000
22,000
Total
Contribution
Margin
$120,000
15,000
80,000
88,000
Fixed
Operating
Expenses Income
$30,000
$90,000
b
15,000
-030,000
50,000
50,000
38,000
Break-Even
Sales
Revenue
$40,000
80,000
45,000c
62,500d
sales revenue...............................................................................
Fixed expenses ................................................................................................
Variable expenses ...........................................................................................
$40,000
30,000
$10,000
d$62,500
2.
Contribution-margin ratio
McGraw-Hill/Irwin
Managerial Accounting, 9/e Global Edition
fixed expenses
unit contribution margin
$40,000
= 10,000 pizzas
$10 $6
$10 $6
= .4
$10
2011 The McGraw-Hill Companies, Inc.
7-5
4.
fixed expenses
contribution-margin ratio
$40,000
= $100,000
.4
Let X denote the sales volume of pizzas required to earn a target operating income of
$80,000.
$10X $6X $40,000 = $80,000
$4X = $120,000
X = 30,000 pizzas
2.
3.
fixed costs
unit contribution margin
$4,000,000
= 4,000 components
$3,000 $2,000
($4,000,000) (1.10)
$3,000 $2,000
$4,400,000
= 4,400 components
$1,000
McGraw-Hill/Irwin
7-6
$4,000,000
$2,500 $2,000
= 8,000 components
5.
$2,500
$15,500,000
12,400,000
3,100,000
4,000,000
($900,000)
The price cut should not be made, since projected operating income will decline.
McGraw-Hill/Irwin
Managerial Accounting, 9/e Global Edition
Cost-volume-profit graph:
$300,000
Total expenses
Break-even point:
20,000 tickets
$250,000
Profit
area
Variable
expense
(at 30,000
tickets)
$200,000
$150,000
Loss area
$100,000
Annual
fixed
expenses
$50,000
5,000
McGraw-Hill/Irwin
7-8
10,000
15,000
20,000
25,000
Tickets
sold per
30,000 year
10,000
50%
5,000
4
Attendanceper game
5,000
The team must play 4 games to break even.
McGraw-Hill/Irwin
Managerial Accounting, 9/e Global Edition
Profit-volume graph:
$100,000
$50,000
Break-even point:
20,000 tickets
0
$(50,000)
5,000
10,000
15,000
Profit
area
20,000
25,000
Tickets sold
per year
Loss
area
$(100,000)
Annual fixed
expenses
$(150,000)
$(180,000)
McGraw-Hill/Irwin
7-10
Safety margin:
Budgeted sales revenue
(12 games 10,000 seats .30 full $10) .............................................
Break-even sales revenue
(20,000 tickets $10) ...............................................................................
Safety margin .................................................................................................
3.
$360,000
200,000
$160,000
Let P denote the break-even ticket price, assuming a 12-game season and 50 percent
attendance:
(12)(10,000)(.50)P (12)(10,000)(.50)($1) $180,000 = 0
60,000P = $240,000
P = $4 per ticket
McGraw-Hill/Irwin
Managerial Accounting, 9/e Global Edition
$2,200,000
1,500,000
$ 700,000
$150,000
150,000
300,000
$ 400,000
$2,200,000
$1,000,000
100,000
30,000
$ 500,000
50,000
120,000
1,130,000
$ 1,070,000
670,000
$ 400,000
contribution margin
operating income
$1,070,000
2.6
$400,000
McGraw-Hill/Irwin
7-12
= 10% 2.6
= 26%
4.
Most operating managers prefer the contribution income statement for answering this
type of question. The contribution format highlights the contribution margin and
separates fixed and variable expenses.
Sales
Price
$500
300
Unit
Variable Cost
$300 ($275 + $25)
150 ($135 + $15)
Unit
Contribution Margin
$200
150
Sales mix:
High-quality bicycles ........................................................................................
Medium-quality bicycles ...................................................................................
3.
Weighted-average unit
contribution margin
25%
75%
4.
fixed expenses
weighted-average unit contribution margin
$65,000
400 bicycles
$162.50
Bicycle Type
High-quality bicycles
Medium-quality bicycles
Total
McGraw-Hill/Irwin
Managerial Accounting, 9/e Global Edition
Break-Even
Sales Volume
100 (400 .25)
300 (400 .75)
Sales Price
$500
300
Sales
Revenue
$ 50,000
90,000
$140,000
$65,000 $48,750
$162.50
700 bicycles
This means that the shop will need to sell the following volume of each type of
bicycle to earn the target operating income:
High-quality ...........................................................................
Medium-quality .....................................................................
$550,000
300,000
$250,000
200,000
$ 50,000
Percent
(rounded)
100.0
54.5
45.5
36.4
9.1
2.
Decrease in
Revenue
$55,000*
Contribution Margin
Percentage
45.5%
Decrease in
Operating Income
$25,025
McGraw-Hill/Irwin
7-14
contribution margin
operating income
$250,000
5
$50,000
3.
4.
in revenue
factor
20 % 5
100%
Requirement (1)
$660,000
360,000
$300,000
280,000
$ 20,000
Requirement (2)
$ 550,000
600,000
$ (50,000)
175,000
$ (225,000)
fixed expenses
contribution margin ratio
$120,000
$600,000
.20
1.
2.
$80,000
1 .40
McGraw-Hill/Irwin
Managerial Accounting, 9/e Global Edition
.20
fixed expenses
3.
4.
A change in the tax rate will have no effect on the firm's break-even point. At the breakeven point, the firm has no profit and does not have to pay any income taxes.
McGraw-Hill/Irwin
7-16
SOLUTIONS TO PROBLEMS
PROBLEM 7-34 (30 MINUTES)
1.
$600,000
$4
= 150,000 units
2.
3.
McGraw-Hill/Irwin
Managerial Accounting, 9/e Global Edition
$16 $13 $2
.0625
$16
$12,800,000
Let P denote the selling price that will yield the same contribution-margin ratio:
$16 $10 $2
P $13 $2
$16
P
.25
P $15
P
.25P P $15
$15 .75P
P $15/.75
P $20
Check: New contribution-margin ratio is:
$20 $15
.25
$20
5. In the electronic version of the solutions manual, press the CTRL key and click on the
following link: Build a Spreadsheet 07-34.xls
fixed expenses
contribution - margin ratio
$180,000 $72,000
$252,000
$20 $8 $2
.5
$20
$504,000
McGraw-Hill/Irwin
7-18
$20 $8 $2
$10
43,200 units
3.
= $8 110%
= $8.80
4.
Let P denote the selling price that will yield the same contribution-margin ratio:
$20.00 $8.00 $2.00
P $8.80 $2.00
$20.00
P
P $10.80
.5
P
.5P P $10.80
$10.80 .5P
P $10.80/.5
P $21.60
McGraw-Hill/Irwin
Managerial Accounting, 9/e Global Edition
$64.00
19.20
$44.80
Model no. 4399 is more profitable when sales and production average 46,000 units.
Model
No. 6754
Model
No. 4399
$2,944,000
$2,944,000
$ 147,200
$ 147,200
736,000
$ 883,200
$2,060,800
985,600
$1,075,200
588,800
$ 736,000
$2,208,000
1,113,600
$1,094,400
Annual fixed costs will increase by $90,000 ($450,000 5 years) because of straightline depreciation associated with the new equipment, to $1,203,600 ($1,113,600 +
$90,000). The unit contribution margin is $48 ($2,208,000 46,000 units). Thus:
Required sales = (fixed costs + target net profit) unit contribution margin
= ($1,203,600 + $956,400) $48
= 45,000 units
4.
McGraw-Hill/Irwin
7-20
Current income:
Sales revenue...
Less: Variable costs $ 924,000
Fixed costs. 2,280,000
Operating income..
$3,360,000
3,204,000
$ 156,000
If operations are shifted to Slovakia, the new unit contribution margin will be $64
($80 - $16). Thus:
Break-even point = fixed costs unit contribution margin
= $1,984,000 $64
= 31,000 units
3.
(a)
Advanced Electronics desires to have a 31,000-unit break-even point with a
$58 unit contribution margin. Fixed cost must therefore drop by $482,000
($2,280,000 - $1,798,000), as follows:
Let X = fixed costs
X $58 = 31,000 units
X = $1,798,000
(b)
McGraw-Hill/Irwin
Managerial Accounting, 9/e Global Edition
(a)
Increase
(b)
No effect
(c)
Increase
(d)
No effect
Sales mix refers to the relative proportion of each product sold when a company
sells more than one product.
2.
(a)
Yes. Plan A sales are expected to total 65,000 units (45,500 + 19,500), which
compares favorably against current sales of 60,000 units.
(b)
Yes. Sales personnel earn a commission based on gross dollar sales. As the
following figures show, Deluxe sales will comprise a greater proportion of
total sales under Plan A. This is not surprising in light of the fact that Deluxe
has a higher selling price than Basic ($86 vs. $74).
Current
Units
Sales
Mix
Plan A
Units
Sales
Mix
45,500 70%
19,500 30%
65,000 100%
McGraw-Hill/Irwin
7-22
No. The company would be less profitable under the new plan.
Sales revenue:
Deluxe: 39,000 units x $86; 45,500 units x $86
Basic: 21,000 units x $74; 19,500 units x $74..
Total revenue.
Less variable cost:
Deluxe: 39,000 units x $65; 45,500 units x $65
Basic: 21,000 units x $41; 19,500 units x $41..
Sales commissions (10% of sales revenue).
Total variable cost
Contribution margin..
Less fixed cost (salaries).
Operating income....
3.
(a)
Current
Plan A
$3,354,000
1,554,000
$4,908,000
$3,913,000
1,443,000
$5,356,000
$2,535,000
861,000
$2,957,500
799,500
535,600
$4,292,600
$1,063,400
---$1,063,400
$3,396,000
$1,512,000
400,000
$1,112,000
The total units sold under both plans are the same; however, the sales mix
has shifted under Plan B in favor of the more profitable product as judged by
the contribution margin. Deluxe has a contribution margin of $21 ($86 - $65),
and Basic has a contribution margin of $33 ($74 - $41).
Plan A
Units
Sales
Mix
McGraw-Hill/Irwin
Managerial Accounting, 9/e Global Edition
Plan B
Units
Sales
Mix
26,000 40%
39,000 60%
65,000 100%
Plan B is more attractive both to the sales force and to the company.
Salespeople earn more money under this arrangement ($549,900 vs. $400,000)
and the company is more profitable ($1,283,100 vs. $1,112,000).
Sales revenue:
Deluxe: 39,000 units x $86; 26,000 units x $86
Basic: 21,000 units x $74; 39,000 units x $74..
Total revenue.
Less variable cost:
Deluxe: 39,000 units x $65; 26,000 units x $65
Basic: 21,000 units x $41; 39,000 units x $41..
Total variable cost
Contribution margin..
Less: Sales force compensation:
Flat salaries...
Commissions ($1,833,000 x 30%)
Operating Income ...
Current
Plan B
$3,354,000
1,554,000
$4,908,000
$2,236,000
2,886,000
$5,122,000
$2,535,000
861,000
$3,396,000
$1,512,000
$1,690,000
1,599,000
$3,289,000
$1,833,000
400,000
$1,112,000
549,900
$1,283,100
2.
Operating leverage refers to the use of fixed costs in an organizations overall cost
structure. An organization that has a relatively high proportion of fixed costs and
low proportion of variable costs has a high degree of operating leverage.
McGraw-Hill/Irwin
7-24
Plan A
Plan B
$540,000
$540,000
$300,000
54,000
$354,000
$186,000
34,100
$151,900
$300,000
---$300,000
$240,000
72,000
$168,000
Plan A
Plan B
$450,000
$450,000
$250,000
45,000
$295,000
$155,000
34,100
$120,900
$250,000
---$250,000
$200,000
72,000
$128,000
McGraw-Hill/Irwin
Managerial Accounting, 9/e Global Edition
McGraw-Hill/Irwin
7-26
90,000 units
$25.00 $19.80
1.
2.
3.
4.
fixed cost
contribution - margin ratio
$468,000
$2,250,000
$25.00 $19.80
$25.00
fixed costs target operating income
unit contribution margin
$468,000 $260,000
140,000 units
$25.00 $19.80
fixed costs
new unit contribution margin
$468,000
97,500 units
$4.80
Break-even point
McGraw-Hill/Irwin
Managerial Accounting, 9/e Global Edition
$25.00 $19.80
$25.00
.208
Let P denote sales price required to maintain a contribution-margin ratio of .208. Then
P is determined as follows:
P $6.00 ($5.00)(1.08) $4.50 $3.00 $1.30
.208
P
P $20.20 .208P
.792P $20.20
P $25.51 (rounded)
Check:
McGraw-Hill/Irwin
7-28
Total revenue
Dollars per year
(in millions)
20
18
Profit
area
Break-even point:
80,000 units or
$8,000,000 of sales
16
14
Total expenses
12
10
8
6
4
Loss
area
Fixed expenses
2
50
McGraw-Hill/Irwin
Managerial Accounting, 9/e Global Edition
100
150
200
Break-even point:
contribution margin $12,000,000
.75
sales
$16,000,000
fixed expenses
$6,000,000
Break - even point
3.
2
$6,000,000
4.
5.
$6,000,000 $9,000,000
$20,000,000
.75
6.
Cost structure:
Sales revenue .......................................................
Variable expenses ................................................
Contribution margin.............................................
Fixed expenses ....................................................
Operating income.................................................
McGraw-Hill/Irwin
7-30
Amount
$16,000,000
4,000,000
$12,000,000
6,000,000
$6,000,000
Percent
100.0
25.0
75.0
37.5
37.5
(a)
(b)
fixed costs
unit contribution margin
$210,000
70,000 units
$3
Contribution-margin ratio
2.
contribution margin
sales revenue
$1,000,000 $700,000
.3
$1,000,000
fixed costs
contribution-margin ratio
$210,000
$700,000
.3
fixed costs
$210,000
$90,000
(1 .4)
$3
$360,000
$3
120,000 units
3.
McGraw-Hill/Irwin
Managerial Accounting, 9/e Global Edition
$210,000 $31,500
80,500 units
$3
$500,000
$250,000
Break-even point:
70,000 units
Loss 25,000
area
50,000
75,000
Profit
area
100,000
Units sold
per year
$(250,000)
$(500,000)
$(750,000)
McGraw-Hill/Irwin
7-32
fixed costs
$210,000
$90,000
(1 .5)
$3
$390,000
$3
130,000 units
6.
In the electronic version of the solutions manual, press the CTRL key and click on
the following link: Build a Spreadsheet 07-42.xls
In order to break even, during the first year of operations, 10,220 clients must visit the
law office being considered by Martin Wong and his colleagues, as the following
calculations show.
Fixed expenses:
Advertising ...............................................................................
$ 350,000
Rent (600 $480) .....................................................................
288,000
Property insurance ..................................................................
27,000
Utilities .....................................................................................
37,000
Malpractice insurance .............................................................
160,000
Depreciation ($120,000/4) ........................................................
30,000
Wages and fringe benefits:
Regular wages
($25 + $20 + $15 + $10) 16 hours 360 days .......... $403,200
Overtime wages
(200 $15 1.5) + (200 $10 1.5) ...........................
7,500
Total wages ............................................................ $410,700
Fringe benefits at 40% ....................................................... 164,280
574,980
Total fixed expenses......................................................................
$1,466,980
McGraw-Hill/Irwin
Managerial Accounting, 9/e Global Edition
Safety margin:
Safety margin = budgeted sales revenue break-even sales revenue
Budgeted (expected) number of clients = 50 360 = 18,000
Break-even number of clients = 10,048 (rounded)
Safety margin = [($30 18,000) + ($2,000 18,000 .20 .30)]
[($30 10,048) + ($2,000 10,048 .20 .30)]
= [$30 + ($2,000 .20 .30)] (18,000 10,048)
= $150 7,852
= $1,192,800
McGraw-Hill/Irwin
7-34
Break-even point
fixed costs
unit contribution margin
Selling price......................................
Variable costs:
Direct material..............................
Direct labor ..................................
Variable overhead ........................
Variable selling cost ....................
Contribution margin per unit
(a)
Computer-Assisted
Manufacturing System
$30.00
$5.00
6.00
3.00
2.00
16.00
$14.00
Labor-Intensive
Production System
$30.00
$5.60
7.20
4.80
2.00
19.60
$10.40
$2,440,000 $500,000
$14
$2,940,000
$14
210,000 units
(b)
$1,320,000 $500,000
$10.40
$1,820,000
$10.40
175,000 units
McGraw-Hill/Irwin
Managerial Accounting, 9/e Global Edition
3.
Operating leverage is the extent to which a firm's operations employ fixed operating
costs. The greater the proportion of fixed costs used to produce a product, the
greater the degree of operating leverage. Thus, the computer-assisted
manufacturing method utilizes a greater degree of operating leverage.
The greater the degree of operating leverage, the greater the change in
operating income (loss) relative to a small fluctuation in sales volume. Thus, there
is a higher degree of variability in operating income if operating leverage is high.
4.
5.
McGraw-Hill/Irwin
7-36
(a)
(b)
(c)
Break-even volume
annualrental cost
unit contribution margin
$8,000
25,000 liters
$1.75 $1.43
$11,000
27,500 liters
$1.75 $1.35
$20,000
40,816 liters (rounded)
$1.75 $1.26
Economy model:
Regular model:
Super model:
McGraw-Hill/Irwin
Managerial Accounting, 9/e Global Edition
Profit
$20
$10
Break-even point:
40,816 liters
10
20
30
40
Profit
area
50
Liters sold
per year
(in thousands)
Loss
Loss
area
($10)
($20)
McGraw-Hill/Irwin
7-38
The sales price per liter is the same regardless of the type of machine selected.
Therefore, the same profit (or loss) will be achieved with the Economy and Regular
models at the sales volume, X, where the total costs are the same.
Model
Economy ....................................................
Regular ......................................................
Variable Cost
per Liter
$1.43
1.35
Total
Fixed Cost
$ 8,000
11,000
$.08
37,500 liters
Check: the total cost is the same with either model if 37,500 liters are sold.
Economy
Variable cost:
Economy, 37,500 $1.43 ..........................
Regular, 37,500 $1.35 .............................
Fixed cost:
Economy, $8,000 .......................................
Regular, $11,000 ........................................
Total cost .........................................................
Regular
$53,625
$50,625
8,000
$61,625
11,000
$61,625
Since the sales price for popcorn does not depend on the popper model, the sales
revenue will be the same under either alternative.
McGraw-Hill/Irwin
Managerial Accounting, 9/e Global Edition
$625,000 $375,000
25,000 units
2.
3.
fixed costs
unit contribution margin
$150,000
15,000 units
$10
$150,000 $140,000
29,000 units
$10
4.
$154,000 $100,000 *
$8
31,750 units
McGraw-Hill/Irwin
7-40
5.
*Given in problem.
Let P denote the price required to cover increased direct-material cost and maintain
the same contribution margin ratio:
P $15* $2
.40
P
P $17 .40P
.60P $17
P $28.33 (rounded)
*Old unit variable cost = $15 = $375,000 25,000 units
Increase
in direct-material cost = $2
Check:
$28.33 $15 $2
$28.33
.40 (rounded)
McGraw-Hill/Irwin
Managerial Accounting, 9/e Global Edition
Memorandum
Date:
Today
To:
From:
Controller
Subject:
Activity-Based Costing
The $150,000 cost that has been characterized as fixed is fixed with respect to sales volume.
This cost will not increase with increases in sales volume. However, as the activity-based
costing analysis demonstrates, these costs are not fixed with respect to other important
cost drivers. This is the difference between a traditional costing system and an ABC system.
The latter recognizes that costs vary with respect to a variety of cost drivers, not just sales
volume.
2.
$26
12
$14
$ 12,000
22,400
4,500
176,100
$215,000
30,000
$245,000
fixed costs
unit contribution margin
$245,000
$14
17,500 units
McGraw-Hill/Irwin
7-42
4.
Its break-even point will be higher (17,500 units instead of 15,000 units).
(b)
The number of sales units required to show operating income of $140,000 will be
lower (27,515 units instead of 29,000 units).
(c)
These results are typical of situations where firms adopt advanced manufacturing
equipment and practices. The break-even point increases because of the
increased fixed costs due to the large investment in equipment. However, at
higher levels of sales after fixed costs have been covered, the larger unit
contribution margin ($14 instead of $10) earns a profit at a faster rate. This results
in the firm needing to sell fewer units to reach a given target profit level.
McGraw-Hill/Irwin
Managerial Accounting, 9/e Global Edition
The controller should include the break-even analysis in the report. The Board of
Directors needs a complete picture of the financial implications of the proposed
equipment acquisition. The break-even point is a relevant piece of information. The
controller should accompany the break-even analysis with an explanation as to
why the break-even point will increase. It would also be appropriate for the
controller to point out in the report that the advanced manufacturing equipment
would require fewer sales units at higher volumes in order to achieve a given
target profit, as in requirement (3) of this problem.
To withhold the break-even analysis from the controller's report would be a
violation of the following ethical standards:
(a)
(b)
Integrity: Refrain from engaging in any conduct that would prejudice carrying out
duties ethically.
(c)
McGraw-Hill/Irwin
7-44
2.
Promotional campaign:
Increase in contribution margin (10%) ...........................................................
Increase in monthly promotional expenses ($60,000/12) .............................
Decrease in operating income ........................................................................
3.
$ 3,600
(5,000)
$(1,400)
Sales ..................................................................................
Less: variable expenses ...................................................
Contribution margin..........................................................
Downtown Store
Items Sold at
Their
Variable Cost Other Items
$60,000*
$60,000*
60,000
24,000
$
-0$ 36,000
$(7,200)
6,000
$(1,200)
*$60,000 is one half of the Downtown Store's dollar sales for November 20x1.
4. In the electronic version of the solutions manual, press the CTRL key and click on the
following link: Build a Spreadsheet 07-48.xls
McGraw-Hill/Irwin
Managerial Accounting, 9/e Global Edition
Hedge
Clippers
$36
$12
4
$16
$20
50,000
$1,000,000
$2,160,000
600,000
$2,760,000
$440,000
176,000
$ 264,000
2.
(a)
Unit
Contribution
Weeders ......................................................
$10
Hedge Clippers ...........................................
20
Leaf Blowers ...............................................
17
Weighted-average unit
contribution margin ..............................
(b)
Sales
Proportion
.25
.25
.50
(a) (b)
$ 2.50
5.00
8.50
$16.00
172,500 units
$16
McGraw-Hill/Irwin
7-46
Weeders ........................................................
Hedge Clippers .............................................
Leaf Blowers .................................................
Total ...............................................................
Sales
Proportion
.25
.25
.50
3.
(a)
Unit
Contribution
Weeders ................................................................... $10
Hedge Clippers* ...................................................... 19
Leaf Blowers .......................................................... 12
Weighted-average unit contribution margin .........
(b)
Sales
Proportion
.20
.20
.60
(a) (b)
$ 2.00
3.80
7.20
$13.00
Sales proportions:
Sales
Proportions
Weeders .............................................................. .20
Hedge Clippers ................................................... .20
Leaf Blowers ....................................................... .60
Total .....................................................................
McGraw-Hill/Irwin
Managerial Accounting, 9/e Global Edition
Total Unit
Sales
212,308
212,308
212,308
Product Line
Sales
53,077
53,077
106,154
212,308
$405,000
$225 per ton
1,800
fixed costs
unit contribution margin
2.
$247,500
1,100 tons
$225
3.
$472,500
247,500
$225,000
German
Order
1,500
$175
$262,500
McGraw-Hill/Irwin
7-48
Regular
Sales
1,500
$225
$337,500
$262,500
337,500
$600,000
247,500
$352,500
5.
$247,500 $58,500
$225 $25
$306,000
1,224 tons
$250
.30
$1,140,000
McGraw-Hill/Irwin
Managerial Accounting, 9/e Global Edition
1.
2.
fixed expenses
$44,160
(1 .40) $614,250
X
$162.50 $117.00
$45.50
$540,650
X 13,500 units
3.
$693,000
11,000 units
$180.00 $117.00
Let Y denote the variable cost of the touring model such that the break-even point
for the touring model is 11,000 units.
Then we have:
$540,650
$162.50 Y
(11,000) ($162.50 Y ) $540,650
$1,787,500 11,000Y $540,650
11,000Y $1,246,850
Y $113.35
11,000
Thus, the variable cost per unit would have to decrease by $3.65 ($117.00 $113.35).
McGraw-Hill/Irwin
7-50
5.
$540,650 110%
$162.50 ($117.00)(90%)
$594,715
$57.20
10,397 units (rounded)
Weighted-average unit
contribution margin
Break-even point
SUMMARY OF EXPENSES
Manufacturing ....................................................................
Selling and administrative ................................................
Interest ...............................................................................
Costs from budgeted income statement .....................
If the company employs its own sales force:
Additional sales force costs .........................................
Reduced commissions [(.15 .10) $16,000].............
Costs with own sales force ...............................................
If the company sells through agents:
Deduct cost of sales force ............................................
Increased commissions [(.225 .10) $16,000] .........
Costs with agents paid increased commissions ............
McGraw-Hill/Irwin
Managerial Accounting, 9/e Global Edition
$7,200
(2,400)
2,000
$ 10,800
$4,800
totalfixed expenses
contribution margin ratio
total variable expenses
Contribution-margin ratio 1
sales revenue
(a)
$9,600,000
$16,000,000
1 .60
$4,800,000
.40
$12,000,000
(b)
$8,800,000
$16,000,000
1 .55
.45
$7,200,000
.45
$16,000,000
2.
Requiredsales dollars
$10,800
$16,000
1 .675
.325
$4,800,000 $1,600,000
.325
$6,400,000
.325
$19,692,308
McGraw-Hill/Irwin
7-52
The volume in sales dollars (X) that would result in equal net income is the volume
of sales dollars where total expenses are equal.
Total expenses with agents paid
increased commission
$10,800,000
$8,800,000
X $4,800,000
X $7,200,000
$16,000,000
$16,000,000
.675 X $4,800,000 .55 X $7,200,000
.125 X $2,400,000
X $19,200,000
Therefore, at a sales volume of $19,200,000, the company will earn equal before-tax
income under either alternative. Since before-tax income is the same, so is after-tax
net income.
McGraw-Hill/Irwin
Managerial Accounting, 9/e Global Edition