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Problem 18-4B (75 minutes)
Part 1 Instructor note: Use the equation in Exhibit 18.12
2015 break-even in dollar sales = Fixed costs / Contribution margin ratio
= $200,000 / 20%*
Part 2 Instructor note: Use equation in Exhibit 18.12 with predicted numbers
2016 break-even in dollar sales = Fixed costs / Contribution margin ratio
= $350,000* / 60%**
= $583,333 (rounded to whole dollars)
*To compute predicted fixed costs
2015 fixed costs plus 2016 increase ($200,000 + $150,000)....................................$350,000
**To compute predicted contribution margin ratio
Part 3
RIVERA COMPANY
Forecasted Contribution Margin Income Statement
For Year Ended December 31, 2016
Sales (20,000 x $37.50)...........................................................................$750,000
Variable costs (20,000 x $15)................................................................. 300,000
Problem 18-4B (Continued)
Part 4 Instructor note: Use equations in Exhibit 18.22 and 18.23 with predicted
numbers
(Fixed costs + Pretax income)
Required sales in dollars = Contribution margin ratio
(Fixed costs + Pretax income)
Required sales in units = Contribution margin per unit
* 2015 fixed costs plus 2016 increase ($200,000 + $150,000)...............................$350,000
** Predicted contribution margin ratio ($37.50-$15)/$37.50—from part 2.............. 60%
†Taken from “required sales in dollars” above......................................................$916,667
‡Taken from part 2....................................................................................................$ 37.50
Part 5
RIVERA COMPANY
Forecasted Contribution Margin Income Statement
For Year Ended December 31, 2016
Sales (24,445 units x $37.50)........................................................ $916,688
Variable costs (24,445 units x $15).............................................. 366,675
Contribution margin (24,445 units x $22.50).............................. 550,013
Problem 18-5B (65 minutes)
Part 1 Instructor note: Use the equation in Exhibit 18.12
Break-even in dollar sales = Fixed costs / Contribution margin ratio
Product BB:
*To compute contribution margin ratio
Sales price per unit
Product BB ($800,000 / 50,000)................................................................................
Product TT ($800,000 / 50,000)................................................................................
BB
$16.00
TT
$16.00
Variable costs per unit
Product BB ($560,000 / 50,000)................................................................................
$11.20
Part 2
Forecasted contribution margin income statements for each product
assuming sales decline to 33,000 units with no change in unit sales price
STAM CO.
Forecasted Contribution Margin Income Statement
Product BB Product TT
Sales*............................................................................ $528,000 $ 528,000
Variable costs**............................................................ 369,600 66,000
Contribution margin.................................................... 158,400 462,000
Unit sales price and variable costs are computed in Part 1 and used in these computations:
* Product BB sales = 33,000 units x $16; Product TT sales = 33,000 units x $16.
**Product BB variable costs = 33,000 units x $11.20;
Product TT variable costs = 33,000 units x $2.
Problem 18-5B (Continued)
Forecasted contribution margin income statements for each product
assuming sales increase to 64,000 units with no change in unit sales price:
STAM CO.
Forecasted Contribution Margin Income Statement
Product BB Product TT
Sales*............................................................................$1,024,000 $1,024,000
Variable costs**............................................................ 716,800 128,000
Income taxes (32%)..................................................... 66,304 107,520
Net income...................................................................$ 140,896 $ 228,480
Unit sales price and variable costs are computed in Part 1 and used in these computations:
* Product BB sales = 64,000 units x $16; Product TT sales = 64,000 units x $16.
**Product BB variable costs = 64,000 units x $11.20;
Product TT variable costs = 64,000 units x $2.
Part 4
If sales were to greatly increase, Product TT would experience the greater
increase in income because it would gain more contribution margin per
Part 5
Factors that could cause Product BB to have lower fixed costs include:
Labor arrangement that pays workers for units produced.
Sales representatives that work totally on commission.
Problem 18-6B (45 minutes)
Part 1 Instructor note: Use the equation in Exhibit 18.12
Break-even in dollar sales = Fixed costs / Contribution margin ratio
Existing Strategy: = $950,000 / 55%*
= $1,727,273 (rounded to the next dollar)
*To compute contribution margin ratio
Sales price per unit
Existing strategy......................................................................................................
New strategy [$20.00 x (1 – 20%)]...........................................................................
Existing
Strategy
$20.00
New
Strategy
$16.00
Total variable costs per unit
Unit costs ($800,000 / 100,000)................................................................................
Unit costs [($800,000/100,000) x (1 – 25%)]............................................................
$ 8.00
$ 6.00
Part 2
BEST COMPANY
Forecasted Contribution Margin Income Statement
Existing Strategy New Strategy
Sales*............................................................................$2,000,000 $2,880,000
Variable costs**............................................................ 900,000 1,296,000
Contribution margin.................................................... 1,100,000 1,584,000
Fixed costs................................................................... 950,000 950,000
Unit sales price and variable costs are computed in Part 1 and used here:
* Existing strategy sales = 100,000 units x $20; New strategy sales = 180,000 units x $16.
**Existing strategy variable costs = 100,000 units x ($8 + $1).
New strategy variable costs = 180,000 units x ($6 + $1.20).
Problem 18-7B (50 minutes)
Part 1 BREAK-EVEN ANALYSIS ASSUMING USE OF SAME MATERIALS
Step 1: Compute break-even in composite units—Use equation in Exhibit 18.29
Break-even in composite units = Fixed costs/Contribution margin per composite unit
* To compute the contribution margin per composite unit
Unit Sales Price Unit Variable Costs
6 units of Product 1
@ $40 per unit...................................................
@ $30 per unit...................................................
$240
$180
@ $ 8 per unit...................................................
____ 16
Selling price of a composite unit.......................
Variable cost of a composite unit.......................
$400
$256
Thus:
Contribution margin per composite unit = $400 - $256 = $144
Contribution margin ratio = $144 / $400 = 36%
Step 2: Compute break-even in individual product unit sales
Step 3: Compute break-even in individual product dollar sales
Dollar sales of Product 1 at break-even: 11,250 units x $40 = $450,000
Crossfoot Step 3 total with that from formula:
Break-even in dollar sales = Fixed costs / Contribution margin ratio
= $270,000 / 36%
Problem 18-7B (Continued)
Part 2 BREAK-EVEN ANALYSIS ASSUMING USE OF NEW MATERIALS
Step 1: Compute break-even in composite units—Use equation in Exhibit 18.29
*To compute the contribution margin per composite unit
Unit Sales Price Unit Variable Costs
6 units of Product 1
@ $40 per unit......................................................
@ ($30 - $10) per unit..........................................
$240
$120
4 units of Product 2
@ ($8 – $0) per unit..............................................
____ 16
Selling price of a composite unit...........................
Variable cost of a composite unit..........................
$400
$176
Thus:
Contribution margin per composite unit = $400 - $176 = $224
Contribution margin ratio = $224 / $400 = 56%
Step 2: Compute break-even in individual product unit sales
Step 3: Compute break-even in individual product dollar sales
Dollar sales of Product 1 at break-even: 8,574 units x $40 = $342,960
Crossfoot Step 3 total with that from formula ($171 of rounding differences):
Break-even in $ sales = Fixed costs / Contribution margin ratio
Part 3
When a business invests in fixed assets, as in this case, there is an increase
in its risk level (more fixed costs must be recovered). However, investments
