11-1
Break-even dollars = 11,250 units x $75 selling price = $843,750
Contribution Margin Income Statement
Sales ($75 x 11,250 units)
$843,750
Variable costs ($39 x 11,250)
(438,750)
Contribution margin
$405,000
Fixed costs
(405,000)
Net income
$ 0
Problem 11-29
Skin Cream
Color Gel
Sales price (a)
$7.00
$10.00
Variable costs (b)
2.00
6.00
Contribution margin (c) = (a – b)
5.00
4.00
Fixed costs (d)
$420,000
$100,000
Break-even units (e) = (d ÷ c)
84,000
25,000
Break-even sales in $ (f) = (e x a)
$588,000
$250,000
Budgeted sales in units (g)
100,000
60,000
Budgeted sales in $ (h) = (g x a)
$700,000
$600,000
Margin of safety (h – f) ÷ h
.16
.58
Skin Cream
Bath Oil
Color Gel
Expected sales in units (a)
120,000
216,000
72,000
Expected sales price (b)
$7.00
$4.00
$10.00
Variable costs per unit (c)
2.00
1.00
6.00
Income Statements
Sales revenue (a x b)
$840,000
$864,000
$720,000
Variable costs (a x c)
(240,000)
(216,000)
(432,000)
Contribution margin
600,000
648,000
288,000
Fixed cost
(420,000)
(480,000)
(100,000)
Net income
$180,000
$168,000
$188,000
Skin Cream
Bath Oil
Color Gel
Income before growth (a)
$ 80,000
$ 60,000
$140,000
Income after growth (b)
180,000
168,000
188,000
% Change in income (b – a) ÷ a
125%
180%
34%
a.
b.
c.
c.
11-2
Problem 11-29 (continued)
d. A pessimistic, risk-averse management would most likely choose to add color gel
e. If management is optimistic and risk-aggressive, then bath oil would be the favored
ATC 11-1 Business Applications
a. Costco, Inc. experienced a 14.1% (i.e., [$88,915− $77,946] $77,946) increase in reve-
nue. This increase in revenue produced a 17.4% (i.e., [$2,439 − $2,077] $2,077)
change in operating income, suggesting that the company has virtually no operating
b. Many rational explanations are possible. However, the student’s answer should in
some fashion make note of the fact that Merck must have a higher portion of fixed
c. In the case of declining revenues, Merck can be expected to have the greatest decline in
11-3
ATC 11-2 Group Assignment
a.
Revenue ($28 x 500)
$14,000
Cost of speaker*
10,000
Net income
$ 4,000
b. Group Task 1: Assuming growth of 10% in revenue and speaker’s fee is fixed at
$10,000.
Revenue
$14,000
x 1.10 =
$15,400
Cost of speaker
10,000
10,000
Net income
$ 4,000
$ 5,400
Group Task 2: Assuming a decline of 10% in revenue and speaker’s fee is fixed at
$10,000.
Revenue
$14,000
x 0.90 =
$12,600
Cost of speaker
10,000
10,000
Net income
$ 4,000
$ 2,600
ATC 11-2 Group Assignment (continued)
Group Task 3: Assuming growth of 10% in revenue and speaker’s fee is variable at $20
per unit (500 x 1.10 x $20 = $11,000):
Revenue
$14,000
x 1.10 =
$15,400
Cost of speaker
10,000
11,000
Net income
$ 4,000
$ 4,400
Group Task 4: Assuming a decline of 10% in revenue, speaker’s fee is variable at $20 per
unit (500 x 0.90 x $20 = $9,000):
Revenue
$14,000
x 0.90 =
$12,600
Cost of speaker
10,000
9,000
11-4
Net income
$ 4,000
$ 3,600
Decline in net income is 10% (i.e. [$3,600 − $4,000] / $4,000)
c. In class assignment requiring no written solution.
d. 1. A fixed cost structure provides greater growth potential in profitability due to
operating leverage.
ATC 11-3 Research Assignment
a. Change in sales from 2010 to 2011: $2,032.5*
Sales of 2010 $8,343.9
= % increase in sales 24.4%
* ($10,376.4 – $8,343.9 = $2,032.5)
b. Fixed costs would best explain why the percentage increase in income was greater than
the percentage increase in sales.
c. Research and development costs should not vary with the number of units produced
11-5
ATC 11-4
Memorandum
The accounting concept that explains why the percentage change in a company’s net
earnings is usually greater than the corresponding percentage change in its revenues is
called operating leverage. Operating leverage exists entirely because of fixed costs. If all of
Unless there is some major change in a company’s fixed cost structure, a decrease in
a company’s sales means that its net earnings will be closer to its break-even point, effec-
a.
Accounting period
2014
2015
Amount of scientific seed sold in pounds(a)
2,400,000
1,300,000
Royalty per pound (b)
$0.50
$0.50
Total royalty paid (a x b)
$1,200,000
$650,000
Total cost savings:
2014 royalty payment
$1,200,000
Less: 2015 royalty payment
650,000
Royalty cost savings
550,000
Less: cost of ad campaign
100,000
Total savings for World Agra
$ 450,000
World Agra’s sales revenue remained the same in the second year after Mr. Borrough’s
b. World Agra’s customers and society in general suffered from the move to promote the
11-6
c. While it could be argued that Mr. Borrough’s actions violated some of the ethical
standards such as engaging in activities that would discredit the profession, it is highly