Fundamental Accounting Principles, 21st Edition
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Exercise 21-17 (25 minutes)
1. Selling price per composite unit
8 windows @ $200 per unit ……………………………………………………...
$1,600
$2,600
2. Variable costs per composite unit
8 windows @ $125 per unit ……………………………………………………...
$1,000
Variable costs per composite unit …………………………..……………....
$1,700
3. Break-even point in composite units
Fixed costs .
= Contribution margin per composite unit
4. Unit sales of windows and doors at break-even point
Windows: 8 x 1,000 units (from 3) ………..…….
8,000 units
2,000 units
Exercise 21-18 (20 minutes)
Contribution Percentage of Weighted
(1) margin per unit x sales mix = unit CM
Windows ……………………….. $75.00 80% $60
Doors ……………………………. 150.00 20 30
(3) Unit sales of windows and doors at break-even point:
Windows: 80% x 10,000 units (from 2) …………………………..
8,000 units
Exercise 21-19 (25 minutes)
1. Selling price per composite unit
$ 250
375
2. Variable costs per composite unit
5 Easy returns @ $30 each …………………………………………………….
$ 150
3 Moderate returns @ $75 each ……………………………………………..
225
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Exercise 21-19 (concluded)
3. Break-even point in composite units
Fixed costs .
= Contribution margin per composite unit
4. Unit sales of Easy, Moderate, and Business returns at break-even point
Easy: 5 x 30 units (from 3) …………….…….
150 units
Exercise 21-20 (25 minutes)
Contribution Percentage of Weighted
(1) Margin per unit x sales mix = Unit CM
Easy ……………………………… $ 20 50% $10
Moderate ………………………. 50 30 15
(2) Break-even point in units = $18,000 = 300 units
$60
(3) Unit sales of Easy, Moderate, and Business returns at break-even point:
Easy: 50% x 300 units (from 2) ……………
150 units
Exercise 21-21 (30 minutes)
Instructor note: This exercise is solved in 3 steps
1. Prepare a contribution margin income statement for Co. A to compute its DOL;
Step 1.
Company A
Contribution Margin Income Statement
Sales (given)…………………………………………………………………..
$6,000,000
Variable costs [$6,000,000 x (100% – 60%)] ………………………
2,400,000
Contribution margin ($6,000,000 x 60%) ………………………….
3,600,000
Fixed costs (given) …………………………………………………………
2,600,000
Pretax income ………………………………………………………………..
$1,000,000
Contribution margin in dollars / Pretax income
$3,600,000 / $1,000,000
Step 2.
Company B
Contribution Margin Income Statement
Sales (given)…………………………………………………………………..
$4,500,000
Variable costs [$4,500,000 x (100% – 25%)] ………………………
3,375,000
Contribution margin ($4,500,000 x 25%) ………………………….
1,125,000
Fixed costs (given) …………………………………………………………
375,000
Pretax income ………………………………………………………………..
Contribution margin in dollars / Pretax income
$1,125,000 / $750,000
Step 3.
Interpretation: Company A benefits more from a 20% increase in sales.
This is because we expect a 20% increase in sales to yield a 72%
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PROBLEM SET A
Problem 21-1A (25 minutes)
Parts 1 and 2
Tom Thompson Company
Contribution Margin Income Statement
For Year Ended December 31, 2013
(1,000 units) Per unit % of sales
Sales ($500 x 1,000) ……………………….
$500,000
$500
100%
Variable costs
Plastic for casing …………………..…….
$17,000
$17
Assembly worker wages ………………..
82,000
82
Drum stands …………………………..
26,000
26
Sales commissions ……………….…….
140,000
Contribution margin ………………..…….
360,000
$360
Fixed costs
Taxes on factory …………………….…….
Factory machinery deprec. ……..……..
40,000
Sales equipment lease …………………..
10,000
Admin. mgmt. salaries …………………..
Pretax income …………………………..
135,000
Income tax (25%) ……………………..……
33,750
Net income …………………………..….……..
$101,250
Part 3 Analysis Component
Contribution margin shows how much of total sales are available to cover fixed
costs and contribute to operating income. This is why the title for this statement
Problem 21-2A (40 minutes)
Part 1
(a) Instructor note: Use the equation in Exhibit 21.11
Break-even in sales units = Fixed costs / Contribution margin per unit
= $270,000 / $60*
= 4,500 units (1 unit = 100 yards)
(b) Instructor note: Use the equation in Exhibit 21.12
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Problem 21-2A (Continued)
Part 2
CVP Chart for Xcite Equipment Company
Part 3
XCITE EQUIPMENT CO.
Contribution Margin Income Statement (at Break-Even) — Product XT
Sales (4,500 x $200) ……………………………………………………….…………..
$900,000
Variable costs (4,500 x $140) ……………………………………………………...
$ 0
$600,000
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
Units (100 yards)
Problem 21-3A (45 minutes)
Parts 1 and 2
The scatter diagram and its estimated line of cost behavior appear below.
$0
$50,000
$0 $50,000 $100,000 $150,000 $200,000 $250,000 $300,000 $350,000
Sales
Part 2 – Calculation of variable and fixed costs
Part 3
The estimates in Part 2 can be used to predict the total costs that will be
Predictions
Sales (given) ……………………………………………………….
$200,000
$300,000
Fixed costs (from part 2) …………………………………….….
16,000
16,000
Alden Co.
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Problem 21-4A (75 minutes)
Part 1 Instructor note: Use the equation in Exhibit 21.12
2013 break-even in sales dollars = Fixed costs / Contribution margin ratio
= $250,000 / 20%*
= $1,250,000
Part 2 Instructor note: Use the equation in Exhibit 21.12 with predicted
numbers
Part 3
ASTRO COMPANY
Forecasted Contribution Margin Income Statement
For Year Ended December 31, 2014
$1,000,000
400,000
450,000
Problem 21-4A (Continued)
Part 4 Instructor note: Use equations in Exhibits 21.22 and 21.23 with
predicted numbers
(Fixed costs + Target pretax income)
Required sales in dollars = Contribution margin ratio
= ($450,000* + $200,000**) / 60%***
= $650,000 / 60.0%
= $1,083,333 (rounded to whole dollars)
Part 5
ASTRO COMPANY
Forecasted Contribution Margin Income Statement
For Year Ended December 31, 2014
Sales (21,667 units x $50) ……………………………………………………….
$1,083,350
Variable costs (21,667 units x $20) …………………………………………….
433,340
Contribution margin (21,667 units x $30) ………………………………..….
650,010
Fixed costs (from part 2) ………………………………………………………..….
Income before income taxes ………………………………………………….….
200,010
60,003
Net income* …………………………………………………………………………..….
*Slightly greater than the targeted $140,000 income due to rounding of units.
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Problem 21-5A (65 minutes)
Part 1 Instructor note: Use the equation in Exhibit 21.12
Break-even in dollar sales = Fixed costs / Contribution margin ratio
Product T:
= $125,000 / 20%*
= $625,000
Part 2
Forecasted contribution margin income statements for each product
assuming sales declines to 30,000 units with no change in unit sales price
VANNA CO.
Forecasted Contribution Margin Income Statement
Product T
Product O
Sales* …………………………………………………………………
$1,200,000
$1,200,000
Variable costs** ………………………………………………..…
960,000
150,000
Contribution margin ……………………………………………
240,000
1,050,000
Fixed costs ……………………………………………………….
125,000
115,000
36,800
Net income ……………………………………………………….
Problem 21-5A (Continued)
Part 3 Forecasted contribution margin income statements for each product
assuming sales increase to 60,000 units with no change in unit sales price
VANNA CO.
Forecasted Contribution Margin Income Statement
Product T
Product O
Sales* …………………………………………………………………
$2,400,000
$2,400,000
Variable costs** ………………………………………………..…
1,920,000
300,000
Contribution margin ……………………………………………
480,000
2,100,000
Fixed costs ……………………………………………………….
125,000
1,475,000
Income before taxes ……………………………………………
355,000
113,600
200,000
Part 4
If sales were to greatly decrease, Product O would suffer the greater loss
because it would lose more contribution margin per unit than Product T
Part 5
Factors that could cause Product T to have lower fixed costs might include:
• Labor arrangement that pays workers for units produced.
• Sales representatives that work totally on commission.
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Problem 21-6A (45 minutes)
Part 1 Instructor note: Use the equation in Exhibit 21.12
Break-even in dollar sales = Fixed costs / Contribution margin ratio
Plan 1:
*To compute contribution margin ratio
Sales price per unit
Plan 1 (no change)……………………………………………………....
Plan 2 [$25.00 x (1 + 20%)] ………………………………………….……………
Plan 1
$25.00
Plan 2
$30.00
Total variable costs per unit (both Plans 1 and 2)
Material [$8.00 x (1 – 50%)] ……………………………………………………….
Direct labor [$5.00 x (1 – 60%)] ……………………………………………………….
$ 4.00
2.00
$ 4.00
2.00
Contribution margin ratio
Part 2
BERTRAND CO.
Forecasted Contribution Margin Income Statement
Plan 1
Plan 2
Sales* …………………………………………………………………
$1,000,000
$1,080,000
Variable costs** ………………………………………………..…
300,000
270,000
Contribution margin ……………………………………………
700,000
810,000
Fixed costs ……………………………………………………….
525,000
525,000
Income before taxes ……………………………………………
52,500
85,500
Net income ……………………………………………………….
Problem 21-7A (50 minutes)
Part 1 BREAK–EVEN ANALYSIS ASSUMING USE OF SAME MATERIALS
Step 1: Compute break-even in composite units—Use equation in Exhibit 21.27
*To compute the contribution margin per composite unit
Unit Sales Price
Unit Variable Costs
5 units of Red
@ $20 per unit…………………………………………..
@ $12 per unit…………………………………………..
$100
$ 60
2 units of Blue
Step 2: Compute break-even in individual product unit sales
Unit sales of Red at break-even: 2,050 x 5 = 10,250 units
Unit sales of White at break-even: 2,050 x 4 = 8,200 units
Unit sales of Blue at break–even: 2,050 x 2 = 4,100 units
Step 3: Compute break-even in individual product dollar sales
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Problem 21-7A (Continued)
Part 2 BREAK–EVEN ANALYSIS ASSUMING USE OF NEW MATERIALS
Step 1: Compute break-even in composite units—Use equation in Exhibit 21.27
Break-even in composite units = Fixed costs/Contribution margin per composite unit
= ($250,000 + $50,000) / $220*
= 1,364 composite units (rounded to the next whole unit)
*To compute the contribution margin per composite unit
Unit Sales Price
Unit Variable Costs
5 units of Red
@ $20 per unit ……………………………………………..
@ ($12 – $6) per unit …………………………………….
$100
$ 30
4 units of White
Step 2: Compute break-even in individual product unit sales
Unit sales of Red at break-even: 1,364 x 5 = 6,820 units
Unit sales of White at break-even: 1,364 x 4 = 5,456 units
Unit sales of Blue at break-even: 1,364 x 2 = 2,728 units
Step 3: Compute break-even in individual product dollar sales
Crossfoot Step 3 total with that from formula ($139 rounding difference):
Part 3
When a business invests in fixed assets, as in this case, there is an