Financial & Managerial Accounting, 5th Edition
1022
Exercise 18-17 (25 minutes)
1. Selling price per composite unit
8 windows @ $200 per unit ……………………………………………………...
$1,600
2 doors @ $500 per unit …………………………………………………………..
1,000
Selling price per composite unit ……………………………………………...
$2,600
2. Variable costs per composite unit
8 windows @ $125 per unit ……………………………………………………...
$1,000
2 doors @ $350 per unit …………………………………………………………..
700
Variable costs per composite unit …………………………..……………....
$1,700
3. Break-even point in composite units
4. Unit sales of windows and doors at break-even point
Windows: 8 x 1,000 units (from 3) ………..…….
8,000 units
Doors: 2 x 1,000 units (from 3) ………..…….
2,000 units
Exercise 18-18 (20 minutes)
Contribution Percentage of Weighted
(1) margin per unit x sales mix = unit CM
Windows ……………………….. $75.00 80% $60
(3) Unit sales of windows and doors at break-even point:
Windows: 80% x 10,000 units (from 2) …………………………..
8,000 units
Doors: 20% x 10,000 units (from 2) …………………………..
2,000 units
Exercise 18-19 (25 minutes)
1. Selling price per composite unit
$ 250
375
550
$1,175
2. Variable costs per composite unit
5 Easy returns @ $30 each …………………………………………………….
$ 150
3 Moderate returns @ $75 each ……………………………………………..
225
2 Business returns @ $100 each ……………………………………………
Variable costs per composite unit …………………………..……………..
200
$ 575
Financial & Managerial Accounting, 5th Edition
1024
Exercise 18-19 (concluded)
3. Break-even point in composite units
Fixed costs .
4. Unit sales of Easy, Moderate, and Business returns at break-even point
Easy: 5 x 30 units (from 3) …………….…….
150 units
Moderate: 3 x 30 units (from 3) …………….…….
90 units
Business: 2 x 30 units (from 3) …………….…….
60 units
Exercise 18-20 (25 minutes)
Contribution Percentage of Weighted
(1) Margin per unit x sales mix = Unit CM
Easy …………………………..…. $ 20 50% $10
Moderate ………………………. 50 30 15
(3) Unit sales of Easy, Moderate, and Business returns at break-even point:
Easy: 50% x 300 units (from 2) ……………
150 units
Moderate: 30% x 300 units (from 2) ……………
90 units
Business: 20% x 300 units (from 2) ……………
60 units
Exercise 18-21 (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;
2. Prepare a contribution margin income statement for Co. B to compute its DOL;
3. Analyze and interpret which company benefits more from a 20% sales increase.
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
Sales (given)…………………………………………………………………..
Variable costs [$4,500,000 x (100% – 25%)] ………………………
Contribution margin ($4,500,000 x 25%) ………………………….
Fixed costs (given) …………………………………………………………
Pretax income ……………………………………………………….……….
$1,125,000 / $750,000
PROBLEM SET A
Problem 18-1A (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 ……………….…….
15,000
140,000
15
140
28%
Contribution margin ………………..…….
360,000
$360
72%
Fixed costs
Taxes on factory …………………….…….
5,000
Factory maintenance ……………………..
10,000
Factory machinery deprec. ……..……..
40,000
Sales equipment lease …………………..
10,000
Accounting staff salaries ………..……..
35,000
Admin. mgmt. salaries …………………..
125,000
225,000
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
is “Contribution Margin Income Statement.” Contribution margin ratio shows
management the percent of each sales dollar that is available to cover fixed costs
and to contribute to operating income. That is, for each $1 of sales, $0.72 is
available both to cover fixed costs and to contribute to operating income.
Problem 18-2A (40 minutes)
Part 1
(a) Instructor note: Use the equation in Exhibit 18.11
Break-even in sales units = Fixed costs / Contribution margin per unit
(b) Instructor note: Use the equation in Exhibit 18.12
Break-even in sales dollars = Fixed costs / Contribution margin ratio
Financial & Managerial Accounting, 5th Edition
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Problem 18-2A (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) ……………………………………………………...
630,000
Contribution margin (4,500 x $60) ……………………………………………….
270,000
Fixed costs (given) …………………………………………………………………….
270,000
Net income ………………………………………………………………………………...
$ 0
$ 0
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
$1,400,000
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
Units (100 yards)
Total costs
Sales
Break-even point
Problem 18-3A (45 minutes)
Parts 1 and 2
The scatter diagram and its estimated line of cost behavior appear below.
$0
$50,000
$100,000
$150,000
$200,000
$250,000
$0 $50,000 $100,000 $150,000 $200,000 $250,000 $300,000 $350,000
Sales
Total cost
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
incurred at sales levels of $200,000 and $300,000.
Predictions
Sales (given) ……………………………………………………….
$200,000
$300,000
Fixed costs (from part 2) …………………………………….….
16,000
16,000
Variable costs (from part 2) ………………………………..….
120,000*
180,000**
Total cost …………………………………………………………..….
$136,000
$196,000
* ($200,000 sales) x ($0.60 per sales dollar).
** ($300,000 sales) x ($0.60 per sales dollar).
$220,000 – $64,000
Alden Co.
Financial & Managerial Accounting, 5th Edition
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Problem 18-4A (75 minutes)
Part 1 Instructor note: Use the equation in Exhibit 18.12
2013 break-even in sales dollars = Fixed costs / Contribution margin ratio
Sales price per unit ($1,000,000 / 20,000) ………………………………….……………………
$50
Variable costs per unit ($800,000 / 20,000) ……………………………….…………………….
$40
Contribution margin ratio ($50- $40) / $50) ……………………………….…………………….
20%
Part 2 Instructor note: Use the equation in Exhibit 18.12 with predicted
numbers
2014 break-even in sales dollars = Fixed costs / Contribution margin ratio
2013 fixed costs plus 2014 increase ($250,000 + $200,000) ……….………………….
$450,000
**To compute predicted contribution margin ratio
Predicted sales price per unit (no change in sales price) ………….……………….
$50
Predicted variable costs per unit ($40 x 50%) …………………………..
$20
Predicted contribution margin ratio ($50- $20) / $50) …………………………..
60%
Part 3
ASTRO COMPANY
Forecasted Contribution Margin Income Statement
For Year Ended December 31, 2014
$1,000,000
400,000
600,000
450,000
$ 150,000
Problem 18–4A (Continued)
Part 4 Instructor note: Use equations in Exhibits 18.22 and 18.23 with
predicted numbers
(Fixed costs + Target pretax income)
Required sales in dollars = Contribution margin ratio
= ($450,000* + $200,000**) / 60%***
= $650,000 / 60.0%
Alternately:
Problem 18-5A (65 minutes)
Part 1 Instructor note: Use the equation in Exhibit 18.12
Break-even in dollar sales = Fixed costs / Contribution margin ratio
Product T:
= $125,000 / 20%*
Problem 18-5A (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
625,000
Income taxes (32%) ………………………………………….…
113,600
200,000
Net income ……………………………………………………….
$ 241,400
$ 425,000
Unit sales price and variable costs are computed in Part 1 and used in these computations:
* Product T sales = 60,000 units x $40; Product O sales = 60,000 units x $40.
** Product T variable costs = 60,000 units x $32; Product O variable costs = 60,000 units x $5.
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
($35 for O versus $8 for T). Examining the operating leverage of these two
Part 5
Factors that could cause Product T to have lower fixed costs might include:
• Labor arrangement that pays workers for units produced.
Problem 18-6A (45 minutes)
Part 1 Instructor note: Use the equation in Exhibit 18.12
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%)] ……………………………………………………….
Variable overhead ($1.00; given) ………………………………..……………………..
Variable selling & admin ($0.50; given) ………………………..…
Total variable cost per unit …………………………………………..…………..
$ 4.00
2.00
1.00
0.50
$ 7.50
$ 4.00
2.00
1.00
0.50
$ 7.50
Contribution margin ratio
Plan 1 ($25.00 – $7.50) / $25.00)……………………………………………………….
Plan 2 ($30.00 – $7.50) / $30.00)……………………………………………………….
70%
75%
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 ……………………………………………
175,000
285,000
Income taxes (30%) ………………………………………….…
52,500
85,500
Net income ……………………………………………………….
$ 122,500
$ 199,500
Unit sales price and variable costs are computed in Part 1 and used in these computations:
Problem 18-7A (50 minutes)
Part 1 BREAK–EVEN ANALYSIS ASSUMING USE OF SAME MATERIALS
Step 1: Compute break-even in composite units—Use equation in Exhibit 18.27
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
5 units of Red
@ $20 per unit…………………………………………..
@ $12 per unit…………………………………………..
$100
$ 60
4 units of White
@ $35 per unit…………………………………………..
@ $22 per unit…………………………………………..
140
88
2 units of Blue
@ $65 per unit…………………………………………..
@ $50 per unit…………………………………………..
130
____
100
Selling price of a composite unit ………………….
Variable cost of a composite unit …………………
$370
$248
Thus:
Contribution margin per composite unit = $370 – $248 = $122
Contribution margin ratio (rounded) = $122 / $370 = 32.97%
Step 2: Compute break-even in individual product unit sales
Step 3: Compute break-even in individual product dollar sales
Dollar sales of Red at break-even: 10,250 units x $20 = $205,000
Financial & Managerial Accounting, 5th Edition
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Problem 18–7A (Continued)
Part 2 BREAK–EVEN ANALYSIS ASSUMING USE OF NEW MATERIALS
Step 1: Compute break-even in composite units—Use equation in Exhibit 18.27
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
5 units of Red
@ $20 per unit ……………………………………………..
@ ($12 – $6) per unit …………………………………….
$100
$ 30
4 units of White
@ $35 per unit ……………………………………………..
@ ($22 – $12) per unit …………………………………..
140
40
2 units of Blue
@ $65 per unit ……………………………………………..
@ ($50 – $10) per unit …………………………………..
130
____
80
Selling price of a composite unit ……………………..
Variable cost of a composite unit …………………….
$370
$150
Thus:
Contribution margin per composite unit = $370 – $150 = $220
Contribution margin ratio (rounded) = $220/ $370 = 59.46%
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
Dollar sales of Red at break-even: 6,820 units x $20 = $136,400
Dollar sales of White at break-even: 5,456 units x $35 = $190,960
Part 3
When a business invests in fixed assets, as in this case, there is an