Exercise 5-3 (continued)
2. Looking at the graph, the break-even point appears to be 3,200 units.
This can be verified as follows:
Profit
= Unit CM × Q − Fixed expenses
= $5 × Q − $16,000
= $5 × 3,200 − $16,000
= $16,000 − $16,000
= $0
Exercise 5-5 (20 minutes)
1. The following table shows the effect of the proposed change in monthly
advertising budget:
Sales With
Additional
Current
Advertising
Sales
Budget
Difference
Sales …………………………
$180,000
$189,000
$ 9,000
Variable expenses ………..
126,000
132,300
6,300
Contribution margin ………
54,000
56,700
2,700
Fixed expenses ……………
30,000
35,000
5,000
Net operating income ……
$ 24,000
$ 21,700
$ (2,300)
Assuming no other important factors need to be considered, the
increase in the advertising budget should not be approved because it
would lead to a decrease in net operating income of $2,300.
Alternative Solution 1
Expected total contribution margin:
$189,000 × 30% CM ratio ………………
$56,700
Present total contribution margin:
$180,000 × 30% CM ratio ………………
54,000
Incremental contribution margin ………..
2,700
Change in fixed expenses:
Less incremental advertising expense .
5,000
Change in net operating income …………
$ (2,300)
Alternative Solution 2
Incremental contribution margin:
$9,000 × 30% CM ratio …………………
$2,700
Less incremental advertising expense ….
5,000
Change in net operating income …………
$ (2,300)
Exercise 5-6 (20 minutes)
1. The equation method yields the break-even point in unit sales, Q, as
follows:
Profit
= Unit CM × Q − Fixed expenses
$0
= ($15 − $12) × Q − $4,200
$0
= ($3) × Q − $4,200
$3Q
= $4,200
Q
= $4,200 ÷ $3
Q
= 1,400 baskets
2. The equation method can be used to compute the break-even point in
dollar sales as follows:
= CM ratio × Sales − Fixed expenses
= 0.20 × Sales − $4,200
= $4,200
= $21,000
Unit contribution margin
CM ratio = Unit selling price
Exercise 5-7 (10 minutes)
1. The equation method yields the required unit sales, Q, as follows:
Profit
= Unit CM × Q − Fixed expenses
$10,000
= ($120 − $80) × Q − $50,000
$10,000
= ($40) × Q − $50,000
$40 × Q
= $10,000 + $50,000
Q
= $60,000 ÷ $40
Q
= 1,500 units
2. The formula approach yields the required unit sales as follows:
Target profit + Fixed expenses
Units sold to attain =
the target profit Unit contribution margin
$15,000 + $50,000
$65,000
= = 1,625 units
$40
Exercise 5-9 (20 minutes)
1. The company’s degree of operating leverage would be computed as
follows:
Contribution margin (a) ……………………..
$48,000
Net operating income (b) ……………………
$10,000
Degree of operating leverage (a) ÷ (b) ….
4.8
2. A 5% increase in sales should result in a 24% increase in net operating
income, computed as follows:
Degree of operating leverage (a) ……………………………………
4.8
Percent increase in sales (b) ………………………………………….
5%
Estimated percent increase in net operating income (a) × (b) .
24%
3. The new income statement reflecting the change in sales is:
Amount
Percent
of Sales
Sales ………………………
$84,000
100%
Variable expenses ……..
33,600
40%
Contribution margin ……
50,400
60%
Fixed expenses …………
38,000
Net operating income …
$12,400
Net operating income reflecting change in sales ……
$12,400
Original net operating income (a) ………………………
10,000
Change in net operating income (b) …………………..
$ 2,400
Percent change in net operating income (b) ÷ (a) …
24%
