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Problem 5-20 (continued)
c. This problem illustrates the difficulty faced by some companies. When
Problem 5-21 (continued)
3. Memo to the president:
Although the company met its sales budget of $750,000 for the month,
the mix of products changed substantially from that budgeted. This is
the reason the budgeted net operating income was not met, and the
Problem 5-22 (continued)
3.
Sales (39,000 units @ $27.00 per unit*) .........
$1,053,000
Variable expenses
(39,000 units @ $21.00 per unit) .................
819,000
Contribution margin .......................................
234,000
Fixed expenses ($180,000 + $60,000) ............
240,000
Net operating loss .........................................
$ (6,000)
*$30.00 – ($30.00 × 0.10) = $27.00
4.
Profit
= Unit CM × Q − Fixed expenses
$9,750
= ($30.00 − $21.75) × Q − $180,000
$9,750
= ($8.25) × Q − $180,000
$8.25Q
= $189,750
Q
= $189,750 ÷ $8.25
Q
= 23,000 units
5. a. The new CM ratio would be:
Per Unit
Percent of Sales
Sales ............................
$30.00
100%
Variable expenses .........
18.00
60%
Contribution margin ......
$12.00
40%
Problem 5-22 (continued)
c. Whether or not the company should automate its operations depends
on how much risk the company is willing to take and on prospects for
future sales. The proposed changes would increase the company’s
fixed costs and its break-even point. However, the changes would
The greatest risk of automating is that future sales may drop back
down to present levels (only 19,500 units per month), and as a
result, losses will be even larger than at present due to the
company’s greater fixed costs. (Note the problem states that sales
are erratic from month to month.) In sum, the proposed changes will
between the two alternatives in terms of units sold; i.e., the point
where profits will be the same under either alternative. At this point,
total revenue will be the same; hence, we include only costs in our
equation:
Let Q =
Point of indifference in units sold
$21.00Q + $180,000 =
$18.00Q + $252,000
$3.00Q =
$72,000
Q =
$72,000 ÷ $3.00
Q =
24,000 units
Problem 5-23 (continued)
5.
Last Year:
18,000 units
Proposed:
24,000 units*
Amount
Per Unit
Amount
Per Unit
Sales ...........................
$360,000
$20.00
$432,000
$18.00
**
Variable expenses .........
144,000
8.00
192,000
8.00
Contribution margin ......
216,000
$12.00
240,000
$10.00
Fixed expenses ............
180,000
210,000
Net operating income ...
$ 36,000
$ 30,000
6.
Expected total contribution margin:
18,000 units × 1.25 × $11.00 per unit* ........................
$247,500
Present total contribution margin:
18,000 units × $12.00 per unit .....................................
216,000
Incremental contribution margin, and the amount by
which advertising can be increased with net operating
income remaining unchanged .......................................
$ 31,500
*$20.00 – ($8.00 + $1.00) = $11.00
