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Analytical Thinking (continued)
Allocation of common fixed expenses on the basis of sales revenue:
Velcro
Metal
Nylon
Total
Sales ...................................
$165,000
$300,000
$340,000
$805,000
Percentage of total sales ......
20.497%
37.267%
42.236%
100.0%
Allocated common fixed
expense* ..........................
$49,193
$ 89,441
$101,366
$240,000
Product fixed expenses ........
20,000
80,000
60,000
160,000
Allocated common and
product fixed expenses (a)
$69,193
$169,441
$161,366
$400,000
Unit contribution margin (b) .
$0.40
$0.80
$0.60
“Break-even” point in units
sold (a) ÷ (b) ....................
172,983
211,801
268,943
*Total common fixed expense × percentage of total sales
If the company sells 172,983 units of the Velcro product, 211,801 units of
the Metal product, and 268,943 units of the Nylon product, the company
will indeed break even overall. However, the apparent break-evens for two
of the products are higher than their normal annual sales.
Velcro
Metal
Nylon
Normal annual sales volume ....
100,000
200,000
400,000
“Break-even” annual sales .......
172,983
211,801
268,943
“Strategic” decision .................
drop
drop
retain
Analytical Thinking (continued)
If the managers drop the Velcro and Metal products, the company would
face a loss of $60,000 computed as follows:
Velcro
Metal
Nylon
Total
Sales ............................
dropped
dropped
$340,000
$340,000
Variable expenses .........
100,000
100,000
Contribution margin ......
$240,000
240,000
Fixed expenses* ...........
300,000
Net operating loss .........
$ (60,000)
* By dropping the two products, the company reduces its fixed expenses
© The McGraw-Hill Companies, Inc., 2016. All rights reserved.
78 Introduction to Managerial Accounting, 7th Edition
Teamwork in Action
1. The answer to this question will vary from school to school.
2. Managers will hire more support staff, such as security and vending
personnel, for big games that predictably draw more people. These
on.
3. The answer to this question will vary from school to school, but a clear
distinction should be drawn between the costs that are variable with
4. The answer to this question will vary from school to school. The lost
5. The answer to this question will vary from school to school.
6. The answer to this question will vary from school to school, but should
be based on the answers to parts (4) and (5) above.
Chapter 5
Take Two Solutions
Exercise 5-4 (10 minutes)
1. The company’s contribution margin (CM) ratio is:
Total sales ............................
$200,000
Total variable expenses .........
110,000
= Total contribution margin ...
90,000
÷ Total sales .........................
$200,000
= CM ratio ............................
45%
2. The change in net operating income from an increase in total sales of
$1,000 can be estimated by using the CM ratio as follows:
Change in total sales .......................................
$1,000
× CM ratio ......................................................
45
%
= Estimated change in net operating income ....
$ 450
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 ..............................
$200,000
$209,000
$ 9,000
Variable expenses ...........
80,000
83,600
3,600
Contribution margin .........
120,000
125,400
5,400
Fixed expenses ...............
30,000
35,000
5,000
Net operating income ......
$ 90,000
$ 90,400
$ 400
Assuming no other important factors need to be considered, the
increase in the advertising budget should be approved because it would
lead to an increase in net operating income of $400.
Alternative Solution 1
Expected total contribution margin:
$209,000 × 60% CM ratio ..................
$125,400
Present total contribution margin:
$200,000 × 60% CM ratio ..................
120,000
Incremental contribution margin ...........
5,400
Change in fixed expenses:
Less incremental advertising expense .
5,000
Change in net operating income ............
$ 400
Alternative Solution 2
Incremental contribution margin:
$9,000 × 60% CM ratio .....................
$5,400
Less incremental advertising expense ....
5,000
Change in net operating income ............
$ 400
Exercise 5-5 (continued)
2. The $2 increase in variable expense will cause the unit contribution
margin to decrease from $60 to $58 with the following impact on net
operating income:
Expected total contribution margin with the
higher-quality components:
2,200 units × $58 per unit .....................
$127,600
Present total contribution margin:
2,000 units × $60 per unit .....................
120,000
Change in total contribution margin ...........
$ 7,600
Assuming no change in fixed expenses and all other factors remain the
same, the higher-quality components should be used.
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 − $6,000
$0
= ($3) × Q − $6,000
$3Q
= $6,000
Q
= $6,000 ÷ $3
Q
= 2,000 baskets
2. The equation method can be used to compute the break-even point in
dollar sales as follows:
Unit contribution margin
CM ratio = Unit selling price
Exercise 5-6 (continued)
4. The formula method also gives an answer that is identical to the
equation method for the break-even point in dollar sales:
Fixed expenses
Dollar sales to break even = CM ratio
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
= ($160 − $80) × Q − $50,000
$10,000
= ($80) × Q − $50,000
$80 × Q
= $10,000 + $50,000
Q
= $60,000 ÷ $80
Q
= 750 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
= = 812.50 units
$80
Exercise 5-8 (10 minutes)
1. To compute the margin of safety, we must first compute the break-even
unit sales.
Profit
= Unit CM × Q − Fixed expenses
$0
= ($30 − $20) × Q − $7,500
$0
= ($10) × Q − $7,500
$10Q
= $7,500
Q
= $7,500 ÷ $10
Q
= 750 units
Sales (at the budgeted volume of 900 units) .....
$27,000
Less break-even sales (at 750 units) .................
22,500
Margin of safety (in dollars) .............................
$ 4,500
2. The margin of safety as a percentage of sales is as follows:
Margin of safety (in dollars) (a) ................
$4,500
Sales (b) .................................................
$27,000
Margin of safety percentage (a) ÷ (b) ......
16.67%
Exercise 5-9 (20 minutes)
1. The company’s degree of operating leverage would be computed as
follows:
Contribution margin (a) ..........................
$54,000
Net operating income (b) ........................
$16,000
Degree of operating leverage (a) ÷ (b) ....
3.375
2. A 5% increase in sales should result in a 16.88% increase in net
operating income, computed as follows:
Degree of operating leverage (a) ..........................................
3.375
Percent increase in sales (b) .................................................
5%
Estimated percent increase in net operating income
(a) × (b) ..........................................................................
16.88%
3. The new income statement reflecting the change in sales is:
Amount
Percent
of Sales
Sales ...........................
$94,500
100%
Variable expenses ........
37,800
40%
Contribution margin ......
56,700
60%
Fixed expenses ............
38,000
Net operating income ...
$18,700
Net operating income reflecting change in sales ......
$18,700
Original net operating income (a) ...........................
16,000
Change in net operating income (b) .......................
$ 2,700
Percent change in net operating income (b) ÷ (a) ...
16.88%
Exercise 5-10 (20 minutes)
1. The overall contribution margin ratio can be computed as follows:
Total contribution margin
Overall CM ratio = Total sales
$25,000
= =25%
$100,000
2. The overall break-even point in dollar sales can be computed as follows:
Total fixed expenses
3. To construct the required income statement, we must first determine
the relative sales mix for the two products:
Claimjumper
Makeover
Total
Original dollar sales ......
$30,000
$70,000
$100,000
Percent of total ............
30%
70%
100%
Sales at break-even ......
$28,800
$67,200
$96,000
Claimjumper
Makeover
Total
Sales ...........................
$28,800
$67,200
$96,000
Variable expenses* .......
24,000
48,000
72,000
Contribution margin ......
$ 4,800
$19,200
24,000
Fixed expenses ............
24,000
Net operating income ...
$ 0
*Claimjumper variable expenses: ($28,800/$30,000) × $25,000 = $24,000
Makeover variable expenses: ($67,200/$70,000) × $50,000 = $48,000
Exercise 5-15 (15 minutes)
1.
Total
Per
Unit
Sales (15,000 games) .........
$300,000
$20
Variable expenses ...............
90,000
6
Contribution margin ............
210,000
$14
Fixed expenses ...................
189,000
Net operating income .........
$ 21,000
$210,000
= = 10
$21,000
2. a. Sales of 18,000 games represent a 20% increase over last year’s
sales. Because the degree of operating leverage is 10, net operating
income should increase by 10 times as much, or by 200% (10 ×
20%).
Exercise 5-17 (30 minutes)
1.
Profit
= Unit CM × Q − Fixed expenses
$0
= ($50 − $30) × Q − $108,000
$0
= ($20) × Q − $108,000
$20Q
= $108,000
Q
= $108,000 ÷ $20
Q
= 5,400 stoves, or, at $50 per stove, $270,000 in sales
Exercise 5-17 (continued)
4.
Profit
= Unit CM × Q − Fixed expenses
$35,000
= ($45 − $30) × Q − $108,000
$35,000
= ($15) × Q − $108,000
$15 × Q
= $143,000
Q
= $143,000 ÷ $15
Q
= 9,533 stoves (rounded)
Alternative solution:
Target profit + Fixed expenses
Unit sales to attain =
target profit Unit contribution margin
$35,000 + $108,000
=
$15
= 9,533 stoves (rounded)
