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Chapter 7 Cost-Volume-Profit Analysis
(continued) E7-30A
bWeighted-average
Total sales mix contribution margin
Total sales mix units
contribution
=
margin per unit
$110
=
$455 + X
10
$1,100
=
$455 + X
X
=
$645
cContribution
×
3
=
$645
margin per
Classic watch
Contribution margin
=
$215
per Classic watch
(15 min.) E7-31A
Req. 1
The company’s operating income can be computed as follows:
Sales revenue…………………………………….
$6,800,000
Less: Variable expenses………………………
1,088,000
Contribution margin…………………………….
5,712,000
Less: Fixed expenses……($2,600,000 - $1,088,000)
1,512,000
Operating income………………………………..
$4,200,000
Current contribution margin
$5,712,000
Percentage increase
× 14%
Increase in contribution margin
799,680
Less: Increase in fixed costs of advertising campaign
250,000
Increase in operating income
$549,680
Managerial Accounting 4e Solutions Manual
(15 min.) E7-32A
Req. 1
Contribution margin ratio
=
1.00 – 0.60
=
0.40
Breakeven sales in dollars
=
Fixed expenses + Operating income
Contribution margin ratio
=
$12,000 + $0
0.40
=
$30,000
Chapter 7 Cost-Volume-Profit Analysis
(10 min.) E7-33A
First, find the company’s contribution margin:
Sales………………………………
$60,000
Contribution margin ratio……..
× .35
Contribution margin……………
$21,000
Chapter 7 Cost-Volume-Profit Analysis
(20-25 min.) E7-35A
Req. 1
Breakeven in units
=
Fixed expenses
Contribution margin per unit
=
$600
$30*
=
20 grooming kits
Managerial Accounting 4e Solutions Manual
(continued) E7-35A
Req. 3
Margin of safety in dollars:
Sales at target level:
$3,100
Sales at B/E level:
$1,240*
Margin of safety in dollars
$1,860
Margin of safety in units:
Sales at target level:
50
Sales at B/E level:
20
Margin of safety in units
30
Margin of safety in %:
Margin of safety in dollars:
$1,860
Sales at target level:
$3,100
$1,860/$3,100 =
60.00%
*Sales at B/E level: 20 kits x $62 = $1,240
Managerial Accounting 4e Solutions Manual
(continued) E7-36A
3b.
Margin of Safety in Dollars
$48,750
Divided by: Budgeted Sales Dollars
$81,250
Margin of Safety %
60.0%
(20-25 min.) E7-37A
1.
Sales price per unit.............................................
$25.00
Less: Variable cost per unit (7.30+6+2.60+2.10).........................................
$18.00
Contribution margin per unit .............................
$ 7.00
Contribution margin ratio
=
$7.00
=
.28
$25.00
=
28%
Sales revenue (140,000 × $25.00)………………
$ 3,500,000
Less: Variable expenses (140,000 × $18.00)…
(2,520,000)
Contribution margin……………………………..
$ 980,000
2.
Sales volume (units)………………………………
170,000
Unit contribution margin…………………………
x $7.00
Contribution margin………………………………
$1,190,000
Less: Fixed expenses………($292,000 + $447,200)
(739,200)
Operating income………………………………….
$450,800
3.
Sales revenue………………………………………
$4,500,000
Contribution margin ratio………………………..
x 28%
Contribution margin………………………………
$1,260,000
Less: fixed expenses…………………………….
(739,200)
Operating income………………………………….
$ 520,800
4.
B/E sales in units
=
$739,200
=
105,600
$7.00
units
B/E sales in dollars
=
$739,200
=
$2,640,000
28%
Budgeted Sales Units
3,250
Chapter 7 Cost-Volume-Profit Analysis
(continued) E7-37A
5.
$739,200 + $269,500
=
144,100 units
$7.00
6.
Original contribution margin per unit..................
$7.00
Less: Increase in direct labor cost per unit ($6.00 x
10%)..........................................................
$0.60
New contribution margin per unit………………...
$6.40
Original fixed expenses…………………………….
$739,200
Plus: Increase in fixed expenses………………..
24,000
New fixed expenses…………………………………
$763,200
New breakeven in units
=
$763,200
=
119,250
$6.40
Units
7.
Contribution margin (from part 1)………………...
$980,000
Less: Fixed expenses……………………………...
(739,200)
Operating income……………………………………
$ 240,800
Operating Leverage factor
=
$980,000
=
4.07
(rounded)
$ 240,800
8.
Increase in volume……………………..
8%
× Operating leverage factor…………..
4.07
New fixed expenses……………………
32.6%(rounded)
9.
Margin of safety
=
Sales − Sales at breakeven
=
$3,500,000 − $2,640,000
(from part 1) (from part 4)
=
$860,000
Margin of safety as a percentage
=
$860,000
$3,500,000
=
.25
(rounded)
=
25%
(rounded)
10.
16 GB
32 GB
Total
Sales price……………..
$25
$50
Less: Variable cost…………..
18
22
Contribution margin….
$ 7
$28
Sales mix……………….
× 6
× 1
7
Multiply by: Contribution margin….
$42
$28
$70
Weighted-average contribution margin per unit
$10.00
Sales in units
=
$739,200 + $269,500
=
100,870 units
$10
Smaller 16 GB: 100,870 × 6/7…………………..
86,460 units (rounded)
Larger 32 GB: 100,870 × 1/7….………………….
14,410 units (rounded)
The target profit volume is lower than before (Req. 5) because now the company is selling a product with a much
higher unit contribution margin.
(15 min.) E7-38B
Req. 1
Contribution Margin Income Statements
Sales revenue
$190,000
$420,000
Less: Variable expenses (35% of sales revenue*)
66,500
147,000
Contribution margin (65% of sales
revenue**)
123,500
273,000
Fixed expenses
176,800
176,800
Operating income (loss)
$ (53,300)
$ 96,200
Chapter 7 Cost-Volume-Profit Analysis
(10-15 min.) E7-39B
This problem involves working backwards through the shortcut contribution margin formula and then working
backwards through the contribution margin income statement to find the missing data.
First, fill in the given data in the short cut contribution margin formula, and solve for the contribution margin ratio:
Sales needed to breakeven
=
Fixed expenses
Contribution margin ratio
$40,000
=
$30,000
Contribution margin ratio
Contribution margin ratio
=
$30,000
$40,000
Contribution margin ratio
=
.75
Next, fill in the given data in the contribution margin income statement:
Sales………………………….
$ ?
Less: Variable expenses….
45,000
Contribution margin……….
?
Less: Fixed expenses……..
30,000
Operating income…………..
$ ?
Managerial Accounting 4e Solutions Manual
(15 min.) E7-40B
Req. 1
Contribution margin per unit:
Sale price....................................…………..
$1.60
Less: Variable expenses.................................….
0.80
Contribution margin per unit....................
$0.80
Chapter 7 Cost-Volume-Profit Analysis
(continued) E7-41B
The company would have to sell 11,250 fewer packages of socks (120,000 − 131,250 from E7-40B) to earn $25,000 of
operating income.
(10-15 min.) E7-42B
Req. 1
Contribution
=
Contribution margin per unit
margin ratio
Sales price per unit
=
$6.25 − $2.50
$6.25
=
0.60
Managerial Accounting 4e Solutions Manual
(10- 15 min.) E7-43B
Req. 1
Prior to changes, the average restaurant location had the following operating income:
Contribution margin per unit (from E7-42B)
$ 3.75
Average sales volume units…………………
× 5,500
Contribution margin…………………………..
$20,625
Less: Fixed expenses……………………….
(8,250)
Operating income……………………………...
$12,375
Req. 2
After the price cut and advertising fees, the average restaurant location will have the following operating income:
New contribution margin per unit ($5.75 sales price – $2.50
variable cost…………………………………….
$ 3.25
New sales volume (units)………….
× 6,000
Contribution margin………………...
$19,500
Less: New fixed expenses
($8,250 + $500 advertising fee)……
(8,750)
New operating income……………..
$ 10,750
Assuming volume increases according to plan, cutting the sales price and advertising will allow the franchise owners to
reach their target profits of $6,600 per month.
(10-15 min.) E7-44B
Req. 1
Breakeven sales in dollars
=
Fixed expenses + Operating income
Contribution margin ratio
=
$620,000 + $0
0.80
=
$775,000
Managerial Accounting 4e Solutions Manual
(continued) E7-46B
(5-10 min.) E7-47B
Use the short cut contribution margin formula to determine the company’s current level of fixed expenses:
Sales needed to breakeven
=
Fixed expenses
Contribution margin ratio
$500,000
=
Fixed expenses
.50
$500,000 × .50
=
Fixed expenses
$250,000
=
Fixed expenses
After buying the equipment, the company’s fixed expenses will be $300,000 ($250,000 + $50,000 increase). Calculate
breakeven (in sales) at the new level of fixed expenses:
Sales needed to breakeven
=
Fixed expenses
Contribution margin ratio
=
$300,000
.50
=
$600,000
The company will now have to generate $600,000 of sales revenue to breakeven.
(5-10 min.) E7-48B
Sales price per unit………………..
$14.00
Contribution margin ratio………...
× .625
Contribution margin per unit…….
$8.75
Chapter 7 Cost-Volume-Profit Analysis
(continued) E7-48B
Alternatively:
Breakeven in sales revenue
=
Fixed expenses
Contribution margin ratio
=
$350
.625
=
$560 in sales revenue
(15-20 min.) E7-49B
Weighted-Average Contribution Margin per Unit
Twig
Oak
Total
Sales price per unit
$18.00
$38.00
Less Variable cost per unit
3.00
8.00
Contribution margin per unit
$15.00
$30.00
Multiply by: Sales mix in units
× 4
× 1
5
Contribution margin
$60.00
$30.00
$90.00
Weighted-average contribution margin per unit ($90 / 5 units)
$18.00
Sales in total units:
=
Fixed expenses + Operating income
Weighted-average contribution margin per unit
=
$360 + $0
$18
=
20 units
Breakeven sales of twig stands (20 × 4/5)………………
16 units
Breakeven sales of oak stands (20 × 1/5).………………
4 units
By charging her husband part of the craft fair entrance fees, the wife’s fixed costs will decrease. Therefore, the wife will
need to sell fewer scarves to breakeven than before her husband decided to share her craft booths.
Managerial Accounting 4e Solutions Manual
(15-20 min.) E7-50B
Weighted-Average Contribution Margin per Unit
Standard
Chrome
Total
Sales price per unit
$65
$85
Less: Variable cost per unit
55
65
Contribution margin per unit
$10
$20
Multiply by: Sales mix in units
× 3
× 2
5
Contribution margin
$30
$40
$70
Weighted-average contribution margin
$ 14
Sales in total units to breakeven:
=
Fixed expenses + Operating income
Weighted-average contribution margin per unit
=
$9,800 + $0
$14
=
700 units
Breakeven sales of standard scooters (700 × 3/5)………………
420 units
Breakeven sales of chrome scooters (700 × 2/5).………………..
280 units
Sales in total units to achieve target operating income:
=
Fixed expenses + Operating income
Weighted-average contribution margin per unit
=
$9,800 + 8,400
$14
=
1,300 units
Target sales of standard scooters (1,300 × 3/5)........……………
780 units
Target sales of chrome scooters (1,300 × 2/5)............….............
520 units
Managerial Accounting 4e Solutions Manual
(15 min.) E7-52B
Req. 1
The company’s operating income can be computed as follows:
Sales revenue…………………………………….
$6,100,000
Less: Variable expenses………………………
1,342,000
Contribution margin…………………………….
4,758,000
Less: Fixed expenses………($2,590,000 - $1,342,000)
1,248,000
Operating income………………………………..
$3,510,000
Current contribution margin
$4,758,000
Percentage increase
× 16%
Increase in contribution margin
761,280
Less: Increase in fixed costs of advertising campaign
260,000
Increase in operating income
$501,280
