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Solutions Manual, Chapter 3 41
Problem 3-20 (continued)
leverage, often a higher break-even point, and greater risk for the
company.
of constructing the new plant.
Problem 3-21 (30 minutes)
1.
Product
White
Fragrant
Loonzain
Total
Percentage of total
sales .....................
40%
24%
36%
100%
Sales .......................
$300,000
100%
$180,000
100%
$270,000
100%
$750,000
100%
Variable expenses .....
216,000
72%
36,000
20%
108,000
40%
360,000
48%
Contribution margin ..
$ 84,000
28%
$144,000
80%
$162,000
60%
390,000
52%
*
Fixed expenses .........
449,280
Net operating
income (loss) .........
$ (59,280)
2. Break-even sales would be:
Fixed expenses
Dollar sales to =
break even CM ratio
$449,280
= = $864,000
0.520
Solutions Manual, Chapter 3 43
Problem 3-21 (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
As shown by these data, sales shifted away from Fragrant Rice, which
provides our greatest contribution per dollar of sales, and shifted toward
White Rice, which provides our least contribution per dollar of sales.
Problem 3-22 (60 minutes)
1. The CM ratio is 30%.
Total
Per Unit
Percent of Sales
Sales (19,500 units) .........
$585,000
$30.00
100%
Variable expenses ............
409,500
21.00
70%
Contribution margin .........
$175,500
$ 9.00
30%
The break-even point is:
Profit
= Unit CM × Q − Fixed expenses
$0
= ($30 − $21) × Q − $180,000
$0
= ($9) × Q − $180,000
$9Q
= $180,000
Q
= $180,000 ÷ $9
Q
= 20,000 units
20,000 units × $30 per unit = $600,000 in sales
Alternative solution:
Fixed expenses
Unit sales to =
break even Unit contribution margin
$180,000
= = 20,000 units
$9.00
Fixed expenses
Dollar sales to =
break even CM ratio
$180,000
= = $600,000 in sales
0.30
2.
Incremental contribution margin:
$80,000 increased sales × 0.30 CM ratio ............
$24,000
Problem 3-22 (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)
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
*$21.00 + $0.75 = $21.75
Alternative solution:
Target profit + Fixed expenses
Unit sales to attain =
target profit CM per unit
$9,750 + $180,000
=
$8.25**
= 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 3-22 (continued)
The new break-even point would be:
Fixed expenses
Unit sales to =
break even Unit contribution margin
$180,000 + $72,000
=
$12.00
= 21,000 units
Fixed expenses
Dollar sales to =
break even CM ratio
$180,000 + $72,000
=
0.40
= $630,000
b. Comparative income statements follow:
Not Automated
Automated
Total
Per
Unit
%
Total
Per
Unit
%
Sales (26,000
units) ..............
$780,000
$30.00
100
$780,000
$30.00
100
Variable
expenses ........
546,000
21.00
70
468,000
18.00
60
Contribution
margin ............
234,000
$ 9.00
30
312,000
$12.00
40
Fixed expenses ..
180,000
252,000
Net operating
Solutions Manual, Chapter 3 47
Problem 3-22 (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
The greatest risk of automating is that future sales may drop back
present levels.
Note to the Instructor: Although it is not asked for in the problem,
if time permits you may want to compute the point of indifference
between the two alternatives in terms of units sold; i.e., the point
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
48 Managerial Accounting for managers, 4th Edition
Problem 3-23 (60 minutes)
1. The CM ratio is 60%:
Sales price ......................
$20.00
100%
Variable expenses ...........
8.00
40%
Contribution margin .........
$12.00
60%
2.
Fixed expenses
Dollar sales to =
break even CM ratio
$180,000
=
0.60
= $300,000
4.
a.
Contribution margin
Degree of
=
operating leverage Net operating income
$240,000
=
$60,000
= 4
Solutions Manual, Chapter 3 49
Problem 3-23 (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
Problem 3-24 (30 minutes)
1. The contribution margin per sweatshirt would be:
Selling price .............................................
$13.50
Variable expenses:
Purchase cost of the sweatshirts .............
$8.00
Commission to the student salespersons .
1.50
9.50
Contribution margin ..................................
$ 4.00
$1,200 profit by the unit contribution margin:
Target profit $1,200
= = 300 sweatshirts
Unit CM $4.00
300 sweatshirts × $13.50 per sweatshirt = $4,050 in total sales
2. Since an order has been placed, there is now a “fixed” cost associated
Selling price .........................................
$13.50
Variable expenses (commissions only) ...
1.50
Contribution margin ..............................
$12.00
