Solutions Manual, Chapter 3 61
Problem 3-28 (continued)
2. The sales mix has shifted over the last year from Standard sets to
3. Sales commissions could be based on contribution margin rather than
a. The break-even in dollar sales can be computed as follows:
Fixed expenses $189,700
Dollar sales to = = = $350,000
break even CM ratio 0.542
b. The break–even point is higher with May’s sales mix than with April’s.
Problem 3-29 (60 minutes)
1. The income statements would be:
Present
Amount
Per Unit
%
Sales …………………….
$450,000
$30
100%
Variable expenses ……
315,000
21
70%
Contribution margin …
135,000
$ 9
30%
Fixed expenses ……….
90,000
Net operating income .
$ 45,000
Proposed
Amount
Per Unit
%
Sales …………………….
$450,000
$30
100%
Variable expenses* ….
180,000
12
40%
Contribution margin …
270,000
$18
60%
Fixed expenses ……….
225,000
Net operating income .
$ 45,000
*$21 – $9 = $12
2. a. Degree of operating leverage:
Present:
Contribution margin
Degree of
=
operating leverage Net operating income
$135,000
= = 3
$45,000
Proposed:
Contribution margin
Degree of
=
operating leverage Net operating income
$270,000
= = 6
$45,000
Problem 3-29 (continued)
b. Dollar sales to break even:
Present:
Fixed expenses
Dollar sales to =
break even CM ratio
$90,000
= = $300,000
0.30
Proposed:
Fixed expenses
Dollar sales to =
break even CM ratio
$225,000
= = $375,000
0.60
c. Margin of safety:
Present:
Margin of safety = Actual sales – Break-even sales
= $450,000 – $300,000 = $150,000
Margin of safety in dollars
Margin of safety =
percentage Actual sales
$150,000
= = 33 1/3%
$450,000
Proposed:
Margin of safety = Actual sales – Break-even sales
= $450,000 – $375,000 = $75,000
Margin of safety in dollars
Margin of safety =
percentage Actual sales
64 Managerial Accounting for Managers, 4th Edition
Problem 3-29 (continued)
3. The major factor would be the sensitivity of the company’s operations to
cyclical movements in the economy. Because the new equipment will
sustained more quickly than at present. Thus, management must decide
whether the potential for greater profits in good years is worth the risk
of deeper losses in bad years.
4. No information is given in the problem concerning the new variable
New variable expenses:
Profit
= (Sales − Variable expenses) − Fixed expenses
$54,000**
= ($585,000* − Variable expenses) − $180,000
Variable expenses
= $585,000 − $180,000 − $54,000
= $351,000
*New level of sales: $450,000 × 1.30 = $585,000
**New level of net operating income: $45,000 × 1.2 = $54,000
New CM ratio:
Sales …………………………..
$585,000
100%
Variable expenses …………..
351,000
60%
Contribution margin ………..
$234,000
40%
With the above data, the new break-even point can be computed:
Fixed expenses $180,000
Dollar sales to = = = $450,000
break even CM ratio 0.40
Problem 3-29 (continued)
It would be a good idea to compare the new marketing strategy to the
current situation more directly. What level of sales would be needed
Target profit + Fixed expenses
Dollar sales to =
attain target profit CM ratio
$45,000 + $180,000
= 0.40
= $562,500 in sales each month
be extremely risky.
Problem 3-30 (60 minutes)
1.
Profit
= Unit CM × Q − Fixed expenses
$0
= ($40 − $16) × Q − $60,000
$0
= ($24) × Q − $60,000
$24Q
= $60,000
Q
= $60,000 ÷ $24
Q
= 2,500 pairs, or at $40 per pair, $100,000 in sales
Alternative solution:
Fixed expenses $60,000
Unit sales to = = = 2,500 pairs
break even CM per unit $24.00
Fixed expenses $60,000
Dollar sales to = = = $100,000
break even CM ratio 0.600
2. See the graphs at the end of this solution.
3.
Profit
= Unit CM × Q − Fixed expenses
$18,000
= $24 × Q − $60,000
$24Q
= $18,000 + $60,000
Q
= $78,000 ÷ $24
Q
= 3,250 pairs
Alternative solution:
Target profit + Fixed expenses
Unit sales to attain =
target profit Unit contribution margin
$18,000 + $60,000
= = 3,250 pairs
$24.00
4.
Incremental contribution margin:
$25,000 increased sales × 60% CM ratio …..
$15,000
Incremental fixed salary cost …………………….
8,000
Increased net income ………………………………
$ 7,000
© The McGraw-Hill Companies, Inc., 2017. All rights reserved.
Solutions Manual, Chapter 3 69
Problem 3-31 (30 minutes)
1.
(1)
Dollars
(2)
Volume of output, expressed in units, % of capacity, sales,
or some other measure
(3)
Total expense line
(4)
Variable expense area
(5)
Fixed expense area
(6)
Break-even point
(7)
Loss area
(8)
Profit area
(9)
Sales line