70 Managerial Accounting for Managers, 4th Edition
Problem 3-31 (continued)
2.
a.
Line 3:
Remain unchanged.
Line 9:
Have a steeper slope.
Break-even point:
Decrease.
b.
Line 3:
Have a flatter slope.
Line 9:
Remain unchanged.
Break-even point:
Decrease.
c.
Line 3:
Shift upward.
Line 9:
Remain unchanged.
Break-even point:
Increase.
d.
Line 3:
Remain unchanged.
Line 9:
Remain unchanged.
Break-even point:
Remain unchanged.
e.
Line 3:
Shift downward and have a steeper slope.
Line 9:
Remain unchanged.
Break-even point:
Probably change, but the direction is uncertain.
f.
Line 3:
Have a steeper slope.
Line 9:
Have a steeper slope.
Break-even point:
Remain unchanged in terms of units; increase
in terms of total dollars of sales.
g.
Line 3:
Shift upward.
Line 9:
Remain unchanged.
Break-even point:
Increase.
h.
Line 3:
Shift upward and have a flatter slope.
Line 9:
Remain unchanged.
Break-even point:
Probably change, but the direction is uncertain.
Solutions Manual, Chapter 3 71
Case 3-32 (60 minutes)
Note: This is a problem that will challenge the very best students’ conceptual
1. The overall break-even sales can be determined using the CM ratio.
Velcro
Metal
Nylon
Total
Sales ……………………….
$165,000
$300,000
$340,000
$805,000
Variable expenses ………
125,000
140,000
100,000
365,000
Contribution margin …….
$ 40,000
$160,000
$240,000
440,000
Fixed expenses…………..
400,000
Net operating income ….
$ 40,000
Contribution margin $440,000
CM ratio = = = 0.5466
Sales $805,000
Fixed expenses $400,000
Dollar sales to = = = $732,000 (rounded)
break even CM ratio 0.5466
2. The issue is what to do with the common fixed cost when computing
the break-evens for the individual products. The correct approach is to
profitable.
a. The break-even points for each product can be computed using the
contribution margin approach as follows:
Velcro
Metal
Nylon
Unit selling price ……………………………..
$1.65
$1.50
$0.85
Variable cost per unit ……………………….
1.25
0.70
0.25
Unit contribution margin (a) ………………
$0.40
$0.80
$0.60
Product fixed expenses (b)………………..
$20,000
$80,000
$60,000
Unit sales to break even (b) ÷ (a) ………
50,000
100,000
100,000
72 Managerial Accounting for Managers, 4th Edition
Case 3-32 (continued)
b. If the company were to sell exactly the break-even quantities
Velcro
Metal
Nylon
Total
Unit sales ……………….
50,000
100,000
100,000
Sales ……………………..
$82,500
$150,000
$85,000
$317,500
Variable expenses …….
62,500
70,000
25,000
157,500
Contribution margin ….
$20,000
$ 80,000
$60,000
160,000
Fixed expenses ………..
400,000
Net operating loss …….
$(240,000)
Many students (and managers, for that matter) attempt to resolve this
variable expenses, product-specific fixed expenses, contribution
Solutions Manual, Chapter 3 73
Case 3-32 (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
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
It would be natural for managers to interpret a break-even for a product as
the level of sales below which the company would be financially better off
74 Managerial Accounting for Managers, 4th Edition
Case 3-32 (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 would go from making a profit
chapter.
Velcro
Metal
Nylon
Total
Sales ……………………………..
$165,000
$300,000
$340,000
$805,000
Variable expenses …………….
125,000
140,000
100,000
365,000
Contribution margin ………….
40,000
160,000
240,000
440,000
Product fixed expenses ……..
20,000
80,000
60,000
160,000
Product segment margin ……
$ 20,000
$ 80,000
$180,000
280,000
Common fixed expenses …….
240,000
Net operating income ………..
$ 40,000
$100,000
Solutions Manual, Chapter 3 75
Case 3-33 (75 minutes)
Before proceeding with the solution, it is helpful first to restructure the data into contribution format for
each of the three alternatives. (The data in the statements below are in thousands.)
15% Commission
20% Commission
Own Sales Force
Sales ……………………………………
$16,000
100%
$16,000
100%
$16,000.00
100.0%
Variable expenses:
Manufacturing ……………………..
7,200
7,200
7,200.00
Commissions (15%, 20% 7.5%)
2,400
3,200
1,200.00
Total variable expenses …………….
9,600
60%
10,400
65%
8,400.00
52.5%
Contribution margin …………………
6,400
40%
5,600
35%
7,600.00
47.5%
Fixed expenses:
Manufacturing overhead …………
2,340
2,340
2,340.00
Marketing …………………………...
120
120
2,520.00
*
Administrative ………………………
1,800
1,800
1,725.00
**
Interest …………………………..….
540
540
540.00
Total fixed expenses ………………..
4,800
4,800
7,125.00
Income before income taxes ……..
1,600
800
475.00
Income taxes (30%) ………………..
480
240
142.50
Net income …………………………...
$ 1,120
$ 560
$ 332.50
*$120,000 + $2,400,000 = $2,520,000
**$1,800,000 – $75,000 = $1,725,000
Case 3-33 (continued)
1. When the income before taxes is zero, income taxes will also be zero
a. Break-even point in dollar sales if the commission remains 15%:
Fixed expenses $4,800,000
Dollar sales to = = = $12,000,000
break even CM ratio 0.40
b. Break-even point in dollar sales if the commission increases to 20%:
Fixed expenses $4,800,000
Dollar sales to = = = $13,714,286
break even CM ratio 0.35
c. Break-even point in dollar sales if the company employs its own sales
force:
Fixed expenses $7,125,000
Dollar sales to = = = $15,000,000
break even CM ratio 0.475
2. In order to generate a $1,120,000 net income, the company must
Solutions Manual, Chapter 3 77
Case 3-33 (continued)
X =
Total sales revenue
0.65X + $4,800,000 =
0.525X + $7,125,000
0.125X =
$2,325,000
X =
$2,325,000 ÷ 0.125
X =
$18,600,000
4. a., b., and c.
15%
Commission
20%
Commission
Own
Sales Force
Contribution margin (Part 1) (a) ….
$6,400,000
$5,600,000
$7,600,000
Income before taxes (Part 1) (b) …
$1,600,000
$800,000
$475,000
Degree of operating leverage:
(a) ÷ (b) ……………………………..
4
7
16
5. We would continue to use the sales agents for at least one more year,
and possibly for two more years. The reasons are as follows:
net income.
Second, use of the sales agents for at least one more year would
sales group organized.
Third, the sales force plan doesn’t become more desirable than the
and possibly two years.
Fourth, the sales force plan will be highly leveraged since it will
agents, even at the higher 20% commission rate.