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Solutions Manual, Chapter 5 1
Chapter 5
Cost-Volume-Profit Relationships
Solutions to Questions
5-1 The contribution margin (CM) ratio is
the ratio of the total contribution margin to total
5-2 Incremental analysis focuses on the
5-3 All other things equal, Company B, with
its higher fixed costs and lower variable costs,
5-4 Operating leverage measures the impact
on net operating income of a given percentage
change in sales. The degree of operating
the total revenue line would rise less steeply,
and the break-even point would occur at a
higher unit volume. (b) If the fixed cost
increased, then both the fixed cost line and the
5-7 The margin of safety is the excess of
5-8 The sales mix is the relative proportions
5-9 A higher break-even point and a lower
net operating income could result if the sales
mix shifted from high contribution margin
products to low contribution margin products.
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2 Managerial Accounting, 16th Edition
Chapter 5: Applying Excel
The completed worksheet is shown below.
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Solutions Manual, Chapter 5 3
Chapter 5: Applying Excel (continued)
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4 Managerial Accounting, 16th Edition
Chapter 5: Applying Excel (continued)
The margin of safety percentage is now 10%, whereas it was 20%
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Solutions Manual, Chapter 5 5
Chapter 5: Applying Excel (continued)
2. With the changes in the data, the worksheet should look like this:
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6 Managerial Accounting, 16th Edition
Chapter 5: Applying Excel (continued)
3. The degree of operating leverage can be used to estimate the expected
percentage increase in net operating income from a 15% increase in
unit sales as follows:
Percentage change in net operating income = Degree of operating
An increase of 120% over the current net operating income of $60,000
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Solutions Manual, Chapter 5 7
Chapter 5: Applying Excel (continued)
4. Increasing the unit sales by 15% results in net operating income of
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8 Managerial Accounting, 16th Edition
Chapter 5: Applying Excel (continued)
5. a. The initial plan for the Western Hombre motorcycle is summarized
below:
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Solutions Manual, Chapter 5 9
Chapter 5: Applying Excel (continued)
5. b. The modified plan for the Western Hombre motorcycle is summarized
below:
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10 Managerial Accounting, 16th Edition
Chapter 5: Applying Excel (continued)
This does not appear to be a good plan. At best, Thad would only
break even—and that assumes that 600 units would still be sold
The degree of operating leverage is displayed in the worksheet as
#DIV/0!. This means that Excel is unable to compute the degree of
operating leverage because the divisor is 0. The divisor is 0 because