Accounting Chapter 18 how much of total sales are available to cover

Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 18

Exercise 18-22 (25 minutes)

1. Selling price per composite unit

8 windows @ $200 per unit ………………………………………………………

2. Variable costs per composite unit

8 windows @ $125 per unit ………………………………………………………

Variable costs per composite unit …………………………..……………….

4. Unit sales of windows and doors at break-even point

Windows: 8 x 1,000 units (from 3) ………………

8,000 units

2,000 units

Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 18

Exercise 18-23 (25 minutes)

1. Selling price per composite unit

5 Easy returns @ $50 each …………………………………………………….

$ 250

2. Variable costs per composite unit

5 Easy returns @ $30 each …………………………………………………….

$ 150

3. Break-even point in composite units

4. Unit sales of Easy, Moderate, and Business returns at break-even point

Easy: 5 x 30 units (from 3) …………………..

150 units

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Exercise 18-24 (30 minutes)

Instructor note: This exercise is solved in 3 steps

Step 1.

Company A

Contribution Margin Income Statement

Sales (given)…………………………………………………………………..

$6,000,000

Variable costs [$6,000,000 x (100% – 60%)] ………………………

Fixed costs (given) …………………………………………………………

Pretax income ………………………………………………………………..

$1,000,000

$3,600,000 / $1,000,000

Step 2.

Company B

Contribution Margin Income Statement

Sales (given)…………………………………………………………………..

$4,500,000

Variable costs [$4,500,000 x (100% – 25%)] ………………………

Fixed costs (given) …………………………………………………………

Pretax income ………………………………………………………………..

$1,125,000 / $750,000

Step 3.

Interpretation: Company A benefits more from a 20% increase in sales.

This is because we expect a 20% increase in sales to yield a 72%

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Exercise 18-25 (10 minutes)

2. If sales decrease by 5%, then pretax income will decrease by 4.0 x 5%,

3. If sales decrease by 5%, a total of 9,120 (computed as 9,600 x 95%)

units will be sold.

Contribution margin income statement, assuming 5% sales decrease:

HUDSON CO.

Forecasted Contribution Margin Income Statement

For Year Ended December 31, 2020

Sales (9,120 x $225) ……………………………………………………….

$2,052,000

Variable costs (9,120 x $180) ……………………………………………………

Fixed costs …………………………………………………………………………….

Exercise 18–26B (15 minutes)

Reconciliation of variable costing income to absorption costing income:

Year 1

Year 2

Year 3

Variable costing income…………………

$110,000

$114,400

$118,950

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Exercise 18-27 (15 minutes)

Company A

a. Units sold = $208,000/$65 = 3,200

b. Variable cost per unit = $150,400/3,200 = $47

Company B

h. Sales = $43,450 + $39,500 = $82,950

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PROBLEM SET A

Problem 18–1A (25 minutes)

Parts 1 and 2

Tight Drums Company

Contribution Margin Income Statement

For Year Ended December 31, 2019

(1,000 units) Per unit % of sales

Sales ($500 x 1,000) ……………………….

$500,000

$500

100%

Variable costs

Plastic for casing …………………………

$17,000

$17

Assembly worker wages ………………..

82,000

26,000

Sales commissions ……………………..

Contribution margin ………………………

$360

Fixed costs

Taxes on factory …………………………..

Factory maintenance ……………………..

10,000

Factory machinery deprec. …………….

40,000

Sales equipment lease …………………..

10,000

Accounting staff salaries ……………….

35,000

Admin. mgmt. salaries …………………..

Pretax income …………………………..

Income tax (25%) …………………………..

Net income ……………………………………..

$101,250

Part 3 Analysis Component

Contribution margin shows how much of total sales are available to cover fixed

costs and contribute to operating income. This is why the title for this statement

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Problem 18-2A (20 minutes)

Part 1 – Calculation of variable and fixed costs

Part 2

The estimates in Part 1 can be used to predict the total costs that will be

incurred at sales levels of 200,000 and 300,000 units.

Predictions

Sales units (given) …………………………………………………

200,000

300,000

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Problem 18-3A (40 minutes)

Part 1

(a) Instructor note: Use the equation in Exhibit 18.11

(b) Instructor note: Use the equation in Exhibit 18.12

Break-even in sales dollars = Fixed costs / Contribution margin ratio

Part 2

PRAVEEN CO.

Contribution Margin Income Statement (at Break-Even) — Product XT

Sales (4,500 x $200) ……………………………………………………….…………..

$900,000

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Problem 18-3A (Continued)

For the instructor:

CVP Chart for Praveen Company

$1,400,000

Sales

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Problem 18-4A (75 minutes)

Part 1 Instructor note: Use the equation in Exhibit 18.12

Sales price per unit ($1,000,000 / 20,000) ……………………………………………………….

$50

Variable costs per unit ($800,000 / 20,000) …………………………..…………………………

$40

Contribution margin ratio ($50- $40) / $50) ……………………………………………………..

Part 2 Instructor note: Use the equation in Exhibit 18.12 with predicted

numbers

**To compute predicted contribution margin ratio

Predicted sales price per unit (no change in sales price) …………………………..

$50

Predicted variable costs per unit ($40 x 50%) …………………………..

$20

Predicted contribution margin ratio ($50- $20) / $50) …………………………..

60%

Part 3

ASTRO COMPANY

Forecasted Contribution Margin Income Statement

For Year Ended December 31, 2020

Sales (20,000 x $50) ……………………………………………………….………..

$1,000,000

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Problem 18–4A (Continued)

Part 4 Instructor note: Use equations in Exhibits 18.22 and 18.23 with

predicted numbers

Part 5

ASTRO COMPANY

Forecasted Contribution Margin Income Statement

For Year Ended December 31, 2020

Sales (21,667 units x $50) ……………………………………………………….

$1,083,350

Variable costs (21,667 units x $20) …………………………………………….

Income before income taxes* …………………………………………………….

Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 18

Problem 18-5A (65 minutes)

Part 1 Instructor note: Use the equation in Exhibit 18.12

Break-even in dollar sales = Fixed costs / Contribution margin ratio

*To compute contribution margin ratio

Contribution margin ratio

Sales price per unit

__T__

__O__

Part 2

Forecasted contribution margin income statements for each product

assuming sales declines to 30,000 units with no change in unit sales price

HENNA CO.

Forecasted Contribution Margin Income Statement

Product T

Product O

Sales* …………………………………………………………………

$1,200,000

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Problem 18-5A (Continued)

Part 3 Forecasted contribution margin income statements for each product

assuming sales increase to 60,000 units with no change in unit sales price

HENNA CO.

Forecasted Contribution Margin Income Statement

Product T

Product O

Sales* …………………………………………………………………

$2,400,000

Variable costs** …………………………………………………..

1,920,000

300,000

Part 4

If sales were to greatly decrease, Product O would suffer the greater

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Problem 18-6A (45 minutes)

Part 1 Instructor note: Use the equation in Exhibit 18.12

Break-even in dollar sales = Fixed costs / Contribution margin ratio

*To compute contribution margin ratio

Sales price per unit

Plan 1 (no change)……………………………………………………….

Plan 2 [$25.00 x (1 + 20%)] ……………………………………………………….

Plan 1

$25.00

Plan 2

$30.00

Contribution margin ratio

Plan 2 ($30.00 – $7.50) / $30.00)……………………………………………………….

Part 2

BURCHARD CO.

Forecasted Contribution Margin Income Statement

Plan 1

Plan 2

Sales* …………………………………………………………………

$1,000,000

$1,080,000

Variable costs** …………………………………………………..

300,000

270,000

Fixed costs ……………………………………………………….

525,000

52,500

85,500

Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 18

Problem 18-7A (50 minutes)

Part 1 BREAK–EVEN ANALYSIS ASSUMING USE OF SAME MATERIALS

Step 1: Compute break-even in composite units—Use equation in Exhibit 18.29

*To compute the contribution margin per composite unit

Unit Sales Price

Unit Variable Costs

5 units of Red

@ $20 per unit…………………………………………..

@ $12 per unit…………………………………………..

$100

$ 60

Thus:

Contribution margin per composite unit = $370 – $248 = $122

Contribution margin ratio (rounded) = $122 / $370 = 32.97%

Step 2: Compute break-even in individual product unit sales

Step 3: Compute break-even in individual product dollar sales

Dollar sales of Red at break-even: 10,250 units x $20 = $205,000

Crossfoot Step 3 total with that from formula ($235 rounding difference):

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Problem 18–7A (Continued)

Part 2 BREAK–EVEN ANALYSIS ASSUMING USE OF NEW MATERIALS

Step 1: Compute break-even in composite units—Use equation in Exhibit 18.29

*To compute the contribution margin per composite unit

Unit Sales Price

Unit Variable Costs

4 units of White

5 units of Red

Selling price of a composite unit ……………………..

Variable cost of a composite unit …………………….

$370

$150

Thus:

Contribution margin per composite unit = $370 – $150 = $220

Contribution margin ratio (rounded) = $220/ $370 = 59.46%

Step 2: Compute break-even in individual product unit sales

Step 3: Compute break-even in individual product dollar sales

Dollar sales of Red at break-even: 6,820 units x $20 = $136,400

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PROBLEM SET B

Problem 18-1B (25 minutes)

Parts 1 and 2

Gilmore Company

Contribution Margin Income Statement

For Year Ended December 31, 2019

(12,000 units) Per unit % of sales

Sales ($18 x 12,000) ………………………..

$216,000

$18.000

100.00%

Variable costs

Plastic for CD sets ………………………..

$ 1,500

$0.125

Contribution margin ……………………….

$14.625

Fixed costs

Net income ………………………………………

The contribution margin per unit is $14.625, and the contribution margin ratio is

81.25%.

Part 3 Analysis Component

Contribution margin shows how much of total sales are available to cover

fixed costs and contribute to operating income. This is why the title for this