Accounting Chapter 18 Its cost structure includes more fixed costs

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Problem 18-3B (Continued)

Part 3 continued

Fixed costs + Target income

Required sales in units = Contribution margin per unit

Problem 18-4B (60 minutes)

Part 1

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

Product BB: = $100,000 / 30%*

= $333,334 (rounded up to dollar)

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Problem 18-4B (continued)

Part 2

Next year’s contribution margin income statements for each product

assuming sales decline to 33,000 units with no change in unit sales price.

STAM CO.

Contribution Margin Income Statement

Product BB

Product TT

Sales* ………………………………..

$528,000

$ 528,000

Part 3

Next year’s contribution margin income statements for each product

assuming sales increase to 64,000 units with no change in unit sales price.

STAM CO.

Contribution Margin Income Statement

Product BB

Product TT

Sales* ………………………………..

$1,024,000

Part 4

Product TT

If sales of each product increase to 64,000 units, Product TT would

experience the greater increase in income. Its cost structure includes more

fixed costs, which remain constant as sales increase.

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Problem 18–5B (45 minutes)

Part 1

Contribution margin per unit

(a)

With new

material

(b)

With new

material and

price increase

Sales price per unit

Current ………………………………………………………….

With price increase ………………………………………..

$28

$30

Part 2

Contribution Margin Income Statements

(a)

With new

material

(b)

With new

material and

price increase

Sales* ……………………………………………………

$840,000

$750,000

Variable costs** ……………………………………..

480,000

400,000

Fixed costs ……………………………………………

225,000

Part 3

No. Based on (next year’s) income computed in part 2, the company

should not increase its selling price.

1153

Problem 18-6B (40 minutes)

Part 1

(a) Break-even in unit sales = Fixed costs / Contribution margin per unit

= $42,000 / $140*

= 300 units

Part 2

HIP-HOP CO.

Contribution Margin Income Statement (at Break-Even)—Keyboards

Sales (300 x $350) …………………………………………………………….

$105,000

Variable costs (300 x $210) ……………………………………………….

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

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Problem 18-6B (Continued)

Part 3

Hip-Hop Company CVP chart

$150,000

$200,000

$250,000

Sales

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Problem 18-7B (25 minutes)

2. Break-even point = Fixed costs = $520,000

in units Weighted-average contribution margin $26

3. Revised weighted-average contribution margin

= ($34 x 60%) + ($24 x 40%) = $30

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SERIAL PROBLEM — SP 18

Serial Problem, Business Solutions (20 minutes)

1. Weighted-average contribution margin = ($500 x 60%) + ($250 x 40%) = $400

Accounting Analysis — AA 18-1

Note: $ in millions

1. Degree of operating leverage = Contribution margin = $2,400,000,000 = 6.0

(DOL) Income $400,000,000

Wild and Shaw, Financial & Managerial Accounting 9e Solutions Manual: Chapter 18

Comparative Analysis — AA 18-2

1.

Contribution Margin Income Statements

$ millions Apple Google

Sales …………………………………..

$260,174

$161,857

2.

$ millions Apple Google

Contribution margin ……………

$138,140

$ 75,555

3. Apple. Apple has a higher degree of operating leverage. If unit sales

decline, Apple will experience a larger decline in income.

Extended Analysis — AA 18-3

1.

$ millions

Samsung

Apple

Contribution margin ……………..

$74,612

$138,140

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DISCUSSION QUESTIONS

1. A variable cost is one that varies proportionately with the volume of activity. Direct

2. Within the relevant range of activity, variable costs per unit stay the same (remain

constant) when output volume changes.

3. Within the relevant range of activity, fixed costs per unit decrease when output volume

4. Cost-volume-profit analysis requires the number of units sold, sales price per unit,

variable costs per unit, and fixed costs (in total).

5. A mixed cost include both a variable and a fixed component. Salesperson

6. Definition: Contribution margin per unit = Sales price per unit – Variable costs per unit.

7. Definition: Contribution margin ratio = Contribution margin per unit / Sales price per

8. First, the contribution margin income statement classifies costs and expenses as

variable or fixed. A traditional income statement classifies costs as product or period.

9. A CVP analysis for a manufacturing company is simplified by assuming that the

10. Margin of safety is the excess of expected sales over the break-even sales level. It is

the amount by which sales could drop before a net loss is incurred.

11. The relevant range of operations is the normal operating range for a business. It

12. Three common methods for measuring cost behavior are: the scatter diagram, the

high-low method, and least-squares regression.

13. A scatter diagram is used to display the relation between past costs and sales

14. At break-even, income is zero. Break-even is the point where sales equals fixed plus

variable costs.

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15. The four assumptions in CVP analysis are: costs can be classified as variable or fixed,

17. Multiproduct CVP analysis assumes that sales mix of different products is known and

remains constant during the planning period.

18. The degree of operating leverage is a measure of the relative size of fixed costs in a

company’s cost structure. It is computed as the total contribution margin (in dollars)

divided by the income (in dollars).

19. Apple’s primary variable costs in making tablet computers are: direct materials

20. Apple manufactures several different types of products (e.g. computers, phones, and

21. A 65% increase in sales of a popular smartphone model of Samsung is likely viewed

as large. When this occurs, the sales and cost structures are likely to change.

22. If units produced equals units sold, no conversion is necessary. If production

exceeds sales, absorption costing income can be determined by adding [increase in

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Ethics Challenge — BTN 18-1

Instructor note: This question can serve to generate class discussion on

cost analysis and estimation. Discussion can focus on accounting,

business, and other ethical concerns.

MEMORANDUM

To: “Mechanics” and “Owners”

From: Your name

RE: Analysis of labor costs for survey

Date: Current date

The memorandum should include many of the following points:

Objectivity: A statement about the need to be objective in the analysis. Both

ethical and professional concerns should motivate the preparer’s desire for

objectivity.

Cost Accounting Estimation: The memorandum should outline how cost

Business Concerns: The memorandum should point out that the repair

business should follow established business practices for setting cost

estimates. There should also be an expressed concern of fairness for the

Mechanic-Related Issues: The memorandum should also be concerned about

the quality of mechanical work. Is the work being done correctly and is

Wild and Shaw, Financial & Managerial Accounting 9e Solutions Manual: Chapter 18

Communicating in Practice — BTN 18-2

Instructor note: Reports will vary, but a typical report would likely include

assumptions similar to the following.

1. Revenue (salary) assumptions

• Find job that pays a specified amount.

2. Cost assumptions

• Find living accommodations at a specified amount.

Teamwork in Action — BTN 18-3

(a) Questions for school administrators (others are possible)

• Number of students that would attend the theater.

(b) Questions for owners (others are possible)

• List of other potential markets for theater showings during school

days.

Wild and Shaw, Financial & Managerial Accounting 9e Solutions Manual: Chapter 18

Entrepreneurial Decision — BTN 18-4

1. Costs that won’t change regardless of how much candy SmartSweets

(i.e., fixed costs) produces likely include rent, production supervisor

salaries, depreciation on equipment, insurance, and taxes.

3. Tara can use CVP techniques to manage her company. Focusing on

contribution margins enables the company to set selling prices that