Wild and Shaw, Financial & Managerial Accounting 9e Solutions Manual: Chapter 18
1137
Exercise 18-25 (20 minutes)
1. Degree of operating leverage = Contribution margin
Income
= $432,000 / $108,000
= 4.0
3. If sales decrease by 5%, this means 9,120 units will be sold (computed
as 9,600 x 95%). We can then compute the following contribution
margin income statement (assuming this 5% sales decrease).
HUDSON CO.
Contribution Margin Income Statement
For Year Ended December 31
Sales (9,120 x $225) ………………………………..
$2,052,000
Variable costs (9,120 x $180)…………………..
Fixed costs …………………………………………….
Exercise 18-26B (15 minutes)
Computing absorption costing income from variable costing income
Year 1
Year 2
Year 3
Variable costing income ………………………
$110,000
$114,400
$118,950
Wild and Shaw, Financial & Managerial Accounting 9e Solutions Manual: Chapter 18
1138
PROBLEM SET A
Problem 18-1A (20 minutes)
Part 1
Variable costs = = $0.60 per unit
Part 2
Estimates from Part 1 are used to predict total costs at production levels of
220,000 and 240,000 units.
Predictions
(a)
(b)
$220,000 – $64,000
340,000 – 80,000
Wild and Shaw, Financial & Managerial Accounting 9e Solutions Manual: Chapter 18
1139
Problem 18-2A (25 minutes)
Part 1
Tight Drums Company
Contribution Margin Income Statement
For Year Ended December 31
Sales ($500 x 1,000) ………………………….
$500,000
Variable costs
Plastic for casing …………………………...
$17,000
Contribution margin …………………………
Fixed costs
$135,000
Part 2
Contribution margin per unit = Selling price per unit – Total variable costs per unit
Part 3
$0.72
Explanation: For each $1 of sales, $0.72 is available both to cover fixed costs and to
contribute to income; computed as $1 x Contribution margin ratio.
1140
Problem 18-3A (30 minutes)
Part 1
Break-even for next year = Revised fixed costs / Revised contribution margin ratio
Part 2
ASTRO COMPANY
Contribution Margin Income Statement
For Year Ended December 31
Sales (20,000 x $50) ………………………………
$1,000,000
Variable costs (20,000 x $24) …………………
Fixed costs …………………………………………..
Part 3
Fixed costs + Target income
Required sales in dollars = Contribution margin ratio
Wild and Shaw, Financial & Managerial Accounting 9e Solutions Manual: Chapter 18
1141
Problem 18-3A (Continued)
Part 3 continued
Fixed costs + Target income
Required sales in units = Contribution margin per unit
Problem 18-4A (60 minutes)
Part 1
Break-even in dollar sales = Fixed costs / Contribution margin ratio
Product Carvings: = $125,000 / 20%*
= $625,000
Wild and Shaw, Financial & Managerial Accounting 9e Solutions Manual: Chapter 18
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Problem 18-4A (continued)
Part 2
Next year’s contribution margin income statements for each product
assuming sales declines to 30,000 units with no change in unit sales price.
HENNA CO.
Contribution Margin Income Statement
Carvings
Mementos
Sales* ……………………………….
$1,200,000
$1,200,000
Part 3
Next year’s contribution margin income statements for each product
assuming sales increase to 60,000 units with no change in unit sales price.
HENNA CO.
Contribution Margin Income Statement
Carvings
Mementos
Sales* ………………………………
$2,400,000
$2,400,000
Part 4
Mementos
Explanation: If sales decrease to 30,000 units, Mementos experience a
1143
Problem 18-5A (45 minutes)
Part 1
Contribution margin per unit
(a)
With new
material
(b)
With new
material and
price increase
Sales price per unit
Current ……………………………………………………
$25.00
Part 2
Contribution Margin Income Statements
(a)
With new
material
(b)
With new
material and
price increase
Sales* …………………………………………
$1,000,000
$1,080,000
Variable costs** …………………………..
320,000
288,000
Fixed costs …………………………………
525,000
525,000
Part 3
Yes. Based on (next year) income computed in part 2, the company should
increase its selling price, in addition to using the new material.
Wild and Shaw, Financial & Managerial Accounting 9e Solutions Manual: Chapter 18
1144
Problem 18-6A (30 minutes)
Part 1
(a) Break–even in sales units = Fixed costs / Contribution margin per unit
= $270,000 / $60*
= 4,500 units
Part 2
PRAVEEN CO.
Contribution Margin Income Statement (at Break-Even)—Product XT
Sales (4,500 x $200) …………………………………………………………
$900,000
Wild and Shaw, Financial & Managerial Accounting 9e Solutions Manual: Chapter 18
1145
Problem 18-6A (Continued)
For the instructor:
CVP Chart for Praveen Company
$400,000
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
$1,200,000
$1,400,000
Sales
Wild and Shaw, Financial & Managerial Accounting 9e Solutions Manual: Chapter 18
1146
Problem 18-7A (25 minutes)
1. Weighted-average contribution margin = ($7 x 80%) + ($12 x 20%) = $8
2. Break-even point = Fixed costs = $240,000
in units Weighted-average contribution margin $8
3. Revised weighted-average contribution margin
= ($8 x 80%) + ($13 x 20%) = $9
The break-even point increases by 2,000 units (32,000 – 30,000) with the
new equipment.
The number of units of each type of product to sell:
Wild and Shaw, Financial & Managerial Accounting 9e Solutions Manual: Chapter 18
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PROBLEM SET B
Problem 18-1B (20 minutes)
Part 1 Calculation of variable and fixed costs
Part 2
Estimates in Part 1 are used to predict total costs incurred at production
levels of 100,000 and 170,000.
Predictions
Part 3
The scatterplot shows a mixed cost. Total costs are above zero when zero
units are sold, and increase proportionately with the volume of units sold.
$80,000
$100,000
$120,000
Wild and Shaw, Financial & Managerial Accounting 9e Solutions Manual: Chapter 18
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Problem 18-2B (25 minutes)
Part 1
LEGO Company
Contribution Margin Income Statement
For Year Ended December 31
Sales ($20 x 12,000) …………………………………
$240,000
Variable costs
Plastic for LEGO sets …………………………….
$ 3,000
Wages of assembly workers ………………….
Labeling …………………………..……………………
Sales commissions ……………………………….
Fixed costs
Rent on factory ……………………………………..
Factory machinery depreciation …………….
Lease of office equipment ……………………..
Office staff salaries ……………………………….
Administrative salaries ………………………….
120,000
$ 30,680
Part 2
Contribution margin per unit = Selling price per unit – Variable costs per unit
Part 3
$0.825
Explanation: For each $1 of sales, $0.825 is available both to cover fixed costs and to
contribute to income; computed as $1 x Contribution margin ratio.
Wild and Shaw, Financial & Managerial Accounting 9e Solutions Manual: Chapter 18
1149
Problem 18–3B (30 minutes)
Part 1
Break-even for next year = Revised fixed costs / Revised contribution margin ratio
Part 2
RIVERA COMPANY
Contribution Margin Income Statement
For Year Ended December 31
Sales (20,000 x $37.50) …………………………..
$750,000
Variable costs (20,000 x $22.50) ……………..
Fixed costs ……………………………………………
Part 3
Fixed costs + Target income
Required sales in dollars = Contribution margin ratio