22-1
SOLUTION
Chapter 22 Waterways Continuing Problem
WCP22 (Note: All figures are rounded.)
(a)
(1) The contribution margin ratio is 30% ($883,920 $2,937,120):
Waterways Corporation
Contribution Margin Income Statement for Water Control and Timer
For the Year
Unit Cost
(2) Break-even point in units = 538,061 units
Fixed expenses $683,338
Unit CM $1.27 = 538,061 units (rounded)
(3) Margin of safety in dollars = $659,327
Sales $2,937,120
Less: Break-even in dollars 2,277,793
$ 659,327
22-2
(4) Waterways would have to sell an additional 15,794 units.
10% increase in income = $ 20,058.20 $903,978.20
Current income +200,582.00 $1.27 = 711,794 units
(5) Income will increase by $90,284 ($290,866 – $200,582):
Waterways Corporation
Contribution Margin Income Statement for Water Control and Timer
Unit Cost
(b) (1) If the average sales price per unit increased, the contribution margin ratio would
drop by 2% (from 27% to 25%). Net income, however, would increase by $101,650
($762,806 − $661,156). We would give strong consideration to mass-producing the
Waterways Corporation Sprinkler Units (current sales)
Avg per unit
Sales (491,740)
$13,031,110
$ 26.50
100%
Variable expenses: Manufacturing
$6,863,512
Variable expenses: Selling and administrative
Contribution margin
$ 7.13
Fixed expenses: Manufacturing
$2,050,140
Fixed expenses: Selling and administrative
Net income from sprinkler units
$ 661,156
22-3
Waterways Corporation Sprinkler Units (increase price)
Avg per unit
Sales (540,914)
$14,469,449.50
$ 26.75
100%
Waterways Corporation Sprinkler Units (no price change)
Avg per unit
Sales (540,914)
$ 14,334,221
$ 26.50
100%
Variable expenses
10,861,553
20.08
26%
Contribution margin
3,472,668
$ 6.42
24%
Fixed expenses
2,845,090
Net income from sprinkler units
$ 627,578
Variable expenses
10,861,553.12
20.08
Contribution margin
3,607,896.38
$ 6.67
Fixed expenses
2,845,090.00
Net income from sprinkler units
$ 762,806.38