CHAPTER 5
SOLUTIONS TO EXERCISES—SET B
EXERCISE 5-1 B
(a)
(b) The relevant range is 4,000 – 9,000 units of output since a straight-line
relationship exists for both direct materials and rent within this range.
(c)
Variable cost per unit
Within the relevant range
=
Difference in cost
Difference in units
9,000 – 4,000
$15,000*
5,000*
(d) Fixed cost within the
relevant range = $8,000
EXERCISE 5-2B
(a) Maintenance Costs:
= = $3.20 variable cost per machine hour
(b)
$5,000
$2,000
Total Cost Line
$4,400
$4,000
$3,000
Variable Cost Element
$4,500–$2,900
800–300
$1,600
500
EXERCISE 5-3B
(a) Maintenance Costs:
= $.50 variable cost per machine hour
Activity Level
High
Low
Total cost
Less: Variable costs
$6,000
$2,500
(b)
$5,000
$6,000
$4,000
Variable Cost Element
$3,000
$6,000 – $2,500
10,000 – 3,000 =$3,500
7,000
Total fixed costs
EXERCISE 5-4B
(a)
Cost
Fixed
Variable
Mixed
Direct materials
X
Direct labor
X
Utilities
X
(b) Fixed costs = $1,000 + $1,800 + $2,400
= $5,200
Variable costs to produce 4,000 units = $7,500 + $15,000 + $5,500
= $28,000
Maintenance:
Variable cost to produce 4,000 units = $1,400 – $200
= $1,200
Variable cost per unit = $1,200/4,000 units
= $.30 per unit
Property taxes
X
Indirect labor
X
Supervisory salaries
X
Maintenance
X
Depreciation
X
EXERCISE 5-5B
(a)
Contribution margin per lawn
Contribution margin per lawn
=
=
$70 – ($15 + $7 + $6)
$42
(b) Break-even point in dollars = 120 lawns X $70 per lawn
= $8,400 per month
OR
EXERCISE 5-6B
(1)
Contribution margin per room
Contribution margin per room
=
=
$120 – ($32 + $40)
$48
(2) Break-even point in dollars = 375 rooms X $120 per room
= $45,000 per month
EXERCISE 5-7B
(a) Contribution margin in dollars: Sales = 600 X $90 = $54,000
Variable costs = $54,000 X .60 = 32,400
Contribution margin $21,600
(b) Breakeven sales (in dollars):
$18,000
= $45,000
40%
$18,000
EXERCISE 5-8B
(a)
(1) Contribution margin ratio is:
$43,200
= 75%
$57,600
Break-even point in dollars =
= $24,000
(2) Round-trip fare =
$57,600
= $40
1,440 fares
(b) At the break-even point fixed costs and contribution margin are equal.
EXERCISE 5-9B
(a) Unit contribution margin =
=
$105,000
(420,000 ÷ $8)
(b) Fixed costs = Breakeven sales in units X Unit contribution
margin
= ($450,000 ÷ $8.00) X $2
= $112,500
OR
units in sales Breakeven
costs Fixed
EXERCISE 5-10B
(a) AMBER COMPANY
CVP Income Statement
For the Month Ended September 30, 2017
Total
Per Unit
Sales (720 video game consoles) ……………… $360,000 $500
Variable costs …………………………………………. 252,000 350
(b) Sales = Variable costs + Fixed costs
$500X = $350X + $72,000
(c) AMBER COMPANY
CVP Income Statement
For the Month Ended September 30, 2017
Total
Per Unit
Sales (480 video game consoles)………………. $240,000 $500
EXERCISE 5-11B
(a) Sales = Variable cost + Fixed cost + Target net income
$180X = $90X + $540,000 + $90,000
EXERCISE 5-11B (Continued)
OR
Units sold in 2016 =
$540,000 + $90,000
= 7,000 units
$180 − $90
(c)
$540,000 + $162,000
= 7,000 units, where X = new selling price
X − $90
EXERCISE 5-12B
1. Unit sales price = $350,000 ÷ 5,000 units = $70
2. Reduce variable costs to 70% of sales.
$540,000 + $162,000*
EXERCISE 5-13B
$3,200
Sales Line
DOLLARS (000)
2,800
Breakeven Point
2,000
1,600
1,200
800
Fixed Cost Line
400
100
200
300
400
500
600
700
800
Number of Units (in thousands)
(b) (1) Breakeven sales in units:
$4X = $2.50X + $870,000
(2) Breakeven sales in dollars:
X = .625X + $870,000
(c) (1) Margin of safety in dollars: $2,900,000 – $2,320,000 = $580,000
EXERCISE 5-14B
(a) Contribution ratio = Contribution margin ÷ Sales
($50 – $10) ÷ $50 = 80%
SOLUTIONS TO PROBLEMS—SET C
PROBLEM 5-1C
(a)
Variable costs (per haircut)
Fixed costs (per month)
Barbers’ commission $2.00
Barbers’ salaries $ 9,600
(b)
$11X = $3X + $11,200
1,400 haircuts X $11 = $15,400
(c)
18
Breakeven Point
Sales Line
DOLLARS (000)
15
Total Cost Line
12
Fixed Cost Line
6
3
300
600
900
1,200
1,500
1,800
Number of Haircuts
Total variable $3.00
Utilities 300
PROBLEM 5-2C
(a) HAWKINS COMPANY
CVP Income Statement (Estimated)
For the Year Ending December 31, 2017
Net sales ………………………………………… $2,000,000
Variable expenses
Cost of goods sold …………………… $880,000 (1)
Selling expenses ……………………… 80,000
Fixed expenses
Cost of goods sold …………………… 280,000
(1) Direct materials $290,000 + direct labor $370,000 + variable manufacturing
overhead $220,000.
(b) Variable costs = 50% of sales ($1,000,000 ÷ $2,000,000) or $.25 per bottle
($.50 X 50%). Total fixed costs = $500,000.
(c) Contribution margin ratio = ($.50 – $.25) ÷ $.50
= 50%
PROBLEM 5-3C
(a) Sales were $1,600,000 and variable expenses were $1,040,000, which
means contribution margin was $560,000 and CM ratio was 35%. Fixed
expenses were $840,000. Therefore, the breakeven point in dollars is:
(b) 1. The effect of this alternative is to increase the selling price per unit to
$35 ($1,600,000 ÷ 64,000) X 140%). Total sales become $2,240,000
2. The effects of this alternative are to change total fixed costs to $670,000
($840,000 – $170,000) and to change the contribution margin ratio to .30
[($1,600,000 – $1,040,000 – $80,000) ÷ $1,600,000]. The new breakeven
point is:
(
1
8
,
0
0
0
X
$
3
0
)
–
(
1
3
,
5
0
0
X
$
3
0
)
(
1
8
,
0
0
0
X
$
3
0
)
PROBLEM 5-4C
(a) Current breakeven point: $30X = $18X + $162,000
(where X = pairs of shoes)
(b) Current margin of safety percentage =
(c) EASY-FIT SHOE STORE
CVP Income Statement
Current
New
Net income
Sales (18,000 X $30)
Variable expenses (18,000 X $18)
$540,000
324,000
$616,000
396,000
(22,000 X $28)
(22,000 X $18)
PROBLEM 5-5C
(a)
(1)
Current Year
Net sales
Variable costs
Direct materials
$2,500,000
600,000
Current Year
Projected Year
Contribution margin
Sales
Variable costs
Direct materials
Direct labor
$2,500,000
600,000
425,000
X 1.2
X 1.2
X 1.2
$3,000,000
720,000
510,000
(2)
Fixed Costs
Current Year
Projected Year
Total fixed costs
Manufacturing overhead ($525,000 X .80)
$ 420,000
$ 420,000
Contribution margin
PROBLEM 5-5C (Continued)
(b) Unit selling price = $2,500,000 ÷ 100,000 = $25
Unit variable cost = $1,400,000 ÷ 100,000 = $14
(c) Sales dollars
required for
=
(Fixed costs
+
Target net income)
÷
Contribution margin ratio
income
=
+
÷
(d) Margin of safety
ratio
=
(Expected sales
–
Break-even
sales)
÷
Expected sales
Break-even point in units
=
Fixed costs
÷
Unit contribution margin
Break-even point in dollars
Fixed costs
÷
Contribution margin ratio
PROBLEM 5-6C
(a) (1) Let variable selling and administrative expenses = VSA
Sales – Variable cost of goods sold – VSA = Contribution Margin
(2) Let fixed manufacturing overhead = FMO
Sales – Variable cost of goods sold – FMO = Gross profit
(3) Let fixed selling and administrative expenses = FSA
Contribution margin ratio = $117,000 ÷ $1,300,000 = 9%
Contribution margin at break-even = $1,350,000 X 9% = $121,500
(b) Incremental sales = $1,300,000 X 15% = $195,000
Incremental contribution margin = $195,000 X 9% = $17,550