SOLUTION
Chapter 5 Waterways Continuing Problem
WCP5 (Note: All figures are rounded.)
(a) (1) The contribution margin ratio is 35% ($1,023,120 $2,937,120):
WATERWAYS CORPORATION
Contribution Margin Income Statement for Water Control and Timer
For the Year 2017
Per unit
Sales (696,000 units)
$2,923,200
$4.20
100%
Variable expenses
1,900,080
2.73
65%
(2) Break-even point in units = 464,800 units
Fixed expenses $683,256
Unit CM $1.47 = 464,800 units
Break-even point in dollars = $1,952,160
(3) Margin of safety in dollars = $984,960
Sales $2,923,200
Contribution margin
1,023,120
1.47
35%
(4) Waterways would have to sell an additional 23,120 units.
10% increase in income =$ 33,986.40 $1,057,106.40
(5) Income will increase by $74,970 ($414,834 – $339,864):
WATERWAYS CORPORATION
Contribution Margin Income Statement for Water Control and Timer
Per unit
$3,137,400
$4.20
100%
2,039,310
2.73
65%
1.47
35%
(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
$81,137.10 ($751,988.10 – $670,851). We would give strong consideration to mass–
producing the sprinklers. An increase in variable costs is less risky than an increase
in fixed and such a decision can be reversed if it does not result in the projected
increase in sales.
Waterways Corporation Sprinkler Units (current sales)
Per unit
Sales (491,740)
$13,031,110
$26.50
100%
Variable expenses: Manufacturing
$6,863,512
Variable expenses: Selling and administrative
Contribution margin
Fixed expenses: Manufacturing
$2,050,140
Fixed expenses: Selling and administrative
Net income from sprinkler units
Waterways Corporation Sprinkler Units (increase price)
Per unit
Sales (540,914)
$14,442,403.80
$26.70
100%
Variable expenses
10,845,325.70
20.05
75%
(2) If the average sales price did not increase, the contribution margin ratio would drop
3% (from 27% to 24%). Profit would decrease by $27,046 ($670,851 – $643,805).
This definitely would not be in the best interest of the company.
Waterways Corporation Sprinkler Units (no price change)
Per unit
Sales (540,914)
$14,334,221
$26.50
100%
Variable expenses
10,845,326
20.05
76%
Net income from sprinkler units
Contribution margin
3,597,078.10
25%
Fixed expenses
2,845,090.00