SOLUTION
Chapter 6 Waterways Continuing Problem
WCP6
Part 1
(a) Total units = 460,000 + 1,480,000 + 60,000 = 2,000,000
Sales mix
(b)
Sprinklers
Valves
Controllers
Sales price
$26.50
$11.20
$42.50
Variable costs
Manufacturing
13.96
7.95
29.75
8.45
Contribution margin
$11.24
$ 2.75
$ 9.34
Weighted-Average Unit Contribution Margin
Weighted-Avg
Unit CM X
Sales Mix % =
Unit CM
Sprinklers
$11.24
23%
$ 2.59
Valves
74%
Controllers
(c)
Break-even Point in Units
Fixed Costs
$2,360,000*
Sprinklers = 460,000
2,000,000 =23%
Part 2
The small set is the best use of a limited resource as it produces a higher contribution margin
per machine hour.
Small Set
Large Set
Contribution margin per unit
$27*
$ 52**
Part 3
(a)
February
Sales (4,000 X $42.50) $170,000
Variable costs (4,000 X $12.75*) 51,000*
Contribution Margin Ratio
Contribution Margin / Sales = Contribution Margin Ratio
Degree of Operating Leverage
Contribution Margin / Net Income = Degree of Operating Leverage
Break-even Point in Dollars
Fixed Costs / Contribution Margin Ratio = Break-even Point in Dollars
Margin of Safety Ratio
Actual Sales – Break-even Sales / Actual Sales = Margin of Safety Ratio
(b) Waterways has high fixed costs relative to its variable costs. This results in a high degree of
operating leverage. As a consequence, if the market is good and the company’s sales
increase, its net income will increase very rapidly. Its degree of operating leverage of 4.78
Machine hours required