Chapter 6 – Weygandt Managerial 7e
Challenge Exercises Solutions
Solution
CE6-1
(a)
(1) Booth Company
CVP Income Statement
For the year ended December 31, 2017
Sales (75,000 units x $25/unit)……………………………………… $1,875,000
(2) Booth Company
CVP Income Statement
For the year ended December 31, 2017
Sales (78,000 units x $23/unit)…………………………………….…$1,794,000
Variable Costs (78,000 units x $12/unit…………………………………936,000
(b) Booth Company
CVP Income Statement
For the year ended December 31, 2017
Sales (67,500 units x $28/unit)…………………………………………$1,890,000
Variable Costs (67,500 units x $17.25/unit…………………….……….1,164,375
(c) Booth Company
CVP Income Statement
For the year ended December 31, 2017
Sales (75,000 units x $28/unit)………………………… ………………$2,100,000
Variable Costs (75,000 units x $17.75/unit………….…………………..1,331,250
Solution
CE 6-2
(a) Operating leverage = Contribution margin / Net income
Personal Service System Automated Self-Service System
(b) Increase in sales = $250,000/$2,500,000 = 10% increase
Personal Service System = 1.25 x 10% = 12.5% increase in net income with 10%
increase in sales
(c) Margin of safety ratio = (Actual sales – Break-even sales) / Actual sales
Personal Service System:
Break even = Fixed Costs / Contribution margin ratio = $125,000 / ($625,000 / $2,500,000)
= $125,000 / .25
Automated Self-Service System:
Break even = Fixed Costs / Contribution margin ratio = $875,000 / ($1,375,000 / $2,500,000)
= $875,000 / .55
(d) (1) Blended System
Contribution Margin 1,000,000
Net income 500,000 = 2.00 operating leverage
CE 6-2 solution (continued)
(3)
Break even = Fixed Costs / Contribution margin ratio = $500,000 / ($1,000,000 / $2,500,000)
= $500,000 / .40
= $1,250,000