Class Notes (838,371)
Canada (510,867)
Accounting (108)
ACCTG322 (19)
Lecture

Chapter 7 In Class Questions Solutions.pdf

5 Pages
132 Views
Unlock Document

Department
Accounting
Course
ACCTG322
Professor
Trish Stringer
Semester
Winter

Description
In Class #7.1 – Break-even Analysis; Target Profit; Margin of Safety; CM Ratio Required 1: What is the monthly break-even point in units sold and in sales dollars? VaSiasleenses + Fixed expenses + Profits $40Q = $28Q + $150,000 + $0 $1=0,000 Q = $150,000 ÷ $12 per unit Q = 12,500 units, or at $40 per unit, $500,000 Alternatively: Break-even point Fixed expenses in unit sales = Unit contribution mar gin $150,000 = =12,500 units $12 per unit or, at $40 per unit, $500,000. Required 2: Without performing computations, what is the total contribution margin at the break-even point? The contribution margin at the break-even point is $150,000 since at that point it must equal the fixed expenses. Required 3: How many units would have to be sold each month to earn a target profit of $18,000? Use the contribution margin method. Verify your answer by preparing a contribution format income statement at the target level of sales. Units sold to attain Fixed expenses + Target profit = target profit Unit contribution margin $150,000 + $18,000 = $12 per unit =14,000 units Total Unit Sales (14,000 units × $40 per unit).......................$560,000.....$40 Variable expenses (14,000 units × $28 per unit)............................392,000......28. Contribution margin 168,000 $12 (14,000 units × $12 per unit)............................................ Fixed expenses...............................................150,000............... Operating income............................................$ 18,000............. Required 4: Refer to the original data. Compute the company’s margin of safety in both dollar and percentage terms. Margin of safety in dollar terms: Margin of safety in dollars = Total sales - Break-even sales = $600,000 - $500,000 = $100,000 Margin of safety in percentage terms: Margin of safety in dollars Margin of safety = percentage Total sales $100,000 = = 16.7% (rounded) $600,000 Required 5: What is the company’s CM ratio? If monthly sales increase by $80,000 and there is no change in fixed expenses, by how much would you expect monthly operating income to increase? The CM ratio is 30%. Expected total contribution margin: $680,000 × 30%....................$204,000.. Present total contribution margin: $600,000 × 30%......................180,000.... Increased contribution margin.........................................$ 24,000................. Alternativesolution: $80,000 incremental sales × 30% CM ratio = $24,000 Since in this case the company’s fixed expenses will not change, monthly operating income will increase by the amount of the increased contribution margin, $24,000. In Class #7.2 - Compute and Use the degree of Operating Leverage Required 1: Compute the company’s degree of operating leverage. The company’s degree of operating leverage would be computed as follows: Contributionmargin........................$36,000 ÷Operatingincome..........................$12,000 Degree of operating leverage................ 3.0 Required 2: Using the degree of operating leverage, estimate the impact on operating income of a 10% increase in sales. A 10% increase in sales should result in a 30% increase in operating income, computed as follows: Degree of operating leverage..............................................3.0............... × Percent increase in sales................................................10%................. Estimated percent increase in operating income.............................30%.. Required 3: Verify your estimate from part (2) above by constructing a new contribution format income statement for the company assuming a 10% increase in sales. The new income statement reflecting the change in sales would be:
More Less

Related notes for ACCTG322

Log In


OR

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


OR

By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.


Submit