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Lecture

# Chapter 7 In Class Questions Solutions.pdf

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School
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:
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