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ACCTG322 (11)
Chapter 7

Chapter 7.pdf

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Department
Accounting
Course
ACCTG322
Professor
Trish Stringer
Semester
Winter

Description
Chapter 7 – Solutions to Recommended Questions Problem 7-18 1. The CM ratio is 60%: Selling price .......................$30....100%.. Variable expenses.....................12.....40% Contribution margin..................$18... 60% 2. Fixed expenses Break-even point in = total sales dollars CM ratio $270,000 = =$450,000 sales 0.60 3. $60,000 increased sales × 60% CM ratio = $36,000 increased contribution margin. Since fixed costs will not change, operating income should also increase by $36,000. 4 a. Contribution margin Degree of operating leverage = Operating income $360,000 = = 4 $90,000 b. 4 × 16% = 64% increase in operating income. In dollars, this increase would be 64% × $90,000 = $57,600. 5. Last Year: Proposed: 23,000 units 29,900 units* Total Per Unit Total Per Unit Sa...s......................$690,000.....$30.00 $789,360 $26.40** Variable expenses.................276,000 12.00 358,800 12.00 Contributmnarg.............414,000 $18.00 430,560 $14.40 Fixed expenses....................270,000 310,000 Operatiigco...e..........$144,000 $120,560 * 23,000 units × 1.3 = 29,900 units ** $30 per unit × (1 – 0.12) = $26.40 per unit No, the changes should not be made since operating income decreases. Page 1 of 13 Chapter 7 – Solutions to Recommended Questions 6. Expected total contribution margin: 23,000 units × 150% × $14 per unit*.......................................$483,000 Present total contribution margin: 23,000 units × $18 per unit................................................414,000.. Incremental contribution margin, and the amount by which advertising can be increased with operating income remaining unchanged..................................... $ 69,000 *$30 – ($12 + $4) = $14 Page 2 of 13 0 7 3* 5 d ase ted d costs. Page 3 of 13 of sales, and shif % % 215,004,000 55 45 and 32% Vanities. The actual we had planned. With less average contribution contribution per dollaronly 43%, as compared to a Consequently, although the company met its % 77,000 0 0 0 40,0$0 100% $500,000 10 8 2 ng income was not met, and the reason the break-even Product anned at 48% Sinks, 20% Mirrors, achieved to provide sufficient contribution margin to cover fixe % 40%,0$0 160,000 30 70 leaconsed statements that the company’s overall VSanikiesMiTrotasl the reason the budgeted operatithe break-even point was higher than mpany met its sales budget of $500,000 for the month, the mix of products sold change CM ratio 0.43 Fixed expenses600 = = = $520,000 in sales eater level of sales had to be Brein total dollar sales substlntialrefgreathratbndgetdde.eh.Tise company’s sales mix was pl ChapterP7robSleutio2s0to Recommended Questions*.21r5,k-0ven$5les:,000 = 43%.to the president: Although the co sales shifted aw Page 4 of 13 51 784 49 816 75 25 45 704 55 576 240 80 € 20 80 20 80 96€384 9€384 60 40 60 40 AlvaroCa naozan Total Alvaro Bazan Total Euros % Euros % Euros % Euros % Euros % Euros % Euros % €280 - € 1200 = €80 or €80 / €1280 ChapterP 7r–oSlelutio2s5to Recommended Questbarg.ni.nsBreak-e.Mvargialosf safety = Fixei+d€e6=p0e/.2s5/Cr€1.ra%io....................0 44........6 Chapter 7 – Solutions to Recommended Questions Problem 7-25 (continued) b. Break-even sales = Fixed expenses ÷ CM ratio = €660 ÷ 0.49 = €1,347 (rounded) Margin of safety = Actual sales - Break-even sales in euros = €1,600 - €1,347 = €253 Margin of safety = Mar gin of safety in euros ÷ Actual sales percentage = €253 ÷ €1,600 = 15.81% 3. The reason for the increase in the break-even point can be traced to the decrease in the company’s average contribution margin ratio when the third product is added. Note from the income statements above that this ratio drops from 55% to 49% with the addition of the third product. This product, called Cano, has a CM ratio of only 25%, which causes the average contribution margin ratio to fall. This problem shows the somewhat tenuous nature of break-even analysis when more than one product is involved. The manager must be very careful of his or her assumptions regarding sales mix when making decisions such as adding or deleting products. It should be pointed out to the president that even though the break-even point is higher with the addition of the third product, the company’s margin of safety is also greater. Notice that the margin of safety increases from €80 to €253 or from 6.25% to 15.81%. Thus, the addition of the new product shifts the company much further from its break-even point, even though the break-even point is higher. Page 5 of 13 Chapter 7 – Solutions to Recommended Questions Problem 7-27 1. a. Sellpric.......................$37.50....100% Variable expenses...................22.50.. 60% Contributmnarg................$15.00 40% SalesVariablexpenses + Fixed expenses + Profits $37.50Q = $22.50Q + $480,000 + $0 $15.00Q $480,000 Q = $480,000 ÷ $15.00 per skateboard Q =32,00skateboards Alternativesolution: Fixed expenses Break-even point = in unit sales CM per unit $480,000 = $15 per skateboard = 32,000 skateboards b. The degree of operating leverage would be: Contribution margin Degree of operating leverage = Operatin g income = $600,000 = 5.0 $120,000 2. The new CM ratio will be: Selling price ..........................$37.50....100%.. Variable expenses........................25.50.....68% Contribution margin.....................$12.00... 32% Page 6 of 13 Chapter 7 – Solutions to Recommended Questions Problem 7-27 (continued) The new break-even point will be: Sales Variabexpenses + Fixed expenses + Profits $37.50Q = $25.50Q + $480,000 + $0 $12.00Q =$480,000 Q = $480,000 ÷ $12.00 per skateboard Q =40,00skateboards Alternativesolution: Break-even point = Fixed expenses in unit sales CM per unit = $480,000 $12 per skateboard = 40,000 skateboards 3.rialesses + Fixed expenses + Profits $37.50Q = $25.50Q + $480,000 + $120,000 $12$0=Q,000 Q = $600,000 ÷ $12.00 per skateboard skat50ar0s = Q Alternativesolution: Fixed expenses + Target profit Unit sales to attain = target profi
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