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Break-Even Point and Cost-Volume-Profit Analysis: Questions
Break-Even Point and Cost-Volume-Profit Analysis: Questions
CHAPTER 9
QUESTIONS
1. The variable costing income statement classifies costs by the way they react
relative to changes in volume. Variable costs are deducted from revenues to
determine contribution margin and then fixed costs are deducted from contribution
margin to determine operating profit. Breakeven analysis involves a study of
fixed costs, variable costs, and revenues to determine the volume at which total
costs equal total revenues. Hence, variable costing provides the variable and fixed
cost classifications needed to compute breakeven. The absorption costing income
statement uses functional classifications—manufacturing and nonmanufacturing
costs—to compute gross profit and operating income, respectively. A functional
classification requires a cost to be classified based on the reason it was incurred,
i.e., selling, administrative, or production. This classification does not separate
variable from fixed costs and is therefore not useful in computing breakeven.
2. The breakeven point is the starting point for CVP analysis, because before a
company can earn profits, it must first cover all of its variable and fixed costs; the
point at which all costs are just covered is the breakeven point. The formula
approach requires solving for the exact breakeven using the following algebraic
equation: R(X) – V(X) – FC = 0; where R is revenue per unit, X is volume, V is
variable cost per unit, and FC is fixed cost.
The graph approach provides a visual relationship between revenues and costs.
The breakeven point is where the total revenue line intersects the total cost line
on the traditional or costvolumeprofit graph or where the profit line intersects
the xaxis on the profitvolume graph. Unlike the formula approach, the graph
approach does not provide a precise solution because exact points cannot be
determined from a visual view of the graph.
The income statement approach requires preparing an income statement to prove
the accuracy of the computations of breakeven. Only by trialanderror can the
exact breakeven be determined using the income statement approach.
3. The contribution margin ratio is contribution margin per unit divided by selling
price per unit. It represents the proportion of revenue that remains after variable
costs are covered. The contribution margin ratio can be used to calculate break
even in sales dollars by dividing fixed costs by the contribution margin ratio.
4. The usefulness of CVP analysis is its ability to clearly forecast income expected to
result from the shortrun interplay of cost, volume, price, and quantity. It is often
useful in analyzing current problems regarding product mix, make or buy, sell or
process further, and pricing.
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6 Chapter 9
In the long run, however, all of these factors and their relationships and the
assumptions that underlie CVP regarding these factors are likely to change. This
emphasizes that CVP only holds true for the short run. Results must be
recalculated periodically to maintain validity.
6. If the company includes more of its higher contribution margin products—
squigees—than its lower contribution margin products—widgees—in its
multiproduct mix, then its weighted average contribution margin will be higher
and its breakeven point lower. This is because the contribution margin is
weighted based on the relative quantities of each product. In the contribution
margin weighting process, the product making up the larger proportion of the bag
has the greatest impact on the average contribution margin. Previously, the
product widgees, with the lowest contribution margin had the greater impact on
the average contribution margin. However when the sales mix changed, the
product squigees, with the higher contribution margin, has the greater impact on
the average contribution margin.
7. Margin of safety is the difference between actual or projected sales and break
even level sales. Margin of safety can be expressed in units, in dollars, or as a
percentage of total sales dollars. It identifies the amount by which sales could fall
and still leave the firm’s bottom line in the black. Margin of safety measures
provide either comfort or risk depending on whether the margin of safety is
positive or negative. Operating leverage refers to the amount of fixed costs relative
to variable costs in a company’s cost structure. It indicates how sensitive a
company’s sales are to sales volume increases and decreases.
Higher operating leverage is associated with a higher proportion of fixed costs;
lower operating leverage is associated with a lower level of fixed costs. The level
of operating leverage varies with the level of revenues. Further, operating leverage
provides information about how profit will change when revenue changes. High
operating leverage indicates that the level of profit is very sensitive to a change in
revenue level. The reverse is true for low operating leverage. Margin of safety
percentage is 1 ÷ Degree of operating leverage; degree of operating leverage is 1
÷ Margin of safety percentage. Thus, the margin of safety percentage is the
reciprocal of the degree of operating leverage and the degree of operating level is
the reciprocal of the margin of safety percentage.
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Chapter 9
EXERCISES
a. Ingredients $ 56,000
Labor 26,000
Variable overhead 48,000
Total variable cost $ 130,000
Divided by units ÷ 104,000
Variable production cost per unit $1.25
b. Variable cost of goods sold = 98,000 × $1.25
= $122,500
c. and d.
Dollars Percent
Contribution margin ratio is:
Sales (98,000 × $3.10) $ 303,800 100
Less variable costs
Cost of goods sold $122,500
Variable selling & admin. 10,000
(132,500) 44
Contribution margin and ratio $ 171,300 56
Contribution margin per unit = $171,300 ÷ 98,000 = $1.75 per bottle (rounded)
b. Contribution margin per unit:
Revenue $450,000
Less variable costs
Cost of goods sold (180,000 × $1.00) $180,000
Selling and administrative 90,000 270,000
Contribution margin $180,000
Divided by units sold ÷180,000
Contribution margin per unit $1.00
c. Top Disc
Income Statement
For 2013
Sales revenue $ 450,000
Less variable costs
Cost of goods sold (180,000 × $1.00) $180,000
Selling and administrative 90,000 (270,000)
Contribution margin $ 180,000
Less fixed expenses
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8 Chapter 9
Manufacturing overhead $112,500
Selling and administrative 100,000
(212,500)
Net loss $ (32,500)
b. Total costs rise by the amount of variable costs, $21
c. Total pretax profit rises at the rate of the CM per unit, $25
b. In dollars breakeven = 3,000 × $70 = $210,000
b. Breakeven point in sales dollars = 1,150 × $600 = $690,000
d. Breakeven point would be $339,000 ÷ ($600 $300) = 1,130
rings
b.
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Chapter 9
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10 Chapter 9
c. Breakeven point
d. Graph (b) demonstrates how total costs and total revenues change as
volume changes. Profit or loss is the distance between the total revenue and
total cost lines. In graph (c), variable costs are not explicitly shown but can be
inferred as the distance between the total cost and fixed cost lines. Graph (c)
shows only how profit changes with changes in volume. The shaded area to
the right of the profit line is the profit area; the shaded area to the left is the
loss area. No actual revenues or costs can be determined by looking at this
graph.
e. Pittsburg Tar Co.
Income Statement
For the Year Ended 2013
Sales (11,600 gal. × $8 per gal.) $92,800
Variable costs
Production (11,600 gal. × $3.00 per gal.) $34,800
Selling (11,600 × $0.50 per gal.) 5,800 40,600
Contribution margin $52,200
Fixed costs
Production $46,000
Selling and administrative 6,200 52,200
Net income $ 0
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Chapter 9
Let S = sales
Then S 0.7S = $900,000
0.3S = $900,000
S = $3,000,000
Then the minimum selling price is $3,000,000 ÷ 30,000 units = $100.
15. a. Breakeven in units is $260,000 ÷ ($1,800 $1,000) = 325 garden sheds.
b. To earn a pretax profit of $200,000 = ($260,000 + $200,000) ÷ $800 = 575
garden sheds
c. To earn a pretax profit of $280,000 = ($260,000 + $280,000) ÷ $800 = 675
garden sheds
b. Contribution margin ratio = Contribution margin ÷ Sales
$108 ÷ $180 = 60%
c. Breakeven in units is fixed costs ÷ Contribution margin per unit
$62,640 ÷ $108 = 580 units
e. To earn $51,840 in pretax profit, Austin
Automotive must sell:
($62,640 + $51,840) ÷ $108 = 1,060 units
17. a. Convert aftertax to pretax profit: $182,000 ÷ (1 0.35) = $280,000
The number of garden sheds that must be sold to generate $280,000 =
($260,000 + $280,000) ÷ $800 = 675 garden sheds.
b. Let R = revenue; then 0.08R = Aftertax income desired
Beforetax income = 0.08R ÷ (1 – 0.35) = 0.123R
Revenue – Variable costs – Fixed costs = Income before tax
Let X = Units sold
SP(X) – VC(X) – FC = Income before tax
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12 Chapter 9
$1,800X $1,000X $260,000 = 0.123($1,800)X
$800X $260,000 = $221.4X
$578.6X = $260,000
X = 450 units (rounded) sold to earn 8 percent of revenue after tax
Amount of revenue = 450 × $1,800 = $810,000
Check: $810,000 × 0.08 = $64,800 aftertax income needed (round to
$65,000) $64,800 ÷ 0.65 = $99,692 beforetax income (round to
$100,000) $1,800(450) $1,000(450) $260,000 = $100,000
(beforetax income)
$100,000 0.35($100,000) = $100,000 $35,000 = $65,000
$65,000 ÷ $810,000 = 8%
b. Convert the aftertax to pretax profit:
$7.20 ÷ $180 = 0.04, or 4%; 0.04 ÷ (1 – 0.30) = 5.7% of sales
A pretax return on sales of 5.7 percent is required to generate an aftertax
profit of $7.20 per unit
Let R = the Level of revenue that generates a pretax return of 5.7%:
Variable costs = ($30 + $25 + 17) ÷ $180 = 0.4, or 0.4R
R – $62,640 – 0.4R = 0.057R
0.543R = $62,640
R = $115,359
$115,359 ÷ $180 = 640.88 or 641 units (rounded)
19. Let Y = Level of sales generating income equal to 30% of sales, then:
Y – 0.60Y – ($25,000 per month × 12 months) = 0.30Y
0.10Y = $300,000
Y = $3,000,000
Since existing sales are $2,250,000, sales would need to increase by $3,000,000
$2,250,000 = $750,000.
Next, let P represent the number of golf carts that must be sold to generate
$1,000,000 in pretax income:
$5,000P $3,000P $370,000 = $1,000,000
$2,000P = $1,370,000
= 685 golf carts
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Chapter 9
b. Find aftertax equivalent of 20%: 20% ÷ (1 0.40) = 33.33%
Variable costs as a percentage of sales: $3,000 ÷ $5,000 = 60%
Let R = Level of revenue that generates a pretax return of 33.33%:
R – 0.6R – $370,000 = 0.3333R
0.0667R = $370,000
R = $5,547,226
Proof: Sales $ 5,547,226
Variable costs (60%) (3,328,336)
Contribution margin $ 2,218,890
Fixed costs
(370,000)
Income before tax $ 1,848,890
Income tax (40%)
(739,556)
Net income $ 1,109,334
$1,109,334 ÷ $5,547,226 = 20%
b. Breakeven: $2,000 ÷ 2,900 = $0.69 (rounded) per passenger
Earn $250: ($2,000 + $250) ÷ 2,900 = $0.78 (rounded)
c. Total variable cost = $2,000 – ($2,000 × 0.80) = $400
Variable cost per passenger = $400 ÷ 2,900 = $0.14 (rounded)
Profit if fare is $0.60 = (2,900 × 0.90 × $0.60) – (2,900 × 0.9 × $0.14)
$1,600 = $(399.40)
Current loss = $1,450 $2,000 = $(550)
County will be better off by $(399.40) – ($550) = $150.60.
d. At a fare of $0.70:
(2,900 × $0.70 × 0.95) – (2,900 × $0.14 × 0.95) $1,600 = $(57.20)
The county would incur a slight loss at a fare of $0.70.
At a fare of $0.90:
(2,900 × $0.90 × 0.90) – (2,900 × $0.14 × 0.90) $1,600 = $383.60
The company would first make a profit when the fare is set at $0.90.
e. Increasing volume will help improve profitability only if the volume change
increases total contribution margin. Because an increase in volume can often
be achieved only with a decrease in price, the change in contribution margin
may be negative rather than positive.
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14 Chapter 9
Ainsley: (50,000 × 1.60 × $28) – (50,000 × 1.60 × $28) $0 = $0
Bard: (50,000 × 1.60 × $28) – (50,000 × 1.60 × $0) $1,400,000 = $840,000
This strategy is best used by Bard.
b. New selling price: $40 × 1.3 = $52
Ainsley: (50,000 × 0.85 × $52) – (50,000 × 0.85 × $28) $0 = $1,020,000
Bard: (50,000 × 0.85 × $52) – (50,000 × 0.85 × $0) $1,400,000 = $810,000
This strategy is best used by Ainsley.
c. Ainsley: (65,000 × $40) – (65,000 × $28) $200,000 = $580,000
Bard: (65,000 × $40) – (65,000 × $0) $1,600,000 = $1,000,000
This strategy is best used by Bard.
b. Sales mix units = ($180,000 + $150,000) ÷ $30 = 11,000 = 33,000 wallets
and 11,000 money clips
Total revenue = (33,000 × $30) + (11,000 × $15) = $1,155,000
c. Equivalent pretax profit = $150,000 ÷ (1 0.40) = $250,000
Sales mix units = ($180,000 + $250,000) ÷ $30 = 14,333.33 = 43,000 wallets
and 14,333 money clips
Total revenue = (43,000 × $30) + (14,333 × $15) = $1,504,995
d. Units of sales mix = $1,155,000 ÷ [(5 × $30) + (2 × $15)] = 6,417 (rounded)
= 32,085 wallets and 12,834 money clips
Income = (32,085 × $8) + (12,834 × $6) $180,000 = $153,684
The sales mix shifted such that the ratio of wallets to money clips declined,
and the breakeven point was reduced because money clips have a higher
contribution margin ratio than money clips. Hence, at a sales level of
$1,155,000, more contribution margin is generated at the actual sales mix than
at the planned sales mix.
Mod = 3 × 168,750 = 506,250 units × $2,200 = $1,113,750,000
Rad = 5 × 168,750 = 843,750 units × $3,700 = 3,121,875,000
Xtreme = 2 × 168,750 = 337,500 units × $6,000 = 2,025,000,000
Revenue to breakeven $6,260,625,000
b.Convert aftertax to pretax income. $1,000,000,000 ÷ (1 0.5) = $2,000,000,000
($2,000,000,000 + $1,080,000,000) ÷ $6,400 = 481,250 bags
Mod = 3 × 481,250 = 1,443,750 units × $2,200 = $ 3,176,250,000
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Chapter 9
Rad = 5 × 481,250 = 2,406,250 units × $3,700 = 8,903,125,000
Xtreme = 2 × 481,250 = 962,500 units × $6,000 = 5,775,000,000
Total revenue needed $17,854,375,000
c. This change will increase the number of units required to break even
because fewer units of Rad and Xtreme, which have the greatest contribution
margin, are being sold and more units of Mod, which has the lowest
contribution margin, are being sold.
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16 Chapter 9
Scooter Contribution Margin
Mod 5 × $300 = $1,500
Rad 4 × $700 = 2,800
Xtreme 1 × $1,000 = 1,000
Total $5,300
Now the contribution margin is $5,300 per bag, which is less than the
contribution margin per bag of $6,400 in (a) above.
d. If Green Rider sells more of its scooters with the greatest contribution
margin (Xtreme) and fewer of the scooters with the lowest contribution
margin (Mod), then fewer scooters would be needed to be sold to break even.
b. Bushels sold Breakeven bushels = Margin of safety
174,000 – 132,000 = 42,000 bushels
(174,000 × $9.60) $1,267,200 = $403,200
$403,200 ÷ $1,670,400 = 24.1%
27. a. Breakeven = Fixed costs ÷ Contribution margin
$450,000 ÷ $30 = 15,000 tires per month
15,000 × $60 = $900,000 per month
b. Profit before tax desired is 25% of sales revenue
PBT = 0.25 × $60 = $15
CM(X) – PBT(X) = FC
$30(X) $15(X) = $450,000
$15(X) = $450,000
X = 30,000 units
c. Degree of operating leverage = Contribution margin ÷ Profit before tax
($30 × 20,000) ÷ $150,000a = 4
a
Profit = Contribution margin – Fixed costs
$30(20,000) $450,000 = $150,000
d. (Total contribution margin × 1.15) = $30 × 20,000 × 1.15 = $690,000
Contribution margin – Fixed cost = Net income
$690,000 $450,000 = $240,000 new net income
Increase in net income is $240,000 $150,000 = $90,000
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Chapter 9
Racine Tire Co.
Income Statement
For the Month XXX
Current Proposed
Sales $60 (20,000; 23,000) $1,200,000 $1,380,000
Less variable expense
$30 (20,000; 23,000)
(600,000)
(690,000)
Contribution margin $ 600,000 $ 690,000
Less fixed costs
(450,000)
(450,000)
Net income $ 150,000 $ 240,000
Breakeven point = $316,600 ÷ 0.40a = $791,500 or 109,931 packages
(rounded)
Margin of safety, dollars: $900,000 $791,500 = $108,500
Margin of safety in units: $108,500 ÷ $7.20 = 15,069 packages (rounded)
a
($7.20 $4.32) ÷ $7.20 = Contribution margin ratio
b. $360,000 ÷ $43,400 = 8.295
c.Income will increase by: 8.295 × 30% = 249%
Proof:
Sales ($7.20 × 125,000 × 1.30) $1,170,000
Variable costs ($4.32 × 125,000 × 1.30)
(702,000)
Contribution margin $ 468,000
Fixed costs
(316,600)
Net income $ 151,400
($151,400 $43,400) ÷ $43,400 = 249%
d. Breakeven point = ($316,600 + $41,200) ÷ 0.40 = $894,500
Sales ($7.20 × 125,000 × 1.15) $1,035,000
Variable costs ($4.32 × 125,000 × 1.15)
(621,000)
Contribution margin $ 414,000
Fixed costs ($316,600 + $41,200)
(357,800)
Net income $ 56,200
Operating leverage = $414,000 ÷ $56,200 = 7.37
29. Substantial cost structure implications must be considered in selecting from
the alternative production technologies. Machinebased technologies will tend to
have much higher levels of fixed costs and lower levels of variable costs than
laborintense technologies. Accordingly, the machinebased technologies will
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18 Chapter 9
have higher operating leverage. Having higher operating leverage means that the
firm’s income will be much more sensitive to changes in the level of sales.
Because higher operating leverage is associated with higher income sensitivity to
volume changes, high operating leverage is desired if future sales are expected to
be increasing. Higher leverage allows net income to grow at a higher rate as sales
increase. Alternatively, if sales will be decreasing, firms will prefer to have low
operating leverage because costs will tend to fall more rapidly as sales diminish.
With high operating leverage, costs will remain more constant as sales drop
causing net income to drop very rapidly.
In an ideal world, one would desire to have a very low level of fixed costs below
the breakeven point and only fixed costs above the breakeven point. If the cost
structure contained only fixed costs, then each dollar of revenue above the break
even point would generate a dollar of income before profit. CVP analysis is useful
to determine when a firm should consider trading variable costs for fixed costs in
order to shift the cost structure from more variable to more fixed, or vice versa.
For a given level of sales, a company with mostly variable costs will have a higher
margin of safety than a similar firm with mostly fixed costs. If a firm had only
variable costs, its sales could fall to zero without causing the firm to incur a loss.
Consequently, its breakeven point is zero. The firm with a high level of fixed
costs would have a much higher breakeven point.
30. An issue in the use of CVP analysis is that CVP analysis requires costs to be
classified as either variable or fixed. The outcome of CVP analysis is sensitive to
variations in this classification. In making decisions that rely on CVP analyses, it
is important to be mindful of the requirement to dichotomize costs between these
two categories (fixed and variable). Further, it is important to recognize that in the
long term, all costs are variable. A problem arises when shortterm decisions have
longterm consequences. In this circumstance, costs will have been incorrectly
considered in the CVP analysis because too many of the costs would have been
classified as fixed. Accordingly, the greatest potential for problems arises in
situations in which a longterm decision is made on the basis of a shortterm
classification of costs. A final observation is that CVP decisions are made in an
incremental fashion. This means that each decision is made independently of all
other decisions. The reality is that past decisions affect future decisions and short
term decisions can affect longterm decisions.
CVP analysis can be used in long, medium, and shortterm decision making. The
key is to use a classification of costs that is appropriate for the time horizon. For
longerterm decisions, newer cost control technologies such as activitybased
costing can be used to determine which costs are likely to vary with decision
alternatives being considered. By relating the cost drivers to the decision at hand,
managers can determine which costs are likely to be affected, and by how much,
by the decision being made.
The breakeven point would be: $100,000 ÷ $20 = 5,000 bags. Since each bag
contains two units of spray, at the breakeven point 5,000 × 2 or 10,000 units of
spray must be sold.
b. At the breakeven point, Total CM = Total FC; and the CM per unit would
be $1,600 ÷ 4,000 = $0.40. If one unit is sold beyond the breakeven point, net
income would rise by $0.40.
c. $10X 0.40($10X) $216,000 = 0.25($10X)
$3.50X = $216,000
X = 61,715 units (rounded)
d. In units: 3,200 – 2,800 = 400 units
In dollars: 400 units × $65 per unit = $26,000
Percentage: $26,000 ÷ ($65 × 3,200) = 12.5%
c. The employees are implying that (1) not addressing the problem is the lesser
of evils because there is no proof that the waste causes cancer; (2) to clean up
the problem may cause the company to become uncompetitive; (3) 10,000
employees could lose their jobs; and (4) the town’s economy could collapse.
The fault with the above rationalizations about the waste not being toxic to
humans lies partially in the fact that the company failed to recognize the
damage to other nonhuman environmental participants. The waste may be
potentially harmful to the fish and other organisms in the river, and the
polluted water is absorbed by the surrounding land (thus polluting the land).
Furthermore, the fishermen sell their polluted catches to outside markets, thus
spreading the effects of the pollution even further.
Fault is also seen in the rationalization because the company falsified the
levels of suspected cancercausing materials in its reports to authorities. If the
company truly believed that no harm was being done to either the people
downstream or the environment, why were the reports falsified? Doing so
instilled a false sense of security in the members of its society (both
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20 Chapter 9
employees and townspeople) regarding their general welfare. If the company
had provided accurate disclosure of toxicity levels, the public would have had
the opportunity to decide whether to remain on their jobs or in the vicinity of
the polluters, look for work elsewhere or relocate to an area where better
conditions exist, or to seek the necessary assistance in requiring the company
to take corrective action.
These rationalizations seem to indicate that unhealthy and unethical acts can
be permitted and tolerated if a large number of directly affected people benefit
without regard for the effects on people or entities that are indirectly affected.
While utilitarianism does look at the greatest good for the greatest number, it
considers all parties—directly and indirectly affected—in making that cost
benefit analysis. The company in this case is not considering the indirect
effects of its actions.
d. The president must take some action to deal with the problem. First, the
dumping should be discontinued altogether until the waste is tested to
determine if it is cancer causing. If it is not, obtain information on the
environmental effects of the dumping and, if not harmful, continue to dump.
The company should then report its findings to the authorities and discontinue
falsifying its reports.
If the waste is cancer causing or causes significant environmental damage, the
company should immediately issue a policy statement that no additional
dumping shall take place. Then the costs of treating the waste to neutralize it
should be compared to other alternatives that might exist or could be created
such as using it as a raw material in another product or introducing alternative
processing methods. The company could solicit the employees’ and
townspeople’s assistance since all have a large vested interest in finding a
solution to the problem. Investigation of how other companies producing the
same waste handle the problem would be helpful; some of this type of
information should be available from the EPA or state environmental
agencies. If other companies are handling the waste in a similar manner, all
companies could be liable for the costs of cleanup, which would disallow any
economic advantage to the other companies. In addition, the company should
investigate the costs of cleaning up the waste (if possible) that has already
been dumped. Since all of these options take time, however, the company will
most likely have to incur additional shortrun costs so that the longrun effects
can be minimized.
b. Variable costs are constant per unit within the relevant range. Labor
productivity will not change.
c. The sales mix remains constant as volume changes within the relevant range.
d. Mixed costs can be accurately separated into their fixed and variable
components.
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Chapter 9
e. All variable costs are constant per unit within the relevant range and total
fixed cost is constant within the relevant range.
f. Sales and production are equal.
g. No capacity additions will be made within a period.
34. Joanna’s calculations assume that the current cost and revenue structure will be
maintained in future periods. Over time productivity can be improved and
revenues can be increased. Closing the business is a longterm decision and CVP
is shortterm analysis. The CVP analysis is based on the assumption that cost and
revenue structures will not change. Over the long term, prices may be increased,
volume may be increased, and cost structures can be improved. Hence, Joanna’s
recommendation should be taken with skepticism, and Aire should examine her
longterm prospects to enhance revenues and reduce costs.
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22 Chapter 9
PROBLEMS
b. Fixed costs in CGS = $400,000 – (100 × $2,800) = $120,000
Only $120,000 of fixed overhead was assigned to CGS, therefore units sold =
$120,000 ÷ $200,000 of units produced = 100 ÷ 0.6 = 167 units (rounded)
c. Because the company manufactured more units than it sold, $80,000 of fixed
overhead was assigned to ending inventories rather than the Cost of Goods
Sold. Accordingly, the company reported breakeven results even though sales
fell far short of the breakeven level.
d. Sales $ 500,000
Variable costs
Production $280,000
Selling 20,000 (300,000)
Contribution margin $ 200,000
Fixed costs
Production $200,000
Selling & admin. 80,000
(280,000)
Operating income (loss) $ (80,000)
e. No, it would not be unethical to present the absorption costing income format.
In fact, that is the most accepted format for reporting outside of the firm. The
lending institution, with adequate information regarding the inventories, can
adjust the income statement to a variable costing format if it desires to do so.
Dollars per Unit Percent
Sales $ 60.00 100%
Variable costs (45.00) (75)
Contribution margin $ 15.00 25%
b. Breakeven point = $975,000 ÷ $15.00 per unit = 65,000 carts
c. Target pretax profit of $900,000
($975,000 + $900,000) ÷ $15.00 per cart = 125,000 carts
d. Target aftertax profit of $750,000
Before tax profit = $750,000 ÷ (1 0.40) = $1,250,000
($975,000 + $1,250,000) ÷ $15 per cart = 148,333 carts (rounded)
e. Selling price $60.00
Variable costs
Manufacturing ($35 × 0.40) 14.00
Manufacturing labor (0.60 × $35 × 0.90) 18.90
Selling 10.00
Contribution margin $17.10
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Chapter 9
Fixed costs:
Manufacturing ($975,000 × 0.40 × 0.90) $351,000
Selling ($975,000 × 0.60) 585,000
Total fixed costs $936,000
Breakeven point = $936,000 ÷ 17.10 = 54,737 carts (rounded up)
The breakeven point will decrease by 10,263 carts
f. Target unit sales 600,000 × 0.25 = 150,000 carts
Sales – VC – FC = $1,350,000
Let X = variable cost per unit
($60 × 150,000) 150,000X $975,000 = $1,350,000
$9,000,000 – 150,000X = $2,325,000
$6,675,000 = 150,000X
X = $44.50
Variable costs will need to be reduced by $0.50 ($45.00 $44.50).
Student answers will vary. No solution provided.
Dollars per Unit Percent
Sales $ 6.50 100.00%
Variable costs (4.00) (61.54)
Contribution margin $ 2.50 38.46%
b. Breakeven point in units = $1,250,000 ÷ $2.50 per unit = 500,000 baseballs
c. Breakeven point in dollars = $1,250,000 ÷ 0.3846 = $3,250,130
d. MS, in units = 960,000 – 500,000 = 460,000 baseballs
MS, in dollars = ($6.50 × 460,000) = $2,990,000
MS, percentage = $2,990,000 ÷ $6,240,000 = 47.9%
e. Current sales (960,000 × $6.50) $ 6,240,000
Variable costs (960,000 × $4) (3,840,000)
Contribution margin $ 2,400,000
Fixed costs (1,250,000)
Income before taxes $ 1,150,000
Degree of operating leverage = $2,400,000 ÷ $1,150,000 = 2.087
Percentage increase in income = 30% × 2.087 = 62.6%
f. Required sales = ($1,250,000 + $1,096,000) ÷ $2.50 per baseball =
938,400 baseballs
g. Pretax equivalent of $750,000 = $750,000 ÷ (1 0.40) = $1,250,000
Required sales = ($1,250,000 + $1,250,000) ÷ $2.50 per baseball =
1,000,000 baseballs
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24 Chapter 9
h. Breakeven point = ($1,250,000 + $50,000) ÷ $2.50 per baseball =
520,000 baseballs
e. Additional sales ($4.40 × 20,000) $ 88,000
Additional variable costs ($4.20 × 20,000) (84,000)
Additional contribution margin $ 4,000
Additional fixed costs
(6,000)
Additional pretax income (loss) $ (2,000)
No, the order should not be accepted as profits will decrease by $2,000.
Even though normal sales would not be affected, regular customers may find
out about the special deal and become upset because their prices have been
undercut. Alternatively, by making this onetime sale at a loss to this
customer, goodwill and future business from this customer could follow.
38. a. Total variable cost = $28 + $12 + $8 = $48
Contribution margin per unit = $70 $48 = $22 per unit
Contribution margin ratio = $22 ÷ $70 = 31.4% (rounded)
Total fixed costs = $10,000 + $24,000 = $34,000
Breakeven point in units = $34,000 ÷ $22 per unit = 1,545 units (rounded)
Breakeven point in dollars = $34,000 ÷ 0.314 = $108,280 (rounded)
b. ($40,000 + $34,000) ÷ 0.314 = $235,669 (rounded)
($235,669 ÷ $70) = 3,367 units (rounded)
c. Convert aftertax earnings to pretax earnings: $40,000 ÷ (1 0.40) = $66,667
Required sales = ($66,667 + $34,000) ÷ 0.314 = $320,596 (rounded)
$320,596 ÷ $70 = 4,580 units (rounded)
d. Convert the aftertax rate of earnings to a pretax rate of earnings:
[20% ÷ (1 0.40)] = 33.33%
Because the CM% is only 31.4%, no level of sales would generate net income
equal to, on a pretax basis, 33.33% of sales.
e. Variable cost savings (5,000 × $6.00) $ 30,000
Additional fixed costs
(40,000)
Decrease in profit $(10,000)
The company should not buy the new sewing machine.
f. Existing CM per unit = $22
CM under proposal = ($70 × 0.90) $48 = $15
Total CM under proposal (3,000 × 1.30 × $15) $ 58,500
Existing CM (3,000 × $22)
(66,000)
Change in CM $ (7,500)
Change in fixed costs (10,000)
Change in net earnings before taxes $ (17,500)
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Chapter 9
No, these two changes should not be made because they would lower pretax
profits by $17,500 relative to existing levels.
39. a. Revenues:
Game tickets ($60,000 × 0.08 $4,800
Airline tickets ($9,000 × 0.10) 900
Hotel bookings ($14,000 × 0.20) 2,800
$ 8,500
Costs:
Advertising $2,200
Rent 1,800
Utilities 500
Other 4,400
(8,900)
Net loss
(400)
b. Increase in revenue ($9,000 × 0.40 × 0.10) $ 360
Increase in cost
(1,200)
Increase in profit $ (840)
No, Weatherby should not incur the $1,200 of advertising expense because it
would cause profit to drop by $840.
c. Increase in revenues:
Game ticket ($8,000 × 0.08) $ 640
Airline ticket ($1,500 × 0.10) 150
Hotel booking ($6,000 × 0.20) 1,200 $ 1,990
Increase in costs:
Rusty’s commission ($1,990 × 0.50) $ 995
Rusty’s wage 400 (1,395)
Increase in profits $ 595
Yes, Weatherby should hire Rusty because it would increase his profits by $595.
d. Increase in revenues:
Airline tickets ($13,000 × 0.10) $ 1,300
Increase in costs:
Rusty’s commission ($1,300 × 0.50) $650
Increase in fixed costs 600
(1,250)
Increase (decrease) $ 50
Because there was at least a slight increase in profits, Weatherby did make a
good decision.
40. a. Total Revenue
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26 Chapter 9
b.
c. The breakeven chart would probably be more helpful. The point could be
made that the club has only 20 members in excess of the breakeven level of
100 members. Additional information should be provided indicating the
contribution margin and contribution margin ratio. Armed with the chart and
the additional information, a very good point could be made for a membership
recruiting project.
41. a. Total sales price per bag:
Commercial ($5,600 × 1) $5,600
Residential ($1,800 × 3) 5,400
$11,000
Total variable costs per bag:
Commercial ($3,800 × 1) $3,800
Residential ($1,000 × 3) 3,000
(6,800)
Total contribution margin $ 4,200
Breakeven point in units = $8,400,000 ÷ $4,200 = 2,000 bags
Commercial: 2,000 × 1 = 2,000 mowers
Residential: 2,000 × 3 = 6,000 mowers
b. ($8,400,000 + $1,260,000) ÷ $4,200 = 2,300 bags
Commercial: 2,300 × 1 = 2,300 mowers
Residential: 2,300 × 3 = 6,900 mowers
Residential: 2,400 × 3 = 7,200 mowers
d. Let X = number of bags that must be sold to produce pretax earnings
equaling 12 percent of sales revenue, then:
$4,200X $8,400,000 = 0.12($11,000X)
X = 2,917 bags (rounded)
Commercial: 2,917 × 1= 2,917 mowers
Residential: 2,917 × 3 = 8,751 mowers
e. Convert the aftertax return to a pretax rate of return:
0.08 ÷ (1 0.40) = 13% (rounded)
$4,200X $8,400,000 = 0.13($11,000X)
X = 3,032 bags (rounded)
Commercial: 3,032 × 1= 3,032 mowers
Residential: 3,032 × 3 = 9,096 mowers
b. Breakeven point = $288,000 ÷ $32 = 9,000 bags per year or 750 bags a month
Ducks: 750 × 1 = 750 per month
Ducklings: 750 × 5 = 3,750 per month
c. Target profit is $96,000 × 12 = $1,152,000
($288,000 + $1,152,000) ÷ $32 = 45,000 bags per year or 3,750 bags a month.
Ducks: 3,750 × 1 = 3,750 per month
Ducklings: 3,750 × 5 = 18,750 per month
d. Ducks Ducklings
Sales $ 24.00 $12.00
Variable costs (12.00) (8.00)
Contribution margin $ 12.00 $ 4.00
Mix × 1 × 9
Total contribution margin $ 12.00 $36.00
Target profit after tax is $31,680.
Pretax profit is $31,680 ÷ (1 0.40) = $52,800 monthly or $633,600 per year.
Breakeven = ($633,600 + $288,000) ÷ $48 = 19,200 bags per year, or 1,600
per month
Units Revenue
Ducks (19,200 × $24) 19,200 $ 460,800
Ducklings (19,200 × 9 × $12) 172,800 2,073,600
Total $2,534,400
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28 Chapter 9
e. [$288,000 + ($8,500 × 12)] ÷ [$12 + ($8 × 5)]
($288,000 + $102,000) ÷ $52 = 7,500
Yes, the company would want to make the change because the breakeven
point is reduced from 9,000 mix units to 7,500 mix units.
43. a. and b.
Total variable costs:
Reindeer Snowmen Flamingos
Variable product cost $12.00 $15.00 $25.00
Variable selling expenses 6.00 4.50 8.00
Variable administrative exp. 3.00 5.50 6.00
Total $21.00 $25.00 $39.00
Contribution margin per “bag” = $19 + 20 + $84 = $123
Breakeven point in units = ($420,000 + $150,000 + $80,178) ÷ $123
= 5,286 “bags”
Units Sold Revenues
Reindeer (5,286 × $40.00) 5,286 $ 211,440
Snowmen (5,286 × 2 × $35.00) 10,572 370,020
Flamingos (5,286 × 4 × $60.00) 21,144 1,268,640
Total $1,850,100
c. Units = ($650,178 + $250,428) ÷ $123 = 7,322 bags
Units Sold Revenues
Reindeer (7,322 × $40.00) 7,322 $ 292,880
Snowmen (7,322 × 2 × $35.00) 14,644 512,540
Flamingos (7,322 × 4 × $60.00) 29,288 1,757,280
Total $2,562,700
d. Pretax profit = $155,718 ÷ (1 0.40) = $259,530
Breakeven in units = ($650,178 + $259,530) ÷ $123 = 7,396 bags
Units Sold Revenues
Reindeer (7,396 × $40.00) 7,396 $ 295,840
Snowmen (7,396 × 2 × $35.00) 14,792 517,720
Flamingos (7,396 × 4 × $60.00) 29,584 1,775,040
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Chapter 9
Total $2,588,600
e. MS bags = 7,396 bags 5,286 bags = 2,110 bags
MS $ = 2,110 × [$40 + ($35 × 2) + ($60 × 4)] = $738,500
MS % = 2,110 ÷ 7,396 = 28.5%
44. a. and b.
Total variable costs:
Oak Hickory Cherry
Direct material $10.40 $6.50 $17.60
Direct labor 3.60 0.80 12.80
Variable overhead 2.00 0.30 3.50
Variable selling 1.00 0.50 4.00
Variable administrative 0.40 0.20
0.60
Total $17.40 $8.30 $38.50
Determination of sales ratio:
Sales in Yards % of Sales Per “Bag”*
Oak 9,000 10.34 3
Hickory 72,000 82.76 24
Cherry 6,000
6.90 2
Total 87,000 100.00 29
*The content per bag is determined by dividing the sales in yards by 3,000.
Contribution Margin Sales
Oak $15.40 × 3 = $ 46.20 $32.80 × 3 = $ 98.40
Hickory $7.70 × 24 = 184.80 $16.00 × 24 = 384.00
Cherry $11.50 × 2 = 23.00 $50.00 × 2 = 100.00
Total $254.00 $582.40
Total fixed costs = $760,000 + $240,000 + $200,000 = $1,200,000
Breakeven point in units = $1,200,000 ÷ $254 = 4,724.409 or 4,725 bags
Oak: 4,725 × 3 = 14,175 square yards
Hickory: 4,725 × 24 = 113,400 square yards
Cherry: 4,725 × 2 = 9,450 square yards
Contribution margin ratio per bag = $254 ÷ $582.40 = 0.4 (rounded)
Breakeven point in dollars = $1,200,000 ÷ 0.4 = $3,000,000
c. ($1,200,000 + $800,000) ÷ $254 = 7,875 bags (rounded)
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30 Chapter 9
Yards Revenue
Oak: 7,875 × 3 = 23,625 × $32.80 = $ 774,900
Hickory: 7,875 × 24 = 189,000 × 16.00 = 3,024,000
Cherry: 7,875 × 2 = 15,750 × 50.00 = 787,500
Total $4,586,400
d. Revenue per bag:
Oak ($32.80 × 3) $ 98.40
Hickory ($16.00 × 24) 384.00
Cherry ($50.00 × 2) 100.00
Total $ 582.40
Contribution margin ratio = $254 ÷ $582.40 = 43.6%
{$1,200,000 + [$680,000 ÷ (1 0.40)]} ÷ 0.436 = $5,351,681
e. Breakeven point in dollars = $1,200,000 ÷ 0.436 = $2,752,294
Margin of safety in dollars = $5,351,681 $2,752,294 = $2,599,387
Margin of safety percentage = $2,599,387 ÷ $5,351,681 = 48.6%
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Chapter 9
45. Fixed costs:
a.
Depreciation $160,000
Labor 320,000
Utilities 158,000
Miscellaneous 100,000
Total $738,000
Total fixed costs $ 738,000
Total variable costs
Coaches: (10 × $52.00 × 360 × 80%) $149,760
Players: (50 × $27.00 × 360 × 80%) 388,800
538,560
Desired profit 240,000
Total required revenue $1,516,560
Guest days:
Coaches: 10 × 360 × 80% = 2,880
Players: 50 × 360 × 80% = 14,400
Total 17,280
Required charge per guest day: $1,516,560 ÷ 17,280 = $87.76 (rounded)
b. Coaches Players
(1)
Sales price per day $240.00 $200.00
Variable costs 52.00 27.00
Contribution margin $188.00 $173.00
CM per “bag” of guest days = $188.00 + ($173.00 × 4) = $880
(2) ($738,000 + $400,000) ÷ $880 per bag = 1,293 (rounded) bags, which
represents 1,293 coachdays and 5,172 playerdays.
c. $500,000 ÷ (839 + 3,356) = $119.19 per guest day (rounded)
46. a. Contribution margin = $140 $60 = $80 per passenger
Contribution margin ratio = $80 ÷ $140 = 57.1%
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32 Chapter 9
Breakeven point in passengers = Fixed costs ÷ Contribution margin =
$2,400,000 ÷ $80 per passenger = 30,000 passengers
Breakeven point in dollars = Fixed costs ÷ Contribution margin ratio =
$2,400,000 ÷ 0.571 = $4,203,152
b. 60 × 0.75 = 45 seats per train car
30,000 ÷ 45 = 667 train cars (rounded)
c. CM = $170 $60 = $110 per passenger
60 × 0.60 = 36 filled seats
Breakeven point in passengers = Fixed costs ÷ Contribution margin =
$2,400,000 ÷ $110 per passenger = 21,818 passengers (rounded)
21,818 ÷ 36 = 606 train cars (rounded)
d. Contribution margin = $140 $80 = $60 per passenger
Breakeven point in passengers = Fixed costs ÷ Contribution margin =
$2,400,000 ÷ $60 per passenger = 40,000 passengers
40,000 ÷ 4 = 889 train cars (rounded)
e. Aftertax income = $800,000 ÷ (1 Tax rate)
= $800,000 ÷ (1 0.40)
= $800,000 ÷ 0.60
= $1,333,333
$160X $3,000,000 $70X = $1,333,333
$90X = $4,333,333
X = 48,148 (rounded)
f. Number of discounted seats = 60 × 0.05 = 3 seats
Contribution margin for discounted fares = $100 $60 = $40 × 3 discounted
seats = $120 each train × 40 train cars per day × 30 days per month =
$144,000 – $160,000 additional fixed costs = $16,000 pretax loss.
g.(1) No.
Contribution margin = $150 $60 = $90 per passenger
60 × 0.60 = 36 seats × $90 × 15 train cars = $ 48,600
Increased fixed costs (200,000)
Pretax loss on new route $ (151,400)
(2) $150X $60X $200,000 = $101,000
$90X = $301,000
X = 3,345 passengers (rounded)
3,345 ÷ 36 = 93 train cars (rounded)
(3) 60 × 0.75 = 45 seats filled
3,345 ÷ 45 = 74 train cars (rounded)
(4) Fairbanks should consider such things as:
connections to other Fairbanks trains that might be made by these
passengers
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Chapter 9
longrange potential for increased load factors
increased customer goodwill in this new market
increased employment opportunities for labor in the area
competition in the market
47. a. Breakeven point in units = Fixed costs ÷ Contribution margin
Contribution margin = $94.00 – ($18.40 + $13.00 + $8.60 + $4.60 + $3.00)
= $46.40
Breakeven point in units = ($1,200,000 + $960,000 + $480,000) ÷ $46.40
= $2,640,000 ÷ $46.40 = 56,897 units or $5,348,318
b. Margin of safety
Dollars = Total sales – Breakeven sales = (150,000 × $94) $5,343,318
= $14,100,000 $5,343,318 = $8,756,682
Units = 150,000 56,897 = 93,103
Percentage = 93,103 ÷ 150,000 = 62%
Original 1 2 3
Sales $14,100,000 $ 16,920,000 $ 16,215,000 $14,734,500
Variable cost (7,140,000) (11,160,000)
(8,211,000) (7,854,000)
Contribution
margin $ 6,960,000 $ 5,760,000 $ 8,004,000 $ 6,880,500
Fixed
expenses (2,640,000) (2,640,000) (3,160,000) (2,640,000)
Net income $ 4,320,000 $ 3,120,000 $ 4,844,000 $ 4,240,500
The best alternative is idea number 2; this is the plan management should
implement.
48. a. Olson
Income Statements
2013 2014
Sales $ 600,000 $ 960,000
Less variable expense a
(420,000) (672,000)
Contribution marginb $ 180,000 $ 288,000
Less fixed expenses
(60,000) (60,000)
Net income before taxc $ 120,000 $ 228,000
Tax expense (48,000) (91,200)
Net income $ 72,000 $ 136,800
Variable expense = Sales Contribution margin
a
2013 = $600,000 $180,000 = $420,000
2014 = $960,000 $288,000 = $672,000
b
Contribution margin = Net income before tax + Fixed costs
2013 = $120,000 + $60,000 = $180,000
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accessible website, in whole or in part.
34 Chapter 9
2014 = $228,000 + $60,000 = $288,000
Net income before tax 2013 = $ 72,000 ÷ (1 0.40) = $120,000
c
2014 = $136,800 ÷ (1 0.40) = $228,000
Miami
Income Statements
2013 2014
Sales $ 600,000 $ 840,000
Less variable expensea (180,000)
(252,000)
Contribution marginb $ 420,000 $ 588,000
Less fixed expenses (300,000)
(300,000)
Net income before taxc $ 120,000 $ 288,000
Tax expense (48,000) (115,200)
Net income $ 72,000 $ 172,800
Variable expense = Sales less contribution margin
a
2013 = $600,000 $420,000 = $180,000
2014 = $840,000 $588,000 = $252,000
b
Contribution margin = Net income before tax + Fixed costs
2013 = $120,000 + $300,000 = $420,000
2014 = $288,000 + $300,000 = $588,000
Net income before tax =
c
2013 = $ 72,000 ÷ (1 0.40) = $120,000
2014 = $172,800 ÷ (1 0.40) = $288,000
b. Breakeven sales
2013 2014
Olson
$60,000 ÷ ($180,000 ÷ $600,000) $200,000
$60,000 ÷ ($288,000 ÷ $960,000) $200,000
Miami
$300,000 ÷ ($420,000 ÷ $600,000) 428,572
$300,000 ÷ ($588,000 ÷ $840,000) 428,572
c. Olson
Profit before taxes = 0.12(of investment); tax rate = 40%
= 0.12($1,200,000) = $144,000
Profit after taxes = $144,000 ÷ (1 0.4) = $240,000
($60,000 + $240,000) ÷ 0.30 = $1,000,000
Miami
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Chapter 9
Profit before taxes = 0.12(of investment); tax rate = 40%
= 0.12($1,200,000) = $144,000
Profit after taxes = $144,000 ÷ (1 0.4) = $240,000
($300,000 + $240,000) ÷ 0.70 = $771,429
d. Margin of safety = Actual sales – Breakeven sales
Olson
2013 $600,000 $200,000 = $400,000
2014 $960,000 $200,000 = $760,000
Miami
2013 $600,000 $428,572 = $171,428
2014 $840,000 $428,572 = $411,428
Operating leverage = Contribution margin ÷ Profit before tax
Olson
2013 $180,000 ÷ $120,000 = 1.50
2014 $288,000 ÷ $228,000 = 1.26
Miami
2013 $420,000 ÷ $120,000 = 3.50
2014 $588,000 ÷ $288,000 = 2.04
e. Olson Miami
Contribution margin $ 288,000 $ 588,000
f. Olson Miami
Contribution margin $288,000 $ 588,000
g. Olson
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36 Chapter 9
Miami
49. a. Dayton Company
Income Statement (Variable Costing)
First Qtr. of 2013 Second Qtr. of 2013
Sales $ 4,500,000 $ 5,250,000
Cost of goods sold
Beginning FG $ 0 $ 588,000
CGM
Variable production 4,116,000
3,528,000
Available goods $4,116,000 $4,116,000
Ending FG (588,000) (0)
Other variable costs 342,000 (3,870,000) 399,000 (4,515,000)
Contribution margin $ 630,000 $ 735,000
Fixed costs
Production $ 195,000 $ 195,000
Operating 42,800
(237,800) 42,800
(237,800)
Pretax income $ 392,200 $ 497,200
Income taxes
(137,270)
(174,020)
Net income $ 254,930 $ 323,180
b. 1. $75.00 ($58.80 + $5.70) = $10.50
2. $10.50 ÷ $75.00 = 14%
3. 260,000 × $ 10.50 = $2,730,000
4. Contribution margin $2,730,000
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Chapter 9
Fixed costs [($195,000 + $42,800) × 4] 951,200
Pretax income $1,778,800
Income taxes (35%) 622,580
Net income $1,156,220
5. $2,730,000 ÷ $1,778,800 = 1.5 (rounded)
6. $951,200 ÷ $10.50 per unit = 90,590 units (rounded)
7. $951,200 ÷ 0.14 = $6,794,286 (rounded)
8. 260,000 – 90,590 = 169,410
169,410 ÷ 260,000 = 65% (rounded)
9. 260,000 – 90,590 = 169,410 units
50. Accountants don’t believe that their assumptions are perfectly descriptive, nor do
they believe that they are reasonable for any possible level of activity. Rather,
accountants only believe their assumptions are “reasonably valid” within a
relevant range of activity. The simplifying assumptions are justified because they
allow the accountant to work with linear cost and revenue functions, which are
much more manageable than nonlinear functions. Significant time and effort
would be required to model nonlinear functions and the improvement in
predictability would likely be small. Thus, the effort would largely be wasted.
51. a. Atlantic Fish Company
Contribution Income Statement
For the Year Ended December 31, 2013
Sales $ 3,600,000
Variable costs:
Cost of cod $2,240,000
Shipping 160,000
Commissions 360,000 (2,760,000)
Contribution margin $ 840,000
Fixed costs:
Selling and administrative
(650,000)
Income before tax $ 190,000
Income tax expense
(76,000)
Net income $ 114,000
b. Selling price $ 9.00
Variable costs per unit:
Cost of cod $5.60
Shipping 0.40
Sales commissions 0.90
(6.90)
Contribution margin $ 2.10
Contribution margin ratio: $2.10 ÷ $9.00 = 23.3%
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accessible website, in whole or in part.
38 Chapter 9
Or
BEPu = FC ÷ CM%
BEPu = $650,000 ÷ 0.233 = $2,789,700 (off due to rounding)
d. Degree of operating leverage:
DOL = CM ÷ Income before tax
DOL = $840,000 ÷ $190,000 = 4.4
Margin of safety: Projected 2013 sales $ 3,600,000
Breakeven sales (2,785,716)
Margin of safety $ 814,284
e. Sales increase × Degree of operating leverage = Projected increase in profit
before income taxes
20% × 4.4 = 88% expected increase in operating profit
Projected profit before taxes (a) $190,000
Expected increase in profit ($190,000 × 0.88)
167,200
Expected profit before taxes after 20% increase $357,200
f. Convert desired aftertax income to before tax income: After tax income ÷ (1
– Tax rate)
$900,000 ÷ (1 – 0.4) = $900,000 ÷ 0.6 = $1,500,000
Pounds required: (Total fixed costs + Desired beforetax profit) ÷ CM per
pound
($650,000 + $1,500,000) ÷ $2.10 = $2,150,000 ÷ $2.10 = 1,023,810 pounds
(rounded)
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.