ACCOUNTING FOR MANAGERS

WEEK 2 ASSIGNMENTS

3-1
Wheeler Corporation’s most recent income statement follows:

Total Per Unit

Sales (8,000 units) $208,000 $26.00
Variable expenses 144,000 18.00
Contribution margin 64,000 $8.00
Fixed expenses 56,000
Net operating income $8,000

Required:
Prepare a new contribution format income statement under each of the following conditions
(consider each case independently):

1. The sales volume increases by 50 units.

Contribution Income Statement

Total Per Unit
Sales (8,050 units x $26) $209,300 $26.00
Variable expenses $144.00 $18.00
Contribution margin $64,400 $8.00
Fixed expenses $56,000
Net operating income $8,400

2. The sales volume declines by 50 units.

Contribution Income Statement

Total Per Unit
Sales (7,950 units x $26) $206,700 $26.00
Variable expenses $143,100 $18.00
Contribution margin $63,600 $8.00
Fixed expenses correct $56,000
Net operating income $7,600

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 3. The sales volume is 7,000 units.

Contribution Income Statement

Total Per Unit
Sales $182,000 $26.00
Variable expenses $126,000 $18.00
Contribution margin 56,000 $8.00
Fixed expenses correct 56,000
Net operating income $0

3-6,
Liman Corporation has a single product whose selling price is $140 and whose variable expense
is $60 per unit. The company’s monthly fixed expense is $40,000.

1. Using the equation method, determine the unit sales that are required to earn a target profit
of $6,000.

140Q = 60Q +$40,000 + $6,000

140Q-60Q = $46,000
80Q = $46,000
Q = $46,000/80
Sales units = 575

2. Using the formula method, determine for the dollar sales that are required to earn a target
profit of $8,000.

Fixed Costs + Target Net Income/Contribution Margin Per Unit = Required Sales in units
($40,000+$8,000)/($140-$60)= Required Sales in Units
$48,000/$80 = Required Sales units
Required Sales units = 600

Contribution Margin Ratio = Contribution Margin Per Unit/Unit Selling Price

= ($140 - $60)/$140
= 57.14%

Required Sales in Dollars = (Fixed Cost + Target Net Income)/Contribution Margin Ratio
= ($40,000+$8,000)/57.14%
= $48,000/57.14%
= $84,004

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 3-7

Maxson Products distributes a single product, a woven basket whose selling price is $8 and
whose variable cost is $6 per unit. The company's monthly fixed expense is $5,500.

Required:
1. Solve for the company’s break-even point in unit sales using the equation method.

Sales = Variable expenses + Fixed Expenses + Profit

$15Q = $12Q + $4,200 + 0

$15Q - $12Q = $4,200
Q = $4200 / 3 = 1,400 units

2. Solve for the company’s break-even point in sales dollars using the equation method and the
CM ratio.
Sales ($) = Variable expenses + Fixed Expenses + Profit

Sales = Variable expenses + Fixed Expenses + Profit

$15Q = $12Q + $4,200 + 0

$15Q - $12Q = $4,200
Q = $4200 / 3 = 1,400 units

Sales ($) = 1,400 units x $15 = $21,000

3. Solve for the company’s break-even point in unit sales using the formula method.

Break Even Sales in Dollars = [Fixed Cost / 1 – (Variable Cost / Sales)]

BES($) = $4,200 / 1 - (12/15) = $4,200 / 0.2 = $21,000
Unit sales = $21,000 / $15 = 1,400 units

4. Solve for the company’s breakeven point in sales dollars using the formula method and the
cm ration.

BEP = fixed cost /1-Variable cost / Selling price = 4200/1-12/15 = $21000

CM ratio method
BEP = fixed cost /Sales-Variable cost /Sales = 4200/15-12/15 = $21000

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 3-8

Mohan Corporation is a distributor of a sun umbrella used at resort hotels. Data concerning
next month's budget appear below:

Selling price....$25 per unit

Variable expenses...$15 per unit
Fixed Expenses... $8,500 per month
Unit Sales...1,000 units per month

1. Compute the company's margin of safety.

Breakeven sales = $8,500 / (25-15)*25 =21,250

Company's margin of safety =1000*25-21,250 =$3750

2. Compute the company's margin of safety as a percentage of its sales.

Company's margin of safety as a percentage of its sales = $3750 / (1000*25) =15.00%

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