6.

26
1.
Contribution Margin per unit=Selling Price per unit−Variable Expenses per
unit= $70 - $40 = $30
Total Contribution Margin=Contribution Margin per unit×Number of units
sold= $30 \times x 15,000 = $450,000
Net Operating Income or Loss=Total Contribution Margin−Fixed Expenses
= $450,000 - $540,000 = -$90,000 ( loss )
2.
Contribution Margin per unit=Selling Price per unit−Variable Expenses per
unit
= $70 - $40 = $30
Break-even point (in units)= Fixed expenses / contribution margin per unit
= $540,000 / $30 = 18,000
Break-even point (in dollar sales)=Break-even point (in units) x Selling
price per unit
= 18,000 x $ 70 = $1,260,000
The present break-even point for the Minden Company is 18,000
units or $1,260,000 in dollar sales.
4.
Contribution Margin per unit=Selling Price per unit−Variable Expenses per
unit =$48−$40=$8
Break-even point (in units)= Fixed expenses / contribution margin per unit
= 540,000 / 8 = 67,500 Units
Break-even point (in sales dollars)=Break-even point (in units) x selling
price per unit
= 67,500 units×$48=$3,240,000
The break-even point using the optimal selling price ($48 per unit)
is higher than the one computed before ($1,260,000). This
difference arises because the optimal selling price maximizes profit
by balancing higher sales volume with lower profit margin per unit.
As a result, the break-even point increases because more units need
to be sold to cover fixed expenses at a lower profit margin per unit.
6.27
1. CM Ratio=( Contribution Margin / sales )×100%
Contribution Margin=Sales−Variable Expenses= $750,000−
$450,000=$300,000
 CM Ratio=( $300,000 / $750,000 )×100% = 40%

Break-even point (in balls)= Fixed Expenses /

Contribution Margin per ball
Contribution Margin per ball=
Selling Price per ball−Variable Expenses per ball= $25−$15=$10

Break-even point (in balls)= 210,000 / 10 = 21,000 balls
 DOL= Contribution margin / Net operating income
= 300,000 / 90,000 = 3,33
At last year's sales level, the CM ratio is 40%, the break-even
point is 21,000 balls, and the degree of operating leverage is 3.33.
2.
New Contribution Margin=Sales−New Variable Expenses
= $750,000−($18×30,000)= $210,000
New CM Ratio =( Contribution Margin / sales )×100%
= (210,000 / 750,000 ) x 100% = 28%
Break-even point (in balls)= Fixed Expenses / Contribution Margin per ball
Contribution Margin per ball=Selling Price per ball−New Variable Expense
s per ball
= $25−$18=$7
 Break-even point (in balls) = 210,000 / 7 = 30,000 balls
 The increase in variable costs to $18 per ball, the new CM ratio
is approximately 28%, and the break-even point remains at
30,000 balls
3.
Net Operating Income=(Sales−Variable Expenses−Fixed Expenses)
Net Operating Income=(Selling Price per ball×Number of balls)−(Variable
Expenses per ball×Number of balls)−Fixed Expenses
 Net Operating Income=(25×Number of balls)−(18×Number of balls)
−210,000
= (25−18)×Number of balls−210,000 = 7×Number of balls−210,000
 Net Operating Income = 90,000 = 7×Number of balls−210,000
 Number of balls= 300,000 / 7 = 42,857
 42,857 balls will have to be sold next year to earn the same net
operating income ($90,000) as last year.
4.
New Contribution Margin=Sales−New Variable Expenses =$750,000−
($18×30,000) = $210,000
New CM Ratio=( New Contribution Margin / sales ) x 100%
= ( 210,000 / 750,000 ) x 100 % = 28 %
 Break-even point (in balls)= Fixed Expenses /
Contribution Margin per ball
Contribution Margin per ball=Selling Price per ball−New Variable Expense
s per ball
= $25−$18=$7
Break-even point (in balls)= 210,000 / 7 = 30,000 balls
Selling Price per ball=Variable Expenses per ball+Contribution Margin per
ball
= $15+$7 = 22 $

Therefore, to maintain the same CM ratio as last year, Northwood

Company must raise the selling price per ball to $22 to cover the increased
labor costs.

5.
New Variable Expenses per ball=60%×$9=$5.40
New Contribution Margin per ball=Selling Price per ball−New Variable Exp
enses per ball
= $25−$5.40=$19.60
New Contribution Margin=Sales−(New Variable Expenses per ball×Sales)
= $750,000−($5.40×30,000) = $588,000
New CM Ratio= (New contribution margin / sales) x 100% = (588,000/
750,000) x 100% = 78,4%
Break-even point (in balls)= Fixed Expenses /
Contribution Margin per ball
Contribution Margin per ball=Selling Price per ball−New Variable Expense
s per ball
= $25−$5.40=$19.60
Break-even point (in balls)= 420,000 / 19,60 = 21,428.57

Therefore, with the new automated manufacturing plant, the new CM ratio
is approximately 78.4%, and the new break-even point in balls is
approximately 21,429 balls.
Problem 6-28 (continued)

1. Profit = Unit CM × Q − Fixed expenses

$0 = ($40 − $16) × Q − $60,000
$0 = ($24) × Q − $60,000
$24Q = $60,000
Q = $60,000 ÷ $24
Q = 2,500 pairs, or at $40 per pair, $100,000 in sales
Alternative solution:
Unit sales to Fixed expenses $60,000 = 2,500 pairs
=
=
break even CM per unit $24.00
Dollar sales to Fixed expenses $60,000 = $100,000
= =
break even CM ratio 0.600

2. See the graphs at the end of this solution.

3. Profit = Unit CM × Q − Fixed expenses

$18,000 = $24 × Q − $60,000
$24Q = $18,000 + $60,000
Q = $78,000 ÷ $24
Q = 3,250 pairs
Alternative solution:
Unit sales to attain = Target profit + Fixed expenses
target profit Unit contribution margin

$18,000 + $60,000
= $24.00 = 3,250 pairs

4. Incremental contribution margin:

$25,000 increased sales × 60% CM ratio...... $15,000
Incremental fixed salary cost............................ 8,000
5. a Degree of Contribution margin $72,000
= = = 6
. operating leverage Net operating income $12,000

b. 6.00 × 50% sales increase = 300% increase in net operating income.

Thus, net operating income next year would be: $12,000 + ($12,000 ×
300%) = $48,000.

2. Cost-volume-profit graph:

$200

Total Sales
$180
$160

Break-even point:
Total Sales (000s)

$140 Total
2,500 pairs of sandals or Expense

$100

$80
Total
Fixed
Expense
$40

$20

0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000
Number of Pairs of Sandals Sold
Profit graph:

Profit Graph

$35,000
$30,000

$25,000

$20,000

$15,000 Break-even point:

2,500 sandals
$10,000

$5,000

$0
Profit

-$5,000

-$10,000

-$15,000

-$20,000

-$25,000

-$30,000

-$35,000

0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000

Sales Volume in Units