Chapter 5 Complete Solution
Exercise 5-1 The Effect of Changes in Activity on Net Operating Income [LO5-1]
Whirly Corporation’s contribution format
... [Show More] income statement for the most recent month is shown below:
Total Per Unit
Sales (10,000 units) $ 350,000 $ 35.00
Variable expenses 200,000 20.00
Contribution margin 150,000 $ 15.00
Fixed expenses 135,000
Net operating income $ 15,000
________________________________________
Required:
(Consider each case independently):
1. What would be the revised net operating income per month if the sales volume increases by 100 units?
2. What would be the revised net operating income per month if the sales volume decreases by 100 units?
3. What would be the revised net operating income per month if the sales volume is 9,000 units?
1. Revised net operating income $16,500selected answer correct
2. Revised net operating income $13,500selected answer correct
3. Revised net operating income $0selected answer correct
Explanation
1.
The revised net operating income would be:
Total Per Unit
Sales (10,100 units) $ 353,500 $ 35.00
Variable expenses 202,000 20.00
Contribution margin 151,500 $ 15.00
Fixed expenses 135,000
Net operating income $ 16,500
________________________________________
2.
The revised net operating income would be:
Total Per Unit
Sales (9,900 units) $ 346,500 $ 35.00
Variable expenses 198,000 20.00
Contribution margin 148,500 $ 15.00
Fixed expenses 135,000
Net operating income $ 13,500
________________________________________
3.
The revised net operating income would be:
Total Per Unit
Sales (9,000 units) $ 315,000 $ 35.00
Variable expenses 180,000 20.00
Contribution margin 135,000 $ 15.00
Fixed expenses 135,000
Net operating income $ 0
________________________________________
Exercise 5-4 Computing and Using the CM Ratio [LO5-3]
Last month when Holiday Creations, Inc., sold 50,000 units, total sales were $200,000, total variable expenses were $120,000, and fixed expenses were $65,000.
Required:
1. What is the company’s contribution margin (CM) ratio?
2. What is the estimated change in the company’s net operating income if it can increase total sales by $1,000?
1. Contribution margin ratio 40selected answer correct %
2. Estimated change in net operating income $400selected answer correct
Explanation
1. The company’s contribution margin (CM) ratio is:
Total sales $ 200,000
Total variable expenses 120,000
Total contribution margin (a) $ 80,000
Total contribution margin (a) $ 80,000
Total sales (b) $ 200,000
CM ratio (a) ÷ (b) 40 %
________________________________________
2. The change in net operating income from an increase in total sales of $1,000 can be estimated by using the CM ratio as follows:
Change in total sales (a) $ 1,000
CM ratio (b) 40 %
Estimated change in net operating income (a) × (b) $ 400
________________________________________
Exercise 5-6 Break-Even Analysis [LO5-5]
Mauro Products distributes a single product, a woven basket whose selling price is $15 per unit and whose variable expense is $12 per unit. The company’s monthly fixed expense is $4,200.
Required:
1. Calculate the company’s break-even point in unit sales.
2. Calculate the company’s break-even point in dollar sales.
3. If the company's fixed expenses increase by $600, what would become the new break-even point in unit sales? In dollar sales?
1. Break-even point in unit sales 1,400selected answer correct baskets
2. Break-even point in dollar sales $21,000selected answer correct
3. Break-even point in unit sales 1,600selected answer correct baskets
Break-even point in dollar sales $24,000selected answer correct
Explanation
1.
The break-even point in unit sales, Q, is computed as follows:
Profit = Unit CM × Q − Fixed expenses
$0 = ($15 − $12) × Q − $4,200
$0 = ($3) × Q − $4,200
$3Q = $4,200
Q = $4,200 ÷ $3
Q = 1,400 baskets
2.
The break-even point in dollar sales is computed as follows:
Unit sales to break even (a) 1,400
Selling price per unit (b) $ 15
Dollar sales to break even (a) × (b) $ 21,000
________________________________________
3.
The new break-even point in unit sales, Q, is computed as follows:
Profit = Unit CM × Q − Fixed expenses
$0 = ($15 − $12) × Q − $4,800
$0 = ($3) × Q − $4,800
$3Q = $4,800
Q = $4,800 ÷ $3
Q = 1,600 baskets
The break-even point in dollar sales is computed as follows:
Unit sales to break even (a) 1,600
Selling price per unit (b) $ 15
Dollar sales to break even (a) × (b) $ 24,000
________________________________________
Lin Corporation has a single product whose selling price is $120 per unit and whose variable expense is $80 per unit. The company’s monthly fixed expense is $50,000.
Required:
1. Calculate the unit sales needed to attain a target profit of $10,000.
2. Calculate the dollar sales needed to attain a target profit of $15,000.
(For all requirements, do not round intermediate calculations.)
1. Units sales to attain target profit 1,500selected answer correct
2. Dollar sales to attain target profit 195,000selected answer correct
Garrison 16e Rechecks 2017-09-07
Explanation
1.
The required unit sales, Q, to attain the target profit is computed as follows:
Profit = Unit CM × Q − Fixed expenses
$10,000 = ($120 − $80) × Q − $50,000
$10,000 = ($40) × Q − $50,000
$40 × Q = $10,000 + $50,000
Q = $60,000 ÷ $40
Q = 1,500 units
2.
One approach to solving this requirement is to compute the unit sales required to attain the target profit and then multiply this quantity by the selling price per unit:
Profit = Unit CM × Q − Fixed expenses
$15,000 = ($120 − $80) × Q − $50,000
$15,000 = ($40) × Q − $50,000
$40 × Q = $15,000 + $50,000
Q = $65,000 ÷ $40
Q = 1,625 units
Unit sales to attain the target profit (a) 1,625
Selling price per unit (b) $ 120
Dollar sales to attain target profit (a) × (b) $ 195,000
________________________________________
Exercise 5-8 Compute the Margin of Safety [LO5-7]
Molander Corporation is a distributor of a sun umbrella used at resort hotels. Data concerning the next month’s budget appear below:
Selling price per unit $ 30
Variable expense per unit $ 20
Fixed expense per month $ 7,500
Unit sales per month 1,000
________________________________________
Required:
1. What is the company’s margin of safety?
2. What is the company’s margin of safety as a percentage of its sales?
1. Margin of safety (in dollars) $7,500selected answer correct
2. Margin of safety percentage 25selected answer correct %
Explanation
1.
To compute the margin of safety, we must first compute the break-even unit sales.
Profit = Unit CM × Q − Fixed expenses
$0 = ($30 × $20) × Q − $7,500
$0 = ($10) × Q − $7,500
$10Q = $7,500
Q = $7,500 ÷ $10
Q = 750 units; or, at $30 per unit, $22,500
Sales (at the budgeted volume of 1,000 units) $ 30,000
Less break-even sales (at 750 units) 22,500
Margin of safety (in dollars) $ 7,500
________________________________________
2.
The margin of safety as a percentage of sales is as follows:
Margin of safety (in dollars) (a) $ 7,500
Sales (b) $ 30,000
Margin of safety percentage (a) ÷ (b) 25 %
________________________________________
Exercise 5-9 Compute and Use the Degree of Operating Leverage [LO5-8]
Engberg Company installs lawn sod in home yards. The company’s most recent monthly contribution format income statement follows:
Amount Percent of
Sales
Sales $ 80,000 100 %
Variable expenses 32,000 40 %
Contribution margin 48,000 60 %
Fixed expenses 38,000
Net operating income $ 10,000
________________________________________
Required:
1. What is the company’s degree of operating leverage?
2. Using the degree of operating leverage, estimate the impact on net operating income of a 5% increase in sales.
3. Construct a new contribution format income statement for the company assuming a 5% increase in sales.
Explanation
1.
The company’s degree of operating leverage would be computed as follows:
Contribution margin (a) $ 48,000
Net operating income (b) $ 10,000
Degree of operating leverage (a) ÷ (b) 4.8
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2.
A 5% increase in sales should result in a 24% increase in net operating income, computed as follows:
Degree of operating leverage (a) 4.8
Percent increase in sales (b) 5 %
Estimated percent increase in net operating income (a) × (b) 24 %
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3.
The new income statement reflecting the change in sales is:
Construct a new contribution format income statement for the company assuming a 5% increase in sales.
Engberg Company
Contribution Income Statement
Amount Percent of Sales
Salesselected answer correct $84,000selected answer correct 100selected answer correct %
Variable expensesselected answer correct 33,600selected answer correct 40selected answer correct %
Contribution marginselected answer correct 50,400 60 %
Fixed expensesselected answer correct 38,000selected answer correct
Net operating incomeselected answer correct $12,400
•
Net operating income reflecting change in sales $ 12,400
Original net operating income (a) 10,000
Change in net operating income (b) $ 2,400
Percent change in net operating income (b) ÷ (a) 24 %
________________________________________
Exercise 5-10 Multiproduct Break-Even Analysis [LO5-9]
Lucido Products markets two computer games: Claimjumper and Makeover. A contribution format income statement for a recent month for the two games appears below:
Claimjumper Makeover Total
Sales $ 30,000 $ 70,000 $ 100,000
Variable expenses 20,000 50,000 70,000
Contribution margin $ 10,000 $ 20,000 30,000
Fixed expenses 24,000
Net operating income $ 6,000
________________________________________
Required:
1. What is the overall contribution margin (CM) ratio for the company?
2. What is the company's overall break-even point in dollar sales?
3. Prepare a contribution format income statement at the company's break-even point that shows the appropriate levels of sales for the two products.
Garrison 16e Rechecks 2017-10-23
Explanation
1.
The overall contribution margin ratio can be computed as follows:
Overall CM ratio = Total contribution margin
Total sales
= $30,000 = 30%
$100,000
2.
The overall break-even point in dollar sales can be computed as follows:
Overall break-even = Total fixed expenses
Overall CM ratio [Show Less]