157_35295_EY311_2013_4__2_1_14e_GNB_CH05_SM

Chapter 5 Cost-Volume-Proft Relationships Solutions to Questions

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1

%$ 5-1 The contri&"tion margin 'CM( 'CM( ratio is the ratio o) the total contri&"tion margin to total sales reven"e. It is "se in target pro*t an &rea+-even analsis an can &e "se to "ic+l estimate the eect on pro*ts o) a change in sales reven"e. 5-2 Incremental analsis )oc"ses on the changes in reven"es an costs that will res"lt )rom a partic"lar action. 5-3 All other things e"al, Compan /, with its higher *e costs an lower varia&le costs, will have a higher contri&"tion margin ratio than Compan A. There)ore, There)ore, it will ten to realie realie a larger larger increase in contri&"tion margin an in pro*ts when sales increase. 5-4 perating leverage meas"res the impact on net operating income o) a given percentage change in sales. The egree o) operating leverage at a given level o) sales is comp"te & iviing the contri&"tion margin at that level o) sales & the net operating income at that level o) sales. 5-5 The &rea+-even &rea+-even point is is the level level o) sales at which pro*ts are ero. 5-6 'a( I) the selling price ecrease, then the total reven"e line wo"l rise less steepl, an the &rea+-even point wo"l occ"r at a higher "nit vol"me. '&( I) the *e cost increase, then &oth the *e

cost line an the total cost line wo"l shi)t "pwar an the &rea+-even &rea+-even point wo"l occ"r at a higher "nit vol"me. 'c( I) the varia&le cost increase, then the total cost line wo"l rise more steepl an the &rea+-even point wo"l occ"r at a higher "nit vol"me. 5-7 The margin o) sa)et is the ecess ecess o) &"gete 'or act"al( sales over the &rea+-even vol"me o) sales. It is the amo"nt & which sales can rop &e)ore losses &egin to &e inc"rre. 5-8 The sales mi is the relative relative proportions in which a compan3s pro"cts are sol. The "s"al ass"mption in costvol"me-pro*t vol"me-pro*t analsis is that the sales mi will not change. 5-9 A higher &rea+-even point an a lower net operating income co"l res"lt i) the sales mi shi)te )rom high contri&"tion margin pro"cts to low contri&"tion margin pro"cts. !"ch a shi)t wo"l ca"se the average contri&"tion margin ratio in the compan to ecline, res"lting res"lting in less total contri&"tion margin )or a given amo"nt o) sales. Th"s, net operating income wo"l ecline. 4ith a lower contri&"tion margin ratio, the &rea+even point wo"l &e higher &eca"se more sales wo"l &e re"ire to cover the same amo"nt o) *e costs.

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Managerial Acco"nting, 15th 6ition

5-1 The contri&"tion margin 'CM( 'CM( ratio is the ratio o) the total contri&"tion margin to total sales reven"e. It is "se in target pro*t an &rea+-even analsis an can &e "se to "ic+l estimate the eect on pro*ts o) a change in sales reven"e. 5-2 Incremental analsis )oc"ses on the changes in reven"es an costs that will res"lt )rom a partic"lar action. 5-3 All other things e"al, Compan /, with its higher *e costs an lower varia&le costs, will have a higher contri&"tion margin ratio than Compan A. There)ore, There)ore, it will ten to realie realie a larger larger increase in contri&"tion margin an in pro*ts when sales increase. 5-4 perating leverage meas"res the impact on net operating income o) a given percentage change in sales. The egree o) operating leverage at a given level o) sales is comp"te & iviing the contri&"tion margin at that level o) sales & the net operating income at that level o) sales. 5-5 The &rea+-even &rea+-even point is is the level level o) sales at which pro*ts are ero. 5-6 'a( I) the selling price ecrease, then the total reven"e line wo"l rise less steepl, an the &rea+-even point wo"l occ"r at a higher "nit vol"me. '&( I) the *e cost increase, then &oth the *e

cost line an the total cost line wo"l shi)t "pwar an the &rea+-even &rea+-even point wo"l occ"r at a higher "nit vol"me. 'c( I) the varia&le cost increase, then the total cost line wo"l rise more steepl an the &rea+-even point wo"l occ"r at a higher "nit vol"me. 5-7 The margin o) sa)et is the ecess ecess o) &"gete 'or act"al( sales over the &rea+-even vol"me o) sales. It is the amo"nt & which sales can rop &e)ore losses &egin to &e inc"rre. 5-8 The sales mi is the relative relative proportions in which a compan3s pro"cts are sol. The "s"al ass"mption in costvol"me-pro*t vol"me-pro*t analsis is that the sales mi will not change. 5-9 A higher &rea+-even point an a lower net operating income co"l res"lt i) the sales mi shi)te )rom high contri&"tion margin pro"cts to low contri&"tion margin pro"cts. !"ch a shi)t wo"l ca"se the average contri&"tion margin ratio in the compan to ecline, res"lting res"lting in less total contri&"tion margin )or a given amo"nt o) sales. Th"s, net operating income wo"l ecline. 4ith a lower contri&"tion margin ratio, the &rea+even point wo"l &e higher &eca"se more sales wo"l &e re"ire to cover the same amo"nt o) *e costs.



!er"ise 5-1 '20 min"tes( 1. The new income income statemen statementt wo"l &e7 Total Per Unit !ales '8,0#0 "nits(. . 920$,%00 92:.00 ;aria&le epenses. .. .. 155,$00 18.00 Contri&"tion margin :5,500 9 8.00 o" >o" can get the same net operating income "sing the )ollowing approach. riginal net operating inco income me... ...... ...... ...... ....... ........ ........ ........ ...... 98,0 98,000 00 Change in contri&"tion margin '#0 "nits ? 98.00 per "nit "nit(. (... .... .... .... .... .... .... .... .... .... .... ..... ..... ..... ...... ... 500 500 =ew =ew net net oper operati ating ng inco income. me. . 98 98,5 ,500 00 2. The new income income statemen statementt wo"l &e7 Per Total Unit 920:,@0 92:.00 !ales '@,$#0 '@,$#0 "nits(........ "nits(....... . 0 ;aria&le e epens enses.... ...... .... .... 15%,100 18.00 Contri&"tion margin.... ...... .. :%,:00 9 8.00 o" >o" can get the same net operating income "sing the )ollowing approach. rig rigina inall net opera operati ting ng inco income. me.... ...... ... Change in contri&"tion margin '-# -#0 0 "ni "nits ? 98 98.0 .00 0 per "ni "nit(... t(...... ..... .. =ew =ew net net oper operat atin ing g inco income me... ...... ...... ...... ...

98,0 98 ,000 00 '50 '500( 9@,: 9@ ,:00 00


1$#

!er"ise 5-1 'contin"e( %. The new income statement wo"l &e7 !ales '@,000 "nits(... . ;aria&le epenses..... Contri&"tion margin. .
Total Per Unit 9182,000 92:.00 12:,000 18.00 #:,000 9 8.00 #:,000 9

0

=ote7 This is the compans &rea+-even point.

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!er"ise 5-2 '%0 min"tes( 1. The C;B graph can &e plotte "sing the three steps o"tline in the tet. The graph appears on the net page. !tep 1. raw a line parallel to the vol"me ais to represent the total *e epense.
912,000 58,000 9:0,000

!tep %. Choose some vol"me o) sales an plot the point representing total sales ollars at the activit level o" have selecte. 4e3ll "se the sales level o) 2,000 "nits again. Total sales reven"e '2,000 "nits ? 9%: per "nit(............................................................

9@2,000

2. The &rea+-even point is the point where the total sales reven"e an the total epense lines intersect. This occ"rs at sales o) 1,000 "nits. This can &e veri*e as )ollows7 Bro*t D Enit CM ? F 

1$@

!er "ise 5-2 'contin"e(



!er"ise 5-3 '1# min"tes( 1. The pro*t graph is &ase on the )ollowing simple e"ation7 Bro*t D Enit CM ? F 

1$$

!er"ise 5-3 'contin"e( 2. oo+ing at the graph, the &rea+-even point appears to &e %,000 "nits. This can &e veri*e as )ollows7 Bro*t D Enit CM ? F 
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!er"ise 5-4 '10 min"tes( 1. The compan3s contri&"tion margin 'CM( ratio is7 Total sales......................... 9%00,000 Total varia&le epenses..... 250,000 D Total contri&"tion margin............................ 9 :0,000 J Total sales..................... 9%00,000 D CM ratio......................... 20K 2. The change in net operating income )rom an increase in total sales o) 91,#00 can &e estimate & "sing the CM ratio as )ollows7 Change in total sales................ 91,#00 ? CM ratio................................. 20K D 6stimate change in net operating income................... 9 %00 This comp"tation can &e veri*e as )ollows7 Total sales................. J Total "nits sol... ... D !elling price per "nit......................... Increase in total sales....................... J !elling price per "nit......................... D Increase in "nit sales....................... riginal total "nit sales....................... =ew total "nit sales. .

9%00,00 0 50,000 "nits per 9@.#0 "nit

91,#00 per 9@.#0 "nit 200 "nits 50,000 "nits 50,200 "nits

Original New Total "nit sales.......... 50,000 50,200 9%00,00 9%01,#0 !ales......................... 0 0 © The McGraw-Hill Companies, Inc., 2012. All rights reserve. !ol"tions Man"al, Chapter #

201

;aria&le epenses..... 250,000 251,200 Contri&"tion margin. . :0,000 :0,%00


!er"ise 5-5 '20 min"tes( 1. The )ollowing ta&le shows the eect o) the propose change in monthl avertising &"get7 Sales With Additional Advertisin Current g Diferenc Sales Budget e 922#,00 !ales......................... 0 9250,000 91#,000 1%#,00 ;aria&le epenses..... 0 155,000 $,000 Contri&"tion margin. . $0,000 $:,000 :,000
9:,000


20%

ess incremental avertising epense........................................ Change in net operating income.....

8,000 9'2,000(



!er"ise 5-5 'contin"e( 2. The 9% increase in varia&le epenses will ca"se the "nit contri&"tion margin to ecrease )rom 9%0 to 92@ with the )ollowing impact on net operating income7 6pecte total contri&"tion margin with the higher-"alit components7 %,5#0 "nits ? 92@ per "nit........................ 9$%,1#0 Bresent total contri&"tion margin7 %,000 "nits ? 9%0 per "nit........................ $0,000 Change in total contri&"tion margin............ 9 %,1#0 Ass"ming no change in *e epenses an all other )actors remain the same, the higher-"alit components sho"l &e "se.


20#

!er"ise 5-6 '10 min"tes( 1. The e"ation metho iels the re"ire "nit sales, F, as )ollows7 Bro*t D Enit CM ? F 
98,000 L 950,000 980 per "nit

D

958,000 980 per "nit

D :00 "nits

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!er"ise 5-7 '20 min"tes( 1. The e"ation metho iels the &rea+-even point in "nit sales, F, as )ollows7 Bro*t D Enit CM ? F 
CM ratio D D

Enit contri&"tion margin Enit selling price 92 D 0.2# 98

Bro*t D 90 D 0.2# ? !ales D !ales D !ales D

CM ratio ? !ales 
%. The )orm"la metho gives an answer that is ientical to the e"ation metho )or the &rea+-even point in "nit sales7 Enit sales to &rea+ even D D


20@

!er"ise 5-7 'contin"e( 5. The )orm"la metho also gives an answer that is ientical to the e"ation metho )or the &rea+-even point in ollar sales7

ollar sales to &rea+ even D D



!er"ise 5-8 '10 min"tes( 1. To comp"te the margin o) sa)et, we m"st *rst comp"te the &rea+-even "nit sales. Bro* tD 90 D 90 D 910 FD FD FD

Enit CM ? F 
!ales 'at the &"gete vol"me o) 1,000 92#,00 "nits(...................................................... 0 /rea+-even sales 'at 8#0 "nits(................ 21,2#0 Margin o) sa)et 'in ollars(...................... 9 %,@#0 2. The margin o) sa)et as a percentage o) sales is as )ollows7 Margin o) sa)et 'in ollars(................ J !ales............................................... Margin o) sa)et percentage...............

9%,@#0 92#,00 0 1#K


20$

!er"ise 5-9 '20 min"tes( 1. The compan3s egree o) operating leverage wo"l &e comp"te as )ollows7 9%:,00 Contri&"tion margin.......... 0 912,00 J =et operating income.... 0 egree o) operating leverage......................... %.0 2. A 10K increase in sales sho"l res"lt in a %0K increase in net operating income, comp"te as )ollows7 egree o) operating leverage........................... ? Bercent increase in sales............................... 6stimate percent increase in net operating income...........................................................

%.0 10K %0K

%. The new income statement reecting the change in sales is7 Percent Amount o Sales 91%2,00 !ales......................... 0 100K ;aria&le epenses..... $2,500 @0K Contri&"tion margin. . %$,:00 %0K


!er"ise 5-1# '20 min"tes( 1. The overall contri&"tion margin ratio can &e comp"te as )ollows7 verall CM ratio D D

Total contri&"tion margin Total sales 9120,000 D 80K 91#0,000

2. The overall &rea+-even point in sales ollars can &e comp"te as )ollows7

verall &rea+-even D

Total *e epenses verall CM ratio

D

9$0,000 D 9112,#00 80K

%. To constr"ct the re"ire income statement, we m"st *rst etermine the relative sales mi )or the two pro"cts7

riginal ollar sales. . Bercent o) total......... !ales at &rea+-even. .

!ales......................... ;aria&le epensesN. . . Contri&"tion margin. .
Predator unwa! Total 9100,000 9#0,000 91#0,00 0 :@K %%K 100K 9@#,000 9%@,#00 9112,#0 0 Predator unwa! Total 9@#,000 9%@,#00 9112,#0 0 18,@#0 %,@#0 22,#00 9#:,2#0 9%%,@#0 $0,000 $0,000 9 0

NBreator varia&le epenses7 '9@#,000O9100,000( ? 92#,000 D 918,@#0 P"nwa varia&le epenses7 '9%@,#00O9#0,000( ? 9#,000 D © The McGraw-Hill Companies, Inc., 2012. All rights reserve. !ol"tions Man"al, Chapter #

211

9%,@#0



!er"ise 5-11 '%0 min"tes( 1. Bro*t 90 90 912F F

D Enit CM ? F 
Alternativel7

91#0,000 D12,#00 "nits 912 per "nit

or, at 950 per "nit, 9#00,000. 2. The contri&"tion margin at the &rea+-even point is 91#0,000 &eca"se at that point it m"st e"al the *e epenses. %.

Enits sol to attainD Target pro*t L
918,000L 91#0,000 D15,000 "nits 912 per "nit

!ales '15,000 "nits ? 950 per "nit(....... ;aria&le epenses '15,000 "nits ? 928 per "nit(.............. Contri&"tion margin '15,000 "nits ? 912 per "nit(..............
Total Unit 9#:0,000 950 %$2,000

28

1:8,000 1#0,000 9 18,000

912


21%

!er"ise 5-11 'contin"e( 5. Margin o) sa)et in ollar terms7 Margin o) sa)et D Total sales - /rea+-even sales in ollars D 9:00,000 - 9#00,000 D 9100,000

Margin o) sa)et in percentage terms7

Margin o) sa)et D Margin o) sa)et in ollars percentage Total sales D

9100,000 D 1:.@K 'ro"ne( 9:00,000

#. The CM ratio is %0K. 6pecte total contri&"tion margin7 9:80,000 ? %0K................................................................... 9205,000 Bresent total contri&"tion margin7 9:00,000 ? %0K................................................................... 180,000 Increase contri&"tion margin.............................. 9 25,000 Alternative sol"tion7 980,000 incremental sales ? %0K CM ratio D 925,000 Given that the compan3s *e epenses will not change, monthl net operating income will increase & the amo"nt o) the increase contri&"tion margin, 925,000.



!er"ise 5-12 '%0 min"tes( 1. Bro*t 90 90 92@F F

D Enit CM ? F 
Alternative sol"tion7

91%#,000 D #,000 lanterns, 92@ per lantern

or at 9$0 per lantern, 95#0,000 in sales 2. An increase in varia&le epenses as a percentage o) the selling price wo"l res"lt in a higher &rea+-even point. I) varia&le epenses increase as a percentage o) sales, then the contri&"tion margin will ecrease as a percentage o) sales. 4ith a lower CM ratio, more lanterns wo"l have to &e sol to generate eno"gh contri&"tion margin to cover the *e costs. Present" #$%%% &anterns Per Total Unit

%.

!ales........................... 9@20,000

9$0

;aria&le epenses....... Contri&"tion margin....

#05,000 21:,000

:% 92@

1%#,000

=et operating income.

9 81,000

Pro'osed" (%$%%% &anterns) Total Per Unit 9810,00 0 981 NN :%0,00 0 :% 180,000 918 1%#,00 0 9 5#,000


21#

N 8,000 lanterns ? 1.2# D 10,000 lanterns NN 9$0 per lantern ? 0.$ D 981 per lantern As shown a&ove, a 2#K increase in vol"me is not eno"gh to oset a 10K re"ction in the selling priceR th"s, net operating income ecreases.



!er"ise 5-12 'contin"e( 5.

Bro*t 9@2,00 0 9@2,00 0 918F F F

D Enit CM ? F 

Enit sales to attain D Target pro*t L
9@2,000 L 91%#,000 D 11,#00 lanterns 918 per lantern


21@

!er"ise 5-13 '%0 min"tes( 1. The contri&"tion margin per person wo"l &e7 Brice per tic+et............................................ ;aria&le epenses7 inner.......................................................
9%0 9@ % 10 920

The *e epenses o) the 6travagana total 98,000R there)ore, the &rea+-even point wo"l &e comp"te as )ollows7 Bro*t D Enit CM ? F 

98,000 D 500 persons 920 per person

or, at 9%0 per person, 912,000. 2. ;aria&le cost per person '9@ L 9%(............... 910


!er"ise 5-13 'contin"e( %. Cost-vol"me-pro*t graph7

Total !ales /rea+-even point7 500 persons, or 912,000 in sales

Total

21$

!er"ise 5-14 '%0 min"tes( *odel A(%% Amount , 9@00,00 !ales............. 0 100 ;aria&le epenses.. .. 280,000 50 Contri&"tion 9520,00 margin........ 0 :0
1.

*odel B+%% Amount , 9%00,00 0 100

Total Com'an! Amount , 91,000,00 0 100

$0,000 %0 9210,00 0 @0

%@0,000 %@ :%0,000 :% N #$8,#00

9

%1,#00

N:%0,000 J 91,000,000 D :%K. 2. The &rea+-even point )or the compan as a whole is7

/rea+-even point in D
9#$8,#00 D 9$#0,000 in sales 0.:%

%. The aitional contri&"tion margin )rom the aitional sales is comp"te as )ollows7 9#0,000 ? :%K CM ratio D 9%1,#00 Ass"ming no change in *e epenses, all o) this aitional contri&"tion margin sho"l rop to the &ottom line as increase net operating income. This answer ass"mes no change in selling prices, varia&le costs per "nit, *e epenses, or sales mi.



!er"ise 5-15 '1# min"tes( 1. !ales '%0,000 oors(....... 91,800,000 ;aria&le epenses........... 1,2:0,000 Contri&"tion margin........ #50,000
9:0 52 918

egree o) operating D Contri&"tion margin leverage =et operating income D

9#50,000 D: 9$0,000

2. a. !ales o) %@,#00 oors represent an increase o) @,#00 oors, or 2#K, over present sales o) %0,000 oors. /eca"se the egree o) operating leverage is :, net operating income sho"l increase & : times as m"ch, or & 1#0K ': ? 2#K(. &. 6pecte total ollar net operating income )or the net ear is7 Bresent net operating income...................... 9 $0,000 6pecte increase in net operating income net ear '1#0K ? 9$0,000(..................... 1%#,000 Total epecte net operating income........... 922#,000


221

!er"ise 5-16 '%0 min"tes( 1. ;aria&le epenses7 9:0 ? '100K  50K( D 9%:. 2. a.

!elling price...................... 9:0 100K ;aria&le epenses............. %: :0K Contri&"tion margin.......... 925 50K et F D /rea+-even point in "nits. Bro*t 90 90 925F F F

D D D D D D

Enit CM ? F 
In sales ollars7 1#,000 "nits ? 9:0 per "nit D 9$00,000 Alternative sol"tion7 CM ratio ? !ales 
&.

Enit CM ? F 


!er"ise 5-16 'contin"e( Alternative sol"tion7 CM ratio ? !ales 
9:0 100K %% ##K 92@ 5#K

D Enit CM ? F 
In sales ollars7 1%,%%% "nits ? 9:0 per "nit D 9800,000 'ro"ne( Alternative sol"tion7 CM ratio ? !ales 

22%

!er"ise 5-16 'contin"e( %. a
D 9%:0,000 J 925 per "nit D 1#,000 "nits In sales ollars7 1#,000 "nits ? 9:0 per "nit D 9$00,000 Alternative sol"tion7

ollar sales D
In sales ollars7 18,@#0 "nits ? 9:0 per "nit D 91,12#,000 Alternative sol"tion7 ollar sales to attain D Target pro*t L
In "nits7 91,12#,000 J 9:0 per "nit D 18,@#0 "nits



!er"ise 5-16 'contin"e( 5-16 'contin"e( c.

In sales ollars7 1%,%%% "nits ? 9:0 per "nit D 9800,000 'ro"ne( Alternative sol"tion7

/rea+-even point D

22#

!er"ise 5-17 '20 5-17 '20 min"tes( Total tal !ales '%0,000 "nits ? 1.1# D %5,#00 1. "nit "nits( s(.. .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. 91@2 91@2,# ,#00 00 ;ari aria&le a&le epen pense ses. s... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. 10 10%, %,#0 #00 0 Contri&"tion margin.............................. :$,000
Per Unit 9#.00 9#.0 0 %.0 .00 0 92.00

95.#0 95.# 0 %.0 .00 0 91.#0

9#.#0 9#.# 0 %.0 .00 0 92.#0

9#.:0 9#.: 0 %.2 .20 0 92.50



!er"ise 5-18 '20 min"tes( Case -( $,000 N 92@0,000 N 9%0 1:2,000 N 18 108,000 912 $0,000 N

a.

="m&er o) "nits sol. !ales......................... ;aria&le epenses. . . . . Contri&"tion margin. .
Case -. 15,000 9%#0,000 N 92# 150,000 10 210,000 91 # N 1@0,000 N 9 50,000 N

Case -/ Case -0 20,000 N #,000 N 9500,000 920 91:0,000 N 9%2 280,000 N 15 $0,000 18 120,000 9: N @0,000 915 8#,000 82,000 N

="m&er o) "nits sol. !ales......................... ;aria&le epenses. . . Contri&"tion margin. .
!ales......................... ;aria&le epenses..... Contri&"tion margin. .
9'12,000( N

Case -( Case -. 95#0,00 9200,00 0 N 100K 0 N 100 K 2@0,00 0 :0 1%0,000 N :# 180,000 50KN @0,000 %# K 11#,00 0 :0,000 N 9 9 :#,000 N 10,000 Case -/ Case -0 9@00,00 9%00,00 0 100K 0 N 10 0 K 150,00 0 20 $0,000 N %0 #:0,000 80KN 210,000 @0 K 5@0,00 22#,00 0 N 0


22@

=et operating income...................

9 $0,000 N

9'1#,000 (N

NGiven



Pro$lem 5-19 ':0 min"tes( 1. Bro*t o*t 90 90 91#F F F

D Enit Enit CM ? F 
20,000 shirts ? 950 per shirt D 9800,000 Alternative sol"tion7
9%00,000 D 20,000 shirts shirts 91# per shirt

ollar sales D
9%00,000 D 9800,000 in sales 0.%@#

2. !ee the graph graph on the )ollowing )ollowing page. page. %. The simples simplestt approac approach h is7 /rea+-even /rea+-even sales............. sales........... .. Act"al Act"al sales..................... sales..................... !ales short o) &rea+-even

20,000 shirts 1$,000 shirts 1,000 shirts

1,000 shirts ? 91# contri&"tion margin per shirt D 91#,000 loss Alternative sol"tion7 !ales !ales '1$,00 '1$,000 0 shir shirts ts ? 950 per shirt(.. shirt(....... .......... .......... .....

9@:0,0 9@:0,000 00


22$

;aria&le epenses '1$,000 shirts ? 92# per shirt(............................................................... Contri&"tion margin..........................................
5@#,000 28#,000 %00,000 9'1#,000(

© The McGraw-Hill Companies, Inc., 2012. All rights reserve. 2%0


Pro$lem 5-19 'contin"e( 2. Cost-vol"me-pro*t graph7

Total !ales /rea+-even point7 20,000 shirts, or 9800,000 in sales Total


2%1

Pro$lem 5-19 'contin"e( 5. The varia&le epenses will now &e 928 '92# L 9%( per shirt, an the contri&"tion margin will &e 912 '950  928( per shirt. Bro*t 90 90 912F F F

D Enit CM ? F 
2#,000 shirts ? 950 per shirt D 91,000,000 in sales Alternative sol"tion7
9%00,000 D 2#,000 shirts 912 per shirt

ollar sales D
9%00,000 D 91,000,000 in sales 0.%0

#. The simplest approach is7 Act"al sales............................. /rea+-even sales..................... 6cess over &rea+-even sales..

2%,#00 shirts 20,000 shirts %,#00 shirts

%,#00 shirts ? 912 per shirtN D 952,000 pro*t N91# present contri&"tion margin  9% commission D 912 per shirt © The McGraw-Hill Companies, Inc., 2012. All rights reserve. 2%2


Pro$lem 5-19 'contin"e( Alternative sol"tion7 !ales '2%,#00 shirts ? 950 per shirt(............. 9$50,000 ;aria&le epenses S'20,000 shirts ? 92# per shirt( L '%,#00 shirts ? 928 per shirt(........ #$8,000 Contri&"tion margin...................................... %52,000
D Enit CM ? F 
18,#00 shirts ? 950 shirt D 9@50,000 in sales &. Altho"gh the change will lower the &rea+-even point )rom 20,000 shirts to 18,#00 shirts, the compan m"st consier whether this re"ction in the &rea+-even point is more than oset & the possi&le loss in sales arising )rom having the sales sta on a salarie &asis. Ener a salar arrangement, the sales sta ma have )ar less incentive to sell than "ner the present commission arrangement, res"lting in a loss o) sales an a re"ction in pro*ts. Altho"gh it generall is esira&le to lower the &rea+-even point, management m"st consier the other eects o) a change in the cost str"ct"re. The &rea+-even point co"l &e re"ce ramaticall & o"&ling the selling price per shirt, &"t it oes not necessaril )ollow that this wo"l increase the compan3s pro*t.


2%%

Pro$lem 5-2# ':0 min"tes( 1. The CM ratio is %0K. Total !ales '1%,#00 "nits(. .. . 92@0,000 ;aria&le epenses....... 18$,000 Contri&"tion margin. .. . 9 81,000

Per Unit 920 15 9 :

Percentag e 100K @0K %0K

The &rea+-even point is7 Bro*t 90 90 9:F F F

D Enit CM ? F 
1#,000 "nits ? 920 per "nit D 9%00,000 in sales Alternative sol"tion7
9$0,000 D 1#,000 "nits 9: per "nit

ollar sales D
9$0,000 D 9%00,000 in sales 0.%0

2. Incremental contri&"tion margin7 9@0,000 increase sales ? %0K CM ratio. . . 921,000 ess increase *e costs7 Increase avertising cost.......................... 8,000 Increase in monthl net operating income.... 91%,000 !ince the compan presentl has a loss o) 9$,000 per month, i) the changes are aopte, the loss will t"rn into a pro*t o) © The McGraw-Hill Companies, Inc., 2012. All rights reserve. 2%5


95,000 per month.


2%#

Pro$lem 5-2# 'contin"e( %. !ales '2@,000 "nits ? 918 per "nitN(....... ;aria&le epenses '2@,000 "nits ? 915 per "nit(............... Contri&"tion margin................................
958:,000 %@8,000 108,000 12#,000 9'1@,000(

N920  '920 ? 0.10( D 918 5.

Bro*t 95,#00 95,#00 9#.50 F F F

D Enit CM ? F 
N915.00 L 90.:0 D 915.:0. Alternative sol"tion7

95,#00 L 9$0,000 9#.50 per "nitNN

D 1@,#00 "nits NN9:.00  90.:0 D 9#.50. #. a. The new CM ratio wo"l &e7

!ales....................................... ;aria&le epenses................... Contri&"tion margin................

Per Unit 920 @ 91%

Percentag e 100K %#K :#K

© The McGraw-Hill Companies, Inc., 2012. All rights reserve. 2%:


Pro$lem 5-2# 'contin"e( The new &rea+-even point wo"l &e7
9208,000 D 1:,000 "nits 91% per "nit

ollar sales D
9208,000 D 9%20,000 in sales 0.:#

&. Comparative income statements )ollow7 Not Automated Per Total Unit , !ales '20,000 "nits( 9500,000 ;aria&le epenses. . . 280,000 Contri&"tion margin 120,000
920 15 9:

100 @0 %0

Automated Per Total Unit , 9500,00 0 920 100 150,000 @ %# 2:0,000 91% :# 208,000 9 #2,000


2%@

Pro$lem 5-2# 'contin"e( c. 4hether or not one wo"l recommen that the compan a"tomate its operations epens on how m"ch ris+ he or she is willing to ta+e, an epens heavil on prospects )or )"t"re sales. The propose changes wo"l increase the compan3s *e costs an its &rea+-even point. However, the changes wo"l also increase the compan3s CM ratio ')rom %0K to :#K(. The higher CM ratio means that once the &rea+-even point is reache, pro*ts will increase more rapil than at present. I) 20,000 "nits are sol net month, )or eample, the higher CM ratio will generate 922,000 more in pro*ts than i) no changes are mae. The greatest ris+ o) a"tomating is that )"t"re sales ma rop &ac+ own to present levels 'onl 1%,#00 "nits per month(, an as a res"lt, losses will &e even larger than at present "e to the compan3s greater *e costs. '=ote the pro&lem states that sales are erratic )rom month to month.( In s"m, the propose changes will help the compan i) sales contin"e to tren "pwar in )"t"re monthsR the changes will h"rt the compan i) sales rop &ac+ own to or near present levels. =ote to the Instr"ctor7 Altho"gh it is not as+e )or in the pro&lem, i) time permits o" ma want to comp"te the point o) inierence &etween the two alternatives in terms o) "nits solR i.e., the point where pro*ts will &e the same "ner either alternative. At this point, total reven"e will &e the sameR hence, we incl"e onl costs in o"r e"ation7 Boint o) inierence in "nits et F D sol 915F L 9$0,000 D 9@F L 9208,000 9@F D 9118,000 F D 9118,000 J 9@ per "nit F D 1:,8#@ "nits 'ro"ne( I) more than 1:,8#@ "nits are sol, the propose plan will iel the greatest pro*tR i) less than 1:,8#@ "nits are sol, the present plan will iel the greatest pro*t 'or the least loss(. © The McGraw-Hill Companies, Inc., 2012. All rights reserve. 2%8


Pro$lem 5-21 ':0 min"tes( 1. The CM ratio is :0K7 !elling price................... ;aria&le epenses......... Contri&"tion margin......

91# 100K : 50K 9 $ :0K

2.

/rea+-even point inD
9180,000 D9%00,000 sales 0.:0

%. 95#,000 increase sales ? :0K CM ratio D 92@,000 increase in contri&"tion margin. !ince *e costs will not change, net operating income sho"l also increase & 92@,000. 5. a.

egree o) operating leverage D D

Contri&"tion margin =et operating income 921:,000 D: 9%:,000

&. : ? 1#K D $0K increase in net operating income. In ollars, this increase wo"l &e $0K ? 9%:,000 D 9%2,500.


2%$

Pro$lem 5-21 'contin"e( #.

&ast 1ear" .#$%%% units Per Total Unit !ales......................... 9520,000 91#.00 ;aria&le epenses..... Contri&"tion margin. .

1:8,000 :.00 2#2,000 9 $.00

Pro'osed" 0.$%%% units) Total Per Unit 9#:@,00 0 91%.#0NN 2#2,00 0 :.00 %1#,000 9 @.#0 2#0,00 0 9 :#,000

N 28,000 "nits ? 1.# D 52,000 "nits NN 91# per "nit ? 0.$0 D 91%.#0 per "nit =o, the changes sho"l not &e mae. :. 6pecte total contri&"tion margin7 28,000 "nits ? 200K ? 9@ per "nitN........... 9%$2,000 Bresent total contri&"tion margin7 28,000 "nits ? 9$ per "nit.......................... 2#2,000 Incremental contri&"tion margin, an the amo"nt & which avertising can &e increase with net operating income remaining "nchange................................. 9150,000 N91#  '9: L 92( D 9@



Pro$lem 5-22 '%0 min"tes(

1.

Product *irrors

3anities

50K 9200,00 0 100K

28K 9150,00 0 100K

Sin2s Bercentage o) total sales.......................

%2K 91:0,00 !ales......................... 0 100K 58,00 ;aria&le epenses..... 0 %0K 9112,00 Contri&"tion margin. . 0 @0K
Total 100K 9#00,00 0 100K

1:0,000

80K

@@,000

##K

28#,000

#@K

9 50,000

20K

9 :%,000

5#K

21#,000 22%,:00

5%KN

9 '8,:00(

N921#,000 J 9#00,000 D 5%K.


251

Pro$lem 5-22 'contin"e( 2. /rea+-even sales7

ollar sales D
922%,:00 D 9#20,000 in sales 0.5%

%. Memo to the presient7 Altho"gh the compan met its sales &"get o) 9#00,000 )or the month, the mi o) pro"cts sol change s"&stantiall )rom that &"gete. This is the reason the &"gete net operating income was not met, an the reason the &rea+-even sales were greater than &"gete. The compan3s sales mi was planne

Pro$lem 5-22 'contin"e( 2. /rea+-even sales7

ollar sales D
922%,:00 D 9#20,000 in sales 0.5%

%. Memo to the presient7 Altho"gh the compan met its sales &"get o) 9#00,000 )or the month, the mi o) pro"cts sol change s"&stantiall )rom that &"gete. This is the reason the &"gete net operating income was not met, an the reason the &rea+-even sales were greater than &"gete. The compan3s sales mi was planne at 58K !in+s, 20K Mirrors, an %2K ;anities. The act"al sales mi was %2K !in+s, 50K Mirrors, an 28K ;anities. As shown & these ata, sales shi)te awa )rom !in+s, which provies o"r greatest contri&"tion per ollar o) sales, an shi)te strongl towar Mirrors, which provies o"r least contri&"tion per ollar o) sales. Conse"entl, altho"gh the compan met its &"gete level o) sales, these sales provie consiera&l less contri&"tion margin than we ha planne, with a res"lting ecrease in net operating income. =otice )rom the attache statements that the compan3s overall CM ratio was onl 5%K, as compare to a planne CM ratio o) #2K. This also eplains wh the &rea+-even point was higher than planne. 4ith less average contri&"tion margin per ollar o) sales, a greater level o) sales ha to &e achieve to provie s"Ucient contri&"tion margin to cover *e costs.


252

Pro$lem 5-23 '5# min"tes( 1. a.

Alvaro !ales....................... ;aria&le epenses Contri&"tion margin
, V800 100 580 :0 V%20 50

Ba4an , V580 100 $: 20 V%85 80

Total , V1,280 100 #@: 5# @05 ## ::0 V

55

&.

ollar sales to D
V80 D :.2#K V1,280


25%

Pro$lem 5-23 'contin"e( 2. a. !ales........................... ;aria&le epenses....... Contri&"tion margin....
Alvaro , V800 100 580 :0 V%20 50

Ba4an , V580 100 $: 20 V%85 80

Cano

Total

, , V%20 100 V1,:00 100 250 @# 81: #1 V 80 2# @85 5$ ::0 V 125


255

Pro$lem 5-23 'contin"e( &. ro sales to
Pro$lem 5-23 'contin"e( &. ro sales to

25#

Pro$lem 5-24 ':0 min"tes( 1. Aprils Income !tatement7 Standard Delu5e Amoun t , Amount , 980,00 !ales......................... 0 100 9:0,000 100 ;aria&le epenses7 Bro"ction.............. 55,000 ## 2@,000 5# !elling..................... 5,000 # %,000 # Total varia&le epenses................ 58,000 :0 %0,000 #0 9%2,00 Contri&"tion margin. . 0 50 9%0,000 #0
Pro

Total

Amount , 95#0,00 0 100

Amount 9#$0,00 0

,

1#@,#00 22,#00

%# #

228,#00 %8.@ 2$,#00 #.0

180,000 50 92@0,00 0 :0

2#8,000 5%.@

100

%%2,000 #:.% 120,000 100,000 #0,000 2@0,000 9 :2,000

=et operating income


25:

Pro$lem 5-24 'contin"e( Mas Income !tatement7 Standard Delu5e Amoun t , Amount , 9%20,00 !ales........................ 0 100 9:0,000 100 ;aria&le epenses7 Bro"ction.............. 1@:,000 ## 2@,000 5# 1:,00 !elling.................... 0 # %,000 # Total varia&le 1$2,00 epenses................ 0 :0 %0,000 #0 9128,00 Contri&"tion margin. 0 50 9%0,000 #0
Pro

Total

Amount , 92@0,00 0 100

Amount , 9:#0,00 100. 0 0

$5,#00 %#

2$@,#00 5#.8

1%,#00

#

108,000 50 91:2,00 0 :0

%2,#00

#.0

%%0,000 #0.8 %20,000 5$.2 120,000 100,000 #0 000

Pro$lem 5-24 'contin"e( Mas Income !tatement7 Standard Delu5e Amoun t , Amount , 9%20,00 !ales........................ 0 100 9:0,000 100 ;aria&le epenses7 Bro"ction.............. 1@:,000 ## 2@,000 5# 1:,00 !elling.................... 0 # %,000 # Total varia&le 1$2,00 epenses................ 0 :0 %0,000 #0 9128,00 Contri&"tion margin. 0 50 9%0,000 #0
Pro

Total

Amount , 92@0,00 0 100

Amount , 9:#0,00 100. 0 0

$5,#00 %#

2$@,#00 5#.8

1%,#00

#

108,000 50 91:2,00 0 :0

%2,#00

#.0

%%0,000 #0.8 %20,000 5$.2 120,000 100,000 #0,000 2@0,000 9 #0,000


25@

Pro$lem 5-24 'contin"e( 2. The sales mi has shi)te over the last month )rom a greater concentration o) Bro rac+ets to a greater concentration o) !tanar rac+ets. This shi)t has ca"se a ecrease in the compan3s overall CM ratio )rom #:.%K in April to onl 5$.2K in Ma.
ollar sales to D
Pro$lem 5-24 'contin"e( 2. The sales mi has shi)te over the last month )rom a greater concentration o) Bro rac+ets to a greater concentration o) !tanar rac+ets. This shi)t has ca"se a ecrease in the compan3s overall CM ratio )rom #:.%K in April to onl 5$.2K in Ma.
ollar sales to D


Pro$lem 5-25 '5# min"tes( 1. !ales '2#,000 "nits ? !
D

!
28,000 "nits ? !

!
D 52,000 "nits

52,000 "nits ? !
Pro$lem 5-25 'contin"e( %. Unit Sellin Unit gPric 3aria6le e 75'ense :S8rs ; :S8rs; $0 :0 88 :0 8: :0 85 :0 82 :0 80 :0 @8 :0

Unit Contri6utio n *argin :S8rs; %0 28 2: 25 22 20 18

Total Net 3olum Contri6utio 8i5ed O'eratin e n *argin 75'enses g 9ncome :Units; 2#,000 %0,000 %#,000 50,000 5#,000 #0,000 ##,000

:S8rs; @#0,000 850,000 $10,000 $:0,000 $$0,000 1,000,000 $$0,000

:S8rs; 850,000 850,000 850,000 850,000 850,000 850,000 850,000

:S8rs; '$0,000( 0 @0,000 120,000 1#0,000 1:0,000 1#0,000

The maim"m pro*t is !
Pro$lem 5-26 ':0 min"tes( 1. The income statements wo"l &e7

!ales........................... ;aria&le epenses....... Contri&"tion margin....
Present Per Amount Unit 9800,00 0 920 #:0,000 15 250,000 9: 1$2,000 9 58,000

, 100K @0K %0K

Pro$lem 5-26 ':0 min"tes( 1. The income statements wo"l &e7

!ales........................... ;aria&le epenses....... Contri&"tion margin....
!ales........................... ;aria&le epensesN...... Contri&"tion margin....
Present Per Amount Unit 9800,00 0 920 #:0,000 15 250,000 9: 1$2,000 9 58,000 Pro'osed Per Amount Unit 9800,00 0 920 %20,000 8 580,000 912 5%2,000 9 58,000

, 100K @0K %0K

, 100K 50K :0K

N915  9: D 98 2. a. egree o) operating leverage7 Bresent7

Contri&"tion margin egree o) D operating leverage =et operating income D Bropose7

9250,000 D# 958,000

Contri&"tion margin egree o) D operating leverage =et operating income D

9580,000 D 10 958,000

Pro$lem 5-26 'contin"e( &. ollar sales to &rea+ even7 Bresent7

ollar sales to D
91$2,000 D 9:50,000 0.%0

Bropose7

ollar sales to D
95%2,000 D 9@20,000 0.:0

c. Margin o) sa)et7 Bresent7 Margin o) sa)et D Act"al sales - /rea+-even sales D 9800,000 - 9:50,000 D 91:0,000 Margin o) sa)et D Margin o) sa)et in ollars percentage Act"al sales D

91:0,000 D 20K 9800,000

Bropose7 Margin o) sa)et D Act"al sales - /rea+-even sales D 9800,000 - 9@20,000 D 980,000 Margin o) sa)et D Margin o) sa)et in ollars percentage Act"al sales D

980,000 D 10K 9800,000

Pro$lem 5-26 'contin"e( %. The maWor )actor wo"l &e the sensitivit o) the compan3s operations to cclical movements in the econom. /eca"se the new e"ipment will increase the CM ratio, in ears o) strong economic activit, the compan will &e &etter o with the new e"ipment. However, the compan will &e worse o with the new e"ipment in ears in which sales rop. The *e costs o) the new e"ipment will res"lt in losses &eing inc"rre more "ic+l an the will &e eeper. Th"s, management m"st ecie whether the potential )or greater pro*ts in goo ears is worth the ris+ o) eeper losses in &a ears. 5. =o in)ormation is given in the pro&lem concerning the new varia&le epenses or the new contri&"tion margin ratio. /oth o) these items m"st &e etermine &e)ore the new &rea+-even point can &e comp"te. The comp"tations are7 =ew varia&le epenses7 D '!ales  ;aria&le epenses( 
ollar sales D
Pro$lem 5-26 'contin"e( The greatest ris+ is that the increases in sales an net operating income preicte & the mar+eting manager will not happen an that sales will remain at their present level. =ote that the present level o) sales is 9800,000, which is well &elow the &rea+-even level o) sales "ner the new mar+eting strateg. It wo"l &e a goo iea to compare the new mar+eting strateg to the c"rrent sit"ation more irectl. 4hat level o) sales wo"l &e neee "ner the new metho to generate at least the 958,000 in pro*ts the compan is c"rrentl earning each monthX The comp"tations are7

ollar sales to attainD Target pro*t L
958,000 L9250,000 0.2#

D 91,1#2,000 in sales each month Th"s, sales wo"l have to increase & at least 55K '91,1#2,000 is 55K higher than 9800,000( in orer to ma+e the compan &etter o with the new mar+eting strateg than with the c"rrent approach. This appears to &e etremel ris+.

Pro$lem 5-27 '%0 min"tes( 1. The n"m&ere components are as )ollows7 '1( ollars o) reven"e an costs. '2( ;ol"me o) o"tp"t, epresse in "nits, K o) capacit, sales, or some other meas"re o) activit. '%( Total epense line. '5( ;aria&le epense area. '#(
Pro$lem 5-27 'contin"e( 2. a.

&.

c.

.

e.

g.

ine %7 ine $7 /rea+-even point7

Pemain "nchange. Have a atter slope.


Have a steeper slope. Pemain "nchange.


!hi)t ownwar. Pemain "nchange.


Pemain "nchange. Pemain "nchange.


!hi)t "pwar an have a atter slope. Pemain "nchange. Bro&a&l change, &"t the irection is "ncertain.


Have a atter slope. Have a atter slope. Pemain "nchange in terms o) "nitsR ecrease in terms o) total ollars o) sales.


!hi)t "pwar. Pemain "nchange.

ine %7

!hi)t ownwar an have a steeper slope. Pemain "nchange. Bro&a&l change, &"t the irection is "ncertain.

h. ine $7 /rea+-even point7

Increase.

Increase.

ecrease.

Pemain "nchange.

Increase.

Pro$lem 5-28 ':0 min"tes( 1.

Bro*t D Enit CM ? F 
ollar sales D
Bro*t D 9$,000 D 91.20F D FD FD

Enit CM ? F 

9$,000 L 9:0,000 91.20 per pair

D #@,#00 pairs

Pro$lem 5-28 'contin"e( 2. Cost-vol"me-pro*t graph7

Total !ales /rea+-even point7 #0,000 pairs, or 9100,000 in sales

Total

Pro$lem 5-28 'contin"e( Bro*t graph7

/rea+-even point7 #0,000 pairs o)

Pro$lem 5-28 'contin"e( 5. Incremental contri&"tion margin7 920,000 increase sales ? :0K CM ratio..... 912,000 ess incremental *e salar cost................ 8,000 Increase net operating income.................... 9 5,000 >es, the position sho"l &e converte to a )"ll-time &asis. #. a.

Contri&"tion margin 9@#,000 egree o) D D D# erating leverage =et operating income 91#,000

&. # ? 20K sales increase D 100K increase in net operating income. Th"s, net operating income wo"l o"&le net ear, going )rom 91#,000 to 9%0,000.

Pro$lem 5-29 '@# min"tes( 1. a. !elling price................. 9%@.#0 100K ;aria&le epenses........ 22.#0 :0K Contri&"tion margin..... 91#.00 50K Bro*t D 90 D 91#F D FD FD

Enit CM ? F 
Alternative sol"tion7 Enit sales D
9580,000 91# per s+ate&oar

D %2,000 s+ate&oars

&. The egree o) operating leverage wo"l &e7 egree o) operating leverage D D

Contri&"tion margin =et operating income 9:00,000 D #.0 9120,000

2. The new CM ratio will &e7 !elling price....................... ;aria&le epenses............. Contri&"tion margin..........

9%@.#0 100K 2#.#0 :8K 912.00 %2K

Pro$lem 5-29 'contin"e( The new &rea+-even point will &e7 Bro*t D 90 D 912F D FD FD

Enit CM ? F 
Alternative sol"tion7 Enit sales D
9580,000 912 per s+ate&oar

D 50,000 s+ate&oars

%.

9120,000 L 9580,000 912 per s+ate&oar

D #0,000 s+ate&oars

Pro$lem 5-29 'contin"e( Th"s, sales will have to increase & 10,000 s+ate&oars '#0,000 s+ate&oars, less 50,000 s+ate&oars c"rrentl &eing sol( to earn the same amo"nt o) net operating income as earne last ear. The comp"tations a&ove an in part '2( show the ramatic eect that increases in varia&le costs can have on an organiation. These eects )rom a 9% per "nit increase in la&or costs )or Trene Compan are s"mmarie &elow7

/rea+-even point 'in s+ate&oars(..... !ales 'in s+ate&oars( neee to earn net operating income o) 9120,000........................................

75'ecte Present d %2,000 50,000

50,000

#0,000

=ote that i) varia&le costs o increase net ear, then the compan will W"st &rea+ even i) it sells the same n"m&er o) s+ate&oars '50,000( as it i last ear. 5. The contri&"tion margin ratio last ear was 50K. I) we let B e"al the new selling price, then7 B 0.:0B B B

D 92#.#0 L 0.50B D 92#.#0 D 92#.#0 J 0.:0 D 952.#0

To veri)7 !elling price........................ 952.#0 100K ;aria&le epenses............... 2#.#0 :0K Contri&"tion margin............ [email protected] 50K There)ore, to maintain a 50K CM ratio, a 9% increase in varia&le costs wo"l re"ire a 9# increase in the selling price.

Pro$lem 5-29 'contin"e( #. The new CM ratio wo"l &e7 !elling price..................... 9%@.#0 100K ;aria&le epenses........... 1%.#0 N %:K Contri&"tion margin........ 925.00 :5K N922.#0  '922.#0 ? 50K( D 91%.#0 The new &rea+-even point wo"l &e7 Bro*t D 90 D 925F D FD FD

Enit CM ? F 
N9580,000 ? 1.$ D 9$12,000 Alternative sol"tion7 Enit sales D
9$12,000 925 per s+ate&oar

D %8,000 s+ate&oars

Altho"gh this &rea+-even *g"re is greater than the compan3s present &rea+-even *g"re o) %2,000 s+ate&oars Ssee part '1( a&ove, it is less than the &rea+-even point will &e i) the compan oes not a"tomate an varia&le la&or costs rise net ear Ssee part '2( a&ove.

Pro$lem 5-29 'contin"e( :.

a.

N580,000 ? 1.$ D 9$12,000 Alternative sol"tion7 Enit sales to attain D Target pro*t L
9120,000 L 9$12,000 925 per s+ate&oar

D 5%,000 s+ate&oars Th"s, the compan will have to sell %,000 more s+ate&oars '5%,000  50,000 D %,000( than now &eing sol to earn a pro*t o) 9120,000 each ear. However, this is still less than the #0,000 s+ate&oars that wo"l have to &e sol to earn a 9120,000 pro*t i) the plant is not a"tomate an varia&le la&or costs rise net ear Ssee part '%( a&ove.

Pro$lem 5-29 'contin"e( &. The contri&"tion income statement wo"l &e7 !ales '50,000 s+ate&oars ? 9%@.#0 per s+ate&oar(................................................ ;aria&le epenses '50,000 s+ate&oars ? 91%.#0 per s+ate&oar(................................................ Contri&"tion margin......................................
91,#00,000

#50,000 $:0,000 $12,000 9 58,000

egree o) operating D Contri&"tion margin leverage =et operating income D

9$:0,000 D 20 958,000

c. This pro&lem shows the iUc"lt )ace & some companies. 4hen varia&le la&or costs increase, it is o)ten iUc"lt to pass these cost increases along to c"stomers in the )orm o) higher prices. Th"s, companies are )orce to a"tomate, res"lting in higher operating leverage, o)ten a higher &rea+-even point, an greater ris+ )or the compan. There is no clear answer as to whether one sho"l have &een in )avor o) constr"cting the new plant.

Pro$lem 5-3# '%0 min"tes( 1. The contri&"tion margin per stein wo"l &e7 !elling price.................................................. 9%0 ;aria&le epenses7 B"rchase cost o) the steins........................... 91# Commissions to the st"ent salespersons.... : 21 Contri&"tion margin...................................... 9 $ !ince there are no *e costs, the n"m&er o) "nit sales neee to iel the esire 9@,200 in pro*ts can &e o&taine & iviing the target pro*t & the "nit contri&"tion margin7

Target pro*t 9@,200 D D 800 steins Enit CM 9$ per stein 800 steins ?9%0 per stein D 925,000 in total sales 2. !ince an orer has &een place, there is now a Y*eZ cost associate with the p"rchase price o) the steins 'i.e., the steins can3t &e ret"rne(.
12# steins ?9%0 per stein D9%,@#0 in total sales I) a "antit other than 200 steins were orere, the answer wo"l change accoringl.

Pro$lem 5-31 '5# min"tes( 1. The contri&"tion margin per "nit on the *rst %0,000 "nits is7 Per Unit !elling price....................... 92.#0 ;aria&le epenses............. 1.:0 Contri&"tion margin.......... 90.$0 The contri&"tion margin per "nit on anthing over %0,000 "nits is7 Per Unit !elling price....................... 92.#0 ;aria&le epenses............. 1.@# Contri&"tion margin.......... 90.@# Th"s, )or the *rst %0,000 "nits sol, the total amo"nt o) contri&"tion margin generate wo"l &e7 %0,000 "nits ? 90.$0 per "nit D 92@,000. !ince the *e costs on the *rst %0,000 "nits total 950,000, the 92@,000 contri&"tion margin a&ove is not eno"gh to permit the compan to &rea+ even. There)ore, in orer to &rea+ even, more than %0,000 "nits will have to &e sol. The *e costs that will have to &e covere & the aitional sales are7
Pro$lem 5-31 'contin"e( The aitional sales o) "nits re"ire to cover these *e costs wo"l &e7

Total remaining *e costs 91#,000 D Enit contri&"tion margin on ae "nits 90.@# per "nit D20,000 "nits There)ore, a total o) #0,000 "nits '%0,000 L 20,000( m"st &e sol )or the compan to &rea+ even. This n"m&er o) "nits wo"l e"al total sales o)7 #0,000 "nits ? 92.#0 per "nit D 912#,000 in total sales. 2. Target pro*t 9$,000 D D12,000 "nits nit contri&"tion margin 90.@# per "nit Th"s, the compan m"st sell 12,000 "nits a&ove the &rea+even point to earn a pro*t o) 9$,000 each month. These "nits, ae to the #0,000 "nits re"ire to &rea+ even, e"al total sales o) :2,000 "nits each month to reach the target pro*t. %. I) a &on"s o) 90.1# per "nit is pai )or each "nit sol in ecess o) the &rea+-even point, then the contri&"tion margin on these "nits wo"l rop )rom 90.@# to onl 90.:0 per "nit. The esire monthl pro*t wo"l &e7 2#K ? '950,000 L 92,000( D 910,#00 Th"s,

Target pro*t 910,#00 D D1@,#00 "nits Enit contri&"tion margin 90.:0 per "nit There)ore, the compan m"st sell 1@,#00 "nits a&ove the &rea+-even point to earn a pro*t o) 910,#00 each month. These "nits, ae to the #0,000 "nits re"ire to &rea+ even, wo"l e"al total sales o) :@,#00 "nits each month.

Case 5-32 '@# min"tes( 1. The contri&"tion )ormat income statements 'in tho"sans o) ollars( )or the three alternatives are7

!ales............................................. ;aria&le epenses7 ;aria&le cost o) goos sol......... Commissions.............................. Total varia&le epense................... Contri&"tion margin......................
(#, .%, Commission Commission Own Sales 8orce 9%0,00 9%0,00 0 100K 9%0,000 100K 0 100K 1@,500 #,500 22,800 @,200

@:K 25K

1@,500 :,000 2%,500 :,:00

2,800 800

2,800 800

%,200 :,800

%,200 :,800

9 5 00

9 '200(

1@,500 %,000 @8K 20,500 22K $,:00 2,800 1,%00 N 1,%00 NN %,200 8,:00 9 1,000

N 9800,000 L 9#00,000 D 91,%00,000 NN 9@00,000 L 9500,000 L 9200,000 D 91,%00,000

Case 5-32 'contin"e( 2. Given the ata a&ove, the &rea+-even points can &e etermine "sing total *e epenses an the CM ratios as )ollows7 a. llar sales
:8K %2K

Case 5-32 'contin"e( 2. Given the ata a&ove, the &rea+-even points can &e etermine "sing total *e epenses an the CM ratios as )ollows7 a. llar sales
D

-9200,000 L 98,:00,000 0.%2

D 92:,2#0,000 5.

[ D Total sales reven"e =et operating income D 0.%2[ - 98,:00,000 with compan sales )orce =et operating income D 0.22[ - 9:,800,000 ith the 20K commissions The two net operating incomes are e"al when7 0.%2[  98,:00,000 0.10[ [ [

0.22[  D 9:,800,000 D 91,800,000 D 91,800,000 J 0.10 D 918,000,000

Case 5-32 'contin"e( Th"s, at a sales level o) 918,000,000 either plan will iel the same net operating income. This is veri*e &elow 'in tho"sans o) ollars(7 .%, Commission 9 18,00 0 100K

!ales........................ Total varia&le epense................. 15,050 Contri&"tion margin. %,$:0 Total *e epenses. :,800 =et operating income................... 9 '2,850(

@8K 22K

Own Sales 8orce 9 18,000 100K 12,250 #,@:0 8,:00 9 '2,850(

#. A graph showing &oth alternatives appears &elow7

:8K %2K

Case 5-32 'contin"e( :. To7 Bresient o) Marston Corporation
C%S 5-33 ':0 min"tes( =ote7 This is a pro&lem that will challenge the ver &est st"ents3 concept"al an analtical s+ills. However, wor+ing thro"gh this case will iel s"&stantial iviens in terms o) a m"ch eeper "nerstaning o) critical management acco"nting concepts. 1. The overall &rea+-even sales can &e etermine "sing the CM ratio. 8rog *innow Worm Total 9200,00 !ales....................... 0 9280,000 9250,000 9@20,000 ;aria&le epenses... 120,000 1:0,000 1#0,000 5%0,000 Contri&"tion margin.................. 9 80,000 9120,000 9 $0,000 2$0,000
CM ratioD

Contri&"tion margin 92$0,000 D D0.5028 !ales 9@20,000

ollar sales D
8rog *innow 92.00 91.50 1.20 0.80 90.80

90.:0

Worm 90.80 0.#0 90.%0

Bro"ct *e epenses '&(............................... 918,000 9$:,000 9:0,000 Enit sales to &rea+ even '&( J 'a(...................... 22,#00 1:0,000 200,000

Case 5-33 'contin"e( &. I) the compan were to sell eactl the &rea+-even "antities comp"te a&ove, the compan wo"l lose 9108,000\the amo"nt o) the common *e cost. This occ"rs &eca"se the common *e costs have &een ignore in the calc"lations o) the &rea+-evens. The )act that the compan loses 9108,000 i) it operates at the level o) sales inicate & the &rea+-evens )or the inivi"al pro"cts can &e veri*e as )ollows7 8rog *innow Worm Total Enit sales.............. 22,#00 1:0,000 200,000 91:0,00 9 52$,00 !ales..................... 95#,000 9225,000 0 0 ;aria&le epenses. 2@,000 128,000 100,000 2##,000 Contri&"tion margin................ 918,000 9 $:,000 9 :0,000 1@5,000
common *e costs are allocate on the net page &ase on sales.

Case 5-33 'contin"e( Allocation o) common *e epenses on the &asis o) sales reven"e7 8rog *innow 9200,00 !ales......................... 0 9280,000 Bercentage o) total sales....................... [email protected] %8.$K Allocate common *e epenseN ....... 9%0,000 9 52,000 Bro"ct *e epenses................ 18,000 $:,000 Allocate common an pro"ct *e epenses 'a(........... 958,000 91%8,000 Enit contri&"tion margin '&(.............. 90.80 90.:0 Y/rea+-evenZ point in "nits sol 'a(J'&(.................... :0,000 2%0,000

Worm Total 9250,00 0 9@20,000 %%.%K

100.0K

9%:,000 9108,000 :0,000

1@5,000

9$:,000 9282,000 90.%0

%20,000

NTotal common *e epense ? Bercentage o) total sales I) the compan sells :0,000 "nits o) the
*innow

Worm

=ormal ann"al "nit sales vol"me....................................100,000 200,000 %00,000 Y/rea+-evenZ "nit ann"al sales 'see a&ove(............................. :0,000 2%0,000 %20,000 Y!trategicZ ecision................... retain rop rop

Case 5-33 'contin"e( It wo"l &e nat"ral to interpret a &rea+-even )or a pro"ct as the level o) sales &elow which the compan wo"l &e *nanciall &etter o ropping the pro"ct. There)ore, we sho"l not &e s"rprise i) managers, &ase on the erroneo"s &rea+-even calc"lation on the previo"s page, wo"l ecie to rop the Minnow an 4orm l"res an concentrate on the compan3s Ycore competenc,Z which appears to &e the
Total 9@20,00 0 5%0,000 2$0,000 1@5,000 11:,000

157_35295_EY311_2013_4__2_1_14e_GNB_CH05_SM

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