20840 1 Example Problems Ch. 5 6

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Question 1: Score 0/4

Your responseCorrect response

Exercise 5-1 Fixed and Variable Cost Behavior [LO1]

Espresso Express operates a number of espresso coffee stands in busy suburban malls. The fixed weekly expense of a coffee stand is $1,200 and the variable cost per cup of coffee served is $0.22.

Requirement 1:

Fill in the following table with your estimates of total costs and cost per cup of coffee at the indicated levels of activity for a coffee stand. (Round average cost per cup of coffee to 3 decimal places. Omit the "$" sign in your response.)

Cups of Coffee Served in a Week

2,0002,1002,200

Fixed cost$0.60(0%)$0.571(0%)$0.545(0%)

Variable cost0.22(0%)0.22(0%)0.22(0%)

Total cost$0.82(0%)$0.791(0%)$0.765(0%)

Average cost per cup of coffee served$0.792(0%)$0.792(0%)$0.792(0%)

Exercise 5-1 Fixed and Variable Cost Behavior [LO1]

Espresso Express operates a number of espresso coffee stands in busy suburban malls. The fixed weekly expense of a coffee stand is $1,200 and the variable cost per cup of coffee served is $0.22.

Requirement 1:

Fill in the following table with your estimates of total costs and cost per cup of coffee at the indicated levels of activity for a coffee stand. (Round average cost per cup of coffee to 3 decimal places. Omit the "$" sign in your response.)

Cups of Coffee Served in a Week

2,0002,1002,200

Fixed cost$1,200$1,200$1,200

Variable cost440462484

Total cost$1,640$1,662$1,684

Average cost per cup of coffee served$0.82$0.791$0.765

Total grade: 0.01/12 + 0.01/12 + 0.01/12 + 0.01/12 + 0.01/12 + 0.01/12 + 0.01/12 + 0.01/12 + 0.01/12 + 0.01/12 + 0.01/12 + 0.01/12 = 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0%

Feedback:

Average cost per cup of coffee served = Total cost cups of coffee served in a week

Requirement 2:

Does the average cost per cup of coffee served increase, decrease, or remain the same as the number of cups of coffee served in a week increases?

Your Answer:ChoiceSelectedCorrect

Increases

Decreases

Remains the same

Feedback:The average cost of a cup of coffee declines as the number of cups of coffee served increases because the fixed cost is spread over more cups of coffee.

Question 2: Score 0/4Your responseCorrect response

Exercise 6-2 Prepare a Cost-Volume-Profit (CVP) Graph [LO2]

Karlik Enterprises distributes a single product whose selling price is $24 and whose variable expense is $18 per unit. The company's monthly fixed expense is $24,000.

Requirement 1:

Offline: Prepare a cost-volume-profit graph for the company up to a sales level of 8,000 units.

Requirement 2:

Estimate the company's break-even point in unit sales using your cost-volume-profit graph analysis.

Break-even point in sales16.67(0%)units

Exercise 6-2 Prepare a Cost-Volume-Profit (CVP) Graph [LO2]

Karlik Enterprises distributes a single product whose selling price is $24 and whose variable expense is $18 per unit. The company's monthly fixed expense is $24,000.

Requirement 1:

Offline: Prepare a cost-volume-profit graph for the company up to a sales level of 8,000 units.

Requirement 2:

Estimate the company's break-even point in unit sales using your cost-volume-profit graph analysis.

Break-even point in sales4,000units

Total grade: 0.01/1 = 0%

Feedback:

The break-even point is the point where the total sales revenue and the total expense lines intersect. This occurs at sales of 4,000 units. This can be verified as follows:

Question 3: Score 2.6/4


Exercise 5-3 High-Low Method [LO3]

The Cheyenne Hotel in Big Sky, Montana, has accumulated records of the total electrical costs of the hotel and the number of occupancy-days over the last year. An occupancy-day represents a room rented out for one day. The hotel's business is highly seasonal, with peaks occurring during the ski season and in the summer.

MonthOccupancy-DaysElectricalCosts

January1,736$4,127

February1,904$4,207

March2,356$5,083

April960$2,857

May360$1,871

June744$2,696

July2,108$4,670

August2,406$5,148

September840$2,691

October124$1,588

November720$2,454

December1,364$3,529

Requirement 1:

Using the high-low method, estimate the variable cost of electricity per occupancy-day and the fixed cost of electricity per month. (Round the fixed cost to the nearest whole dollar and the variable cost to the nearest whole cent. Omit the "$" sign in your response.)

Variable cost$1.56(50%)per occupancy day

Fixed cost$1394(0%)per month

Exercise 5-3 High-Low Method [LO3]

The Cheyenne Hotel in Big Sky, Montana, has accumulated records of the total electrical costs of the hotel and the number of occupancy-days over the last year. An occupancy-day represents a room rented out for one day. The hotel's business is highly seasonal, with peaks occurring during the ski season and in the summer.

MonthOccupancy-DaysElectricalCosts

January1,736$4,127

February1,904$4,207

March2,356$5,083

April960$2,857

May360$1,871

June744$2,696

July2,108$4,670

August2,406$5,148

September840$2,691

October124$1,588

November720$2,454

December1,364$3,529

Requirement 1:

Using the high-low method, estimate the variable cost of electricity per occupancy-day and the fixed cost of electricity per month. (Round the fixed cost to the nearest whole dollar and the variable cost to the nearest whole cent. Omit the "$" sign in your response.)

Variable cost$1.56per occupancy day

Fixed cost$1,395per month

Total grade: 1.01/2 + 0.01/2 = 50% + 0%

Feedback:

Occupancy-DaysElectricalCosts

High activity level (August)2,406$5,148

Low activity level (October)1241,588

Change2,282$3,560

Variable cost= Change in cost Change in activity

= $3,560 2,282 occupancy-days

= $1.56 per occupancy-day

Total cost (August)$5,148

Variable cost element($1.56 per occupancy-day 2,406 occupancy-days)3,753

Fixed cost element$1,395

Requirement 2:

Which of the following statement(s) is true? (Select all that apply.)

ChoiceSelectedPoints

Electrical cost may reflect seasonal factors other than just the variation in occupancy daysYes+1

Fixed cost will not be affected by the number of days in a monthNo

Less systematic factors such as frugality of individual guests may also affect electrical costsYes+1

Total correct answers: 2

Partial Grading Explained

Feedback:Electrical costs may reflect seasonal factors other than just the variation in occupancy days. For example, common areas such as the reception area must be lighted for longer periods during the winter than in the summer. This will result in seasonal fluctuations in the fixed electrical costs.Additionally, fixed costs will be affected by the number of days in a month. In other words, costs like the costs of lighting common areas are variable with respect to the number of days in the month, but are fixed with respect to how many rooms are occupied during the month.Other, less systematic, factors may also affect electrical costs such as the frugality of individual guests. Some guests will turn off lights when they leave a room. Others will not.



Exercise 5-4 Contribution Format Income Statement [LO4]

The Alpine House, Inc., is a large retailer of winter sports equipment. An income statement for the company's Ski Department for a recent quarter is presented below:

The Alpine House, Inc.Income StatementSki DepartmentFor the Quarter Ended March 31

Sales$150,000

Cost of goods sold90,000

Gross margin60,000

Selling and administrative expenses:

Selling expenses $30,000

Administrative expenses10,00040,000

Net operating income$20,000

Skis sell, on the average, for $750 per pair. Variable selling expenses are $50 per pair of skis sold. The remaining selling expenses are fixed. The administrative expenses are 20% variable and 80% fixed. The company does not manufacture its own skis; it purchases them from a supplier for $450 per pair.

Requirement 1:

Prepare a contribution format income statement for the quarter. (Omit the "$" sign in your response.)


Sales(6%) $150000(6%)

Variable expenses:

Cost of goods sold(6%)$90000(6%)

Selling expenses(6%)10000(6%)

Administrative expenses(6%)2000(6%)102000(6%)

Contribution margin(6%)48000(6%)

Fixed expenses:

Advertising expenses(0%)90000(0%)

Administrative expenses(6%)8000(6%)98000(0%)

Net operating income(6%)$-50000(0%)

Exercise 5-4 Contribution Format Income Statement [LO4]

The Alpine House, Inc., is a large retailer of winter sports equipment. An income statement for the company's Ski Department for a recent quarter is presented below:


Sales$150,000

Cost of goods sold90,000

Gross margin60,000

Selling and administrative expenses:

Selling expenses $30,000

Administrative expenses10,00040,000


Skis sell, on the average, for $750 per pair. Variable selling expenses are $50 per pair of skis sold. The remaining selling expenses are fixed. The administrative expenses are 20% variable and 80% fixed. The company does not manufacture its own skis; it purchases them from a supplier for $450 per pair.

Requirement 1:

Prepare a contribution format income statement for the quarter. (Omit the "$" sign in your response.)


Sales $150000

Variable expenses:

Cost of goods sold$90000

Selling expenses10000

Administrative expenses2000102000

Contribution margin48000

Fixed expenses:

Selling expenses20,000

Administrative expenses800028,000


Total grade: 1.01/18 + 1.01/18 + 1.01/18 + 1.01/18 + 1.01/18 + 1.01/18 + 1.01/18 + 1.01/18 + 1.01/18 + 1.01/18 + 1.01/18 + 0.01/18 + 0.01/18 + 1.01/18 + 1.01/18 + 0.01/18 + 1.01/18 + 0.01/18 = 6% + 6% + 6% + 6% + 6% + 6% + 6% + 6% + 6% + 6% + 6% + 0% + 0% + 6% + 6% + 0% + 6% + 0%

Feedback:

Cost of goods sold (200 pairs* $450 per pair)$90,000

Variable selling expenses (200 pairs $50 per pair)10,000

Variable administrative expenses (20% $10,000)2,000

Fixed selling expenses [$30,000 (200 pairs $50 per pair)]20,000

Fixed administrative expenses (80% $10,000)8,000

*$150,000 $750 per pair = 200 pairs


Requirement 2:

For every pair of skis sold during the quarter, what was the contribution toward covering fixed expenses and toward earning profits? (Omit the "$" sign in your response.)

Contribution margin per pair$50(0%)

E5_4_id4E5_4_id6E5_4_id8E5_4_id13E5_4_id15

Requirement 2:

For every pair of skis sold during the quarter, what was the contribution toward covering fixed expenses and toward earning profits? (Omit the "$" sign in your response.)

Contribution margin per pair$240

E5_4_id4E5_4_id6E5_4_id8E5_4_id13E5_4_id15


Feedback:

Since 200 pairs of skis were sold and the contribution margin totaled $48,000 for the quarter, the contribution of each pair of skis toward covering fixed costs and toward earning of profits was $240 ($48,000 200 pairs = $240 per pair). Another way to compute the $240 is:

Selling price per pair$750

Variable expenses:

Cost per pair$450

Selling expenses50

Administrative expenses($2,000 200 pairs)10510

Contribution margin per pair$240



Exercise 5-5 Cost Behavior; Contribution Format Income Statement [LO1, LO4]

Harris Company manufactures and sells a single product.

Requirement 1:

A partially completed schedule of the company's total and per unit costs over the relevant range of 30,000 to 50,000 units produced and sold annually is given. Complete the schedule of the company's total and unit costs below (Round the "total costs" to the nearest dollar amount and the "cost per unit" to 2 decimal places. Omit the "$" sign in your response) :

Units Produced and Sold

30,00040,00050,000

Total costs:

Variable costs$180,000$190000(0%)$200000(0%)

Fixed costs300,000310000(0%)320000(0%)

Total costs$480,000$500000(0%)$520000(0%)

Cost per unit:

Variable cost$3.6(0%)$3.8(0%)$4(0%)

Fixed cost6(0%)6.2(0%)6.4(0%)

Total cost per unit$9.6(0%)$10.0(0%)$6.8(0%)

Exercise 5-5 Cost Behavior; Contribution Format Income Statement [LO1, LO4]

Harris Company manufactures and sells a single product.

Requirement 1:

A partially completed schedule of the company's total and per unit costs over the relevant range of 30,000 to 50,000 units produced and sold annually is given. Complete the schedule of the company's total and unit costs below (Round the "total costs" to the nearest dollar amount and the "cost per unit" to 2 decimal places. Omit the "$" sign in your response) :

Units Produced and Sold

30,00040,00050,000

Total costs:

Variable costs$180,000$240,000$300,000

Fixed costs300,000300,000300,000

Total costs$480,000$540,000$600,000

Cost per unit:

Variable cost$6$6$6

Fixed cost107.56

Total cost per unit$16$13.5$12

Total grade: 0.01/15 + 0.01/15 + 0.01/15 + 0.01/15 + 0.01/15 + 0.01/15 + 0.01/15 + 0.01/15 + 0.01/15 + 0.01/15 + 0.01/15 + 0.01/15 + 0.01/15 + 0.01/15 + 0.01/15 = 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0%

Feedback:

The company's variable cost per unit is:


Requirement 2:

Assume that the company produces and sells 45,000 units during the year at a selling price of $16 per unit. Prepare a contribution format income statement for the year. (Input all amounts as positive values. Omit the "$" sign in your response.)

Income StatementFor the Year Ended

Sales(10%)$720000(10%)

Variable expenses(10%)513000(0%)

Contribution margin(10%)207000(0%)

Fixed expense(10%)279000(0%)

Net operating income(10%)$-70000(0%)

Requirement 2:

Assume that the company produces and sells 45,000 units during the year at a selling price of $16 per unit. Prepare a contribution format income statement for the year. (Input all amounts as positive values. Omit the "$" sign in your response.)

Income StatementFor the Year Ended

Sales$720000

Variable expenses270,000

Contribution margin450,000

Fixed expense300,000


Total grade: 1.01/10 + 1.01/10 + 1.01/10 + 0.01/10 + 1.01/10 + 0.01/10 + 1.01/10 + 0.01/10 + 1.01/10 + 0.01/10 = 10% + 10% + 10% + 0% + 10% + 0% + 10% + 0% + 10% + 0%

Feedback:

Sales (45,000 units $16 per unit) = $720,000

Variable expenses (45,000 units $6 per unit) = $270,000



Exercise 5-6 High-Low Method [LO2, LO3]

The following data relating to units shipped and total shipping expense have been assembled by Archer Company, a wholesaler of large, custom-built air-conditioning units for commercial buildings:

MonthUnits ShippedTotal Shipping Expense

January3$1,800

February6$2,300

March4$1,700

April5$2,000

May 7$2,300

June 8$2,700

July2$1,200

Requirement 1:

Using the high-low method, estimate the cost formula for shipping expense where X is the number of units shipped. (Omit the "$" sign in your response.)

Y=$5(0%)+$5(0%)X

Exercise 5-6 High-Low Method [LO2, LO3]

The following data relating to units shipped and total shipping expense have been assembled by Archer Company, a wholesaler of large, custom-built air-conditioning units for commercial buildings:

MonthUnits ShippedTotal Shipping Expense

January3$1,800

February6$2,300

March4$1,700

April5$2,000

May 7$2,300

June 8$2,700

July2$1,200

Requirement 1:

Using the high-low method, estimate the cost formula for shipping expense where X is the number of units shipped. (Omit the "$" sign in your response.)

Y=$700+$250X

Total grade: 0.01/2 + 0.01/2 = 0% + 0%

Feedback:

Units ShippedShipping Expense

High activity level (June)8$2,700

Low activity level (July)21,200

Change 6$1,500

Variable cost element:

Fixed cost element:

Shipping expense at the high activity level$2,700

Less variable cost element ($250 per unit 8 units)2,000

Total fixed cost$700

The cost formula is $700 per month plus $250 per unit shipped or

Y = $700 + $250X,

where X is the number of units shipped.

Requirement 2:

What factors, other than the number of units shipped, are likely to affect the company's total shipping expense? (Select all that apply.)

ChoiceSelectedPoints

Weight of the units shippedNo

Distance travelledYes+1

Size of the units shippedYes+1

Fixed costYes-1

Variable costNo

Total correct answers: 3

Partial Grading Explained

Feedback:The cost of shipping units is likely to depend on the weight and volume of the units and the distance traveled, as well as on the number of units shipped. In addition, higher cost shipping might be necessary to meet a deadline.



Exercise 5-7 Cost Behavior; High-Low Method [LO1, LO3]

Hoi Chong Transport, Ltd., operates a fleet of delivery trucks in Singapore. The company has determined that if a truck is driven 105,000 kilometers during a year, the average operating cost is 11.4 cents per kilometer. If a truck is driven only 70,000 kilometers during a year, the average operating cost increases to 13.4 cents per kilometer.(The Singapore dollar is the currency used in Singapore.)

Requirement 1:

Using the high-low method, estimate the variable and fixed cost elements of the annual cost of the truck operation. (Round the variable cost per kilometer to 3 decimal places. Omit the "$" sign in your response.)

Variable cost per kilometer$5(0%)

Fixed cost per year$5(0%)

Exercise 5-7 Cost Behavior; High-Low Method [LO1, LO3]

Hoi Chong Transport, Ltd., operates a fleet of delivery trucks in Singapore. The company has determined that if a truck is driven 105,000 kilometers during a year, the average operating cost is 11.4 cents per kilometer. If a truck is driven only 70,000 kilometers during a year, the average operating cost increases to 13.4 cents per kilometer.(The Singapore dollar is the currency used in Singapore.)

Requirement 1:

Using the high-low method, estimate the variable and fixed cost elements of the annual cost of the truck operation. (Round the variable cost per kilometer to 3 decimal places. Omit the "$" sign in your response.)

Variable cost per kilometer$0.074

Fixed cost per year$4,200

Total grade: 0.01/2 + 0.01/2 = 0% + 0%

Feedback:

Kilometers DrivenTotal Annual Cost*

High level of activity105,000$11,970

Low level of activity70,0009,380

Change35,000$2,590

* 105,000 kilometers $0.114 per kilometer = $11,970

70,000 kilometers $0.134 per kilometer = $9,380

Variable cost per kilometer:

Fixed cost per year:

Total cost at 105,000 kilometers$11,970

Less variable portion:105,000 kilometers $0.074 per kilometer7,770

Fixed cost per year$4,200


Requirement 2:

Express the variable and fixed costs in the form Y = a + bX. (Round the variable cost per kilometer to 3 decimal places. Omit the "$" sign in your response.)

Y=$5(0%)+$5(0%)X

Requirement 2:

Express the variable and fixed costs in the form Y = a + bX. (Round the variable cost per kilometer to 3 decimal places. Omit the "$" sign in your response.)

Y=$4,200+$0.074X

Total grade: 0.01/2 + 0.01/2 = 0% + 0%


Requirement 3:

If a truck were driven 80,000 kilometers during a year, what total cost would you expect to be incurred? (Omit the "$" sign in your response.)

Total annual cost$400000(0%)

Requirement 3:

If a truck were driven 80,000 kilometers during a year, what total cost would you expect to be incurred? (Omit the "$" sign in your response.)

Total annual cost$10,120


Feedback:

Fixed cost$4,200

Variable cost: 80,000 kilometers $0.074 per kilometer5,920

Total annual cost$10,120



Exercise 5-8 High-Low Method; Predicting Cost [LO1, LO3]

The Lakeshore Hotel's guest-days of occupancy and custodial supplies expense over the last seven months were:

MonthGuest-Days of OccupancyCustodial Supplies Expense

March4,000$7,500

April6,500$8,250

May8,000$10,500

June10,500$12,000

July12,000$13,500

August9,000$10,750

September7,500$9,750

Guest-days is a measure of the overall activity at the hotel. For example, a guest who stays at the hotel for three days is counted as three guest-days.

Requirement 1:

Using the high-low method, estimate a cost formula for custodial supplies expense where X is the number of guest-days. (Round your answer to 2 decimal places. Omit the "$" sign in your response.)

Y=$5(0%)+$5(0%)X


The Lakeshore Hotel's guest-days of occupancy and custodial supplies expense over the last seven months were:

MonthGuest-Days of OccupancyCustodial Supplies Expense

March4,000$7,500

April6,500$8,250

May8,000$10,500

June10,500$12,000

July12,000$13,500

August9,000$10,750

September7,500$9,750

Guest-days is a measure of the overall activity at the hotel. For example, a guest who stays at the hotel for three days is counted as three guest-days.

Requirement 1:

Using the high-low method, estimate a cost formula for custodial supplies expense where X is the number of guest-days. (Round your answer to 2 decimal places. Omit the "$" sign in your response.)

Y=$4,500+$0.75X

Total grade: 0.01/2 + 0.01/2 = 0% + 0%

Feedback:

Guest-DaysCustodial Supplies Expense

High activity level (July)12,000$13,500

Low activity level (March)4,0007,500

Change8,000$6,000

Variable cost element:

Fixed cost element:

Custodial supplies expense at high activity level$13,500

Less variable cost element:12,000 guest-days $0.75 per guest-day9,000

Total fixed cost$4,500

The cost formula is $4,500 per month plus $0.75 per guest-day or

Y = $4,500 + $0.75X


Requirement 2:

Using the cost formula you derived above, what amount of custodial supplies expense would you expect to be incurred at an occupancy level of 11,000 guest-days? (Omit the "$" sign in your response.)

Variable cost$50(0%)

Fixed cost100(0%)

Total cost$150(0%)

Requirement 2:

Using the cost formula you derived above, what amount of custodial supplies expense would you expect to be incurred at an occupancy level of 11,000 guest-days? (Omit the "$" sign in your response.)

Variable cost$8,250

Fixed cost4,500

Total cost$12,750

Total grade: 0.01/3 + 0.01/3 + 0.01/3 = 0% + 0% + 0%

Feedback:

Variable cost (11,000 guest-days $0.75 per guest-day) = $8,250




St. Mark's Hospital contains 450 beds. The average occupancy rate is 80% per month. In other words, on average, 80% of the hospital's beds are occupied by patients. At this level of occupancy, the hospital's operating costs are $32 per occupied bed per day, assuming a 30-day month. This $32 figure contains both variable and fixed cost elements.

During June, the hospital's occupancy rate was only 60%. A total of $326,700 in operating cost was incurred during the month.

Requirement 1:

(a)Estimate the variable cost per occupied bed on a daily basis using the high-low method. (Omit the "$" sign in your response.)

Variable cost per bed-day$50(0%)


St. Mark's Hospital contains 450 beds. The average occupancy rate is 80% per month. In other words, on average, 80% of the hospital's beds are occupied by patients. At this level of occupancy, the hospital's operating costs are $32 per occupied bed per day, assuming a 30-day month. This $32 figure contains both variable and fixed cost elements.

During June, the hospital's occupancy rate was only 60%. A total of $326,700 in operating cost was incurred during the month.

Requirement 1:

(a)Estimate the variable cost per occupied bed on a daily basis using the high-low method. (Omit the "$" sign in your response.)

Variable cost per bed-day$7


Feedback:

Difference in cost:

Monthly operating costs at 80% occupancy:

450 beds 80% = 360 beds;

360 beds 30 days $32 per bed-day$345,600

Monthly operating costs at 60% occupancy (given)326,700

Difference in cost$18,900

Difference in activity:

80% occupancy (450 beds 80% 30 days)10,800

60% occupancy (450 beds 60% 30 days)8,100

Difference in activity2,700


(b)Estimate the total fixed operating costs per month using the high-low method. (Omit the "$" sign in your response.)

Fixed operating costs per month$50000(0%)

(b)Estimate the total fixed operating costs per month using the high-low method. (Omit the "$" sign in your response.)

Fixed operating costs per month$270,000


Feedback:

Monthly operating costs at 80% occupancy (above)$345,600

Less variable costs:360 beds 30 days $7 per bed-day75,600

Fixed operating costs per month$270,000


Requirement 2:

Assume an occupancy rate of 70% per month. What amount of total operating cost would you expect the hospital to incur? (Omit the "$" sign in your response.)

Fixed costs$500(0%)

Variable costs50(0%)

Total expected costs$550(0%)

Requirement 2:

Assume an occupancy rate of 70% per month. What amount of total operating cost would you expect the hospital to incur? (Omit the "$" sign in your response.)

Fixed costs$270,000

Variable costs66,150

Total expected costs$336,150

Total grade: 0.01/3 + 0.01/3 + 0.01/3 = 0% + 0% + 0%

Feedback:

450 beds 70% = 315 beds occupied:

Variable costs: 315 beds 30 days $7 per bed-day = 66,150



Exercise 6-1 Preparing a Contribution Format Income Statement [LO1]

Whirly Corporation's most recent income statement is shown below:

TotalPer Unit

Sales (10,000 units) $350,000$35.00

Variable expenses 200,00020.00

Contribution margin 150,000$15.00

Fixed expenses135,000

Net operating income $15,000

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

Requirement 1:

The sales volume increases by 100 units. (Omit the "$" sign in your response.)

Total

Sales$350000(0%)

Variable expenses200000(0%)

Contribution margin150000(0%)

Fixed expenses135000(20%)

Net operating income$15000(0%)

Exercise 6-1 Preparing a Contribution Format Income Statement [LO1]

Whirly Corporation's most recent income statement is shown below:

TotalPer Unit

Sales (10,000 units) $350,000$35.00

Variable expenses 200,00020.00

Contribution margin 150,000$15.00



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

Requirement 1:

The sales volume increases by 100 units. (Omit the "$" sign in your response.)

Total

Sales$353,500



Fixed expenses135000


Total grade: 0.01/5 + 0.01/5 + 0.01/5 + 1.01/5 + 0.01/5 = 0% + 0% + 0% + 20% + 0%

Feedback:

Sales (10,100 $35.00) = $353,500Variable expenses (10,100 $20.00) = $202,000

You can get the same net operating income using the following approach.

Original net operating income$15,000

Change in contribution margin(100 units $15.00 per unit)1,500

New net operating income$16,500


Requirement 2:

The sales volume decreases by 100 units. (Omit the "$" sign in your response.)

Total

Sales$350000(0%)





Requirement 2:

The sales volume decreases by 100 units. (Omit the "$" sign in your response.)

Total

Sales$346,500





Total grade: 0.01/5 + 0.01/5 + 0.01/5 + 1.01/5 + 0.01/5 = 0% + 0% + 0% + 20% + 0%

Feedback:

Sales (9,900 $35.00) = $346,500Sales (9,900 $20.00) = $198,000

You can get the same net operating income using the following approach.


Change in contribution margin(-100 units $15.00 per unit)(1,500)

New net operating income$13,500


Requirement 3:

The sales volume is 9,000 units. (Leave no cells blank - be certain to enter "0" wherever required. Omit the "$" sign in your response.)

Total

Sales$350000(0%)





Requirement 3:

The sales volume is 9,000 units. (Leave no cells blank - be certain to enter "0" wherever required. Omit the "$" sign in your response.)

Total

Sales$315,000




Net operating income$0

Total grade: 0.01/5 + 0.01/5 + 0.01/5 + 1.01/5 + 0.01/5 = 0% + 0% + 0% + 20% + 0%

Feedback:

Sales (9,000 $35.00) = $315,000Variable expenses (9,000 $20.00) = $180,000

Note: This is the company's break-even point



Exercise 6-4 Computing and Using the CM Ratio [LO3]

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.

Requirement 1:

What is the company's contribution margin (CM) ratio? (Omit the "%" sign in your response.)

Contribution margin ratio5(0%)%

Exercise 6-4 Computing and Using the CM Ratio [LO3]

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.

Requirement 1:

What is the company's contribution margin (CM) ratio? (Omit the "%" sign in your response.)

Contribution margin ratio40%


Feedback:

The company's contribution margin (CM) ratio is:

Total sales$200,000

Total variable expenses120,000

= Total contribution margin80,000

Total sales$200,000

= CM ratio40%


Requirement 2:

Estimate the change in the company's net operating income if it were to increase its total sales by $1,000.(Omit the "$" sign in your response.).

Estimated change in net operating income$500(0%)

Requirement 2:

Estimate the change in the company's net operating income if it were to increase its total sales by $1,000.(Omit the "$" sign in your response.).

Estimated change in net operating income$400


Feedback:

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$1,000

CM ratio40%

= Estimated change in net operating income$400



Exercise 6-5 Changes in Variable Costs, Fixed Costs, Selling Price, and Volume [LO4]

Data for Hermann Corporation are shown below:

Per unitPercentof Sales

Selling price$90100%

Variable expenses6370%

Contribution margin$2730%

Fixed expenses are $30,000 per month and the company is selling 2,000 units per month.

Requirement 1:

(a) Calculate the change in net operating income if a $5,000 increase in the monthly advertising budget would increase monthly sales by $9,000. (Negative amount should be indicated by a minus sign. Omit the "$" sign in your response.)

Change in net operating income$500(0%)

Exercise 6-5 Changes in Variable Costs, Fixed Costs, Selling Price, and Volume [LO4]

Data for Hermann Corporation are shown below:

Per unitPercentof Sales




Fixed expenses are $30,000 per month and the company is selling 2,000 units per month.

Requirement 1:

(a) Calculate the change in net operating income if a $5,000 increase in the monthly advertising budget would increase monthly sales by $9,000. (Negative amount should be indicated by a minus sign. Omit the "$" sign in your response.)

Change in net operating income$-2,300


Feedback:

The following table shows the effect of the proposed change in monthly advertising budget:

Current salesSales withAdditionalAdvertisingBudgetDifference

Sales$180,000$189,000$9,000

Variable expenses126,000132,3006,300

Contribution margin54,00056,7002,700

Fixed expenses30,00035,0005,000

Net operating income$24,000$21,700($2,300)

(b)Should the advertising budget be increased as suggested in requirement 1(a) above?

Your Answer:ChoiceSelected

Yes

No

Feedback:Assuming no other important factors need to be considered, the increase in the advertising budget should not be approved because it would lead to a decrease in net operating income of $2,300.

Requirement 2:

Refer to the original data. Management is considering using higher-quality components that would increase the variable cost by $2 per unit. The marketing manager believes the higher-quality product would increase sales by 10% per month. Should the higher-quality components be used?

Your Answer:ChoiceSelected

Yes

No

Feedback:The $2 increase in variable cost will cause the unit contribution margin to decrease from $27 to $25 with the following impact on net operating income:

Expected total contribution margin with the higher-quality components: 2,200 units $25 per unit$55,000

Present total contribution margin:2,000 units $27 per unit54,000

Change in total contribution margin$1,000

Assuming no change in fixed costs and all other factors remain the same, the higher-quality components should be used.



Exercise 6-6 Compute the Level of Sales Required to Attain a Target Profit [LO5]

Lin Corporation has a single product whose selling price is $120 and whose variable expense is $80 per unit. The company's monthly fixed expense is $50,000.

Requirement 1:

Using the equation method, solve for the unit sales that are required to earn a target profit of $10,000.

Unit sales to earn target profit5(0%)units

Exercise 6-6 Compute the Level of Sales Required to Attain a Target Profit [LO5]

Lin Corporation has a single product whose selling price is $120 and whose variable expense is $80 per unit. The company's monthly fixed expense is $50,000.

Requirement 1:

Using the equation method, solve for the unit sales that are required to earn a target profit of $10,000.

Unit sales to earn target profit1,500units


Feedback:

The equation method yields the required unit sales, Q, 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


Requirement 2:

Using the formula method, solve for the unit sales that are required to earn a target profit of $15,000.

Unit sales to earn target profit50(0%)units

Requirement 2:

Using the formula method, solve for the unit sales that are required to earn a target profit of $15,000.

Unit sales to earn target profit1,625units


Feedback:

The formula approach yields the required unit sales as follows:



Exercise 6-7 Compute the Break-Even Point [LO6]

Mauro Products distributes a single product, a woven basket whose selling price is $15 and whose variable expense is $12 per unit. The company's monthly fixed expense is $4,200.

Requirement 1:

Solve for the company's break-even point in unit sales using the equation method.

Break-even point in unit sales500(0%)baskets

Exercise 6-7 Compute the Break-Even Point [LO6]

Mauro Products distributes a single product, a woven basket whose selling price is $15 and whose variable expense is $12 per unit. The company's monthly fixed expense is $4,200.

Requirement 1:

Solve for the company's break-even point in unit sales using the equation method.

Break-even point in unit sales1,400baskets


Feedback:

The equation method yields the break-even point in unit sales, Q, 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

The formula method gives an answer that is identical to the equation method for the break-even point in unit sales:

Unit sales to break even=Fixed expenses

Unit CM

=$4,200 = 1,400 baskets

$3


Requirement 2:

Solve for the company's break-even point in sales dollars using the equation method and the CM ratio. (Omit the "$" sign in your response.)

Break-even point in sales $500(0%)

Requirement 2:

Solve for the company's break-even point in sales dollars using the equation method and the CM ratio. (Omit the "$" sign in your response.)

Break-even point in sales $21,000


Feedback:

The equation method can be used to compute the break-even point in sales dollars as follows:

CM ratio=Unit contribution margin

Unit selling price

=$3 = 0.20

$15

Profit= [CM ratio Sales] Fixed expenses

$0= [0.20 Sales] $4,200

0.20 Sales= $4,200

Sales= $4,200 0.20

Sales= $21,000

The formula method also gives an answer that is identical to the equation method for the break-even point in dollar sales:

Dollar sales to break even=Fixed expenses

CM ratio

=$4,200 = $21,000

0.20



Exercise 6-8 Compute the Margin of Safety [LO7]

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

Selling price$30per unit

Variable expenses$20per unit

Fixed expenses$7,500per month

Unit sales1,000units per month

Requirement 1:

Compute the company's margin of safety. (Omit the "$" sign in your response.)

Margin of safety$500(0%)

Exercise 6-8 Compute the Margin of Safety [LO7]

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

Selling price$30per unit

Variable expenses$20per unit

Fixed expenses$7,500per month

Unit sales1,000units per month

Requirement 1:

Compute the company's margin of safety. (Omit the "$" sign in your response.)

Margin of safety$7,500


Feedback:

To compute the margin of safety, we must first compute the break-even unit sales.


$0=[($30 $20) Q] $7,500

$0=[($10) Q] $7,500

$10Q=$7,500

Q=$7,500 $10

Q=750 units

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


Requirement 2:

Compute the company's margin of safety as a percentage of its sales. (Omit the "%" sign in your response.)

Margin of safety as a percentage of sales5(0%)%

Requirement 2:

Compute the company's margin of safety as a percentage of its sales. (Omit the "%" sign in your response.)

Margin of safety as a percentage of sales25%


Feedback:

The margin of safety as a percentage of sales is as follows:

Margin of safety (in dollars)$7,500

Sales$30,000

Margin of safety percentage25%



Exercise 6-9 Compute and Use the Degree of Operating Leverage [LO8]

Engberg Company installs lawn sod in home yards. The company's most recent monthly contribution format income statement follows:

AmountPercent of Sales

Sales $80,000100%

Variable expenses 32,00040%

Contribution margin 48,00060%

Fixed expenses 38,000


Requirement 1:

Compute the company's degree of operating leverage. (Round your answer to 1 decimal place.)

Degree of operating leverage1000(0%)

Exercise 6-9 Compute and Use the Degree of Operating Leverage [LO8]

Engberg Company installs lawn sod in home yards. The company's most recent monthly contribution format income statement follows:

AmountPercent of Sales

Sales $80,000100%

Variable expenses 32,00040%

Contribution margin 48,00060%



Requirement 1:

Compute the company's degree of operating leverage. (Round your answer to 1 decimal place.)

Degree of operating leverage4.8


Feedback:

The company's degree of operating leverage would be computed as follows:

Contribution margin$48,000




Requirement 2:

Using the degree of operating leverage, estimate the impact on net operating income of a 5% increase in sales. (Omit the "%" sign in your response.)

Estimated percent change in net operating income5(0%)%

Requirement 2:

Using the degree of operating leverage, estimate the impact on net operating income of a 5% increase in sales. (Omit the "%" sign in your response.)

Estimated percent change in net operating income24%


Feedback:

A 5% increase in sales should result in a 24% increase in net operating income, computed as follows:


Percent increase in sales5%

Estimated percent increase in net operating income24%


Requirement 3:

Verify your estimate from requirement (2) above by constructing a new contribution format income statement for the company assuming a 5% increase in sales. (Omit the "$" and "%" sign in your response.)

Amount

Sales$80000(0%)





Original net operating income$5000(0%)

Percent change in net operating income100(0%)%

Requirement 3:

Verify your estimate from requirement (2) above by constructing a new contribution format income statement for the company assuming a 5% increase in sales. (Omit the "$" and "%" sign in your response.)

Amount

Sales$84,000



Fixed expenses38000



Percent change in net operating income24%

Total grade: 0.01/7 + 0.01/7 + 0.01/7 + 1.01/7 + 0.01/7 + 0.01/7 + 0.01/7 = 0% + 0% + 0% + 14% + 0% + 0% + 0%



Exercise 6-10 Compute the Break-Even Point for a Multiproduct Company [LO9]

Lucido Products markets two computer games: Claimjumper and Makeover. A contribution format income statement for a recent month for the two games appears on the following page:

ClaimjumperMakeoverTotal

Sales $30,000$70,000$100,000

Variable expenses 20,000 50,00070,000

Contribution margin $10,000$20,00030,000



Requirement 1:

Compute the overall contribution margin (CM) ratio for the company. (Omit the "%" sign in your response.)

Overall CM ratio5(0%)%

Exercise 6-10 Compute the Break-Even Point for a Multiproduct Company [LO9]

Lucido Products markets two computer games: Claimjumper and Makeover. A contribution format income statement for a recent month for the two games appears on the following page:


Sales $30,000$70,000$100,000

Variable expenses 20,000 50,00070,000

Contribution margin $10,000$20,00030,000



Requirement 1:

Compute the overall contribution margin (CM) ratio for the company. (Omit the "%" sign in your response.)

Overall CM ratio30%


Feedback:

The overall contribution margin ratio can be computed as follows:


Requirement 2:

Compute the overall break-even point for the company in sales dollars. (Omit the "$" sign in your response.)

Overall break-even$500(0%)

Requirement 2:

Compute the overall break-even point for the company in sales dollars. (Omit the "$" sign in your response.)

Overall break-even$80,000


Feedback:

The overall break-even point in sales dollars can be computed as follows:


Requirement 3:

Verify the overall break-even point for the company by constructing a contribution format income statement showing the appropriate levels of sales for the two products. (Round your answers to the nearest dollar amount. Do not round your interim calculation. Leave no cells blank - be certain to enter "0" wherever required. Omit the "$" and "%" sign in your response.)


Original dollar sales$50(0%)$500(0%)$5000(0%)

Sales at break-even$2(0%)$10(0%)$100(0%)


Sales$50(0%)$500(0%)$5000(0%)

Variable expenses20(0%)30(0%)400(0%)

Contribution margin$30(0%)$470(0%)4600(0%)



Requirement 3:

Verify the overall break-even point for the company by constructing a contribution format income statement showing the appropriate levels of sales for the two products. (Round your answers to the nearest dollar amount. Do not round your interim calculation. Leave no cells blank - be certain to enter "0" wherever required. Omit the "$" and "%" sign in your response.)


Original dollar sales$30,000$70,000$100,000

Sales at break-even$24,000$56,000$80,000


Sales$24,000$56,000$80,000

Variable expenses16,00040,00056,000

Contribution margin$8,000$16,00024,000


Net operating income$0

Total grade: 0.01/17 + 0.01/17 + 0.01/17 + 0.01/17 + 0.01/17 + 0.01/17 + 0.01/17 + 0.01/17 + 0.01/17 + 0.01/17 + 0.01/17 + 0.01/17 + 0.01/17 + 0.01/17 + 0.01/17 + 0.01/17 + 0.01/17 = 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0%

Feedback:

Claimjumper variable expenses: ($24,000/$30,000) $20,000 = $16,000

Makeover variable expenses: ($56,000/$70,000) $50,000 = $40,000



Exercise 6-11 Using a Contribution Format Income Statement [LO1, LO4]

Miller Company's most recent contribution format income statement is shown below:

TotalPer Unit

Sales (20,000 units)$300,000 $15.00

Variable expenses180,0009.00

Contribution margin120,000 $6.00



Required:

Prepare a new contribution format income statement under each of the following conditions (consider each case independently): (Round your per unit values to 2 decimal places. Omit the "$" sign in your response.)

(a)The number of units sold increases by 15%.

TotalPer Unit

Sales$300000(0%)$15(13%)

Variable expenses180000(0%)9(13%)

Contribution margin120000(0%)$6(13%)



Exercise 6-11 Using a Contribution Format Income Statement [LO1, LO4]

Miller Company's most recent contribution format income statement is shown below:

TotalPer Unit

Sales (20,000 units)$300,000 $15.00


Contribution margin120,000 $6.00



Required:

Prepare a new contribution format income statement under each of the following conditions (consider each case independently): (Round your per unit values to 2 decimal places. Omit the "$" sign in your response.)

(a)The number of units sold increases by 15%.

TotalPer Unit

Sales$345,000$15


Contribution margin138,000$6

Fixed expenses70000


Total grade: 0.01/8 + 1.01/8 + 0.01/8 + 1.01/8 + 0.01/8 + 1.01/8 + 1.01/8 + 0.01/8 = 0% + 13% + 0% + 13% + 0% + 13% + 13% + 0%

Feedback:

Sales (20,000 units 1.15 = 23,000 units)


(b)The selling price decreases by $1.50 per unit, and the number of units sold increases by 25%.

TotalPer Unit

Sales $300000(0%)$15(0%)





(b)The selling price decreases by $1.50 per unit, and the number of units sold increases by 25%.

TotalPer Unit

Sales $337,500$13.5


Contribution margin112,500$4.5

Fixed expenses70000


Total grade: 0.01/8 + 0.01/8 + 0.01/8 + 1.01/8 + 0.01/8 + 0.01/8 + 1.01/8 + 0.01/8 = 0% + 0% + 0% + 13% + 0% + 0% + 13% + 0%

Feedback:



(c)The selling price increases by $1.50 per unit, fixed expenses increase by $20,000, and the number of units sold decreases by 5%.

TotalPer Unit

Sales $300000(0%)$15(0%)





(c)The selling price increases by $1.50 per unit, fixed expenses increase by $20,000, and the number of units sold decreases by 5%.

TotalPer Unit

Sales $313,500$16.5





Total grade: 0.01/8 + 0.01/8 + 0.01/8 + 1.01/8 + 0.01/8 + 0.01/8 + 0.01/8 + 0.01/8 = 0% + 0% + 0% + 13% + 0% + 0% + 0% + 0%

Feedback:



(d)The selling price increases by 12%, variable expenses increase by 60 cents per unit, and the number of units sold decreases by 10%.

TotalPer Unit

Sales $300000(0%)$15(0%)





(d)The selling price increases by 12%, variable expenses increase by 60 cents per unit, and the number of units sold decreases by 10%.

TotalPer Unit

Sales $302,400$16.8



Fixed expenses70000


Total grade: 0.01/8 + 0.01/8 + 0.01/8 + 0.01/8 + 0.01/8 + 0.01/8 + 1.01/8 + 0.01/8 = 0% + 0% + 0% + 0% + 0% + 0% + 13% + 0%

Feedback:




Exercise 6-12 Target Profit and Break-Even Analysis; Margin of Safety; CM Ratio [LO1, LO3, LO5, LO6, LO7]

Menlo Company distributes a single product. The company's sales and expenses for last month follow:

TotalPer Unit

Sales$450,000$30





Requirement 1:

What is the monthly break-even point in units sold and in sales dollars? (Omit the "$" sign in your response.)

Monthly break-even point5(0%)units

Sales$50000(0%)

Exercise 6-12 Target Profit and Break-Even Analysis; Margin of Safety; CM Ratio [LO1, LO3, LO5, LO6, LO7]

Menlo Company distributes a single product. The company's sales and expenses for last month follow:

TotalPer Unit

Sales$450,000$30





Requirement 1:

What is the monthly break-even point in units sold and in sales dollars? (Omit the "$" sign in your response.)

Monthly break-even point12,000units

Sales$360,000

Total grade: 0.01/2 + 0.01/2 = 0% + 0%

Feedback:

Profit=Unit CM Q Fixed expenses

$0Q=($30 $12) Q $216,000

$0Q=($18) Q $216,000

$18Q=$216,000

Q=$216,000 $18

Q=12,000 units, or at $30 per unit, $360,000


Requirement 2:

Without resorting to computations, what is the total contribution margin at the break-even point? (Omit the "$" sign in your response.)

Total contribution margin at the break-even point$500(0%)

Requirement 2:

Without resorting to computations, what is the total contribution margin at the break-even point? (Omit the "$" sign in your response.)

Total contribution margin at the break-even point$216,000


Feedback:

The contribution margin is $216,000 because the contribution margin is equal to the fixed expenses at the break-even point.


Requirement 3:

How many units would have to be sold each month to earn a target profit of $90,000? Use the formula method.

Units sold500(0%)units

Requirement 3:

How many units would have to be sold each month to earn a target profit of $90,000? Use the formula method.

Units sold17,000units


Feedback:


Requirement 4:

Refer to the original data. Compute the company's margin of safety in both dollar and percentage terms. (Omit the "$" and "%" signs in your response.)

DollarsPercentage

Margin of safety$50(0%)5(0%)%

Requirement 4:

Refer to the original data. Compute the company's margin of safety in both dollar and percentage terms. (Omit the "$" and "%" signs in your response.)

DollarsPercentage

Margin of safety$90,00020%

Total grade: 0.01/2 + 0.01/2 = 0% + 0%

Feedback:

Margin of safety in dollar terms:

Margin of safety in percentage terms:


Requirement 5:

What is the company's CM ratio? If sales increase by $50,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase? (Omit the "$" and "%" signs in your response.)

CM ratio5(0%)%

Increase in net operating income$500(0%)

Requirement 5:

What is the company's CM ratio? If sales increase by $50,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase? (Omit the "$" and "%" signs in your response.)

CM ratio60%

Increase in net operating income$30,000

Total grade: 0.01/2 + 0.01/2 = 0% + 0%

Feedback:

The CM ratio is 60%.

Expected total contribution margin: ($500,000 60%)$300,000

Present total contribution margin: ($450,000 60%)270,000

Increase in contribution margin$30,000

Given that the company's fixed expenses will not change, monthly net operating income will also increase by $30,000.

Alternative solution:$50,000 incremental sales 60% CM ratio = $30,000



Exercise 6-13 Target Profit and Break-Even Analysis [LO3, LO4, LO5, LO6]

Lindon Company is the exclusive distributor for an automotive product that sells for $40 per unit and has a CM ratio of 30%. The company's fixed expenses are $180,000 per year. The company plans to sell 16,000 units this year.

Requirement 1:

What are the variable expenses per unit? (Omit the "$" sign in your response.)

Variable expenses per unit$40(0%)

Exercise 6-13 Target Profit and Break-Even Analysis [LO3, LO4, LO5, LO6]

Lindon Company is the exclusive distributor for an automotive product that sells for $40 per unit and has a CM ratio of 30%. The company's fixed expenses are $180,000 per year. The company plans to sell 16,000 units this year.

Requirement 1:

What are the variable expenses per unit? (Omit the "$" sign in your response.)

Variable expenses per unit$28


Feedback:

Variable expenses: $40 (100% 30%) = $28.


Requirement 2:

Use the equation method for the following:

(a)What is the break-even point in units and sales dollars? (Omit the "$" sign in your response.)

Break-even point in units40(0%)units

Break-even point in sales dollars$400(0%)

Requirement 2:

Use the equation method for the following:

(a)What is the break-even point in units and sales dollars? (Omit the "$" sign in your response.)

Break-even point in units15,000units

Break-even point in sales dollars$600,000

Total grade: 0.01/2 + 0.01/2 = 0% + 0%

Feedback:





$0=$12 Q $180,000

$12Q=$180,000

Q=$180,000 $12

Q=15,000 units

In sales dollars: 15,000 units $40 per unit = $600,000


(b)What sales level in units and in sales dollars is required to earn an annual profit of $60,000? (Omit the "$" sign in your response.)

Sales level in units50(0%)units

Sales level in dollars$5000(0%)

(b)What sales level in units and in sales dollars is required to earn an annual profit of $60,000? (Omit the "$" sign in your response.)

Sales level in units20,000units

Sales level in dollars$800,000

Total grade: 0.01/2 + 0.01/2 = 0% + 0%

Feedback:


$60,000=[$12 Q] $180,000

$12Q=$60,000 + $180,000

$12Q=$240,000

Q=$240,000 $12

Q=20,000 units



(c)Assume that by using a more efficient shipper, the company is able to reduce its variable expenses by $4 per unit. What is the company's new break-even point in units and sales dollars? (Omit the "$" sign in your response.)

New break-even point in units50(0%)units

New break-even point in sales dollars$5000(0%)

(c)Assume that by using a more efficient shipper, the company is able to reduce its variable expenses by $4 per unit. What is the company's new break-even point in units and sales dollars? (Omit the "$" sign in your response.)

New break-even point in units11,250units

New break-even point in sales dollars$450,000

Total grade: 0.01/2 + 0.01/2 = 0% + 0%

Feedback:

The company's new cost/revenue relation will be:


Variable expenses ($28 $4)2460%



$0=[($40 $24) Q] $180,000

$16Q=$180,000

Q=$180,000 $16

Q=11,250 units




Exercise 6-14 Missing Data; Basic CVP Concepts [LO1, LO9]

Fill in the missing amounts in each of the eight case situations below. Each case is independent of the others. (Hint: One way to find the missing amounts would be to prepare a contribution format income statement for each case, enter the known data, and then compute the missing items.)

Requirement 1:

Assume that only one product is being sold in each of the four following case situations: (Omit the "$" sign in your response.)

Case #1Case #2Case #3Case #4

Units Sold15,00012000(0%)10,0006,000

Sales$180,000$100,000$250000(0%)$300,000

Variable Expenses120,000110000(0%)70,00050000(0%)

Contribution Margin60,00040,000130,00090,000

Fixed expenses50,00032,00025000(0%)100,000

Net Operating Income (Loss)5000(0%)8,00012,000(10,000)

Contribution Margin per Unit$5(0%)$10$13$15(13%)

Exercise 6-14 Missing Data; Basic CVP Concepts [LO1, LO9]

Fill in the missing amounts in each of the eight case situations below. Each case is independent of the others. (Hint: One way to find the missing amounts would be to prepare a contribution format income statement for each case, enter the known data, and then compute the missing items.)

Requirement 1:

Assume that only one product is being sold in each of the four following case situations: (Omit the "$" sign in your response.)


Units Sold15,0004,00010,0006,000

Sales$180,000$100,000$200,000$300,000

Variable Expenses120,00060,00070,000210,000


Fixed expenses50,00032,000118,000100,000

Net Operating Income (Loss)10,0008,00012,000(10,000)

Contribution Margin per Unit$4$10$13$15

Total grade: 0.01/8 + 0.01/8 + 0.01/8 + 0.01/8 + 0.01/8 + 0.01/8 + 0.01/8 + 1.01/8 = 0% + 0% + 0% + 0% + 0% + 0% + 0% + 13%

Feedback:

Case #1Case #2

Number of units sold15,000*4,000

Sales$180,000*$12$100,000*$25

Variable Expenses120,000*860,00015

Contribution margin60,000$440,000$10*

Fixed Expenses50,000*32,000*

Net operating income$10,000$8,000*

Case #3Case #4

Number of units sold10,000*6,000*

Sales$200,000$20$300,000*$50

Variable Expenses70,000*7210,00035

Contribution margin130,000$13*90,000$15

Fixed Expenses118,000100,000*

Net operating income$12,000*$(10,000)*

* Given


Requirement 2:

Assume that more than one product is being sold in each of the four following case situations: (Omit the "$" and "%" signs in your response.)


Sales$500,000$400,000$300000(0%)600,000

Variable Expenses200000(0%)260,000320000(0%)420,000


Fixed expenses70000(0%)100,000130,000160000(0%)

Net Operating Income (Loss)$7,000$13500(0%)$20,000$(5,000)

Average Contribution Margin Ratio20%40(0%)%60%80(0%)%

Requirement 2:

Assume that more than one product is being sold in each of the four following case situations: (Omit the "$" and "%" signs in your response.)


Sales$500,000$400,000$250,000600,000

Variable Expenses400,000260,000100,000420,000


Fixed expenses93,000100,000130,000185,000

Net Operating Income (Loss)$7,000$40,000$20,000$(5,000)

Average Contribution Margin Ratio20%35%60%30%

Total grade: 0.01/8 + 0.01/8 + 0.01/8 + 0.01/8 + 0.01/8 + 0.01/8 + 0.01/8 + 0.01/8 = 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0%

Feedback:

Case #1Case #2

Sales$500,000*100%$400,000*100%

Variable Expenses400,00080260,000*65

Contribution margin100,00020%*140,00035%

Fixed Expenses93,000100,000*

Net operating income$7,000*$40,000

Case #3Case #4

Sales$250,000100%$600,000*100%

Variable Expenses100,00040420,000*70

Contribution margin150,00060%*180,00030%

Fixed Expenses130,000*185,000

Net operating income$20,000*$(5,000)*

* Given



Exercise 6-15 Operating Leverage [LO4, LO8]

Magic Realm, Inc., has developed a new fantasy board game. The company sold 15,000 games last year at a selling price of $20 per game. Fixed costs associated with the game total $182,000 per year, and variable costs are $6 per game. Production of the game is entrusted to a printing contractor. Variable costs consist mostly of payments to this contractor.

Requirement 1:

(a)Prepare a contribution format income statement for the game last year. (Omit the "$" sign in your response.)

Total

Sales$300000(20%)




Net operating income(loss)$28000(20%)

Exercise 6-15 Operating Leverage [LO4, LO8]

Magic Realm, Inc., has developed a new fantasy board game. The company sold 15,000 games last year at a selling price of $20 per game. Fixed costs associated with the game total $182,000 per year, and variable costs are $6 per game. Production of the game is entrusted to a printing contractor. Variable costs consist mostly of payments to this contractor.

Requirement 1:

(a)Prepare a contribution format income statement for the game last year. (Omit the "$" sign in your response.)

Total

Sales$300000

Variable expenses90000

Contribution margin210000


Net operating income(loss)$28000


(b) Compute the degree of operating leverage. (Round your answer to 1 decimal place.)


(b) Compute the degree of operating leverage. (Round your answer to 1 decimal place.)



Feedback:

The degree of operating leverage is:


Requirement 2:

Management is confident that the company can sell 18,000 games next year (an increase of 3,000 games, or 20%, over last year).

(a)Compute the expected percentage increase in net operating income for next year. (Omit the "%" sign in your response.)

Expected percentage increase in net operating income5(0%)%

Requirement 2:

Management is confident that the company can sell 18,000 games next year (an increase of 3,000 games, or 20%, over last year).

(a)Compute the expected percentage increase in net operating income for next year. (Omit the "%" sign in your response.)

Expected percentage increase in net operating income150%


Feedback:

Sales of 18,000 games represent a 20% increase over last year's sales. Because the degree of operating leverage is 7.5, net operating income should increase by 7.5 times as much, or by 150% (7.5 20%).


(b)Compute the expected total dollar net operating income(loss) for next year. (Do not prepare an income statement; use the degree of operating leverage to compute your answer. Omit the "$" sign in your response.)

Total expected net operating income(loss)$50000(0%)

(b)Compute the expected total dollar net operating income(loss) for next year. (Do not prepare an income statement; use the degree of operating leverage to compute your answer. Omit the "$" sign in your response.)

Total expected net operating income(loss)$70,000


Feedback:

The expected total dollar amount of net operating income for next year would be:

Last year's net operating income(loss)$28,000

Expected increase in net operating income next year (150% $28,000)42,000

Total expected net operating income(loss)$70,000



Exercise 6-16 Target Profit and Break-Even Analysis [LO4, LO5, LO6]

Outback Outfitters sells recreational equipment. One of the company's products, a small camp stove, sells for $50 per unit. Variable expenses are $32 per stove, and fixed expenses associated with the stove total $108,000 per month.

Requirement 1:

Compute the break-even point in number of stoves and in total sales dollars. (Omit the "$" sign in your response.)

Number of stoves50(0%)

Total sales$50000(0%)

Exercise 6-16 Target Profit and Break-Even Analysis [LO4, LO5, LO6]

Outback Outfitters sells recreational equipment. One of the company's products, a small camp stove, sells for $50 per unit. Variable expenses are $32 per stove, and fixed expenses associated with the stove total $108,000 per month.

Requirement 1:

Compute the break-even point in number of stoves and in total sales dollars. (Omit the "$" sign in your response.)

Number of stoves6,000

Total sales$300,000

Total grade: 0.01/2 + 0.01/2 = 0% + 0%

Feedback:


$0=[($50 $32) Q] $108,000

$0=[($18) Q] $108,000

$18Q=$180,000

Q=$180,000 $18

Q=6,000 stoves, or at $50 per stove, $300,000 in sales

Requirement 2:

If the variable expenses per stove increase as a percentage of the selling price, will it result in a higher or a lower break-even point? (Assume that the fixed expenses remain unchanged.)


Lower

Higher

Feedback:An increase in variable expenses as a percentage of the selling price would result in a higher break-even point. If variable expenses increase as a percentage of sales, then the contribution margin will decrease as a percentage of sales. With a lower CM ratio, more stoves would have to be sold to generate enough contribution margin to cover the fixed costs.


Requirement 3:

At present, the company is selling 8,000 stoves per month. The sales manager is convinced that a 10% reduction in the selling price would result in a 25% increase in monthly sales of stoves. Prepare two contribution format income statements, one under present operating conditions, and one as operations would appear after the proposed changes. Show both total and per unit data on your statements. (Omit the "$" sign in your response.)

Present: 8,000 stovesProposed: 50(0%) stoves

TotalPer UnitTotalPer Unit

Sales$500000(0%)$500(0%)$50000(0%)$50(0%)

Variable expenses30000(0%)30(0%)3000(0%)30(0%)

Contribution margin470000(0%)$470(0%)470000(0%)$470(0%)

Fixed expenses5000(0%)5000(0%)

Net operating income$465000(0%)$465000(0%)

Requirement 3:

At present, the company is selling 8,000 stoves per month. The sales manager is convinced that a 10% reduction in the selling price would result in a 25% increase in monthly sales of stoves. Prepare two contribution format income statements, one under present operating conditions, and one as operations would appear after the proposed changes. Show both total and per unit data on your statements. (Omit the "$" sign in your response.)

Present: 8,000 stovesProposed: 10,000 stoves

TotalPer UnitTotalPer Unit

Sales$400,000$50$450,000$45

Variable expenses256,00032320,00032

Contribution margin144,000$18130,000$13

Fixed expenses108,000108,000

Net operating income$36,000$22,000

Total grade: 0.01/17 + 0.01/17 + 0.01/17 + 0.01/17 + 0.01/17 + 0.01/17 + 0.01/17 + 0.01/17 + 0.01/17 + 0.01/17 + 0.01/17 + 0.01/17 + 0.01/17 + 0.01/17 + 0.01/17 + 0.01/17 + 0.01/17 = 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0%

Feedback:

Proposed: 8,000 stoves 1.25 = 10,000 stoves

Sales: $50 0.9 = $45

As shown above, a 25% increase in volume is not enough to offset a 10% reduction in the selling price; thus, net operating income decreases.


Requirement 4:

At present, the company is selling 8,000 stoves per month. The sales manager is convinced that a 10% reduction in the selling price would result in a 25% increase in monthly sales of stoves. How many stoves would have to be sold at the new selling price to yield a minimum net operating income of $35,000 per month?

Number of Stoves50(0%)

Requirement 4:

At present, the company is selling 8,000 stoves per month. The sales manager is convinced that a 10% reduction in the selling price would result in a 25% increase in monthly sales of stoves. How many stoves would have to be sold at the new selling price to yield a minimum net operating income of $35,000 per month?

Number of Stoves11,000


Feedback:


$35,000=($45 $32) Q $108,000

$35,000=($13) Q $108,000

$13 Q=$143,000

Q=$143,000 $13

Q=$11,000 stoves



Exercise 6-18 Multiproduct Break-Even Analysis [LO9]

Olongapo Sports Corporation is the distributor in the Philippines of two premium golf ballsthe Flight Dynamic and the Sure Shot. Monthly sales, expressed in pesos (P), and the contribution margin ratios for the two products follow:

Product

Flight DynamicSure ShotTotal

SalesP150,000P250,000P400,000

CM ratio 80%36%?

Fixed expenses total P183,750 per month.

Requirement 1:

Prepare a contribution format income statement for the company as a whole. (Round your percentage values to one decimal place, e.g., .1234 as 12.3. Omit the "P" and "%" signs in your response.)

Flight DynamicSure ShotTotal Company

Amount%Amount%Amount%

SalesP500000(0%)50(0%)P500000(0%)50(0%)P1000000(0%)50(0%)

Variable expenses250000(0%)50(0%)250000(0%)50(0%)500000(0%)50(0%)

Contribution marginP250000(0%)50(0%)P250000(0%)50(0%)500000(0%)50(0%)


Net operating incomeP450000(0%)

Exercise 6-18 Multiproduct Break-Even Analysis [LO9]

Olongapo Sports Corporation is the distributor in the Philippines of two premium golf ballsthe Flight Dynamic and the Sure Shot. Monthly sales, expressed in pesos (P), and the contribution margin ratios for the two products follow:

Product

Flight DynamicSure ShotTotal

SalesP150,000P250,000P400,000

CM ratio 80%36%?

Fixed expenses total P183,750 per month.

Requirement 1:

Prepare a contribution format income statement for the company as a whole. (Round your percentage values to one decimal place, e.g., .1234 as 12.3. Omit the "P" and "%" signs in your response.)

Flight DynamicSure ShotTotal Company

Amount%Amount%Amount%

SalesP150,000100P250,000100P400,000100

Variable expenses30,00020160,00064190,00047.5

Contribution marginP120,00080P90,00036210,00052.5


Net operating incomeP26,250

Total grade: 0.01/20 + 0.01/20 + 0.01/20 + 0.01/20 + 0.01/20 + 0.01/20 + 0.01/20 + 0.01/20 + 0.01/20 + 0.01/20 + 0.01/20 + 0.01/20 + 0.01/20 + 0.01/20 + 0.01/20 + 0.01/20 + 0.01/20 + 0.01/20 + 0.01/20 + 0.01/20 = 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0%

Feedback:

Total contribution margin percentage: (P210,000 P400,000) = 52.5%.


Requirement 2:

Compute the break-even point for the company based on the current sales mix. (Round your answer to the nearest peso amount. Omit the "P" sign in your response.)

Break-even point P50(0%)

Requirement 2:

Compute the break-even point for the company based on the current sales mix. (Round your answer to the nearest peso amount. Omit the "P" sign in your response.)

Break-even point P350,000


Feedback:

The break-even point for the company as a whole be:


Requirement 3:

If sales increase by P100,000 a month, by how much would you expect net operating income to increase? (Round your answer to the nearest peso amount. Omit the "P" sign in your response.)

Expected increase in net operating incomeP500(0%)

Requirement 3:

If sales increase by P100,000 a month, by how much would you expect net operating income to increase? (Round your answer to the nearest peso amount. Omit the "P" sign in your response.)

Expected increase in net operating incomeP52,500


Feedback:

The additional contribution margin from the additional sales is computed as follows:

P100,000 52.5% CM ratio = P52,500

Assuming no change in fixed expenses, all of this additional contribution margin of P52,500 should drop to the bottom line as increased net operating income.

This answer assumes no change in selling prices, variable costs per unit, fixed expense, or sales mix.



Problem 6-19 Basics of CVP Analysis [LO1, LO3, LO4, LO6, LO8]

Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $20 per unit. Variable costs are $8 per unit, and fixed costs total $180,000 per year.

Requirement 1:

What is the product's CM ratio? (Omit the "%" sign in your response.)

CM ratio5(0%)%

Problem 6-19 Basics of CVP Analysis [LO1, LO3, LO4, LO6, LO8]

Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $20 per unit. Variable costs are $8 per unit, and fixed costs total $180,000 per year.

Requirement 1:

What is the product's CM ratio? (Omit the "%" sign in your response.)

CM ratio60%


Feedback:

Sales price$20100%




Requirement 2:

Use the CM ratio to determine the break-even point in sales dollars. (Omit the "$" sign in your response.)

Break-even point in sales$50(0%)

Requirement 2:

Use the CM ratio to determine the break-even point in sales dollars. (Omit the "$" sign in your response.)

Break-even point in sales$300,000


Feedback:


Requirement 3:

Due to an increase in demand, the company estimates that sales will increase by $75,000 during the next year. By how much should net operating income increase (or net loss decrease) assuming that fixed costs do not change? (Omit the "$" sign in your response.)

Increase in net operating income$5000(0%)

Requirement 3:

Due to an increase in demand, the company estimates that sales will increase by $75,000 during the next year. By how much should net operating income increase (or net loss decrease) assuming that fixed costs do not change? (Omit the "$" sign in your response.)

Increase in net operating income$45,000


Feedback:

$75,000 increased sales 0.60 CM ratio = $45,000 increased contribution margin. Because the fixed costs will not change, net operating income should also increase by $45,000.


Requirement 4:

Assume that the operating results for last year were:

Sales$400,000





(a)Compute the degree of operating leverage at the current level of sales.


Requirement 4:

Assume that the operating results for last year were:

Sales$400,000





(a)Compute the degree of operating leverage at the current level of sales.

Degree of operating leverage4


Feedback:


(b)The president expects sales to increase by 20% next year. By what percentage should net operating income increase? (Omit the "%" sign in your response.)

Increase in net operating income5(0%)%

(b)The president expects sales to increase by 20% next year. By what percentage should net operating income increase? (Omit the "%" sign in your response.)

Increase in net operating income80%


Feedback:

4 20% = 80% increase in net operating income. In dollars, this increase would be 80% $60,000 = $48,000.


Requirement 5:

Refer to the original data. Assume that the company sold 18,000 units last year. The sales manager is convinced that a 10% reduction in the selling price, combined with a $30,000 increase in advertising, would cause annual sales in units to increase by one-third.

(a)Prepare two contribution format income statements, one showing the results of last year's operations and one showing the results of operations if these changes are made. Show both total and per unit data on your statements. (Omit the "$" sign in your response.)

Last Year:18,000 unitsProposed:24,000 units

AmountPer UnitAmountPer Unit

Sales$500000(0%)$50(0%)$50000(0%)$5(0%)

Variable expenses200000(0%)20(0%)20000(0%)2(0%)

Contribution margin300000(0%)$30(0%)30000(0%)$3(0%)

Fixed expenses50000(0%)5000(0%)

Net operating income$295000(0%)$25000(0%)

Requirement 5:

Refer to the original data. Assume that the company sold 18,000 units last year. The sales manager is convinced that a 10% reduction in the selling price, combined with a $30,000 increase in advertising, would cause annual sales in units to increase by one-third.

(a)Prepare two contribution format income statements, one showing the results of last year's operations and one showing the results of operations if these changes are made. Show both total and per unit data on your statements. (Omit the "$" sign in your response.)

Last Year:18,000 unitsProposed:24,000 units

AmountPer UnitAmountPer Unit

Sales$360,000$20$432,000$18

Variable expenses144,0008192,0008

Contribution margin216,000$12240,000$10

Fixed expenses180,000210,000

Net operating income$36,000$30,000

Total grade: 0.01/16 + 0.01/16 + 0.01/16 + 0.01/16 + 0.01/16 + 0.01/16 + 0.01/16 + 0.01/16 + 0.01/16 + 0.01/16 + 0.01/16 + 0.01/16 + 0.01/16 + 0.01/16 + 0.01/16 + 0.01/16 = 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0%

Feedback:

18,000 units + 6,000 units = 24,000 units

$20 0.9 = $18

(b)Would you recommend that the company do as the sales manager suggests?


Yes

No

Feedback:No, the changes should not be made.


Requirement 6:

Refer to the original data. Assume again that the company sold 18,000 units last year. The president does not want to change the selling price. Instead, he wants to increase the sales commission by $1 per unit. He thinks that this move, combined with some increase in advertising, would increase annual sales by 25%. By how much could advertising be increased with profits remaining unchanged? (Do not prepare an income statement; use the incremental analysis approach. Omit the "$" sign in your response.)

The amount by which advertising can be increased $50000(0%)

Requirement 6:

Refer to the original data. Assume again that the company sold 18,000 units last year. The president does not want to change the selling price. Instead, he wants to increase the sales commission by $1 per unit. He thinks that this move, combined with some increase in advertising, would increase annual sales by 25%. By how much could advertising be increased with profits remaining unchanged? (Do not prepare an income statement; use the incremental analysis approach. Omit the "$" sign in your response.)

The amount by which advertising can be increased $31,500


Feedback:

Expected total contribution margin:

18,000 units 1.25 $11 per unit*$247,500

Present total contribution margin:

18,000 units $12 per unit216,000

Incremental contribution margin, and the amount by which advertising can be increased with net operating income remaining unchanged$31,500

*$20 ($8 + $1) = $11

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20840 1 Example Problems Ch. 5 6

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