53046405 Ch6 Cost Volume Profit 1

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True/False Questions

1. One way to compute the total contribution margin is to add total fixed expenses to net operating income.

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium

2. On a CVP graph for a profitable company, the total revenue line will be steeper than the total cost line.

Ans: True AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy

3. In two companies making the same product and with the same total sales and total expenses, the contribution margin ratio will be lower in the company with a higher proportion of fixed expenses in its cost structure.

Ans: False AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium

4. If the variable expense per unit increases, and all other factors remain constant, the contribution margin ratio will increase.


5. The impact on net operating income of any given dollar change in total sales can be estimated by multiplying the CM ratio by the dollar change in total sales.

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy

6. A company with sales of $70,000 and variable expenses of $40,000 should spend $10,000 on increased advertising if the increased advertising will increase sales by $20,000.


Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 6-7

7. The formula for the break-even point is the same as the formula to attain a given target profit for the special case where the target profit is zero.

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5; 6 Level: Medium

8. An increase in total fixed expenses will not affect the break-even point so long as the contribution margin ratio remains unchanged.


9. All other things the same, a reduction in the variable expense per unit will cause the break-even point to rise.


10. The unit sales volume necessary to reach a target profit is determined by dividing the target profit by the contribution margin per unit.

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 6 Level: Medium

11. All other things the same, the margin of safety in dollars at a given level of sales will tend to be lower for a capital-intensive company than for a labor-intensive company with high variable expenses.

Ans: True AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 7 Level: Medium

12. The margin of safety in dollars equals the excess of budgeted (or actual) sales over the break-even volume of sales.

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 7 Level: Easy

13. A company with high operating leverage will experience a lower reduction in net operating income in a period of declining sales than will a company with low operating leverage.


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14. If Q is the quantity of a product sold, P is the price per unit, V is the variable expense per unit, and F is the total fixed expense, then the degree of operating leverage is equal to: [Q(P-V)] ÷ [Q(P-V)-F]

Ans: True AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 8 Level: Hard

15. A shift in the sales mix from products with high contribution margin ratios toward products with low contribution margin ratios will raise the break-even point.

Ans: True AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 9 Level: Medium

Multiple Choice Questions

16. Contribution margin can be defined as:A) the amount of sales revenue necessary to cover variable expenses.B) sales revenue minus fixed expenses.C) the amount of sales revenue necessary to cover fixed and variable expenses.D) sales revenue minus variable expenses.

Ans: D AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy

17. Which of the following statements is correct with regard to a CVP graph?A) A CVP graph shows the maximum possible profit.B) A CVP graph shows the break-even point as the intersection of the total sales

revenue line and the total expense line.C) A CVP graph assumes that total expense varies in direct proportion to unit sales.D) A CVP graph shows the operating leverage as the gap between total sales

revenue and total expense at the actual level of sales.

Ans: B AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy


18. If both the fixed and variable expenses associated with a product decrease, what will be the effect on the contribution margin ratio and the break-even point, respectively?

Contribution margin ratio Break-even pointA) Decrease IncreaseB) Increase DecreaseC) Decrease DecreaseD) Increase Increase

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3; 5 Level: Medium Source: CMA; adapted

19. Which of the following is true regarding the contribution margin ratio of a single product company?A) As fixed expenses decrease, the contribution margin ratio increases.B) The contribution margin ratio multiplied by the selling price per unit equals the

contribution margin per unit.C) The contribution margin ratio will decline as unit sales decline.D) The contribution margin ratio equals the selling price per unit less the variable

expense ratio.

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium

20. If a company is operating at the break-even point:A) its contribution margin will be equal to its variable expenses.B) its margin of safety will be equal to zero.C) its fixed expenses will be equal to its variable expenses.D) its selling price will be equal to its variable expense per unit.

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5; 7 Level: Medium

21. At the break-even point:A) sales would be equal to contribution margin.B) contribution margin would be equal to fixed expenses.C) contribution margin would be equal to net operating income.D) sales would be equal to fixed expenses.


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22. The break-even point would be increased by:A) a decrease in total fixed expenses.B) a decrease in the ratio of variable expenses to sales.C) an increase in the contribution margin ratio.D) none of these.

Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Medium

23. Which of the following strategies could be used to reduce the break-even point?

Fixed expenses Contribution marginA) Increase IncreaseB) Decrease DecreaseC) Decrease IncreaseD) Increase Decrease

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Easy

24. Break-even analysis assumes that:A) Total revenue is constant.B) Unit variable expense is constant.C) Unit fixed expense is constant.D) Selling prices must fall in order to generate more revenue.

Ans: B AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Easy

25. Target profit analysis is used to answer which of the following questions?A) What sales volume is needed to cover all expenses?B) What sales volume is needed to cover fixed expenses?C) What sales volume is needed to earn a specific amount of net operating income?D) What sales volume is needed to avoid a loss?

Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 6 Level: Easy


26. The margin of safety can be calculated by:

A) Sales − (Fixed expenses/Contribution margin ratio).B) Sales − (Fixed expenses/Variable expense per unit).C) Sales − (Fixed expenses + Variable expenses).D) Sales − Net operating income.

Ans: A AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 7 Level: Medium

27. If the degree of operating leverage is 4, then a one percent change in quantity sold should result in a four percent change in:A) unit contribution margin.B) revenue.C) variable expense.D) net operating income.

Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 8 Level: Easy Source: CMA; adapted

28. Which of the following is the correct calculation for the degree of operating leverage?A) net operating income divided by total expenses.B) net operating income divided by total contribution margin.C) total contribution margin divided by net operating income.D) variable expense divided by total contribution margin.

Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 8 Level: Easy

29. Which of the following is an assumption underlying standard CVP analysis?A) In multiproduct companies, the sales mix is constant.B) In manufacturing companies, inventories always change.C) The price of a product or service is expected to change as volume changes.D) Fixed expenses will change as volume increases.

Ans: A AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 9 Level: Easy

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30. Hopi Corporation expects the following operating results for next year:

Sales...........................................................$400,000

Margin of safety.........................................$100,000

Contribution margin ratio.......................... 75%Degree of operating leverage..................... 4

What is Hopi expecting total fixed expenses to be next year?A) $75,000B) $100,000C) $200,000D) $225,000

Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1; 3; 8 Level: Hard

Solution:

Current sales - Breakeven sales = Margin of safetySubstituting the given information into the above equation, we will have:$400,000 − Breakeven sales = $100,000Breakeven sales = $300,000Breakeven sales = Fixed expenses ÷ Contribution margin ratioSubstituting the given information into the above equation, we will have:$300,000 = Fixed expenses ÷ 0.75Fixed expenses = $225,000


31. Escareno Corporation has provided its contribution format income statement for June. The company produces and sells a single product.

Sales (8,400 units).........................$764,40

0Variable expenses.......................... 445,200 Contribution margin...................... 319,200Fixed expenses............................... 250,900 Net operating income..................... $ 68,300

If the company sells 8,200 units, its total contribution margin should be closest to:A) $301,000B) $311,600C) $319,200D) $66,674

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy

Solution:

Current contribution margin ÷ Current sales in units = Contribution margin per unit$319,200 ÷ 8,400 = $38 contribution margin per unitIf 8,200 units are sold, the total contribution margin will be 8,200 × $38, or $311,600.

32. Rovinsky Corporation, a company that produces and sells a single product, has provided its contribution format income statement for November.

Sales (5,700 units).............$319,20

0Variable expenses.............. 188,100 Contribution margin.......... 131,100Fixed expenses................... 106,500 Net operating income......... $ 24,600

If the company sells 5,300 units, its net operating income should be closest to:A) $24,600B) $2,200C) $22,874D) $15,400

Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy

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Solution:

Current sales dollars ÷ Current sales in units = Sales price per unit$319,200 ÷ 5,700 = $56 sales price per unitCurrent variable expenses ÷ Current sales in units = Variable expense per unit$188,100 ÷ 5,700 = $33 variable expense per unit

Sales (5,300 units × $56)....................... $296,800Variable expenses (5,300 units × $33).. 174,900 Contribution margin.............................. 121,900Fixed expenses...................................... 106,500 Net operating income............................ $ 15,400

33. Sorin Inc., a company that produces and sells a single product, has provided its contribution format income statement for January.

Sales (4,200 units).........................$155,40


If the company sells 4,600 units, its total contribution margin should be closest to:A) $54,600B) $59,800C) $69,400D) $13,362


Solution:

Current contribution margin ÷ Current sales in units = Contribution margin per unit$54,600 ÷ 4,200 = $13 contribution margin per unitIf 4,600 units are sold, the total contribution margin will be 4,600 × $13, or $59,800.


34. Decaprio Inc. produces and sells a single product. The company has provided its contribution format income statement for June.

Sales (8,800 units)..........................$528,00

0Variable expenses.......................... 290,400 Contribution margin....................... 237,600Fixed expenses............................... 211,700 Net operating income..................... $ 25,900

If the company sells 9,200 units, its net operating income should be closest to:A) $27,077B) $49,900C) $36,700D) $25,900


Solution:

Current sales dollars ÷ Current sales in units = Sales price per unit$528,000 ÷ 8,800 = $60 sales price per unitCurrent variable expenses ÷ Current sales in units = Variable expense per unit$290,400 ÷ 8,800 = $33 variable expense per unit

Sales (9,200 units × $60 )..........................$552,00

0Variable expenses (9,200 units × $33)....... 303,600 Contribution margin................................... 248,400Fixed expenses........................................... 211,700 Net operating income................................. $ 36,700

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35. The Bronco Birdfeed Company reported the following information:

Sales (400 cases)............................$100,00

0Variable expenses.......................... 60,000Contribution margin...................... 40,000Fixed expenses............................... 35,000Net operating income..................... $5,000

How much will the sale of one additional case add to Bronco's net operating income?A) $250.00B) $100.00C) $150.00D) $12.50


Solution:

Current contribution margin ÷ Current sales in cases = Contribution margin per case$40,000 ÷ 400 = $100 contribution margin per caseIf one additional case is sold, net operating income will increase by $100.


36. The margin of safety in the Flaherty Company is $24,000. If the company's sales are $120,000 and its variable expenses are $80,000, its fixed expenses must be:A) $8,000B) $32,000C) $24,000D) $16,000

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3; 5; 7 Level: Hard

Solution:

Current sales - Breakeven sales = Margin of safetySubstituting the given information into the above equation, we will have:$120,000 - Breakeven sales = $24,000Breakeven sales = $96,000Sales - Variable expenses = Contribution margin$120,000 - $80,000 = $40,000Contribution margin ratio = Contribution margin ÷ SalesContribution margin ratio = $ 40,000 ÷ $120,000Contribution margin ratio = 0.33333Breakeven sales = Fixed costs ÷ Contribution margin ratioSubstituting the given information into the above equation, we will have:$96,000 = Fixed costs ÷ 0.33333Fixed costs = $32,000

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37. Dodero Company produces a single product which sells for $100 per unit. Fixed expenses total $12,000 per month, and variable expenses are $60 per unit. The company's sales average 500 units per month. Which of the following statements is correct?A) The company's break-even point is $12,000 per month.B) The fixed expenses remain constant at $24 per unit for any activity level within

the relevant range.C) The company's contribution margin ratio is 40%.D) Responses A, B, and C are all correct.

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3; 5 Level: Medium

Solution:

Answer A is not correct because:Sales = Variable expenses + Fixed expenses + Profit$100Q = $60Q + $12,000 + $0$40Q = $12,000Q = $12,000 ÷ $40 per unit = 300 units300 units × $100 selling price per unit = $30,000 breakeven sales in dollarsAnswer B is not correct because fixed costs change as activity level changesAnswer C is correct because:Contribution margin per unit = Selling price per unit - Variable expenses per unit= $100 - $60 = $40Contribution margin ratio = Contribution margin per unit ÷ Selling price per unitContribution margin ratio = $40 ÷ $100Contribution margin ratio = 40%


38. Holt Company's variable expenses are 70% of sales. At a $300,000 sales level, the degree of operating leverage is 10. If sales increase by $60,000, the degree of operating leverage will be:A) 12B) 10C) 6D) 4

Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3; 8 Level: Hard

Solution:

Sales..........................................................$300,00

0Variable expenses ($300,000 × 70%)....... 210,000 Contribution margin................................. 90,000Fixed expenses.......................................... ? Net operating income............................... $ ?

Current degree of operating leverage = Current contribution margin ÷ Current net operating income10 = $90,000 ÷ Current net operating incomeCurrent net operating income = $90,000 ÷ 10 = $9,000Contribution margin = Fixed expenses - Net operating income$90,000 = Fixed expenses - $9,000Fixed expenses = $90,000 - $9,000 = $81,000

Sales ($300,000 + $60,000)......................$360,00

0Variable expenses ($360,000 × 70%)....... 252,000 Contribution margin................................. 108,000Fixed expenses.......................................... 81,000 Net operating income............................... $ 27,000

Degree of operating leverage = Contribution margin ÷ Net operating income= $108,000/$27,000 = 4.0

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39. Gayne Corporation's contribution margin ratio is 12% and its fixed monthly expenses are $84,000. If the company's sales for a month are $738,000, what is the best estimate of the company's net operating income? Assume that the fixed monthly expenses do not change.A) $565,440B) $654,000C) $88,560D) $4,560


Solution:

Sales..........................................................$738,00

0Variable expenses ($738,000 × 88%)....... 649,440 Contribution margin ($738,000 × 12%)... 88,560Fixed expenses.......................................... 84,000 Net operating income............................... $ 4,560

40. Jilk Inc.'s contribution margin ratio is 58% and its fixed monthly expenses are $36,000. Assuming that the fixed monthly expenses do not change, what is the best estimate of the company's net operating income in a month when sales are $103,000?A) $23,740B) $59,740C) $67,000D) $7,260

Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy

Solution:

Sales...........................................................$103,00

0

Variable expenses ($103,000 × 42%)........

43,260Contribution margin ($103,000 × 58%).... 59,740Fixed expenses........................................... 36,000 Net operating income................................. $ 23,740


41. Creswell Corporation's fixed monthly expenses are $29,000 and its contribution margin ratio is 56%. Assuming that the fixed monthly expenses do not change, what is the best estimate of the company's net operating income in a month when sales are $95,000?A) $12,800B) $24,200C) $53,200D) $66,000


Solution:

Sales........................................................... $95,000Variable expenses ($95,000 × 44%).......... 41,800 Contribution margin ($95,000 × 56%)....... 53,200Fixed expenses........................................... 29,000 Net operating income................................. $24,200

42. Wilson Company prepared the following preliminary budget assuming no advertising expenditures:

Selling price....................... $10 per unitUnit sales........................... 100,000Variable expenses.............. $600,000Fixed expenses................... $300,000

Based on a market study, the company estimated that it could increase the unit selling price by 15% and increase the unit sales volume by 10% if $100,000 were spent on advertising. Assuming that these changes are incorporated in its budget, what should be the budgeted net operating income?A) $175,000B) $190,000C) $205,000D) $365,000

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Medium Source: CPA; adapted

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Solution:

Sales (110,000 units × $11.50)..................... $1,265,000Variable expenses (110,000 units × $6*)..... 660,000Contribution margin..................................... 605,000Fixed expenses ($300,000 + $100,000)........ 400,000Net operating income.................................... $ 205,000

* Current variable expenses ÷ Current sales in units = Variable expense per unit $600,000 ÷ 100,000 = $6 variable expense per unit

43. Data concerning Kardas Corporation's single product appear below:

Per Unit Percent of SalesSelling price....................... $140 100%Variable expenses.............. 28 20% Contribution margin.......... $112 80%

The company is currently selling 8,000 units per month. Fixed expenses are $719,000 per month. The marketing manager believes that a $20,000 increase in the monthly advertising budget would result in a 180 unit increase in monthly sales. What should be the overall effect on the company's monthly net operating income of this change?A) decrease of $160B) increase of $20,160C) decrease of $20,000D) increase of $160


Solution:

8,000 units 8,180 unitsSales (8,000 units, 8,180 units × $140).......... $1,120,000 $1,145,200Variable expenses

($1,120,000, $1,145,200 × 20%)................ 224,000 229,040Contribution margin....................................... 896,000 916,160Fixed expenses................................................ 719,000 739,000Net operating income..................................... $ 177,000 $ 177,160

Increase in net operating income: $177,160 - $177,000 = $160


44. Kuzio Corporation produces and sells a single product. Data concerning that product appear below:

Per Unit Percent of SalesSelling price....................... $130 100%Variable expenses.............. 78 60% Contribution margin.......... $ 52 40%

The company is currently selling 6,000 units per month. Fixed expenses are $263,000 per month. The marketing manager believes that a $5,000 increase in the monthly advertising budget would result in a 140 unit increase in monthly sales. What should be the overall effect on the company's monthly net operating income of this change?A) increase of $2,280B) increase of $7,280C) decrease of $5,000D) decrease of $2,280


Solution:

6,000 units 6,140 unitsSales (6,000 units, 6,140 units × $130)......... $780,000 $798,200Variable expenses

($780,000, $798,200 × 60%)..................... 468,000 478,920Contribution margin...................................... 312,000 319,280Fixed expenses.............................................. 263,000 268,000Net operating income.................................... $ 49,000 $ 51,280

Increase in net operating income: $51,280 - $49,000 = $2,280

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45. Data concerning Dorazio Corporation's single product appear below:

Per Unit Percent of SalesSelling price................................... $160 100%Variable expenses.......................... 48 30% Contribution margin...................... $112 70%

Fixed expenses are $87,000 per month. The company is currently selling 1,000 units per month. Management is considering using a new component that would increase the unit variable cost by $28. Since the new component would increase the features of the company's product, the marketing manager predicts that monthly sales would increase by 400 units. What should be the overall effect on the company's monthly net operating income of this change?A) increase of $5,600B) increase of $33,600C) decrease of $5,600D) decrease of $33,600


Solution:

1,000 units 1,400 unitsSales (1,000 units, 1,400 units × $160).............. $160,000 $224,000Variable expenses

(1,000 units × $48, 1,400 units × $76)............ 48,000 106,400Contribution margin........................................... 112,000 117,600Fixed expenses.................................................... 87,000 87,000Net operating income.......................................... $ 25,000 $ 30,600



46. Chovanec Corporation produces and sells a single product. Data concerning that product appear below:


Fixed expenses are $521,000 per month. The company is currently selling 7,000 units per month. Management is considering using a new component that would increase the unit variable cost by $6. Since the new component would increase the features of the company's product, the marketing manager predicts that monthly sales would increase by 500 units. What should be the overall effect on the company's monthly net operating income of this change?A) decrease of $48,000B) decrease of $6,000C) increase of $48,000D) increase of $6,000


Solution:

7,000 units 7,500 unitsSales (7,000 units, 7,500 units × $170)............ $1,190,000 $1,275,000Variable expenses

(7,000 units × $68, 7,500 units × $74)......... 476,000 555,000Contribution margin......................................... 714,000 720,000Fixed expenses................................................. 521,000 521,000Net operating income....................................... $ 193,000 $ 199,000


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47. Data concerning Pellegren Corporation's single product appear below:


Fixed expenses are $531,000 per month. The company is currently selling 4,000 units per month. The marketing manager would like to cut the selling price by $14 and increase the advertising budget by $35,000 per month. The marketing manager predicts that these two changes would increase monthly sales by 500 units. What should be the overall effect on the company's monthly net operating income of this change?A) decrease of $18,000B) increase of $38,000C) decrease of $38,000D) increase of $58,000


Solution:

4,000 units 4,500 unitsSales (4,000 units × $200, 4,500 units × $186). $800,000 $837,000Variable expenses

(4,000 units × $40, 4,500 units × $40)........... 160,000 180,000Contribution margin.......................................... 640,000 657,000Fixed expenses................................................... 531,000 566,000Net operating income........................................ $109,000 $ 91,000

Decrease in net operating income: $109,000 - $91,000 = $18,000


48. Cobble Corporation produces and sells a single product. Data concerning that product appear below:


Fixed expenses are $499,000 per month. The company is currently selling 5,000 units per month. The marketing manager would like to cut the selling price by $13 and increase the advertising budget by $33,000 per month. The marketing manager predicts that these two changes would increase monthly sales by 900 units. What should be the overall effect on the company's monthly net operating income of this change?A) increase of $56,100B) decrease of $8,900C) increase of $99,300D) decrease of $56,100


Solution:

5,000 units 5,900 unitsSales (5,000 units × $160, 5,900 units × $147). . $800,000 $867,300Variable expenses

(5,000 units × $48, 5,900 units × $48)............ 240,000 283,200Contribution margin........................................... 560,000 584,100Fixed expenses.................................................... 499,000 532,000Net operating income.......................................... $ 61,000 $ 52,100

Decrease in net operating income: $61,000 - $52,100 = $8,900

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49. Data concerning Bazin Corporation's single product appear below:


Fixed expenses are $384,000 per month. The company is currently selling 6,000 units per month. The marketing manager would like to introduce sales commissions as an incentive for the sales staff. The marketing manager has proposed a commission of $9 per unit. In exchange, the sales staff would accept a decrease in their salaries of $46,000 per month. (This is the company's savings for the entire sales staff.) The marketing manager predicts that introducing this sales incentive would increase monthly sales by 500 units. What should be the overall effect on the company's monthly net operating income of this change?A) increase of $27,500B) decrease of $64,500C) increase of $41,500D) increase of $507,500


Solution:

6,000 units 6,500 unitsSales (6,000 units × $100, 6,500 units × $100). . $600,000 $650,000Variable expenses

(6,000 units × $20, 6,500 units × $29)............ 120,000 188,500Contribution margin............................................ 480,000 461,500Fixed expenses.................................................... 384,000 338,000Net operating income.......................................... $ 96,000 $123,500



50. Sannella Corporation produces and sells a single product. Data concerning that product appear below:


Fixed expenses are $991,000 per month. The company is currently selling 8,000 units per month. The marketing manager would like to introduce sales commissions as an incentive for the sales staff. The marketing manager has proposed a commission of $11 per unit. In exchange, the sales staff would accept a decrease in their salaries of $74,000 per month. (This is the company's savings for the entire sales staff.) The marketing manager predicts that introducing this sales incentive would increase monthly sales by 200 units. What should be the overall effect on the company's monthly net operating income of this change?A) increase of $1,246,600B) increase of $14,600C) decrease of $133,400D) increase of $71,800


Solution:

8,000 units 8,200 unitsSales (8,000 units × $220, 8,200 units × $220).... $1,760,000 $1,804,000Variable expenses

(8,000 units × $66, 8,200 units × $77)............. 528,000 631,400Contribution margin............................................. 1,232,000 1,172,600Fixed expenses..................................................... 991,000 917,000Net operating income........................................... $ 241,000 $ 255,600


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51. Cherry Street Market reported the following information for the sales of their only product, cherries sold by the pint:

Total Per Unit

Sales...................................$31,50

0 $4.50

Variable expenses.............. 9,45

0 1.35 Contribution margin.......... 22,050 $3.15

Fixed expenses................... 13,00

0

Net operating income.........$ 9,05

0

Cherry Street would like to increase their selling price by 50 cents per unit, and feel that this will decrease sales volume by 10%. Should Cherry Street increase the price, and what will the effect be on net operating income?A) Yes; $3,500 increaseB) Yes; $945 increaseC) No; no changeD) No; $945 decrease


Solution:

Current sales (dollars) = Current per unit price × Current sales (units)$31,500 = $4.50 × Current sales (units)7,000 = Current sales (units)

7,000 units 6,300 unitsSales (7,000 units × $4.50, 6,300 units × $5.00). . . $31,500 $31,500Variable expenses

(7,000 units × $1.35, 6,300 units × $1.35)......... 9,450 8,505Contribution margin............................................... 22,050 22,995Fixed expenses....................................................... 13,000 13,000Net operating income............................................. $ 9,050 $ 9,995

Increase in net operating income: $9,995 - $9,050 = $945


52. A company makes a single product that it sells for $16 per unit. Fixed costs are $76,800 per month and the product has a contribution margin ratio of 40%. If the company's actual sales are $224,000, its margin of safety is:A) $32,000B) $96,000C) $128,000D) $192,000

Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5; 7 Level: Medium Source: CIMA; adapted

Solution:Break-even in total sales dollars = Fixed expenses/CM ratio= $76,800/0.400 = $192,000Margin of safety in dollars = Sales - Break-even sales= $224,000 - $192,000 = $32,000

53. The following data are available for the Phelps Company for a recent month:

Product A Product B Product C Total

Sales................................... $150,000 $130,000 $90,000$370,00

0Variable expenses.............. 91,000 104,000 27,000 222,000 Contribution margin........... $ 59,000 $ 26,000 $63,000 148,000Fixed expenses................... 55,000 Net operating income......... $ 93,000

The break-even sales for the month for the company are:A) $91,667B) $203,000C) $148,000D) $137,500

Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5; 9 Level: Medium

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Solution:


Sales................................... $150,000 $130,000 $90,000$370,00

0Variable expenses.............. 91,000 104,000 27,000 222,000 Contribution margin........... $ 59,000 $ 26,000 $63,000 148,000Fixed expenses................... 55,000 Net operating income......... $ 93,000

Overall CM ratio = Total contribution margin/Total sales= $148,000/$370,000 = 0.40Break-even point in total sales dollars = Fixed expenses/Overall CM ratio= $55,000/0.40 = $137,500

54. Hartl Corporation is a single product firm with the following selling price and cost structure for next year:

Selling price per unit.................................. $1.80Contribution margin ratio.......................... 40%

Total fixed expenses for the year...............$218,70

0

How many units will Hartl have to sell next year in order to break-even?A) 121,500B) 202,500C) 303,750D) 546,750

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Medium

Solution:

Variable cost per unit = $1.80 × (1 - 40%)Variable cost per unit = $1.08Sales = Variable expenses + Fixed expenses + Profit$1.80Q = $1.08Q + $218,700 + $0$0.72Q = $218,700Q = $218,700 ÷ $0.72 per unit = 303,750 units


55. Borich Corporation produces and sells a single product. Data concerning that product appear below:

Selling price per unit...................... $150.00Variable expense per unit.............. $73.50

Fixed expense per month...............$308,29

5

The break-even in monthly unit sales is closest to:A) 2,055B) 4,030C) 4,194D) 3,426


Solution:

Sales = Variable expenses + Fixed expenses + Profit$150.00Q = $73.50Q + $308,295 + $0$76.50Q = $308,295Q = $308,295 ÷ $76.50 per unit = 4,030 units

56. Data concerning Buchenau Corporation's single product appear below:



0

The break-even in monthly unit sales is closest to:A) 3,111B) 6,892C) 4,040D) 13,525


Solution:

Sales = Variable expenses + Fixed expenses + Profit$150.00Q = $34.50Q + $466,620 + $0

六

$115.50Q = $466,620Q = $466,620 ÷ $115.50 per unit = 4,040 units


57. Hevesy Inc. produces and sells a single product. The selling price of the product is $200.00 per unit and its variable cost is $80.00 per unit. The fixed expense is $300,000 per month. The break-even in monthly unit sales is closest to:A) 2,500B) 1,500C) 3,750D) 2,583


Solution:


58. Wenstrom Corporation produces and sells a single product. Data concerning that product appear below:



6

The break-even in monthly dollar sales is closest to:A) $342,550B) $204,455C) $109,616D) $161,200


Solution:

Sales = Variable expenses + Fixed expenses + Profit$130.00Q = $41.60Q + $109,616 + $0$88.40Q = $109,616Q = $109,616 ÷ $88.40 per unit = 1,240 units1,240 units × $130.00 selling price = $161,200

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59. Data concerning Follick Corporation's single product appear below:



2

The break-even in monthly dollar sales is closest to:A) $1,148,400B) $638,851C) $321,552D) $446,600


Solution:


60. Wimpy Inc. produces and sells a single product. The selling price of the product is $150.00 per unit and its variable cost is $58.50 per unit. The fixed expense is $366,915 per month.

The break-even in monthly dollar sales is closest to:A) $601,500B) $366,915C) $636,408D) $940,808



Solution:


61. The Saginaw Ice Company had sales of $400,000, with variable expenses of $162,000 and fixed expenses of $98,000. Which of the following is closest to Saginaw's break-even point?A) $260,000B) $165,000C) $140,000D) $238,000


Solution:

Total Percent of SalesSales.......................................................... $400,000 100.0%Variable expenses...................................... 162,000 40.5% Contribution margin and contribution

margin ratio........................................... $ 238,000 59.5%

Break-even in total sales dollars = Fixed expenses/CM ratio= $98,000/0.595 = $164,705.88

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62. Product Y sells for $15 per unit, and has related variable expenses of $9 per unit. Fixed expenses total $300,000 per year. How many units of Product Y must be sold each year to yield an annual profit of $90,000:A) 50,000 unitsB) 65,000 unitsC) 15,000 unitsD) 43,333 units


Solution:

Sales = Variable expenses + Fixed expenses + Target profit$15Q = $9Q + $300,000 + $90,000$6Q = $390,000Q = $390,000 ÷ $6 per unit = 65,000 units

63. Caneer Corporation produces and sells a single product. Data concerning that product appear below:



0

The unit sales to attain the company's monthly target profit of $44,000 is closest to:A) 7,896B) 12,769C) 6,578D) 4,341


Solution:Sales = Variable expenses + Fixed expenses + Target profit$240.00Q = $81.60Q + $997,920 + $44,000$158.40Q = $1,041,920Q = $1,041,920 ÷ $158.40 per unit = 6,578 units (rounded)


64. Data concerning Bedwell Enterprises Corporation's single product appear below:



0

The unit sales to attain the company's monthly target profit of $17,000 is closest to:A) 6,159B) 4,280C) 2,525D) 4,321


Solution:

Sales = Variable expenses + Fixed expenses + Target profit$160.00Q = $65.60Q + $387,040 + $17,000$94.40Q = $404,040Q = $404,040 ÷ $94.40 per unit = 4,280 units (rounded)

65. Hettrick International Corporation's only product sells for $120.00 per unit and its variable expense is $52.80. The company's monthly fixed expense is $396,480 per month. The unit sales to attain the company's monthly target profit of $13,000 is closest to:A) 7,755B) 6,093C) 5,753D) 3,412


Solution:

Sales = Variable expenses + Fixed expenses + Target profit$120.00Q = $52.80Q + $396,480 + $13,000$67.20Q = $409,480Q = $409,480 ÷ $67.20 per unit = 6,093 units (rounded)

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66. Logsdon Corporation produces and sells a single product whose contribution margin ratio is 63%. The company's monthly fixed expense is $720,720 and the company's monthly target profit is $28,000. The dollar sales to attain that target profit is closest to:A) $471,694B) $454,054C) $1,188,444D) $1,144,000


Solution:

Total sales dollars to attain target profit= (Fixed expenses + Target profit)/CM ratio= ($720,720 + $28,000)/0.63 = $1,188,444 (rounded)

67. The contribution margin ratio of Mountain Corporation's only product is 52%. The company's monthly fixed expense is $296,400 and the company's monthly target profit is $7,000. The dollar sales to attain that target profit is closest to:A) $570,000B) $157,768C) $583,462D) $154,128


Solution:Total sales dollars to attain target profit= (Fixed expenses + Target profit)/CM ratio= ($296,400 + $7,000)/0.52 = $583,462 (rounded)


68. Majid Corporation sells a product for $240 per unit. The product's current sales are 41,300 units and its break-even sales are 36,757 units.What is the margin of safety in dollars?A) $8,821,680B) $6,608,000C) $9,912,000D) $1,090,320


Solution:

Margin of safety in dollars:Break-even sales = $240 per unit × 36,757 = $8,821,680Current sales = $240 per unit × 41,300 = $9,912,000Margin of safety in dollars = Sales - Break-even sales= $9,912,000 - $8,821,680 = $1,090,320

69. Mcmurtry Corporation sells a product for $170 per unit. The product's current sales are 10,000 units and its break-even sales are 8,100 units. The margin of safety as a percentage of sales is closest to:A) 23%B) 81%C) 19%D) 77%


Solution:

Margin of safety in dollars:Break-even sales = $170 per unit × 8,100 = $1,377,000Current sales = $170 per unit × 10,000 = $1,700,000Margin of safety in dollars = Sales - Break-even sales= $1,700,000 - $1,377,000 = $323,000Margin of safety as a percentage of sales = Margin of safety in dollars ÷ Current sales = $323,000 ÷ $1,700,000 = 19%

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70. Cubie Corporation has provided the following data concerning its only product:

Selling price....................... $100 per unitCurrent sales...................... 10,600 unitsBreak-even sales................ 9,540 units

What is the margin of safety in dollars?A) $1,060,000B) $106,000C) $954,000D) $706,667


Solution:

Margin of safety in dollars:Break-even sales = $100 per unit × 9,540 = $954,000Current sales = $100 per unit × 10,600 = $1,060,000Margin of safety in dollars = Sales - Break-even sales= $1,060,000 - $954,000 = $106,000


71. Ensley Corporation has provided the following data concerning its only product:


The margin of safety as a percentage of sales is closest to:A) 61%B) 28%C) 72%D) 39%


Solution:

Margin of safety in dollars:Break-even sales = $200 per unit × 30,300 = $6,060,000Current sales = $200 per unit × 21,816 = $4,363,200Margin of safety in dollars = Sales - Break-even sales= $6,060,000 - $4,363,200 = $1,696,800Margin of safety as a percentage of sales = Margin of safety in dollars ÷ Current sales = $1,696,800 ÷ $4,363,200 = 39% (rounded)

72. The following is Noble Company's contribution format income statement last month:

Sales (12,000 units)...........$600,00


What is the company's margin of safety percentage to the nearest whole percent?A) 42%B) 38%C) 33%D) 25%


六

Solution:

Sales = Sales price × Units sold$600,000 = 12,000 × Sales price$50 = Sales priceVariable expenses = Per-unit cost × Units sold$375,000 = 12,000 × Per-unit cost$31.25 = Per-unit costBreak-even sales:Sales = Variable expenses + Fixed expenses + Profit$50.00Q = $31.25Q + $150,000 + $0$18.75Q = $150,000Q = 8,000 unitsMargin of safety in dollars:Break-even sales = $50 per unit × 8,000 = $400,000Current sales = $50 per unit × 12,000 = $600,000Margin of safety in dollars = Sales - Break-even sales= $600,000 - $400,000 = $200,000Margin of safety as a percentage of sales = Margin of safety in dollars ÷ Current sales = $200,000 ÷ $600,000 = 33% (rounded)

73. Ostler Company's net operating income last year was $10,000 and its contribution margin was $50,000. Using the operating leverage concept, if the company's sales increase next year by 8 percent, net operating income can be expected to increase by:A) 20%B) 16%C) 160%D) 40%


Solution:

Degree of operating leverage = Contribution margin ÷ Net operating incomeDegree of operating leverage = $50,000 ÷ $10,000 = 5Percent increase in net operating income= Percent increase in sales × Degree of operating leverage= 8% × 5 = 40%


74. The February contribution format income statement of Mcabier Corporation appears below:a. Degree of operating leverage = Contribution margin/Net operating income

= $251,100/$41,300 = 6.08b. Percent increase in net operating income= Percent increase in sales × Degree of operating leverage= 19% × 6.08 = 115.52%

Sales...................................$211,20


The degree of operating leverage is closest to:A) 0.27B) 6.79C) 3.70D) 0.15


Solution:Degree of operating leverage = Contribution margin/Net operating income= $115,200/$31,100 = 3.70

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75. Serfass Corporation's contribution format income statement for July appears below:

Sales...................................$260,00


The degree of operating leverage is closest to:A) 0.05B) 0.15C) 21.31D) 6.89


Solution:

Degree of operating leverage = Contribution margin/Net operating income= $84,000/$12,200 = 6.89

76. Rushenberg Corporation's operating leverage is 10.8. If the company's sales increase by 14%, its net operating income should increase by about:A) 151.2%B) 14.0%C) 77.1%D) 10.8%


Solution:

Percent increase in net operating income= Percent increase in sales × Degree of operating leverage= 14% × 10.8 = 151.2%


77. Bendel Inc. has an operating leverage of 7.3. If the company's sales increase by 3%, its net operating income should increase by about:A) 243.3%B) 7.3%C) 21.9%D) 3.0%


Solution:

Percent increase in net operating income= Percent increase in sales × Degree of operating leverage= 3% × 7.3 = 21.9%

78. E.D. Manufacturing, Inc. produces and sells ice skates. The current net operating income is $40,000, with a degree of operating leverage of 3. If sales increase by 10%, how much total net operating income should be expected?A) $12.000B) $52,000C) $44,000D) None of the above.


Solution:

Percent increase in net operating income= Percent increase in sales × Degree of operating leverage= 10% × 3 = 30%Current net operating income × Percent increase = Increase in net operating income$40,000 × 30% = $12,000 Increase in net operating incomeCurrent net operating income + Increase in net operating income = Expected net operating income = $40,000 + $12,000 = $52,000

六

79. Mcdale Inc. produces and sells two products. Data concerning those products for the most recent month appear below:

Product I49V Product Z50U

Sales................................... $15,000 $14,000Variable expenses.............. $3,300 $2,790

The fixed expenses of the entire company were $18,460. The break-even point for the entire company is closest to:A) $23,367B) $10,540C) $24,550D) $18,460


Solution:

Multi B/E Solution:Product I49V Product Z50U Total

Sales................................... $15,000 $14,000 $29,000Variable expenses.............. 3,300 2,790 6,090 Contribution margin........... $11,700 $11,210 22,910Fixed expenses................... 18,460 Net operating income......... $ 4,450

Overall CM ratio = Total contribution margin/Total sales= $22,910/$29,000 = 0.79Break-even point in total sales dollars = Fixed expenses/Overall CM ratio= $18,460/0.79 = $23,367 (rounded)


80. Roddam Corporation produces and sells two products. Data concerning those products for the most recent month appear below:

Product K09EProduct G17B


The fixed expenses of the entire company were $41,970. If the sales mix were to shift toward Product K09E with total sales remaining constant, the overall break-even point for the entire company:A) would increase.B) could increase or decrease.C) would not change.D) would decrease.


81. Newham Corporation produces and sells two products. In the most recent month, Product R10L had sales of $28,000 and variable expenses of $6,440. Product X96N had sales of $22,000 and variable expenses of $7,560. And the fixed expenses of the entire company were $32,710. The break-even point for the entire company is closest to:A) $32,710B) $45,431C) $46,710D) $17,290


六

Solution:

Multi B/E Solution:Product R10L

Product X96N Total



82. Flesch Corporation produces and sells two products. In the most recent month, Product C90B had sales of $24,000 and variable expenses of $6,480. Product Y45E had sales of $29,000 and variable expenses of $11,010. And the fixed expenses of the entire company were $32,280. If the sales mix were to shift toward Product C90B with total sales remaining constant, the overall break-even point for the entire company:A) would decrease.B) would increase.C) could increase or decrease.D) would not change.



83. Zachary's Bike Shop sells two products. Sales and contribution margin ratios for the two products follow:

Product A Product B

Sales in dollars............................... $10,000 $40,000Contribution margin ratio.............. 25% 75%

Given these data, the contribution margin ratio for the company as a whole would be:A) 25%B) 50%C) 65%D) It is impossible to determine from the given data.


Solution:

Multi B/E Solution:Product A Product B Total

Sales.......................................................... $10,000 $40,000 $50,000Contribution margin (Sales × CM ratio). . $2,500 $30,000 $32,500

Overall CM ratio = Total contribution margin/Total sales= $32,500/$50,000 = 0.65

Use the following to answer questions 84-86:

A cement manufacturer has supplied the following data:

Tons of cement produced and sold........................ 680,000

Sales revenue.........................................................$2,788,00

0

Variable manufacturing expense...........................$1,156,00

0Fixed manufacturing expense................................ $760,000Variable selling and administrative expense......... $272,000Fixed selling and administrative expense.............. $294,000Net operating income............................................. $306,000

六

84. What is the company's unit contribution margin?A) $0.45B) $2.10C) $2.00D) $4.10


Solution:

Contribution margin = Sales - Variable expensesContribution margin = $2,788,000 - ($1,156,000 + $272,000)Contribution margin = $1,360,000Unit contribution margin = Contribution margin ÷ Tons of cementUnit contribution margin = $1,360,000 ÷ 680,000Unit contribution margin = $2.00

85. The company's contribution margin ratio is closest to:A) 39.0%B) 51.2%C) 11.0%D) 48.8%


Solution:

Contribution margin = Sales - Variable expensesContribution margin = $2,788,000 - ($1,156,000 + $272,000)Contribution margin = $1,360,000Contribution margin ratio = Contribution margin ÷ SalesContribution margin ratio = $1,360,000 ÷ $2,788,000Contribution margin ratio = 48.8%


86. If the company increases its unit sales volume by 4% without increasing its fixed expenses, then total net operating income should be closest to:A) $12,240B) $318,240C) $360,400D) $311,973


Solution:

New contribution margin ($1,360,000 × 1.04)........... $1,414,400Fixed expenses ($760,000 + $294,000)...................... 1,054,000Net operating income................................................. $ 360,400


Righway Corporation has supplied the following data:

Sales per period............................. 1,000 unitsSelling price................................... $50 per unitVariable manufacturing cost.......... $20 per unitSelling expenses............................ $10,000 plus 5% of salesAdministration expenses................ $5,000 plus 15% of sales

87. The total contribution margin per period is:A) $22,500B) $27,500C) $30,000D) $20,000


六

Solution:

Sales (1,000 units × $50)............... $50,000Variable expenses*........................ 30,000Contribution margin....................... $20,000

* Variable manufacturing cost (1,000 units × $20)........... $20,000Selling expenses ($50,000 × 5%).................................... 2,500Administration expenses ($50,000 × 15%)..................... 7,500Total variable expenses................................................... $30,000

88. The break-even point per period is (round to nearest unit):A) 750 unitsB) 545 unitsC) 500 unitsD) 667 units

Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Medium

Solution:

Sales = Variable expenses + Fixed expenses + Profit$50Q = $30Q* + $15,000 + $0$20Q = $15,000Q = $15,000 ÷ $20 per unit = 750 units

*Variable expense per unit = $20 + (5% × $50) + (15% × $50) = $30


89. If the selling price is changed to $55 per unit, the break-even point will be (round to nearest unit):A) 667 unitsB) 545 unitsC) 625 unitsD) 500 units


Solution:

Sales = Variable expenses + Fixed expenses + Profit$55Q = $31Q* + $15,000 + $0$24Q = $15,000Q = $15,000 ÷ $24 per unit = 625 units

*Variable expense per unit = $20 + (5% × $55) + (15% × $55) = $31


Biskra Corporation is a single product firm that expects the following operating results next year:

In Total Per Unit

Sales.................................$288,00

0 $0.80

Variable expenses.............$172,80

0 $0.48Fixed expenses................. $72,000 $0.20

90. Every unit that Biskra sells next year after the break-even point will increase net operating income by:A) $0.12B) $0.20C) $0.32D) $0.60

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1; 5 Level: Easy

Solution:

Sales per unit - Variable expenses per unit = Contribution margin per unit

六

= $0.80 - $0.48 = $0.32


91. What would Biskra's total sales dollars have to be next year to generate $180,000 of net operating income?A) $450,000B) $630,000C) $588,000D) $787,500


Solution:

CM ratio= (Sales - Variable expenses) ÷ Sales= ($288,000 - $172,800) ÷ $288,000 = 40%Total sales dollars to attain target profit= (Fixed expenses + Target profit)/CM ratio= ($72,000 + $180,000)/0.40 = $630,000

92. What is Biskra's margin of safety percentage?A) 15%B) 24%C) 37.5%D) 40%


Solution:

Break-even sales:Sales = Variable expenses + Fixed expenses + Profit$0.80Q = $0.48Q* + $72,000 + $0$0.32Q = $72,000Q = $72,000 ÷ $0.32 per unit = 225,000 unitsMargin of safety in dollars:Break-even sales = $0.80 per unit × 360,000 = $288,000Current sales = $0.80 per unit × 225,000 = $180,000Margin of safety in dollars = Sales − Break-even sales= $288,000 − $180,000 = $108,000Margin of safety as a percentage of sales = Margin of safety in dollars ÷ Current sales = $108,000 ÷ $288,000 = 37.5%

六


A manufacturer of premium wire strippers has supplied the following data:

Units produced and sold........................................ 580,000

Sales revenue.........................................................$4,176,00

0



93. The company's margin of safety in units is closest to:A) 234,222B) 564,242C) 45,455D) 457,500


Solution:

Break-even sales in units:Sales = Variable expenses + Fixed expenses + Profit$7.20Q* = $5.55Q** + $882,000 + $0$1.65Q = $882,000Q = $882,000 ÷ $1.65 per unit = 534,545 unitsMargin of safety in units:Margin of safety in units = Sales in units − Break-even sales in units= 580,000 − 534,545 = 45,455 units

* $4,176,000 ÷ 580,000 units = $7.20 per unit

** Manufacturing expense ($2,871,000 ÷ 580,000 units)................. $4.95Selling and administrative expense ($348,000 ÷ 580,000 units).. 0.60Total variable expenses per unit................................................... $5.55


94. The company's unit contribution margin is closest to:A) $2.25B) $5.55C) $1.65D) $6.60


Solution:

Sales................................... $4,176,000Variable expenses.............. 3,219,000 Contribution margin........... $ 957,000

$957,000 ÷ 580,000 units = $1.65

95. The company's degree of operating leverage is closest to:A) 55.68B) 3.65C) 7.73D) 12.76


Solution:

Sales................................... $4,176,000Variable expenses.............. 3,219,000 Contribution margin........... $ 957,000


六


Keomuangtai Corporation produces and sells a single product. The company has provided its contribution format income statement for October.

Sales (4,600 units).............$266,80


96. If the company sells 4,500 units, its total contribution margin should be closest to:A) $85,500B) $24,652C) $87,400D) $81,600


Solution:

Sales price per unit = $266,800 ÷ 4,600 units = $58Variable expense per unit = $179,400 ÷ 4,600 units = $39

Sales (4,500 units).............$261,00

0Variable expenses.............. 175,500 Contribution margin.......... $ 85,500


97. If the company sells 4,200 units, its net operating income should be closest to:A) $17,600B) $23,009C) $25,200D) $2,000


Solution:


Sales (4,200 units).............$243,60



Souza Inc, which produces and sells a single product, has provided its contribution format income statement for October.

Sales (4,000 units).............$88,00




六

Solution:


Sales (3,600 units)............. $79,200Variable expenses.............. 36,000 Contribution margin.......... $43,200

99. If the company sells 3,500 units, its net operating income should be closest to:A) $5,513B) $6,300C) $300D) -$4,700


Solution:


Sales (3,500 units)............. $77,000Variable expenses.............. 35,000 Contribution margin.......... 42,000Fixed expenses................... 41,700 Net operating income......... $ 300


Wight Corporation has provided its contribution format income statement for June. The company produces and sells a single product.

Sales (9,600 units).............$336,00





Solution:


Sales (9,100 units).............$318,50

0Variable expenses.............. 136,500

Contribution margin..........$182,00

0

101. If the company sells 9,700 units, its net operating income should be closest to:A) $57,000B) $55,000C) $55,573D) $58,500


Solution:


Sales (9,700 units).............$339,50

0


0Contribution margin.......... 194,000

Fixed expenses................... 137,00

0

Net operating income.........$

57,000

六


The following information relates to Francisca Company:

Degree of operating leverage......... 2.5Profit margin percentage............... 24%Margin of safety percentage.......... 40%Contribution margin ratio.............. 60%

102. If Francisca's sales increase by 20%, by what percentage will its net operating income increase?A) 4.8%B) 8%C) 12%D) 50%


Solution:

Percent increase in net operating income= Percent increase in sales × Degree of operating leverage= 20% × 2.5 = 50%

103. Francisca wants to give its sales staff a $60,000 increase in salary but still wants to make the same net operating income. If Francisca gives this increase, by how much would sales at Francisca have to increase in order for the company to maintain its current net operating income level?A) $60,000B) $100,000C) $150,000D) $250,000


Solution:

Increase in sales dollars = Additional fixed expenses ÷ Contribution margin ratio= $60,000 ÷ 0.60 = $100,000



The following data relate to a company that produces and sells a travel guide that is updated monthly:

Fixed costs:Copy editing........................................... $6,000Art work.................................................. $2,000Typesetting............................................. $72,000

Variable costs:

Printing and binding...............................$3.20 per copy

Bookstore discounts................................$4.00 per copy

Salespersons’ commissions....................$0.50 per copy

Author’s royalties...................................$2.00 per copy

Each book sells for $20.00. The company sold 8,000 books in June and 10,000 books in July.

104. The unit contribution margin per book is:A) $10.30B) $14.30C) $10.80D) $8.30


Solution:

Unit contribution margin = Unit sales price - Variable expense per unit= $20.00 - ($3.20 + $4.00 + $0.50 + $2.00) = $10.30

105. The contribution margin ratio for the book is:A) 71.5%B) 54.0%C) 51.5%D) 51.9%


六

Solution:

Unit contribution margin = Unit sales price - Variable expense per unit= $20.00 - ($3.20 + $4.00 + $0.50 + $2.00) = $10.30Contribution margin ratio = Contribution margin ÷ SalesContribution margin ratio = $10.30 ÷ $20.00Contribution margin ratio = 51.5%

106. The break-even point in units is:A) 8,247 booksB) 7,767 booksC) 7,407 booksD) 6,504 books


Solution:

Variable expense per unit = $3.20 + $4.00 + $0.50 + $2.00 = $9.70Sales = Variable expenses + Fixed expenses + Profit$20.00Q = $9.70Q + $80,000 + $0$10.30Q = $80,000Q = $80,000 ÷ $10.30 per unit = 7,767 units (rounded)


107. The degree of operating leverage for July is:A) the same as that for JuneB) higher than that for JuneC) lower than that for JuneD) not determinable

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 8 Level: Hard

Solution:

For June:Variable expense per unit = $3.20 + $4.00 + $0.50 + $2.00 = $9.70

Sales (8,000 units).............$160,00

0



Fixed expenses................... 80,00

0


2,400Degree of operating leverage = Contribution margin/Net operating income= $82,400/$2,400 = 34.33

For July:Variable expense per unit = $3.20 + $4.00 + $0.50 + $2.00 = $9.70

Sales (10,000 units)...........$200,00

0



Fixed expenses................... 80,00

0



As sales increase past the breakeven point, the degree of operating leverage will decrease.

六

108. The degree of operating leverage for July is closest to:A) 4.48B) 3.48C) 4.22D) 8.70


Solution:

Variable expense per unit = $3.20 + $4.00 + $0.50 + $2.00 = $9.70

Sales (10,000 units)...........$200,00

0



Fixed expenses................... 80,00

0




A manufacturer of cedar shingles has supplied the following data:

Bundles of cedar shakes produced and sold.......... 360,000

Sales revenue.........................................................$2,412,00

0




109. The company's break-even in unit sales is closest to:A) 118,806B) 206,957C) 346,087D) 14,775


Solution:

Sales price per unit = $2,412,000 ÷ 360,000 units = $6.70Variable expense per unit = ($1,170,000 + $414,000) ÷ 360,000 units = $4.40Sales = Variable expenses + Fixed expenses + Profit$6.70Q = $4.40Q + $796,000 + $0$2.30Q = $796,000Q = $796,000 ÷ $2.30 per unit = 346,087 units (rounded)

110. The company's contribution margin ratio is closest to:A) 72.6%B) 65.7%C) 34.3%D) 27.4%


Solution:

Contribution margin = Sales - Variable expensesContribution margin = $2,412,000 - $1,584,000 = $828,000Contribution margin ratio = Contribution margin ÷ SalesContribution margin ratio = $828,000 ÷ $2,412,000Contribution margin ratio = 34.3%

六

111. The company's degree of operating leverage is closest to:A) 11.25B) 25.88C) 1.99D) 75.38


Solution:

Sales................................... $2,412,000Variable expenses.............. 1,584,000Contribution margin.......... 828,000Fixed expenses................... 796,000Net operating income......... $ 32,000



Carr Inc. produces small motors that sell for $15 each. Cost data on the motors are provided below:

Sales in units per year................................ 7,000Variable production cost............................ $5.00 per unitVariable selling expense............................ $2.00 per unitVariable administrative expense................ $1.50 per unitFixed expenses per year:

Building rent........................................... $10,000Equipment depreciation.......................... 4,000Selling expense....................................... 8,000Administrative expense.......................... 15,000

Total fixed expenses.................................. $37,000


112. The contribution margin ratio is (round to nearest tenth of a percent):A) 56.7%B) 43.3%C) 66.7%D) 53.3%


Solution:

Unit contribution margin = $15.00 - ($5.00 + $2.00 + $1.50) = $6.50Contribution margin ratio = Contribution margin ÷ SalesContribution margin ratio = $6.50 ÷ $15.00Contribution margin ratio = 43.3%

113. If the selling price is increased by 10 percent, what will be the new break-even point in units (round to the nearest unit)?A) 3,895 unitsB) 4,625 unitsC) 3,700 unitsD) 3,217 units


Solution:

Variable expense per unit = $5.00 + $2.00 + $1.50 = $8.50Sales = Variable expenses + Fixed expenses + Profit$16.50Q = $8.50Q + $37,000 + $0$8.00Q = $37,000Q = $37,000 ÷ $8.00 per unit = 4,625 units

六


(CPA, adapted) The Maxwell Company manufactures and sells a single product. Budgeted data follow:

Forecasted annual sales volume................ 120,000 unitsSelling price per unit.................................. $25.00Variable expenses per unit:

Raw materials......................................... $11.00Direct labor............................................. 5.00Manufacturing overhead......................... 2.50Selling expenses..................................... 1.30

Total variable expenses per unit................ $19.80Annual fixed expenses:

Manufacturing overhead......................... $192,000Selling and administrative...................... 276,000

Total fixed expenses.................................. $468,000

114. Maxwell's break-even point in units is:A) 76,667B) 90,000C) 130,000D) 72,000

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy Source: CPA; adapted

Solution:



115. If Maxwell Company's direct labor costs increase 8 percent, what selling price per unit of product must it charge to maintain the same contribution margin ratio?A) $25.51B) $27.00C) $25.40D) $26.64

Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3; 5 Level: Hard Source: CPA; adapted

Solution:

Current contribution margin per unit = Selling price per unit − Total variable expenses per unit = $25.00 − $19.80 = $5.20Current contribution margin ratio = Contribution margin ÷ Selling price per unit$5.20 ÷ $25.00 = 20.8%Direct labor per unit × 0.08 = Increase in variable expense$5.00 × 0.08 = $0.40New total variable expenses per unit = $19.80 + $0.40 = $20.200.208 = (Selling price − $20.20) ÷ Selling price0.208 × Selling price = Selling price − $20.20$20.20 = Selling price − 0.208 × Selling price$20.20 = 0.792 × Selling priceSelling price = $25.51


The following data was provided by Green Corporation:

Product A Product B Product C

Sales in dollars............................... $80,000 $120,000 $100,000Contribution margin ratio.............. 30% 45% 27%

六

116. The contribution margin ratio for the company as a whole is:A) 34%B) 65%C) 35%D) 66.7%


Solution:


Sales................................... $80,000 $120,000 $100,000$300,00

0Contribution margin (Sales

× Contribution margin ratio)............................... $24,000 $54,000 $27,000 105,000

Overall CM ratio = Total contribution margin/Total sales= $105,000/$300,000 = 35%

117. If total units sold remain unchanged, but the sales mix shifts more heavily toward Product B, one would expect the overall contribution margin ratio to:A) increaseB) decreaseC) remain unchangedD) none of these



Next year, Mudd Face Cosmetics, a single product company, expects to sell 9,000 jars of miracle glaze. Mudd Face is budgeting the following operating results for next year:

Sales...................................$450,00



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118. How many jars of glaze would Mudd Face have to sell next year in order to break-even?A) 2,700B) 5,040C) 6,750D) 7,200


Solution:

TotalPercent of

SalesSales......................................................................... $450,000 100.0%Variable expenses..................................................... 135,000 30.0% Contribution margin and contribution margin ratio. $ 315,000 70.0%

Break-even in total sales dollars = Fixed expenses/CM ratio= $252,000/0.700 = $360,000Selling price per unit = $450,000 ÷ 9,000 jars = $50 per jarBreak-even in units = Break-even sales dollars ÷ Selling price per unit= $360,000 ÷ $50 = 7,200 jars

119. What would Mudd Face's total sales dollars have to be next year in order to increase its projected net operating income by 25%?A) $465,750B) $472,500C) $499,500D) $562,500


Solution:

Contribution margin ratio = $315,000 ÷ $450,000 = 70%Desired net operating income = ($63,000 × 1.25) = $78,750Sales dollars needed to earn $78,750 = (Fixed expenses + Target net operating income) ÷ Contribution margin ratio = ($252,000 + $78,750) ÷ 0.70 = $472,500


120. If sales next year at Mudd Face are 10% higher than expected, its net operating income should be:A) $4,410 higher than expected.B) $6,300 higher than expected.C) $31,500 higher than expected.D) $44,100 higher than expected.


Solution:

Degree of operating leverage = Contribution margin ÷ Net operating income= $315,000 ÷ $63,000 = 5Therefore, increase in net operating income will be 5 × 10%, or 50%, higher.Current net operating income × 50% = $63,000 × 50% = $31,500 increase


Mrs. Rafter has supplied the following data for her small business:

Selling price....................... $10 per unitVariable expenses.............. $6 per unitRent.................................... $400 per weekSalaries............................... $600 per weekOther fixed expenses......... $200 per week

121. If 500 units are sold in a week, the net operating income (loss) would be:A) $1,800B) $(2,000)C) $2,000D) $800


Solution:

Sales................................... $5,000Variable expenses.............. 3,000 Contribution margin.......... 2,000Fixed expenses................... 1,200 Net operating income......... $ 800

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122. If sales commissions $(1.00 per unit) are discontinued in favor of a $300 increase in salaries, the break-even point in units would:A) increaseB) decreaseC) remain the sameD) none of these



Next year, Rad Shirt Company expects to sell 32,000 shirts. Rad is budgeting the following operating results for next year:

Sales...............................................$800,00

0Variable expenses.......................... 288,000 Contribution margin...................... 512,000Fixed expenses............................... 192,000

Net operating income.....................$320,00

0

123. What is Rad's margin of safety for next year?A) $480,000B) $500,000C) $512,000D) $608,000



Solution:

TotalPercent of

SalesSales................................................................ $800,000 100.0%Variable expenses............................................ 288,000 36% Contribution margin and contribution margin

ratio.............................................................. $ 512,000 64%

Break-even in total sales dollars = Fixed expenses/CM ratio= $192,000/0.64 = $300,000

Margin of safety in dollars = Sales − Break-even sales= $800,000 − $300,000 = $500,000

124. What is Rad's degree of operating leverage for next year?A) 1.50B) 1.56C) 1.60D) 2.50


Solution:


六

125. How many shirts would Rad have to sell next year in order to generate $480,000 of net operating income?A) 38,400B) 48,000C) 60,000D) 42,000


Solution:

Sales price = $800,000 ÷ 32,000 units = $25Variable expense per unit = $288,000 ÷ 32,000 units = $9Sales = Variable expenses + Fixed expenses + Target profit$25Q = $9Q + $192,000 + $480,000$16Q = $672,000Q = $672,000 ÷ $16 per unit = 42,000 units

126. Rad is considering increasing its advertising by $48,000 next year. By how much would sales have to increase in order for Rad to still generate a $320,000 net operating income?A) $48,000B) $75,000C) $76,800D) $120,000

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Hard


Solution:

Current Proposed

Sales...............................................$800,00

0Variable expenses.......................... 288,000 Contribution margin...................... 512,000 $560,000 *Fixed expenses............................... 192,000 240,000

Net operating income.....................$320,00

0$320,000

*Work backwards to obtain the number.Sales price = $800,000 ÷ 32,000 units = $25Variable expense per unit = $288,000 ÷ 32,000 units = $9Contribution margin per unit = $25 − $9 = $16$560,000 ÷ $16 = 35,000 units35,000 − 32,000 = 3,000 unit increase3,000 × $25 = $75,000 increase in sales


Houpe Corporation produces and sells a single product. Data concerning that product appear below:


Fixed expenses are $490,000 per month. The company is currently selling 6,000 units per month. Consider each of the following questions independently.

六

127. This question is to be considered independently of all other questions relating to Houpe Corporation. Refer to the original data when answering this question.The marketing manager believes that a $14,000 increase in the monthly advertising budget would result in a 150 unit increase in monthly sales. What should be the overall effect on the company's monthly net operating income of this change?A) increase of $700B) increase of $14,700C) decrease of $14,000D) decrease of $700


Solution:

6,000 units 6,150 unitsSales (6,000 units × $140, 6,150 units × $140)....... $840,000 $861,000Variable expenses (6,000 units × $42, 6,150 units ×

$42)...................................................................... 252,000 258,300Contribution margin................................................ 588,000 602,700Fixed expenses......................................................... 490,000 504,000Net operating income.............................................. $ 98,000 $ 98,700

Increase in net operating income: $98,700 − $98,000 = $700


128. This question is to be considered independently of all other questions relating to Houpe Corporation. Refer to the original data when answering this question.Management is considering using a new component that would increase the unit variable cost by $5. Since the new component would increase the features of the company's product, the marketing manager predicts that monthly sales would increase by 300 units. What should be the overall effect on the company's monthly net operating income of this change?A) decrease of $2,100B) decrease of $27,900C) increase of $2,100D) increase of $27,900


Solution:

6,000 units 6,300 unitsSales (6,000 units × $140, 6,300 units × $140).... $840,000 $882,000Variable expenses (6,000 units × $42, 6,300 units

× $47)................................................................ 252,000 296,100Contribution margin............................................. 588,000 585,900Fixed expenses...................................................... 490,000 490,000Net operating income........................................... $ 98,000 $ 95,900

Decrease in net operating income: $98,000 − $95,900 = $2,100

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129. This question is to be considered independently of all other questions relating to Houpe Corporation. Refer to the original data when answering this question.The marketing manager would like to cut the selling price by $7 and increase the advertising budget by $28,000 per month. The marketing manager predicts that these two changes would increase monthly sales by 500 units. What should be the overall effect on the company's monthly net operating income of this change?A) decrease of $17,500B) increase of $17,500C) decrease of $24,500D) increase of $38,500


Solution:

6,000 units 6,500 unitsSales (6,000 units × $140, 6,500 units × $133). $840,000 $864,500Variable expenses (6,000 units × $42, 6,500

units × $42).................................................... 252,000 273,000Contribution margin.......................................... 588,000 591,500Fixed expenses................................................... 490,000 518,000Net operating income........................................ $ 98,000 $ 73,500



130. This question is to be considered independently of all other questions relating to Houpe Corporation. Refer to the original data when answering this question.The marketing manager would like to introduce sales commissions as an incentive for the sales staff. The marketing manager has proposed a commission of $11 per unit. In exchange, the sales staff would accept a decrease in their salaries of $58,000 per month. (This is the company's savings for the entire sales staff.) The marketing manager predicts that introducing this sales incentive would increase monthly sales by 100 units. What should be the overall effect on the company's monthly net operating income of this change?A) increase of $700B) increase of $56,900C) decrease of $115,300D) increase of $588,700


Solution:

6,000 units 6,100 unitsSales (6,000 units × $140, 6,100 units × $140)..... $840,000 $854,000Variable expenses (6,000 units × $42, 6,100 units

× $53)................................................................. 252,000 323,300Contribution margin............................................... 588,000 530,700Fixed expenses....................................................... 490,000 432,000Net operating income............................................. $ 98,000 $ 98,700



Data concerning Lemelin Corporation's single product appear below:

Per Unit Percent of SalesSelling price................................... $230 100%Variable expenses.......................... 115 50% Contribution margin...................... $115 50%

The company is currently selling 7,000 units per month. Fixed expenses are $581,000 per month. Consider each of the following questions independently.

六

131. This question is to be considered independently of all other questions relating to Lemelin Corporation. Refer to the original data when answering this question.Management is considering using a new component that would increase the unit variable cost by $3. Since the new component would increase the features of the company's product, the marketing manager predicts that monthly sales would increase by 200 units. What should be the overall effect on the company's monthly net operating income of this change?A) decrease of $22,400B) decrease of $1,400C) increase of $22,400D) increase of $1,400


Solution:

7,000 units 7,200 unitsSales (7,000 units × $230, 7,200 units × $230). . $1,610,000 $1,656,000Variable expenses (7,000 units × $115, 7,200

units × $118).................................................... 805,000 849,600Contribution margin............................................ 805,000 806,400Fixed expenses.................................................... 581,000 581,000Net operating income.......................................... $ 224,000 $ 225,400

Increase in net operating income: $225,400 − $224,000 = $1,400

132. This question is to be considered independently of all other questions relating to Lemelin Corporation. Refer to the original data when answering this question.The marketing manager believes that a $11,000 increase in the monthly advertising budget would result in a 100 unit increase in monthly sales. What should be the overall effect on the company's monthly net operating income of this change?A) decrease of $11,000B) increase of $11,500C) decrease of $500D) increase of $500



Solution:

7,000 units 7,100 unitsSales (7,000 units × $230, 7,100 units × $230). $1,610,000 $1,633,000Variable expenses (7,000 units × $115, 7,100

units × $115).................................................. 805,000 816,500Contribution margin.......................................... 805,000 816,500Fixed expenses................................................... 581,000 592,000Net operating income........................................ $ 224,000 $ 224,500


133. This question is to be considered independently of all other questions relating to Lemelin Corporation. Refer to the original data when answering this question.The marketing manager would like to introduce sales commissions as an incentive for the sales staff. The marketing manager has proposed a commission of $20 per unit. In exchange, the sales staff would accept a decrease in their salaries of $113,000 per month. (This is the company's savings for the entire sales staff.) The marketing manager predicts that introducing this sales incentive would increase monthly sales by 300 units. What should be the overall effect on the company's monthly net operating income of this change?A) decrease of $224,500B) increase of $107,000C) increase of $1,500D) increase of $806,500


Solution:

7,000 units 7,300 unitsSales (7,000 units × $230, 7,300 units × $230). . $1,610,000 $1,679,000Variable expenses (7,000 units × $115, 7,300

units × $135).................................................... 805,000 985,500Contribution margin............................................ 805,000 693,500Fixed expenses.................................................... 581,000 468,000Net operating income.......................................... $ 224,000 $ 225,500


六

134. This question is to be considered independently of all other questions relating to Lemelin Corporation. Refer to the original data when answering this question.The marketing manager would like to cut the selling price by $18 and increase the advertising budget by $37,000 per month. The marketing manager predicts that these two changes would increase monthly sales by 1,600 units. What should be the overall effect on the company's monthly net operating income of this change?A) increase of $118,200B) increase of $302,200C) decrease of $118,200D) decrease of $7,800


Solution:


units × $115).................................................. 805,000 989,000Contribution margin.......................................... 805,000 834,200Fixed expenses................................................... 581,000 618,000Net operating income........................................ $ 224,000 $ 216,200



Thornbrough Corporation produces and sells a single product with the following characteristics:


The company is currently selling 7,000 units per month. Fixed expenses are $901,000 per month. Consider each of the following questions independently.


135. This question is to be considered independently of all other questions relating to Thornbrough Corporation. Refer to the original data when answering this question.Management is considering using a new component that would increase the unit variable cost by $11. Since the new component would increase the features of the company's product, the marketing manager predicts that monthly sales would increase by 500 units. What should be the overall effect on the company's monthly net operating income of this change?A) increase of $82,500B) decrease of $5,500C) decrease of $82,500D) increase of $5,500


Solution:


units × $55).................................................... 308,000 412,500Contribution margin.......................................... 1,232,000 1,237,500Fixed expenses................................................... 901,000 901,000Net operating income........................................ $ 331,000 $ 336,500


136. This question is to be considered independently of all other questions relating to Thornbrough Corporation. Refer to the original data when answering this question.The marketing manager believes that a $28,000 increase in the monthly advertising budget would result in a 190 unit increase in monthly sales. What should be the overall effect on the company's monthly net operating income of this change?A) decrease of $28,000B) increase of $33,440C) increase of $5,440D) decrease of $5,440


六

Solution:


units × $44).................................................... 308,000 316,360Contribution margin.......................................... 1,232,000 1,265,440Fixed expenses................................................... 901,000 929,000Net operating income........................................ $ 331,000 $ 336,440


137. This question is to be considered independently of all other questions relating to Thornbrough Corporation. Refer to the original data when answering this question.The marketing manager would like to cut the selling price by $18 and increase the advertising budget by $53,000 per month. The marketing manager predicts that these two changes would increase monthly sales by 1,000 units. What should be the overall effect on the company's monthly net operating income of this change?A) decrease of $105,000B) increase of $149,000C) increase of $105,000D) decrease of $21,000


Solution:

7,000 units 8,000 unitsSales (7,000 units × $220, 8,000 units × $202).... $1,540,000 $1,616,000Variable expenses (7,000 units × $44, 8,000 units

× $44)................................................................ 308,000 352,000Contribution margin............................................. 1,232,000 1,264,000Fixed expenses...................................................... 901,000 954,000Net operating income........................................... $ 331,000 $ 310,000



138. This question is to be considered independently of all other questions relating to Thornbrough Corporation. Refer to the original data when answering this question.The marketing manager would like to introduce sales commissions as an incentive for the sales staff. The marketing manager has proposed a commission of $11 per unit. In exchange, the sales staff would accept a decrease in their salaries of $65,000 per month. (This is the company's savings for the entire sales staff.) The marketing manager predicts that introducing this sales incentive would increase monthly sales by 300 units. What should be the overall effect on the company's monthly net operating income of this change?A) increase of $1,269,500B) increase of $37,500C) increase of $61,700D) decrease of $92,500


Solution:

7,000 units 7,300 unitsSales (7,000 units × $220, 7,300 units × $220)..... $1,540,000 $1,606,000Variable expenses (7,000 units × $44, 7,300 units

× $55)................................................................. 308,000 401,500Contribution margin............................................... 1,232,000 1,204,500Fixed expenses....................................................... 901,000 836,000Net operating income............................................. $ 331,000 $ 368,500



Tricia Corporation is a single product firm that sells its product for $2.50 per unit. Variable expense per unit at Tricia is $1.00. Tricia expects fixed expenses to total $18,000 for next year.

六

139. How many units would Tricia have to sell next year in order to break-even?A) 7,200B) 12,000C) 30,000D) 45,000


Solution:


140. What would Tricia's total sales dollars have to be next year in order to generate $45,000 of net operating income?A) $30,000B) $42,000C) $75,000D) $105,000


Solution:

Contribution margin = Sales price - Variable expense per unitContribution margin = $2.50 - $1.00 = $1.50CM ratio = $1.50 ÷ $2.50 = 0.60Total sales dollars to attain target profit= (Fixed expenses + Target profit)/CM ratio= ($18,000 + $45,000)/0.60 = $105,000



Zanetti Corporation produces and sells a single product. Data concerning that product appear below:



6

141. The break-even in monthly unit sales is closest to:A) 3,873B) 1,740C) 1,201D) 2,271


Solution:


142. The break-even in monthly dollar sales is closest to:A) $191,400B) $249,810C) $426,030D) $132,110


六

Solution:

Per UnitPercent of

SalesSales......................................................................... $110.00 100.0%Variable expenses..................................................... 34.10 31.0% Contribution margin and contribution margin ratio. $ 75.90 69.0%



Data concerning Sinisi Corporation's single product appear below:



0



Solution:

Sales = Variable expenses + Fixed expenses + Profit$200Q = $58Q + $407,540 + $0$142Q = $407,540Q = $407,540 ÷ $142 per unit = 2,870 units


144. The break-even in monthly dollar sales is closest to:A) $407,600B) $1,405,400C) $574,000D) $795,600


Solution:

Per UnitPercent of

SalesSales......................................................................... $200 100.0%Variable expenses..................................................... 58 29.0% Contribution margin and contribution margin ratio. $142 71.0%



Heathman Inc. produces and sells a single product. The selling price of the product is $230.00 per unit and its variable cost is $89.70 per unit. The fixed expense is $308,660 per month.



Solution:


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146. The break-even in monthly dollar sales is closest to:A) $791,436B) $535,365C) $506,000D) $308,660


Solution:

Per UnitPercent of Sales

Sales......................................................................... $230.00 100.0%Variable expenses..................................................... 89.70 39.0% Contribution margin and contribution margin ratio. $140.30 61.0%



Maziarz Corporation produces and sells a single product. Data concerning that product appear below:



8

147. Assume the company's monthly target profit is $14,000. The unit sales to attain that target profit is closest to:A) 7,746B) 2,556C) 4,706D) 3,815


Solution:

Sales = Variable expenses + Fixed expenses + Target profit$220.00Q = $72.60Q + $548,328 + $14,000$147.40Q = $562,328


Q = $562,328 ÷ $147.40 per unit = 3,815 units (rounded)

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148. Assume the company's monthly target profit is $16,000. The dollar sales to attain that target profit is closest to:A) $564,328B) $1,710,085C) $1,038,898D) $842,281


Solution:

Contribution margin per unit = Sales price - Variable expense per unitContribution margin per unit = $220.00 - $72.60 = $147.40CM ratio = $147.40 ÷ $220.00 = 0.67Total sales dollars to attain target profit= (Fixed expenses + Target profit)/CM ratio= ($548,328 + $16,000)/0.67 = $842,281 (rounded)


Data concerning Strite Corporation's single product appear below:



0



Solution:

Sales = Variable expenses + Fixed expenses + Target profit$150Q = $42Q + $421,200 + $17,000$108Q = $438,200Q = $438,200 ÷ $108 per unit = 4,057 units (rounded)


150. Assume the company's monthly target profit is $8,000. The dollar sales to attain that target profit is closest to:A) $596,111B) $1,532,857C) $852,723D) $429,200


Solution:



Speckman Enterprises, Inc., produces and sells a single product whose selling price is $200.00 per unit and whose variable expense is $68.00 per unit. The company's monthly fixed expense is $514,800.



Solution:

Sales = Variable expenses + Fixed expenses + Target profit$200.00Q = $68.00Q + $514,800 + $11,000$132.00Q = $525,800Q = $525,800 ÷ $132 per unit = 3,983 units (rounded)

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152. Assume the company's monthly target profit is $12,000. The dollar sales to attain that target profit is closest to:A) $1,549,412B) $798,182C) $526,800D) $958,131


Solution:



Jerrel Corporation sells a product for $230 per unit. The product's current sales are 24,000 units and its break-even sales are 17,280 units.

153. What is the margin of safety in dollars?A) $5,520,000B) $1,545,600C) $3,974,400D) $3,680,000


Solution:

Margin of safety in dollars:Break-even sales = $230 per unit × 17,280 units = $3,974,400Current sales = $230 per unit × 24,000 units = $5,520,000Margin of safety in dollars = Sales − Break-even sales= $5,520,000 − $3,974,400 = $1,545,600


154. The margin of safety as a percentage of sales is closest to:A) 61%B) 28%C) 72%D) 39%


Solution:

Margin of safety in dollars:Break-even sales = $230 per unit × 17,280 units = $3,974,400Current sales = $230 per unit × 24,000 units = $5,520,000Margin of safety in dollars = Sales − Break-even sales= $5,520,000 − $3,974,400 = $1,545,600Margin of safety as a percentage of sales = Margin of safety in dollars ÷ Current sales = $1,545,600 ÷ $5,520,000 = 28%


Maruska Corporation has provided the following data concerning its only product:


六

155. What is the margin of safety in dollars?A) $4,505,760B) $858,240C) $3,576,000D) $5,364,000


Solution:

Margin of safety in dollars:Break-even sales = $180 per unit × 25,032 = $4,505,760Current sales = $180 per unit × 29,800 = $5,364,000Margin of safety in dollars = Sales − Break-even sales= $5,364,000 − $4,505,760 = $858,240

156. The margin of safety as a percentage of sales is closest to:A) 19%B) 16%C) 84%D) 81%


Solution:

Margin of safety in dollars:Break-even sales = $180 per unit × 25,032 = $4,505,760Current sales = $180 per unit × 29,800 = $5,364,000Margin of safety in dollars = Sales − Break-even sales= $5,364,000 − $4,505,760 = $858,240Margin of safety as a percentage of sales = Margin of safety in dollars ÷ Current sales = $858,240 ÷ $5,364,000 = 16%



Bois Corporation has provided its contribution format income statement for January.

Sales...................................$426,40


157. The degree of operating leverage is closest to:A) 0.11B) 9.37C) 0.27D) 3.66


Solution:


158. If the company's sales increase by 7%, its net operating income should increase by about:A) 26%B) 7%C) 66%D) 11%


Solution:

Degree of operating leverage = Contribution margin/Net operating income= $166,400/$45,500 = 3.66Percent increase in net operating income= Percent increase in sales × Degree of operating leverage= 7% × 3.66 = 26%

六


The July contribution format income statement of Doxtater Corporation appears below:

Sales...............................................$564,40


159. The degree of operating leverage is closest to:A) 0.23B) 0.10C) 4.35D) 9.76


Solution:


160. If the company's sales increase by 19%, its net operating income should increase by about:A) 10%B) 19%C) 83%D) 186%


Solution:

Degree of operating leverage = Contribution margin/Net operating income= $251,600/$57,800 = 4.35Percent increase in net operating income= Percent increase in sales × Degree of operating leverage= 19% × 4.35 = 83%



Taylor, Inc. produces only two products, Acdom and Belnom. These account for 60% and 40% of the total sales dollars of Taylor, respectively. The unit variable expense as a percentage of the selling price is 60% for Acdom and 85% for Belnom. Total fixed expenses are $150,000. There are no other costs.

161. What is Taylor's break-even point in sales dollars?A) $150,000B) $214,286C) $300,000D) $500,000

Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 9 Level: Hard

Solution:

Each product’s contribution margin rate is (1 − variable expense percentage)Acdom = 1 − 0.6 = 0.4Belnom = 1 − 0.85 = 0.15To calculate the weighted average contribution margin, multiply each product’s contribution margin ratio by its percentage of total sales dollars:(60% × 0.4%) + (40% × 0.15%) =0.24% + 0.06% = 0.30%To calculate the break-even point in sales dollars:Fixed expenses ÷ Weighted average contribution margin ratio= $150,000 ÷ 0.30 = $500,000

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162. Assuming that the total fixed expenses of Taylor increase by 30% and the sales mix remains constant, what amount of sales dollars would be necessary to generate a net operating income of $9,000?A) $204,000B) $464,000C) $659,000D) $680,000

Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 9 Level: Hard

Solution:

Each product’s contribution margin rate is (1 − variable expense percentage)Acdom = 1 − 0.6 = 0.4Belnom = 1 − 0.85 = 0.15To calculate the weighted average contribution margin, multiply each product’s contribution margin ratio by its percentage of total sales dollars:(60% × 0.4%) + (40% × 0.15%) = 0.24 + 0.06 = 0.30New fixed expenses = ($150,000 × 1.30) = $195,000Sales dollars needed = (Fixed expenses + Target net operating income) ÷ Weighted average contribution margin ratio= ($195,000 + $9,000) ÷ 0.30 = $680,000


Dietrick Corporation produces and sells two products. Data concerning those products for the most recent month appear below:

Product B32LProduct K84B


Fixed expenses for the entire company were $42,550.


163. The break-even point for the entire company is closest to:A) $42,550B) $71,020C) $69,754D) $30,450


Solution:Product B32L

Product K84B Total



164. If the sales mix were to shift toward Product B32L with total sales remaining constant, the overall break-even point for the entire company:A) could increase or decrease.B) would decrease.C) would not change.D) would increase.



Ingrum Corporation produces and sells two products. In the most recent month, Product R38T had sales of $20,000 and variable expenses of $7,400. Product X08S had sales of $39,000 and variable expenses of $6,170. And the fixed expenses of the entire company were $41,160.

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165. The break-even point for the entire company is closest to:A) $41,160B) $17,840C) $53,455D) $54,730


Solution:Product R38T

Product X08S Total



166. If the sales mix were to shift toward Product R38T with total sales remaining constant, the overall break-even point for the entire company:A) would not change.B) would increase.C) would decrease.D) could increase or decrease.



Essay Questions

167. The following is Arkadia Corporation's contribution format income statement for last month:

Sales...............................................$1,200,00


The company has no beginning or ending inventories and produced and sold 20,000 units during the month.

Required:

a. What is the company's contribution margin ratio?b. What is the company's break-even in units?c. If sales increase by 100 units, by how much should net operating income increase?d. How many units would the company have to sell to attain target profits of

$125,000?e. What is the company's margin of safety in dollars?f. What is the company's degree of operating leverage?

六

Ans:

a. Contribution margin ratio:CM ratio = Contribution margin ÷ Sales = $400,000 ÷ $1,200,000 = 0.333

b. Break-even units:Selling price ($1,200,000 ÷ 20,000 units) = $60 per unitVariable expenses ($800,000 ÷ 20,000 units) = $40 per unit

Sales = Variable expenses + Fixed expenses + Profit$60Q = $40Q + $300,000 + $0$20Q = $300,000Q = $300,000 ÷ $20 per unit = 15,000 units

c. Increase in net operating income from additional sales of 100 units:Selling price............................................... $60 per unitVariable expenses...................................... $40 per unitUnit contribution margin........................... $20 per unitAdditional sales......................................... × 100 unitsIncrease in net operating income............... $2,000

d. Sales to attain target profit:Sales = Variable expenses + Fixed expenses + Profit$60Q = $40Q + $300,000 + $125,000$20Q = $425,000Q = $425,000 ÷ $20 per unit = 21,250 units

e. Margin of safety in dollars:Break-even sales = $60 per unit × 15,000 units = $900,000Margin of safety in dollars = Sales − Break-even sales= $1,200,000 − $900,000 = $300,000

f. Degree of operating leverage = Contribution margin ÷ Net operating income= $400,000 ÷ $100,000 = 4.0

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1; 3; 5; 6; 7; 8 Level: Easy


168. The Garry Corporation's most recent contribution format income statement is shown below:

Total Per unit

Sales (15,000 units).......................$225,00

0 $15Variable expenses.......................... 135,000 9 Contribution margin...................... 90,000 $ 6 Fixed expenses............................... 35,000 Net operating income..................... $ 55,000

Required:

Prepare a new contribution format income statement under each of the following conditions (consider each case independently):a. The sales volume increases by 10% and the price decreases by $0.50 per unit.b. The selling price decreases $1.00 per unit, fixed expenses increase by $15,000, and

the sales volume decreases by 5%.c. The selling price increases by 25%, variable expense increases by $0.75 per unit,

and the sales volume decreases by 15%.d. The selling price increases by $1.50 per unit, variable cost increases by $1.00 per

unit, fixed expenses decrease by $15,000, and sales volume decreases by 12%.

六

Ans:

a. Total Per unitVolume............................ 16,500 unitsSales................................ $239,250 $14.50Variable expenses............ 148,500 9.00 Contribution margin........ 90,750 $ 5.50 Fixed expenses................ 35,000 Net operating income...... $ 55,750

b. Total Per unit

Volume............................ 14,250 unitsSales................................ $199,500 $14.00Variable expenses............ 128,250 9.00 Contribution margin........ 71,250 $ 5.00 Fixed expenses................ 50,000 Net operating income...... $ 21,250

c. Total Per unitVolume............................ 12,750 unitsSales................................ $239,063 $18.75Variable expenses............ 124,313 9.75Contribution margin........ 114,750 $9.00Fixed expenses................ 35,000Net operating income...... $79,750

d. Total Per unit

Volume............................ 13,200 unitsSales................................ $217,800 $16.50Variable expenses........... 132,000 10.00 Contribution margin........ 85,800 $ 6.50 Fixed expenses................ 20,000 Net operating income...... $ 65,800

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement LO: 1; 4 Level: Easy


169. McConkey Corporation produces and sells a single product. The company's contribution format income statement for July appears below:

Sales (5,500 units).............$357,50


Required:

Redo the company's contribution format income statement assuming that the company sells 5,800 units.

Ans:

Sales (5,800 units).............$377,00


AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement LO: 1 Level: Easy

六

170. Giannini Inc., which produces and sells a single product, has provided the following contribution format income statement for March:

Sales (5,900 units).............$477,90


Required:

Redo the company's contribution format income statement assuming that the company sells 5,500 units.

Ans:

Sales (5,500 units).............$445,50




171. Mechem Corporation produces and sells a single product. In April, the company sold 2,100 units. Its total sales were $205,800, its total variable expenses were $107,100, and its total fixed expenses were $82,400.

Required:

a. Construct the company's contribution format income statement for April in good form.

b. Redo the company's contribution format income statement assuming that the company sells 2,200 units.

Ans:

a.Sales (2,100 units)...........

$205,800

Variable expenses............ 107,100 Contribution margin........ 98,700Fixed expenses................ 82,400 Net operating income...... $ 16,300

b. Sales (2,200 units)...........

$215,600

Variable expenses........... 112,200 Contribution margin........ 103,400Fixed expenses................ 82,400 Net operating income...... $ 21,000


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172. In July, Meers Corporation sold 3,700 units of its only product. Its total sales were $107,300, its total variable expenses were $66,600, and its total fixed expenses were $34,800.

Required:

a. Construct the company's contribution format income statement for July in good form.

b. Redo the company's contribution format income statement assuming that the company sells 3,400 units.

Ans:

a.Sales (3,700 units)...........

$107,300


b. Sales (3,400 units)...........

$98,600




173. Spencer Company's most recent monthly contribution format income statement is given below:

Sales................................... $60,000Variable expenses.............. 45,000 Contribution margin.......... 15,000Fixed expenses................... 18,000 Net operating loss.............. ($3,000)

The company sells its only product for $10 per unit. There were no beginning or ending inventories.

Required:

a. What are total sales in dollars at the break-even point?b. What are total variable expenses at the break-even point?c. What is the company's contribution margin ratio?d. If unit sales were increased by 10% and fixed expenses were reduced by $2,000,

what would be the company's expected net operating income? (Prepare a new income statement.)

Ans:

a. The contribution margin ratio is $15,000 ÷ $60,000 = 25%. Therefore, the break-even in sales dollars is $18,000 ÷ 25% = $72,000.

b. The variable cost ratio is $45,000 ÷ $60,000 = 75%. Therefore, the variable expenses at the break-even point are $72,000 × 75% = $54,000.

c. 25% See part (a) above.

d. Sales ($60,000 × 1.1)..............................

$66,000

Variable expenses ($45,000 × 1.1)......... 49,500Contribution margin................................ 16,500Fixed expenses ($18,000 − $2,000)........ 16,000Net operating income.............................. $500

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3; 4; 5 Level: Medium

六

174. Sarratt Corporation's contribution margin ratio is 62% and its fixed monthly expenses are $91,000. Assume that the company's sales for May are expected to be $193,000.

Required:

Estimate the company's net operating income for May. Assume that the fixed monthly expenses do not change. Show your work!

Ans:

Sales....................................................................................$193,00

0Contribution margin ratio.................................................... 62%

Contribution margin (sales × contribution margin ratio)....$119,66

0Fixed expenses.................................................................... 91,000

Net operating income..........................................................$ 28,66

0

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy

175. The management of Merklin Corporation expects sales in May to be $105,000. The company's contribution margin ratio is 70% and its fixed monthly expenses are $48,000.

Required:

Estimate the company's net operating income for May. Assume that the fixed monthly expenses do not change. Show your work!

Ans:

Sales......................................................................................$105,00

0Contribution margin ratio..................................................... 70%Contribution margin (sales × contribution margin ratio)...... $73,500Fixed expenses...................................................................... 48,000 Net operating income............................................................ $25,500



176. Huitron Inc. expects its sales in September to be $143,000. The company's contribution margin ratio is 65% and its fixed monthly expenses are $62,000.

Required:

Estimate the company's net operating income for September. Assume that the fixed monthly expenses do not change. Show your work!

Ans:

Sales.........................................................................................$143,00

0Contribution margin ratio........................................................ 65%Contribution margin (sales × contribution margin ratio)......... $92,950Fixed expenses......................................................................... 62,000Net operating income............................................................... $30,950


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177. Belli-Pitt, Inc, produces a single product. The results of the company's operations for a typical month are summarized in contribution format as follows:

Sales...................................$540,00

0Variable expenses.............. 360,000 Contribution margin........... 180,000Fixed expenses................... 120,000 Net operating income......... $ 60,000

The company produced and sold 120,000 kilograms of product during the month. There were no beginning or ending inventories.

Required:

a. Given the present situation, compute1. The break-even sales in kilograms.2. The break-even sales in dollars.3. The sales in kilograms that would be required to produce net operating income of $90,000.4. The margin of safety in dollars.

b. An important part of processing is performed by a machine that is currently being leased for $20,000 per month. Belli-Pitt has been offered an arrangement whereby it would pay $0.10 royalty per kilogram processed by the machine rather than the monthly lease.

1. Should the company choose the lease or the royalty plan?2. Under the royalty plan compute break-even point in kilograms.3. Under the royalty plan compute break-even point in dollars.4. Under the royalty plan determine the sales in kilograms that would be required to produce net operating income of $90,000.

Ans:

a. Per kg.

Sales................................ $4.50100.0

%Variable expense............. 3.00 66.7% Contribution margin........ $1.50 33.3%

1. Sales = Variable expenses + Fixed expenses + Target profit$4.50Q = $3.00Q + $120,000 + $0


$1.50Q = $120,000Q = $120,000 ÷ $1.50 per unit = 80,000 units

六

2. 80,000 units × $4.50 per unit = $360,000

3. Sales = Variable expenses + Fixed expenses + Target profit$4.50Q = $3.00Q + $120,000 + $90,000$1.50Q = $210,000Q = $210,000 ÷ $1.50 per unit = 140,000 units

4. Margin of safety = Sales − Sales at breakeven = $540,000 − $360,000= $180,000

b.1. As Is Proposed

Per Unit Amount Per Unit Amount

Sales................................$540,00

0 $4.50$540,00

0 $4.50Variable expense............. 360,000 3.00 372,000 3.10 Contribution margin........ 180,000 1.50 168,000 1.40Fixed expense.................. 120,000 1.00 100,000 0.83 Net operating income...... $ 60,000 $0.50 $ 68,000 $0.57

Since net operating income increases by $8,000 the royalty is a good plan, provided sales remains at the same level.

2. Sales = Variable expenses + Fixed expenses + Target profit$4.50Q = $3.10Q + $100,000 + $0$1.40Q = $100,000Q = $100,000 ÷ $1.40 per unit = 71,429 units

3. 71,429 units × $4.50 unit = $321,429

4. Sales = Variable expenses + Fixed expenses + Target profit$4.50Q = $3.10Q + $100,000 + $90,000$1.40Q = $190,000Q = $190,000 ÷ $1.40 per unit = 135,714 units

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4; 5; 6 Level: Medium


178. Shelhorse Corporation produces and sells a single product. Data concerning that product appear below:


Fixed expenses are $275,000 per month. The company is currently selling 4,000 units per month.

Required:

The marketing manager believes that a $13,000 increase in the monthly advertising budget would result in a 150 unit increase in monthly sales. What should be the overall effect on the company's monthly net operating income of this change? Show your work!

Ans:

Increase in total contribution margin ($84 per unit × 150 units)... $12,600Less incremental fixed expenses................................................... 13,000 Change in net operating income.................................................... ($ 400 )


179. Data concerning Cavaluzzi Corporation's single product appear below:



Required:

The marketing manager believes that a $8,000 increase in the monthly advertising budget would result in a 150 unit increase in monthly sales. What should be the overall effect on the company's monthly net operating income of this change? Show your work!

六

Ans:

Increase in total contribution margin ($66 per unit × 150 units).........$9,90

0Less incremental fixed expenses......................................................... 8,000

Change in net operating income..........................................................$1,90

0


180. Naumann Corporation produces and sells a single product. Data concerning that product appear below:



Required:

Management is considering using a new component that would increase the unit variable cost by $7. Since the new component would improve the company’s product, the marketing manager predicts that monthly sales would increase by 500 units. What should be the overall effect on the company’s monthly net operating income of this change if fixed expenses are unaffected? Show your work!

Ans:

New variable cost per unit ($30 + $7)........................................... $37New contribution margin per unit ($100 − $37)............................ $63New unit monthly sales (4,000 units + 500 units)......................... 4,500

New total contribution margin: 4,500 units × $63 per unit...........$283,50

0Current total contribution margin: 4,000 units × $70 per unit....... 280,000 Change in total contribution margin and in net operating income $ 3,500

Since fixed expenses are not affected by this change, the change in net operating income will be equal to the change in total contribution margin.



六

181. Data concerning Milian Corporation's single product appear below:



Required:

Management is considering using a new component that would increase the unit variable cost by $15. Since the new component would improve the company's product, the marketing manager predicts that monthly sales would increase by 200 units. What should be the overall effect on the company's monthly net operating income of this change if fixed expenses are unaffected? Show your work!

Ans:

New variable cost per unit ($39 + $15).............................................. $54New contribution margin per unit ($130 − $54)................................ $76New unit monthly sales (1,000 units + 200 units)............................. 1,200

New total contribution margin: 1,200 units × $76 per unit................$91,20

0Current total contribution margin: 1,000 units × $91 per unit........... 91,000 Change in total contribution margin and in net operating income..... $ 200

Since fixed expenses are not affected by this change, the change in net operating income will be equal to the change in total contribution margin.



182. Bethard Corporation produces and sells a single product. Data concerning that product appear below:



Required:

The marketing manager would like to cut the selling price by $8 and increase the advertising budget by $23,000 per month. The marketing manager predicts that these two changes would increase monthly sales by 600 units. What should be the overall effect on the company's monthly net operating income of this change? Show your work!

Ans:

New selling price ($120 − $8)................................................... $112New contribution margin ($112 − $24).................................... $88New unit monthly sales (5,000 units + 600 units).................... 5,600New total contribution margin: 5,600 units × $88 per unit....... $492,800Present total contribution margin: 5,000 units × $96 per unit. . 480,000 Change in total contribution margin......................................... 12,800Less increase in advertising budget........................................... 23,000 Change in net operating income................................................ ($10,200)


六

183. Data concerning Neuner Corporation's single product appear below:



Required:

The marketing manager would like to cut the selling price by $11 and increase the advertising budget by $23,700 per month. The marketing manager predicts that these two changes would increase monthly sales by 400 units. What should be the overall effect on the company's monthly net operating income of this change? Show your work!

Ans:

New selling price ($220 − $11)....................................................... $209New contribution margin ($209 − $88).......................................... $121New unit monthly sales (4,000 units + 400 units).......................... 4,400New total contribution margin: 4,400 units × $121 per unit........... $532,400Present total contribution margin: 4,000 units × $132 per unit...... 528,000 Change in total contribution margin............................................... 4,400Less increase in advertising budget................................................. 23,700 Change in net operating income...................................................... ($19,300)



184. Hamiel Corporation produces and sells a single product. Data concerning that product appear below:



Required:

The marketing manager would like to introduce sales commissions as an incentive for the sales staff. The marketing manager has proposed a commission of $16 per unit. In exchange, the sales staff would accept an overall decrease in their salaries of $68,000 per month. The marketing manager predicts that introducing this sales incentive would increase monthly sales by 200 units. What should be the overall effect on the company's monthly net operating income of this change? Show your work!

Ans:

New contribution margin ($72 − $16)......................................... $56New unit monthly sales (5,000 units + 200 units)....................... 5,200New total contribution margin: 5,200 units × $56 per unit.......... $291,200Present total contribution margin: 5,000 units × $72 per unit..... 360,000 Change in total contribution margin............................................ (68,800)Plus savings in salespersons’ salaries.......................................... 68,000 Change in net operating income................................................... ($ 800 )


六

185. Data concerning Wislocki Corporation's single product appear below:



Required:

The marketing manager would like to introduce sales commissions as an incentive for the sales staff. The marketing manager has proposed a commission of $11 per unit. In exchange, the sales staff would accept an overall decrease in their salaries of $55,000 per month. The marketing manager predicts that introducing this sales incentive would increase monthly sales by 100 units. What should be the overall effect on the company's monthly net operating income of this change? Show your work!

Ans:

New contribution margin ($104 − $11)....................................... $93New unit monthly sales (6,000 units + 100 units)....................... 6,100New total contribution margin: 6,100 units × $93 per unit.......... $567,300Present total contribution margin: 6,000 units × $104 per unit. . . 624,000 Change in total contribution margin............................................ (56,700)Plus savings in salespersons’ salaries.......................................... 55,000 Change in net operating income................................................... ($ 1,700 )



186. Merlin Enterprises manufactures a cellular telephone. The company's partial contribution format income statement for the most recent year is below.

Total Per Unit Ratio

Sales...................................$300,00

0 $60Variable expenses.............. 55%Contribution margin..........Fixed expenses................... 108,000Net operating income.........

Required:

a. Complete the contribution income statement above.b. Determine the breakeven sales and units using either the equation or the contribution approach.c. Determine the sales necessary to earn a profit of $54,000.d. Determine the margin of safety percentage for the year above.

Ans:

a. Variable expenses = 0.55 × $300,000 = $165,000Variable expenses per unit = 0.55 × $60 = $33

Total Per Unit Ratio

Sales...................................$300,00

0 $60 100%Variable expenses.............. 165,000 33 55% Contribution margin.......... 135,000 $27 45% Fixed expenses................... 108,000 Net operating income......... $ 27,000

b. Break-even in unit sales = $108,000/$27 per unit = 4,000 unitsBreak-even in dollar sales = $108,000/0.45 = $240,000

c. Dollar sales to attain target profit = ($108,000 + $54,000)/0.45 = $360,000

d. Margin of safety = $300,000 − $240,000 = $60,000Margin of safety percentage = $60,000/$300,000 = 20%

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5; 6; 7 Level: Easy

六

187. Frisch Corporation produces and sells a single product. Data concerning that product appear below:

Selling price per unit.......... $170.00Variable expense per unit. . $83.30

Fixed expense per month...$138,72

0

Required:

Determine the monthly break-even in either unit or total dollar sales. Show your work!

Ans:Per Unit

Percent of Sales

Selling price per unit............................................................... $170.00 100%Variable expense per unit........................................................ 83.30 49% Contribution margin per unit and contribution margin ratio... $ 86.70 51%

Break-even in unit sales = Fixed expenses/Unit contribution margin= $138,720/$86.70 = 1,600




188. Hamernik, Inc., produces and sells a single product whose selling price is $240.00 per unit and whose variable expense is $72.00 per unit. The company's fixed expense is $372,960 per month.

Required:

Determine the monthly break-even in either unit or total dollar sales. Show your work!

Ans:Per Unit

Percent of Sales

Selling price per unit............................................................... $240.00 100%Variable expense per unit........................................................ 72.00 30% Contribution margin per unit and contribution margin ratio... $168.00 70%

Break-even in unit sales = Fixed expenses/Unit contribution margin= $372,960/$168 = 2,220



六

189. Yamakawa Corporation produces and sells a single product. Data concerning that product appear below:



0

Required:

Determine the monthly break-even in unit sales. Show your work!

Ans:

Selling price per unit......................$200.0

0Variable expense per unit.............. 64.00

Contribution margin per unit.........$136.0

0

Break-even in unit sales = Fixed expenses/Unit contribution margin= $670,480/$136 = 4,930


190. Liz, Inc., produces and sells a single product. The product sells for $130.00 per unit and its variable expense is $48.10 per unit. The company's monthly fixed expense is $223,587.

Required:

Determine the monthly break-even in unit sales. Show your work!

Ans:


0Variable expense per unit.............. 48.10 Contribution margin per unit......... $ 81.90

Break-even in unit sales = Fixed expenses/Unit contribution margin= $223,587/$81.90 = 2,730



六

191. Cleghorn Corporation produces and sells a single product. Data concerning that product appear below:



6

Required:

Determine the monthly break-even in total dollar sales. Show your work!

Ans:Per Unit

Percent of Sales

Selling price per unit................................................................ $160.00 100%Variable expense per unit........................................................ 70.40 44% Contribution margin per unit and contribution margin ratio.. . $ 89.60 56%



192. Malensek International, Inc., produces and sells a single product. The product sells for $240.00 per unit and its variable expense is $55.20 per unit. The company's monthly fixed expense is $249,480.

Required:

Determine the monthly break-even in total dollar sales. Show your work!

Ans:Per Unit

Percent of Sales

Selling price per unit................................................................ $240.00 100%Variable expense per unit........................................................ 55.20 23% Contribution margin per unit and contribution margin ratio.. . $184.80 77%


AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting


LO: 5 Level: Easy

六

193. Brihon Corporation produces and sells a single product. Data concerning that product appear below:



0

Required:

a. Assume the company's monthly target profit is $12,650. Determine the unit sales to attain that target profit. Show your work!

b. Assume the company's monthly target profit is $63,250. Determine the dollar sales to attain that target profit. Show your work!

Ans:

Per Unit Percent of SalesSelling price per unit........................................... $230.00 100%Variable expense per unit................................... 103.50 45% Contribution margin per unit and CM ratio........ $126.50 55%

a. Unit sales to attain target profit= (Fixed expenses + Target profit)/Unit contribution margin= ($518,650 + $12,650)/$126.50 = 4,200

b. Total sales dollars to attain target profit= (Fixed expenses + Target profit)/CM ratio= ($518,650 + $63,250)/0.55 = $1,058,000



194. Rachal Corporation produces and sells a single product whose selling price is $150.00 per unit and whose variable expense is $57.00 per unit. The company's monthly fixed expense is $381,300.

Required:

a. Assume the company's monthly target profit is $9,300. Determine the unit sales to attain that target profit. Show your work!

b. Assume the company's monthly target profit is $18,600. Determine the dollar sales to attain that target profit. Show your work!

Ans:

Per Unit Percent of SalesSelling price per unit........................................... $150.00 100%Variable expense per unit................................... 57.00 38% Contribution margin per unit and CM ratio........ $ 93.00 62%

a. Unit sales to attain target profit= (Fixed expenses + Target profit)/Unit contribution margin= ($381,300 + $9,300)/$93.00 = 4,200

b. Total sales dollars to attain target profit= (Fixed expenses + Target profit)/CM ratio= ($381,300 + $18,600)/0.62 = $645,000


六

195. Hawver Corporation produces and sells a single product. Data concerning that product appear below:



0

Required:

Assume the company's monthly target profit is $19,800. Determine the unit sales to attain that target profit. Show your work!

Ans:


0Variable expense per unit.............. 81.00 Contribution margin per unit......... $ 99.00

Unit sales to attain target profit= (Fixed expenses + Target profit)/Unit contribution margin= ($594,000 + $19,800)/$99.00 = 6,200



196. The selling price of Old Corporation's only product is $180.00 per unit and its variable expense is $37.80 per unit. The company's monthly fixed expense is $483,480.

Required:

Assume the company's monthly target profit is $56,880. Determine the unit sales to attain that target profit. Show your work!

Ans:


0

Variable expense per unit.............. 37.8

0

Contribution margin per unit.........$142.2

0

Unit sales to attain target profit= (Fixed expenses + Target profit)/Unit contribution margin= ($483,480 + $56,880)/$142.20 = 3,800


197. Bussy Corporation produces and sells a single product whose contribution margin ratio is 54%. The company's monthly fixed expense is $561,600 and the company's monthly target profit is $34,560.

Required:

Determine the dollar sales to attain the company's target profit. Show your work!

Ans:

Total sales dollars to attain target profit= (Fixed expenses + Target profit)/CM ratio= ($561,600 + $34,560)/0.54 = $1,104,000


六

198. The contribution margin ratio of Kuck Corporation's only product is 75%. The company's monthly fixed expense is $585,000 and the company's monthly target profit is $11,250.

Required:

Determine the dollar sales to attain the company's target profit. Show your work!

Ans:

Total sales dollars to attain target profit= (Fixed expenses + Target profit)/CM ratio= ($585,000 + $11,250)/0.75 = $795,000


199. Knezevich Corporation makes a product that sells for $230 per unit. The product's current sales are 36,900 units and its break-even sales are 32,103 units.

Required:

Compute the margin of safety in both dollars and as a percentage of sales.

Ans:

Sales (at the current volume of 36,900 units) (a)............$8,487,00

0Break-even sales (at 32,103 units)................................... 7,383,690

Margin of safety (in dollars) (b)......................................$1,103,31

0Margin of safety as a percentage of sales, (b) ÷ (a)......... 13%



200. Dickus Corporation's only product sells for $100 per unit. Its current sales are 35,600 units and its break-even sales are 29,192 units.

Required:


Ans:


0Break-even sales (at 29,192 units)................................... 2,919,200 Margin of safety (in dollars) (b)...................................... $ 640,800 Margin of safety as a percentage of sales, (b) ÷ (a)......... 18%


201. Haslem Inc. has provided the following data concerning its only product:


Required:


Ans:


0Break-even sales (at 26,483 units)................................... 2,648,300

Margin of safety (in dollars) (b)......................................$1,081,70

0Margin of safety as a percentage of sales, (b) ÷ (a)......... 29%


六

202. Mcquage Corporation has provided its contribution format income statement for July.

Sales...............................................$558,00


Required:

a. Compute the degree of operating leverage to two decimal places.b. Using the degree of operating leverage, estimate the percentage change in net

operating income that should result from a 19% increase in sales.

Ans:

a. Degree of operating leverage = Contribution margin/Net operating income= $251,100/$41,300 = 6.08b. Percent increase in net operating income= Percent increase in sales × Degree of operating leverage= 19% × 6.08 = 115.52%



203. Lubke Corporation's contribution format income statement for the most recent month follows:

Sales...................................$506,00


Required:



Ans:

a. Degree of operating leverage = Contribution margin/Net operating income= $269,500/$27,800 = 9.69

b. Percent increase in net operating income= Percent increase in sales × Degree of operating leverage= 3% × 9.69 = 29.07%


六

204. In the most recent month, Sardella Corporation's total contribution margin was $46,200 and its net operating income $13,200.

Required:



Ans:

a. Degree of operating leverage = Contribution margin/Net operating income= $46,200/$13,200 = 3.50

b. Percent increase in net operating income= Percent increase in sales × Degree of operating leverage= 10% × 3.50 = 35.00%



205. Brancati Inc. produces and sells two products. Data concerning those products for the most recent month appear below:

Product W07C Product B29ZSales................................... $25,000 $27,000Variable expenses.............. $7,000 $8,600

Fixed expenses for the entire company were $32,860.

Required:

a. Determine the overall break-even point for the company. Show your work!b. If the sales mix shifts toward Product W07C with no change in total sales, what

will happen to the break-even point for the company? Explain.

Ans:

a. Product W07C Product B29Z Total

Sales................................ $25,000 $27,000$52,00

0Variable expenses............ 7,000 8,600 15,600 Contribution margin........ $18,000 $18,400 36,400Fixed expenses................ 32,860 Net operating income...... $ 3,540


b. Product W07C Product B29Z

Sales (a)........................... $25,000 $27,000Contribution margin (b). . $18,000 $18,400CM ratio (b)÷(a).............. 0.720 0.681

Since Product W07C’s CM ratio is greater than Product B29Z’s, a shift in the sales mix toward Product W07C will result in a decrease in the company’s overall break-even point.


六

206. Veren Inc. produces and sells two products. During the most recent month, Product F73A's sales were $27,000 and its variable expenses were $9,450. Product L75P's sales were $14,000 and its variable expenses were $5,310. The company's fixed expenses were $21,060.

Required:

a. Determine the overall break-even point for the company. Show your work!b. If the sales mix shifts toward Product F73A with no change in total sales, what

will happen to the break-even point for the company? Explain.

Ans:

a. Product F73A Product L75P Total

Sales................................ $27,000 $14,000$41,00

0Variable expenses............ 9,450 5,310 14,760 Contribution margin........ $17,550 $ 8,690 26,240Fixed expenses................ 21,060 Net operating income...... $ 5,180


b. Product F73A Product L75P

Sales (a)........................... $27,000 $14,000Contribution margin (b). . $17,550 $8,690CM ratio (b)÷(a).............. 0.650 0.621

Since Product F73A’s CM ratio is greater than Product L75P’s, a shift in the sales mix toward Product F73A will result in a decrease in the company’s overall break-even point.



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53046405 Ch6 Cost Volume Profit 1

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