Chapter020 Solutions Manuall 2 (1)

7/25/2019 Chapter020 Solutions Manuall 2 (1)

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CHAPTER 20

COST-VOLUME-PROFIT ANALYSIS


2/29

SOLUTIONS TO BRIEF EXERCISES

B. Ex. 20.1 a. Total variable costs increase approximately in proportion to an increase in the

volume of activity.b. Variable costs per unit remain relatively constant at all levels of activity; this is

the reason that total variable costs vary in proportion to changes in the volume

of activity.

c. Total fixed costs remain relatively constant despite increases in the volume of

activity.

d. Because total fixed costs tend to remain constant as the volume of activity

increases, fixed costs per unit decline with increases in the volume of activity.

e. Semivariable costs include both fixed and variable cost elements. Because of

the variable cost element, total semivariable costs tend to rise as the volume of

activity increases. Due to the fixed element of the semivariable cost, however,

this increase is less than proportionate to the increase in the volume of activity.

f. On a per-unit basis, the fixed elements of a semivariable cost decline as the

volume of activity increases, but the variable elements tend to remain constant.Thus, semivariable costs per unit decline as the volume of activity rises, but not

as rapidly as if the entire cost were fixed.

B. Ex. 20.2 a. Variable. The cost of goods sold normally rises and falls in almost direct

proportion to changes in net sales. Although fixed manufacturing overhead is a

component of cost of goods sold, it is applied on a per unit basis and, therefore,

acts like a variable cost.b. As described in this exercise, the salaries to salespeople are semivariable with

respect to net sales. The monthly minimum amount represents a fixed cost that

does not vary with fluctuations in net sales. However, the commissions on sales

transactions represent a variable element of sales salaries that does fluctuate in

approximate proportion to fluctuations in net sales.


3/29

B. Ex. 20.2

(continued)

c.

d.

e.

f.

B. Ex. 20.3 a. (1)

$ 15,000

30,000

$ 45,000

(2)

$ 45,000

150

$ 300

Fixed. Property tax expense is known for each period and is not affected by

fluctuations in sales volume.

Estimated total cost of responding to 150

emergency calls per month [parta (1) ]

Fixed. Use of an accelerated method causes depreciation expense to changefrom one period to the next, but the expense for each period still remains

fixed with respect to fluctuations in net sales. The key idea is that fluctuations

in net sales have no effect upon the amount of depreciation expense applicable

to the period.

Fixed element of monthly emergency response cost

Variable cost of responding to 150 calls

(150 calls $200 per call)

Average cost per call (150 calls per month):

Number of calls

Estimated total cost of responding to emergency

Average cost per call ($45,000 150 calls) .

Income taxes arenot a fixed, variable, or semivariable cost with respect to net

sales. Income taxes may be viewed as a variable cost, but the relevant activity

base is taxable income, not net sales. (Different tax brackets complicate the

analysis of income taxes expense, even given taxable income as the activity base.Therefore, cost-volume-profit analysis usually focuses upon operating

incomethat is, income before income tax expense and other items that resist

classification as costs that are fixed, variable, or semivariable with respect to net

sales.)

Estimated cost of responding to 150 emergency calls in one

month:

cost ..

calls ..

Fixed. Depreciation expense on a sales showroom is independent of the level of

net sales. Fluctuations in net sales have no effect upon the amount of

depreciation applicable during the period to the sales showroom. (Depreciation

can become a variable cost only when it is treated as a product cost, or when

depreciation is computed using the units-of-output method. Neither of these

situations applies to the depreciation on a sales showroom, which is a period

cost.)


4/29

B. Ex. 20.3

(continued)

b.

B. Ex. 20.4 a.

$6,000 + $0

60%

$10,000

c. $ 6,000

8,000

$ 14,000

B. Ex. 20.5 a.

= 80,000 units

= $4,800,000

b.

c.

Variable element of room service costs ($20,000 40%)

Estimated total room service costs in a month

Unit sales price = $45 variable costs 75% = $60

Unit Contribution Margin Unit Sales Price Variable Cost per Unit

$60 (above) - $45 = $15

Fixed Costs + Target Operating Income

Contribution Margin Ratio

Fixed element of room service costs

generating $20,000 room service revenue

If contribution margin ratio is 25%, variable costs must be 75% of sales

=$800,000 + $400,000


[or 80,000 units (partb ) x ($60 unit sales price (parta ) = $4,800,000]

$15

Unit Contribution Margin

=

Sales Volume (in units)

=$800,000 + $400,000

25%

Sales Volume (in dollars)

b.

The overall cost of responding to emergency calls is semivariablethat

is, it includes both fixed and variable elements. Therefore, when the

volume of emergency calls is unusually low, the average cost of

responding to each call will rise, because the fixed cost elements must bespread over fewer calls.

Contribution margin ratio 60% (100%, minus variable costs of 40%)

Fixed Costs + Target Profit

Contribution Margin RatioBreak-Even Sales Volume


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B. Ex. 20.6 a.

= $ 114,000

B. Ex. 20.7 a. $ 4,500,000

30%

$ 1,350,000

b. $ 4,500,0001,350,000

$ 3,150,000

$ 42

c.

B. Ex. 20.8 a. $6,000

b. $9,000

operating income) 40%]

Break-even sales volume ($60 75,000 units)

Alternatively, if the contribution margin ratio is 30%, variable costs must amount

to 70% of the unit sales price. Thus, $60 sales price 70% = $42.

Variable cost per unit ($3,150,000 75,000 units)

Break-even sales volume ($60 75,000 units)

Contribution margin ratio .

Fixed costs ($4,500,000 30%) .

Less: Fixed costs (parta )

[($2,400 additional cost + $1,200 target

Variable cost at 75,000 units

Total costs = fixed costs + (variable cost per unit number of units)= $1,350,000 + ($42 number of units)

($2,400 additional monthly fixed cost, divided by 40%

contribution margin)

b.

c.

=

=

Break-Even Sales Volume

$24,000

=40%

Fixed Costs

CM ratio

Fixed Costs

40%

$9,600 + $36,000

If variable costs are 60% of sales revenue, the contribution

margin ratio must be (100% - 60%) = 40%

; Fixed Costs = $9,600


Contribution Margin Ratio=Sales Volume


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B. Ex. 20.9

B. Ex. 20.10 a. Contribution Percentage of Average

Margin Ratio Total Sales = Contribution

20% 12%

80% 20%

Average contribution margin ratio 32%

=Break-Even

Sales Revenue

= $5,000,000

b.

= $14,375,000

Fixed Costs/Average Contribution Margin Ratio

=Fixed Costs + Target Operating Income

Average Contribution Margin Ratio

Flashlights

$1,600,000 32%

($1,600,000 + $3,000,000) 32%

Passenger miles driven

Wilson Pump Manufacturers

Machine hours

Number of pumps produced

Sales dollars

Target Revenue

Number of cases

60%

25%Batteries

McCauley & Pratt, Attorneys at Law Billable client hours

Susquehanna Trails Bus

Direct labor hours

Freemans Retail Floral Shop

The following activity bases could be suggested to each of your clients:

Possible Activity BasesClientSales dollars


7/29

SOLUTIONS TO EXERCISES

Ex. 20.1 a.

b.c.

d.

e.

f.

g.

h.

(1) Machine Manufacturing

Hours Overhead

6,000 $320,000

2,500 180,000

3,500 $140,000

(2)

320,000$

240,000

$ 80,000

b.

$ 80,000

180,000

$ 260,000

c. February March

$ 208,000

$ 276,000

224,000 264,000$ (16,000) $ 12,000

Economies of scale

Unit contribution margin

Break-even point

Fixed costsRelevant range

Contribution margin

Estimated manufacturing overhead:

Total estimated manufacturing overhead .

$40 per machine hour) ..

Fixed element of manufacturing overhead ....

Estimated manufacturing overhead at activity level

Fixed element [parta (2) ] ..

Semivariable costs

of 4,500 machine hours:

Thus, the estimated variable element of Bursa Mfg. Co.s manufacturing

overhead is $40per machine hour. [$140,000 change in cost divided by 3,500

unit change in the activity base (machine hours)].

machine-hour level (6,000 machine hours

None (This is not a meaningful measurement; variable costs have already been

deducted in arriving at operating income.)

High point

Low point

at 6,000 machine-hour level .

Variable element of manufacturing overhead at 6,000

Ex. 20.2 a.

Changes

Total manufacturing overhead

Amount over (under) estimated ....Actual manufacturing overhead .....

February:

March:

$80,000 + ($40 per MH 4,900 MH) .....

$80,000 + ($40 per MH 3,200 MH) ....

Variable cost element ($40 per machine hour

4,500 machine hours) ...


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Ex. 20.3 a.

b.

c.

Ex. 20.4 a. Product 1 Product 2

60% 20%

30% 70%

18% + 14% = 32%

b. Product 1 Product 2

60% 20%

20% 80%

12% + 16% = 28%

Contribution

Variable Margin Ratio Fixed Operating UnitsSales Costs per Unit Costs Income Sold

(1) $200,000 $120,000 $20 $55,000 $25,000 4,000

(2) 180,000 105,000 15 45,000 30,000 5,000

(3) 600,000 360,000 30 150,000 90,000 8,000

Contribution

Variable Margin Ratio Fixed OperatingSales Costs Ratio (%) Costs Income

(1) $900,000 $720,000 20% $85,000 $95,000

(2) 600,000 360,000 40% 165,000 75,000

(3) 500,000 350,000 30% 90,000 60,000

Unit contribution margin: $90 $38 = $52

Sales required to break-even: $650,000 $52 = 12,500 units

($650,000 + $234,000) $52 = 17,000 units

Break-Even in Sales =

Relative sales mix

Contribution margin ratio

Relative sales mix


b.

Ex. 20.5 a.

Fixed Costs


Break-Even in Sales = $96,000 32% = $300,000



Break-Even in Sales = ($96,000 + $16,000) 28% = $400,000

Break-Even in Sales =


9/29

Ex. 20.6

Ex. 20.7

$30 $6

$30

$360,000

80%

= $1,000,000

d. Sales volume (60,000 units x $30) 1,800,000$Less: Break-even sales volume (per part b ) 450,000Margin of safety at 60,000 units 1,350,000$

e.

=

=$360,000 + $440,000

c.

=

b.

It is never ethical to lie to ones employees. This type of behavior will only serve

to promote an atmosphere of distrust throughout the company. Rather than

attempting to motivate the sales force by lying about sales quotas, the company

should consider rewarding regional sales managers using commissions andbonuses.

=a. Contribution Margin RatioUnit Sales Price - Variable Cost per Unit

Unit Sales Price

=

=

= 80%

= $1,350,000 80% = $1,080,000

= Margin of Safety Contribution Margin Ratio


Break-Even Dollar Sales

Volume

$450,000

Fixed Costs + $0

=

Dollar SalesVolume


Operating Income

80%



10/29

a.

220,000$

Ad Campaign

Ordering

System

$1,260,000 (1) 1,200,000$0.25 0.30

315,000$ 360,000$(100,000) (100,000)

215,000$ 260,000$

(1)

b.

Ex. 20.8

Thus projected operating income will decrease by $5,000 if the ad campaign is chosen

($215,000 - $220,000), and increase by $40,000 ($260,000 - $220,000) if the ordering system

is chosen.

($1,200,000 x 1.05)

For the ad campaign to result in an equal increase in operating income, the total

contribution margin produced must equal that of the ordering system ($360,000).

Total contribu tion marginminus fixed costs

Operating income

Projected operating Income without either investment:

($1,200,000 0.25) - $80,000

Sales Revenue = $1,440,000

Projected sales revenue

$1,440,000 - $1,200,000

$1,200,000

CM ratio

= 20%

Sales Revenue x 25% = $360,000

Percentage Increase =


11/29


12/29

Ex. 20.10 a.

$45 - $27

$45

$300,000

40%

b. 900,000$

750,000150,000$

Ex. 20.11 a. 20$

(6)

(2)

12$

300,000$

600,000

900,000$

900,000$

$12

75,000

b. 60%

900,000$

1,200,000

2,100,000$

60%

3,500,000$

c. 900,000$

60%

1,500,000$

2,500,000$

(1,500,000)

1,000,000$Margin of safety

Total fixed costs

Target monthly income

Divided by contribution margin ratio .

Sales revenue required

Total fixed costs

Monthly break-even sales revenue

Monthly break-even sales revenue

Current monthly sales level


Divided by contribution margin per unit

Monthly break-even in units

Contribution margin ratio (CM SP) ..


Total fixed costs

Selling price per unit

Variable manufacturing costs per unit.

Variable selling and administrative costs per unit

Total fixed costs ..

Contribution margin per unit

Fixed Costs

Fixed selling and administrative costs ..

Sale volume at 20,000 units (20,000 $45) .

Less: Break-even sales volume (parta ) Margin of safety sales volume

Fixed manufacturing costs ..

Break-Even Sales

Volume=

= = $750,000

=

Contribution Margin

Ratio

Unit Sales Price - Variable Costs

Sales Price=

= 40%


13/29

Ex. 20.11 d. 100,000$

(continued) x 60%

60,000$

Ex. 20.12 20,000 units x $7 per unit = $140,000 total fixed costs

xe os s on r u on arg n = rea - ven n n s

$140,000 (SP - $26) = 10,000 units

10,000 SP - $260,000 = $140,000

10,000 SP = $400,000

SP = Selling Price = $40 per unit

Ex. 20.13 a. The lowest bid price required to maintain the current

level of operating income equals total variable cost

per unit:

9$

8

7

24$

b.

36% = (SP - $9 - $8 - $7 - .04 SP) SP

0.36 SP = 0.96 SP - $24

$24 = 0.60 SP

SP = Bid Price = $40

Anticipated increase in sales revenue .


Estimated increase in operating income .

Contribution Margin Ratio (CM%) = Contribution Margin (CM) Selling

Price (SP)

Direct materials ..

Direct labor .

Variable manufacturing overhead ..

Lowest bid price to maintain current income level


14/29

Ex. 20.14 a. Vests Skis Ropes

Unit selling prices $120 $300 $50

Unit variable costs (60) (210) (10)

Unit contribution margins $60 $90 $40

Divided by unit selling prices 120 300 50

Unit contribution margin ratios 50% 30% 80%

Average

CM% x Mix % = CM

Vests 50% 20% 10%Skis 30% 70% 21%

Ropes 80% 10% 8%


$741,000 39% = $1,900,000

b.

($741,000 + $234,000) 39% = $2,500,000

c.

Ex. 20.15a.

b. $975,000 = Monthly Fixed Costs ($40 19,250 DLH)

Monthly Fixed Costs = $975,000 - $770,000 = $205,000

c.

Total 3-Month Cost = $615,000 $1,600,000 = $2,215,000

(Fixed Costs + Operating Income)/CM% = Sales Revenue Required

To maximize operating income, the marketing manager should pursue a strategy

that shifts the sales mix away from the products with the lowest contribution

margin ratios (vests and skis) to the product with the highest contribution

margin ratio (ropes).

Fixed Costs Average Contribution Ratio (CM%) = Break-Even Sales Revenue

($975,000 - $700,000) (19,250 DLH - $12,375 DLH) = $40 per DLH

Total 3-Month Cost = ($205,000 3 months) ($40 40,000 DLH)


15/29

SOLUTIONS TO PROBLEMS SET A

25 Minutes, Easy PROBLEM 20.1AIONIC CHARGE

a. Required contribution margin per unit

Budgeted operating Income 700,000$

Fixed costs 800,000

Total required contribution margin 1,500,000$Number of units to be produced and sold 60,000

Required contribu tion margin per unit

($1,500,000 60,000 units) 25$

Required sales price per un it:

Required contribu tion margin per unit 25$

Variable costs and expenses per unit 50

Total required unit sales price 75$

$800,000

$25

= 32,000 units

c. Margin of safety at 60,000 units:

Sales volume at 60,000 uni ts ($75 60,000 units) 4,500,000$Less: Break-even sales vo lume ($75 $32,000 units) 2,400,000

Margin of safety 2,100,000$

=

Contribution Margin per Unit

Fixed Costsb. Break-Even Sales Volume (in units) =


16/29

PROBLEM 20.1AIONIC CHARGE (concluded)

d.

$800,000

$10

= 80,000 units

Unless Ionic Charge has the ability to manufacture 80,000 units (or lower fixed and/or

variable costs), setting the unit sales price at $60 will not enable the company to break-even.

Of course, even if it is able to lower its costs, there must be sufficient demand to support a

sales level of 80,000 units, or more.

No. With a unit sales price of $60, the break-even sales volume is 80,000 units:

Unit contribution margin = $60 -$50 variable costs = $10

=Break-even sales volume (in units)


17/29

25 Minutes, Medium PROBLEM 20.2ABLASTER CORPORATION

a. Sales price per unit:

Budgeted costs 2,250,000$Add: Budgeted operat ing income 900,000

Budgeted sales revenue 3,150,000$Sales price per pair ($3,150,000 30,000 pairs) 105$

b. (1) Total fixed costs:

Manufacturing overhead ($720,000 75%) 540,000$Selling and adminst rative expenses ($600,000 80%) 480,000

Total fixed costs 1,020,000$

(2) Variable costs and expenses per pair of boots:

Direct materials 21$

Direct labor 10

Manufacturing overhead ($24 25%) 6Selling and administ rative expense ($20 20%) 4

Total variable costs per pair 41$

(3) Contribution margin per pair of boots:

Sales pr ice per pair 121$Less: Variable costs per pair [from (2) ] 41Contribution margin per pair 80$

(4) Number of pairs required to break even:Fixed costs [from(1) ] 1,020,000$Contribution margin per pair [from (3) ] 80$

Number of pairs required to b reak even ($1,020,000 $80) 12,750


18/29

PROBLEM 20.3A

STOP-N-SHOP

a.

30 Minutes, Medium


19/29

PROBLEM 20.3ASTOP-N-SHOP (continued)

The following information is used for parts b. and c. of this problem.

Operating data:

Revenue per parking-space hour 50 cents

Variable costs per parking-space hour 5 cents

Fixed costs per year:Supervisors salary 24,000$

Wages ($300 52 5) 78,000

Rent on lot ($7,250 12) 87,000

Fixed maintenance and other expenses ($3,000 12) 36,000

Total fixed costs 225,000$

Revenue at full capacity = 2,000,000 $0.50 = $1,000,000 per year

Capacity = 800 spaces 2,500 hours per year = 2,000,000 parking-space hours per year


20/29

PROBLEM 20.3ASTOP-N-SHOP (concluded)

b. Contribution margin ratio:

Parking charge per hour 0.50$

Less: Variable costs per unit 0.05

Contribution margin per unit 0.45$

Contribution margin ratio ($0.45 $0.50) 90%

Break-even sales volume:Fixed costs:

Rent on lot ($7,250 12) 87,000$

Supervisor's salary 24,000

Wages ($300 52 5) 78,000

Fixed maintenance and other costs ($3,000 12) 36,000

Total annual fixed costs 225,000$

Contribution margin ratio (above) 90%

Break-even sales volume ($225,000 0.90) 250,000$

c. (1) New contribution margin ratio per parking-space hour:

Parking charge per hour 0.50$

Less: Variable costs ($0.05 + $0.15) 0.20

Contribution margin per unit 0.30$

New contribution margin ratio ($0.30 $0.50) 60%

New level of fixed costs:

Rent on lot ($7,250 12) 87,000$Supervisors salary 24,000

Vacation pay ($300 2 5) 3,000

Fixed maintenance and other costs ($3,000 12) 36,000

Total fixed costs under new arrangement 150,000$

(2) Required sales revenue to produce desired operating

income:

Total fixed costs under new arrangement (above) 150,000$Add: Target profi t 300,000

Total contribution margin required 450,000$

New contribution margin ratio (above) 60%

Sales volume ($450,000 0.60) 750,000$


21/29

PROBLEM 20.4ARAINBOW PAINTS

a. Contribution margin ratio:

Unit sales price 10$

Less: Variable costs per unit 6

Contribution margin per gallon 4$

Contribution margin ratio ($4 10, the unit sales price) 40%

Break-even sales volume in dollars:

Fixed costs ($3,160 + $3,640 + $1,200) 8,000$

Contribution margin ratio (above) 40%

Break-even sales volume in dollars ($8,000 0.4) 20,000$

Break-even sales volume in gallons:

Break-even sales volume in dollars (above) 20,000$

Unit sales price 10

Break-even sales volume in gal. ($20,000 $10 per gal.) 2,000

b. On the following page.

c. Projected operating income at various levels:

2,200 Gal lons 2,600 Gal lons

Contribution margin per gallon ($10 - $6) 4$ 4$

Total contribution margin at indicated volume 8,800$ 10,400$Less: Fixed costs 8,000 8,000

Projected monthly operating income 800$ 2,400$

30 Minutes, Medium


22/29

PROBLEM 20.4A

RAINBOW PAINTS (concluded)

b.


23/29

40 Minutes, Strong PROBLEM 20.5ASIMON TEGUH

a. Unit contr ibut ion margin:

Sales price per unit 0.75$

Less: Variable costs per unit:

Merchandise 0.25$

Rental commission 0.05 0.30

Unit contribution margin 0.45$

Break-even volume in units:

Monthly fixed costs:

Depreciation ($36,000 0.20 1/12) 600$

Wages 1,500

Other 600

Total monthly fixed costs 2,700$

Contribution margin per unit (above) 0.45$

Break-even volume in units ($2,700 $0.45) 6,000

Break-even volume in dollars:

Break-even volume in units (above) 6,000

Unit sales price 0.75$

Break-even volume in dollars (6,000 units $0.75) 4,500$

b. See fol lowing page.

c. Sales volume to produce operating income equal to 30%

return on investment:

Total monthly fixed costs (part a ) 2,700$

Desired operating income ($45,000 30% 1/12) 1,125

Total desired contribution margin 3,825$

Contribution margin per unit (part a ) 0.45$Sales volume in units ($3,825 $0.45 per unit) 8,500

Sales volume in dollars (8,500 units $0.75 per unit ) 6,375$

d. New monthly fixed costs [$2,700 + (20 $30)] 3,300$

New contribution margin per unit:

Unit sales price 0.75$

Less: Variable costs per unit (only merchandise cost) 0.25 0.50$

New break-even volume in units ($3,300 $0.50 per unit) 6,600


24/29

PROBLEM 20.5A

SIMON TEGUH (concluded)

b.


25/29

30 Minutes, Strong PROBLEM 20.6APRECISION SYSTEMS

a. Variable costs per unit before 15% increase in the cost of

direct labor 60$

Increase in cost of direct labor, 15% of $20 3

Variable costs and expenses per unit

after 15% increase in the cost of direct labor 63$

Because the contribu tion margin ratio of 40% is required,

the variable costs of $63 per unit must equal 60%

of sales price after the wage increase.

New sales price, $63 0.60 105$

Sales price before increase 100

Required increase in sales price per unit 5$

b. Unit contr ibut ion margin:

Sales price per unit 100$

Less: Variable costs per unit

following 15% increase in direct labor cos t (part a ) 63

Unit contribution margin 37$

c. Current After Capacity Expansion

(20,000 Units) (25,000 Units)

Total contribution margin ($37 per unit) 740,000$ 925,000$

Less: Fixed costs 390,000 530,000*

Operating income at full capacity 350,000$ 395,000$

*$390,000 + additional depreciation per year on new

machinery, $140,000 (20% of $700,000).

= 20,000 units

Sales volume required to maintain current operating income:


Unit Contribution Margin

$390,000 + $350,000

$37

Sales Volume


26/29

35 Minutes, Strong PROBLEM 20.7APERCULA FARMS

a. Raising clownfish wil l result in the highestoperating income.

Clownfish Angelfish

Number of salable fish 100,000 50,000

sale price 4$ 10$

Total revenue 400,000$ 500,000$

Variable costs:

Eggs 5,500$ 9,500$Feedings 78,750 150,000

Water changes 35,000 100,000

Heating and lighting 14,000 20,000

Total variable costs 133,250$ 279,500$

Total contribution margin 266,750$ 220,500$

Fixed costs: 80,000 80,000

Operating income 186,750$ 140,500$

b.

c. and d.

Operating income with new filter material:

Clownfish Angelfish


sale price 4$ 10$

Total revenue 480,000$ 600,000$

Variable costs:

Eggs 5,500$ 9,500$

Feedings 84,000 160,000

Water changes 35,000 50,000




Fixed costs: 88,000 88,000


The most important factors in determining operating income are survival rates, and the

costs of feeding and water changes.

Percula will earn the highest operating income by purchasing the new filter material andraising angelfish.


27/29

PROBLEM 20.7APERCULA FARMS (concluded)

c. and d.Operating income with new heating and ligh ting

equipment: Clownfish Angelfish


sale price 4$ 10$

Total revenue 420,000$ 550,000$

Variable costs:

Eggs 5,500$ 9,500$

Feedings 78,750 150,000Water changes 35,000 100,000




Fixed costs: 88,000 88,000



28/29

PROBLEM 20.8A

LIFEFIT PRODUCTS

a. Contribution margins of product l ines:

Shoes ($15 contribution margin $50 sales price) 30%

Shorts ($4 contribution margin $5 sales price) 80%

b. (1) Average contribution margin ratio:From shoes (30% contribution margin 80% of sales mix) 24%

From shorts (80% contribution margin 20% of sales mix) 16%


(2) Monthly operat ing income:

Total sales 1,000,000$


Total contribution margin ($1,000,000 40%) 400,000$

Less: Fixed costs and expenses 378,000Operating income 22,000$

(3) Monthly break-even sales volume (in dollars):

Fixed costs and expenses 378,000$


Break-even sales volume ($378,000 40%) 945,000$

c. Assuming new sales mix (shoes, 70%; shorts, 30%)

(1) Average contr ibut ion margin rat io:

From shoes (30% contribution margin 70% of sales) 21%

From shorts (80% contribution margin 30% of sales) 24%


(2) Monthly operat ing income:

Total sales 1,000,000$

Average contribution margin ratio 45%Total contribution margin ($1,000,000 45%) 450,000$

Less: Fixed costs and expenses 378,000

Operating income 72,000$

(3) Monthly break-even sales volume (in dollars):

Fixed costs and expenses 378,000$


Break-even sales volume ($378,000 45%) 840,000$

35 Minutes, Strong


29/29

PROBLEM 20.8ALIFELIFT PRODUCTS (concluded)

d. In the new sales mix, increased sales of shorts have replaced some sales of shoes. Shortshave a much higher contribution margin than shoes. Thus, at a given sales volume, selling

shorts instead of shoes provides more contribution margin, contributes more toward

operating income, and lowers the sales volume required to break even.

Date post:	26-Feb-2018
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Chapter020 Solutions Manuall 2 (1)

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