Managerial Accounting

Solutions to Chapter 6: Cost-Volume-Profit: Additional Issues

E6-1, p.272:
Rent Price = $60
Variable costs per room = 8 +37 = $45
Total Fixed Costs = 8,800 + 2,400 + 1,500 + 800 = $13,500
Contribution margin per room = Rent price – V. costs per room = 60 – 45 = 15$
Contribution margin ratio = Contribution margin per room / Rent price = 15 / 60 = 25%

a) BEP in units = Fixed costs / Contribution margin per unit = 13,500 / 15 = 900 room
BEP in $ = Fixed costs / Contribution margin ratio = 13,500 / 0.25 = $54,000

b) Expected Monthly Revenue = No. of rooms x 30 days x Rent price = 50 x 30 x 60 = $90,000

Margin of safety in $ = Expected Revenue – BEP Revenue = 90,000 – 54,000 = $36,000
Margin of safety ratio = Margin of safety in $ / Expected Revenue = 36,000 / 90,000 = 40%

E6-2, p.273:
Sales price = $30
Total Fixed costs = $16,800
Variable costs per customer = $30 x 75% = $22.5
Actual Revenue = Sales price x No. of haircuts = 30 x 4,000 = $120,000

a) Contribution margin per haircut = Sales price – V. costs per haircut = 30 – 22.5 = $7.5
Contribution margin ratio = Contribution margin per haircut / Sales price = 7.5 / 30 = 25%

b) BEP in units = Fixed costs / Contribution margin per haircut = 16,800 / 7.5 = 2,240 haircut
BEP in $ = Fixed costs / Contribution margin ratio = 16,800 / 0.25 = $67,200

c) Margin of safety in $ = Actual Revenue – BEP Revenue = 120,000 – 67,200 = $52,800

Margin of safety ratio = Margin of safety in $ / Actual Revenue = 52,800 / 120,000 = 44%

E6-3, p.273:
Net income before change:
CVP Income Statement
Sales $310,000
Variable costs 210,000
Contribution margin 100,000
Fixed costs 75,000
Net Income $25,000

Increasing selling price by 10%:

CVP Income Statement
Sales ($310,000 x 110%) $341,000
Variable costs 210,000
Contribution margin 131,000
Fixed costs 75,000
Net Income $56,000

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Reduce Variable costs to 58% of sales:
CVP Income Statement
Sales $310,000
Variable costs ($310,000 x 58%) 179,800
Contribution margin 130,200
Fixed costs 75,000
Net Income $55,200

Reduce fixed costs by $20,000:

CVP Income Statement
Sales $310,000
Variable costs 210,000
Contribution margin 100,000
Fixed costs 55,000
Net Income $45,000

Increasing selling price by 10% will produce the highest net income

E6-4, p.273:
Sales price = Fare revenue / No. of fares = 48,000 / 400 = $120
Fixed costs = $20,250
Contribution margin per fare = Total contribution margin / No. of fares = 30,000 / 400 = $75
Contribution margin ratio = Contribution margin per fare / Sales price = 75 / 120 = 62.5%

a) BEP in units = Fixed costs / Contribution margin per fare = 20,250 / 75 = 270 fare
BEP in $ = Fixed costs / Contribution margin ratio = 20,250 / 0.625 = $32,400

b) Contribution margin at BEP = Fixed costs = $20,250

c) New price = $120 x (100% - 10%) = $108

New no. of fares = 400 + 100 = 500 fares
Fare revenues = No. of fares x Sales price = 500 x 108 = $54,000
New total variable cost = $18,000 x 120% = $21,600
CVP Income Statement
Before After
Changes Changes
Sales $48,000 $54,000
Variable costs 18,000 21,600
Contribution margin 30,000 32,400
Fixed costs 20,250 20,250
Net Income $9,750 $12,150

The fare decrease should be adopted, because net income will increase by $2,400 (24.6%)

E6-5, p.273:

Before Change:
Sales price = Total revenue / No. of units = 1,560,000 / 60,000 = $26
Variable cost per unit = Total V. Costs / No. of units = 720,000 / 60,000 = $12
Fixed Costs = $500,000

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After Change:
Variable cost per unit = 12 – 3 = $9
Fixed costs = 500,000 + 150,000 = $650,000
Sales price = 26 – (3 x ½) = $24.5
Number of units sold = 60,000 x 105% = 63,000 unit

a) CVP Income statement before changes:

CVP Income Statement
Sales $1,560,000
Variable costs 720,000
Contribution margin 840,000
Fixed costs 500,000
Net Income $340,000

b) CVP Income statement after changes:

CVP Income Statement
Sales (63,000 unit x $24.5) $1,543,500
Variable costs (63,000 unit x $9) 567,000
Contribution margin 976,500
Fixed costs 650,000
Net Income $326,500

E6-6, p.274:
Weighted average unit contribution margin = ∑ (C.M. per unit x Sales mix)
= ($30 x 20%) + ($20 x 50%) + ($40 x 30%) = $28
BEP in units = Fixed costs / W.A unit contribution margin = 4,200,000 / 28 = 150,000 unit
No. of units from each product:
Lawnmower = 150,000 x 20% = 30,000 unit
Weed-trimmers = 150,000 x 50% = 75,000 unit
Chainsaws = 150,000 x 30% = 45,000 unit
Total = 150,000 unit

E6-7, p.274:

Oil Change Brake Repair

Sales mix 70% 30%
Contribution margin Ratio 20% 60%
W.A. Contribution margin ratio = ∑ (Contribution margin ratio x Sales mix)
= (20% x 70%) + (60% x 30%) = 32%

a) BEP in $ = Fixed costs / W.A. Contribution margin ratio = 16,000,000 x 0.32 = $50,000,000
Oil changes sales = $50,000,000 x 70% = $35,000,000
Brake repairs sales = $50,000,000 x 30% = $15,000,000
Total = $50,000,000

b) Outlet Sales for a target net income $60,000:

= (Fixed costs per outlet + target net income) / W.A. Contribution margin ratio
=( 80,000 + 60,000 ) / 0.32
= $437,500
Oil changes sales per outlet = $437,500 x 70% = $306,250
Brake repairs sales per outlet = $437,500 x 30% = $131,250
Total per outlet = $437,500

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E6-8, p.274:

Standardized Non-Standardized
Delivery boxes Delivery boxes
Sales mix 80% 20%
Contribution margin Ratio 20% 70%
W.A. Contribution margin = ∑ (Contribution margin ratio x Sales mix)
= (20% x 80%) + (70% x 20%) = 30%

a) BEP in $ = Fixed costs / W.A. Contribution margin ratio = 12,000,000 x 0.30 = $40,000,000
Standardized Delivery boxes sales = $40,000,000 x 80% = $32,000,000
Non-Standardized Delivery sales = $40,000,000 x 20% = $ 8,000,000
Total = $40,000,000

b) Change in sales mix

Standardized Non-Standardized
Delivery boxes Delivery boxes
Sales mix 40% 60%
Contribution margin Ratio 20% 70%
W.A. Contribution margin ratio = ∑ (Contribu on margin ra o x Sales mix)
= (20% x 40%) + (70% x 60%) = 50%

BEP in $ = Fixed costs / W.A. Contribution margin ratio = 12,000,000 x 0.50 = $24,000,000
Standardized Delivery boxes sales = $24,000,000 x 40% = $ 9,600,000
Non-Standardized Delivery sales = $24,000,000 x 60% = $14,400,000
Total = $24,000,000

E6-9, p.274:
W.A. unit Contribution margin = ∑ (Contribu on margin per unit x Sales mix)
= ($40 x 30%) + ($20 x 60%) + ($60 x 10%) = $30

a) BEP in units = Fixed costs / W.A. unit contribution margin = 630,000 / 30 = 21,000 unit

b) No. of units to be sold at BEP:

Pairs of shoes = 21,000 unit x 30% = 6,300 unit
Pairs of gloves = 21,000 unit x 60% = 12,600 unit
Range finder = 21,000 unit x 10% = 2,100 unit
Total 21,000 unit

c)
Pairs of shoes Pairs of gloves Range finder Total sales
Sales (6,300 x $100) (12,600 x $30) (2,100 x $260)
$630,000 $378,000 $546,000 $1,554,000
Variable costs (6,300 x $60) (12,600 x $10) (2,100 x $200)
378,000 126,000 420,000 924,000
Contribution margin 252,000 252,000 126,000 630,000
Fixed costs 630,000
Net Income $0

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 E6-10, p.275:
a)
iPad Division iPod Division Total
Sales $600,000 $400,000 $1,000,000
Sales mix 600,000/1,000,000 = 60% 400,000/1,000,000 = 40% 100%
Contribution margin $180,000 $140,000 $320,000
Contribution margin ratio 180,000/600,000 = 30% 140,000 / 400,000 = 35% 320,000/1,000,000 = 32%

b) W.A. Contribution margin = 32%

c) BEP in $ = Fixed costs / W.A. Contribution margin = 120,000 / 0.32 = $375,000

d) Sales level at each division:

iPad division = $375,000 x 60% = $225,000
iPod division = $375,000 x 40% = $150,000

E6-11, p.275:
a)
A B C
Selling price $8 $12 $15
Variable costs 3 10 12
Contribution margin/unit 5 2 3
÷ Limited resources (Machine Hours) 2 1 2
C.M./unit of limited resources $2.5 $2 $1.5

b) Additional machine hours should be assigned to product (A) to maximize net income

c) 1. Additional hours divided equally among products:

A B C Total
Machine Hours 500 500 500 1,500
x C.M./unit of limited resources $2.5 $2 $1.5
Contribution margin $1,250 $1,000 $750 $3,000

2. Additional hours allocated entirely to product (A):

A B C Total
Machine Hours 1,500 0 0 1,500
x C.M./unit of limited resources $2.5 $2 $1.5
Contribution margin $3,750 $0 $0 $3,750

E6-12, p.275:
a)
D E F
Direct labor costs $30 $80 $35
÷ Hour rate $10 $10 $10
Direct labor hour/unit 3 8 3.5

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b)
D E F
Selling price $200 $300 $250
Variable costs:
Direct labor costs 30 80 35
Other variable costs 95 80 145
Contribution margin/unit $75 $140 $70
÷ Limited resources (Machine Hours) 3 8 3.5
C.M./unit of limited resources $25 $17.5 $20

c) Additional machine hours should be assigned to product (D) to maximize net income
Total Contribution margin for product (D) = C.M./unit of limited resource x Additional hrs
= $25 x 2,000 hrs = $50,000

E6-13, p.275:
a)
Basic Deluxe
Selling price $40 $52
Variable costs 20 22
Contribution margin/unit $20 $30
÷ Limited resources (Machine Hours) 0.5 0.8
C.M./unit of limited resources $40 $37.5

b) Additional machine hours should be assigned to product (Basic) to maximize net income

c) 1. Additional hours divided equally among products:

Basic Deluxe Total
Machine Hours 500 500 1,000
x C.M./unit of limited resources $40 $37.5
Contribution margin $20,000 $18,750 $38,750

2. Additional hours allocated entirely to product (Basic):

Basic Deluxe Total
Machine Hours 1,000 0 1,000
x C.M./unit of limited resources $40 $37.5
Contribution margin $40,000 0 $40,000

E6-14, p.276:
a) Degree of operating leverage = Contribution margin / Net income
Armstrong Co.: 260,000 / 100,000 = 2.6
Contador Co.: 450,000 / 100,000 = 4.5

b)
Armstrong Contador
Co. Co.
Sales ($500,000 x 110%) $550,000 $550,000
Variable costs $240,000 x 110% = 264,000 $50,000 x 110% = 55,000
Contribution margin 286,000 495,000
Fixed Costs 160,000 350,000
Net income $126,000 $145,000

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 c) Increase in net income % = Increase in sales % x operating leverage
Decrease in net income % = Decrease in sales % x operating leverage

E6-15, p.276:
a) Degree of operating leverage = Contribution margin / Net income
Manual system: 300,000 / 250,000 = 1.2
Computerized system: 900,000 / 250,000 = 3.6

b) Increase in sales % = 150,000 / 1,500,000 = 10%

Increase in net income % = Increase in sales % x operating leverage
For computerized system: 10% x 3.6 = 36%
For manual system: 10% x 1.2 = 12%
Computerized system would produce higher net income if sales increase

c)
Manual Computerized
system System
Sales $1,500,000 $1,500,000
Variable costs 1,200,000 600,000
Contribution margin 300,000 900,000
Contribution margin ratio 300,000/1,500,000 = 20% 900,000/1,500,000 = 60%
Fixed Cost $50,000 $650,000
BEP in $ 50,000/0.20 = $250,000 650,000/0.60 = $1,083,333
Margin of safety 1,500,000–250,000 = $1,250,000 1,500,000-1,083,333 = $416,667
Margin of safety ratio 1,250,000/1,500,000 = 83.3% 416,667/1,500,000 = 27.8%
Manual system with higher margin of safety could sustain the greater decline in sales before operating at
loss

E6-16, p.276:
a) Degree of operating leverage = Contribution margin / Net income
Traditional Yams: 80,000 / 50,000 = 1.6
Auto-Yams: 240,000 / 50,000 = 4.8
Auto-Yam is more sensitive to changes in sales volume

b) Sales decrease by 15%:

Decrease in net income % = Decrease in sales % x operating leverage
For Traditional Yams: 15% x 1.6 = 24%
For Auto-Yams: 15% x 4.8 = 72%

Sales increase by 10%:

Increase in net income % = Increase in sales % x operating leverage
For Traditional Yams: 10% x 1.6 = 16%
For Auto-Yams: 10% x 4.8 = 48%

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