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Solutions To Formative Assignments On Chapter 6

This document contains solutions to exercises on chapter 6 of a textbook about managerial accounting. It includes calculations of degree of operating leverage, break-even analysis using weighted average contribution margin, and the effects of sales mix and operating leverage on company profitability. The exercises analyze how fixed and variable costs, contribution margins, and changes in sales impact net income for different companies and product lines.

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51 views

Solutions To Formative Assignments On Chapter 6

This document contains solutions to exercises on chapter 6 of a textbook about managerial accounting. It includes calculations of degree of operating leverage, break-even analysis using weighted average contribution margin, and the effects of sales mix and operating leverage on company profitability. The exercises analyze how fixed and variable costs, contribution margins, and changes in sales impact net income for different companies and product lines.

Uploaded by

FaidraLourdi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Solutions to Formative Assignments on Chapter 6

EXERCISE 6-14

(a)
Contribution Net Degree of
Margin ÷ Income = Operating
Leverage
Armstrong $260,000 ÷ $100,000 = 2.60
Contador $450,000 ÷ $100,000 = 4.50

Interpretation: Contador has a higher degree of operating


leverage. Its earnings would increase (decrease) by a greater
amount than Armstrong if each experienced an equal increase
(decrease) in sales.

(b)
Armstrong Contador
Company Company
Sales $550,000** $550,000***
Variable costs 264,000** 55,000***
Contribution 286,000** 495,000***
margin 160,000** 350,000***
Fixed costs $126,000** $145,000***
Net income

*$500,000 X 1.1
**$240,000 X 1.1
***$ 50,000 X 1.1

(c) Each company experienced a $50,000 increase in sales.


However, because of Contador’s higher operating leverage,
it experienced a $45,000 ($145,000 – $100,000) increase in
net income while Armstrong experienced only a $26,000
($126,000 – $100,000) increase. This is what we would
have expected, since Contador’s degree of operating
leverage exceeds that of Armstrong.
EXERCISE 6-15

(a)
Contribution Degree of
÷ Net Income = Operating Leverage
Margin
Manual system $300,000 ÷ $200,000 = 1.50
Computerized
system $900,000 ÷ $200,000 = 4.50

(b) The computerized system would produce profits that are


3.0 times
(4.50 ÷ 1.50) as much as the manual system. With a
$150,000 increase in sales, net income would increase
$30,000 ($230,000 – $200,000)
under the manual system and $90,000 ($290,000 –
$200,000) under the computerized system.

Manual Computerized
System System
Sales $1,650,000 $1,650,000
Variable costs 1,320,000* 660,000**
Contribution 330,000 990,000
margin 100,000 700,000
Fixed costs $ 230,000 $ 290,000
Net income

*($1,200,000 ÷ $1,500,000) X $1,650,000


**($600,000 ÷ $1,500,000) X $1,650,000

(c)
(Actual Sales – Break-even ÷ Actual = Margin of Safety
Sales) Sales Ratio
Manual system ($1,500,000 – $500,000*) ÷ $1,500,000 = .67
Computerized
system ($1,500,000 – $1,166,667**) ÷ $1,500,000 = .22

*$100,000 ÷ ($300,000 ÷ $1,500,000)


**$700,000 ÷ ($900,000 ÷ $1,500,000)

The manual system could weather the greater decline in


sales before reaching the break-even point. Under the
manual system sales could drop 67% before suffering a
loss, while sales under the computerized system could
only decline by 22% before suffering a loss.
Discussion Question:
Indicate how operating leverage affects profitability.

Operating leverage refers to the degree to which a company’s


net income reacts to a change in sales. Operating leverage is
determined by a company’s relative use of fixed versus
variable costs. Companies with high fixed costs relative to
variable costs have high operating leverage. A company with
high operating leverage experiences a sharp increase
(decrease) in net income with a given increase (decrease) in
sales. The degree of operating leverage is measured by
dividing contribution margin by net income.

EXERCISE 6-10

(a) Sales mix percentage


iPad division: $600,000 ÷ ($600,000 + $400,000) = .60
iPod division: $400,000 ÷ ($600,000 + $400,000) = .40

Contribution margin ratio:


iPad division: $180,000 ÷ $600,000 = .30
iPod division: $140,000 ÷ $400,000 = .35

(b) Weighted-average contribution = $320,000 = .32   OR


margin ratio $1,000,000

Weighted-average contribution
margin ratio = (.60 X .30) + (.40 X .35) = .32

(c) Break-even point in dollars = $120,000 ÷ .32 = $375,000

(d) Sales dollars needed at break-even point for each


division
iPad division: $375,000 X .60 = $225,000
iPod division: $375,000 X .40 = $150,000

EXERCISE 6-9

(a) Weighted-average unit


contribution margin = ($40 X .35) + ($20 X .55) + ($60
X .10) = $31

Break-even point in units = $620,000 ÷ $31 = 20,000

(b) Shoes (20,000 X .35) = 7,000 pairs of shoes


Gloves (20,000 X .55) = 11,000 pairs of gloves
Range-finders (20,000 X .10) = 2,000 range-finders
(c) Shoes: 7,000 X $40 = $280,000
Gloves: 11,000 X $20 = 220,000
Range-finders: 2,000 X $60 = 120,000
Total contribution margin 620,000
Fixed costs 620,000
Net income $ 0

Discussion Question:
Explain the term sales mix and its effects on break- even
sales.

Sales mix is the relative proportion in which each product is


sold when a company sells more than one product. For a
company with a small number of products, break-even sales
in units is determined by using the weighted-average unit
contribution margin of all the products. If the company sells
many different products, then calculating the break-even
point using unit information is not practical. Instead, in a
company with many products, break-even sales in dollars is
calculated using the weighted-average contribution margin
ratio.

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