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Solution To Exercise 5-1 and 5-4

The document contains examples of calculating net operating income for different sales levels. It shows how net operating income is calculated in the income statement and can also be calculated by tracking changes in contribution margin from the original level. It also provides an example of using the contribution margin ratio to estimate how net operating income would change with a $1,000 increase in sales. This estimated change is then verified by calculating income statements for the original and new sales level.

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Hassan Arafat
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31 views2 pages

Solution To Exercise 5-1 and 5-4

The document contains examples of calculating net operating income for different sales levels. It shows how net operating income is calculated in the income statement and can also be calculated by tracking changes in contribution margin from the original level. It also provides an example of using the contribution margin ratio to estimate how net operating income would change with a $1,000 increase in sales. This estimated change is then verified by calculating income statements for the original and new sales level.

Uploaded by

Hassan Arafat
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Exercise 5-1

1. The new income statement would be:


Total Per Unit
Sales (10,100 units) ........ $353,500 $35.00
Variable expenses ........... 202,000 20.00
Contribution margin......... 151,500 $15.00
Fixed expenses ............... 135,000
Net operating income ...... $ 16,500
You can get the same net operating income using the following
approach:
Original net operating income .... $15,000
Change in contribution margin
(100 units × $15.00 per unit) .. 1,500
New net operating income ......... $16,500

2. The new income statement would be:


Total Per Unit
Sales (9,900 units) ............ $346,500 $35.00
Variable expenses ............. 198,000 20.00
Contribution margin........... 148,500 $15.00
Fixed expenses ................. 135,000
Net operating income ........ $ 13,500
You can get the same net operating income using the following
approach:
Original net operating income ............. $15,000
Change in contribution margin
(-100 units × $15.00 per unit) .......... (1,500)
New net operating income .................. $13,500

3. The new income statement would be:


Total Per Unit
Sales (9,000 units) ....... $315,000 $35.00
Variable expenses ........ 180,000 20.00
Contribution margin...... 135,000 $15.00
Fixed expenses ............ 135,000
Net operating income ... $ 0
Note: This is the company’s break-even point.
Exercise 5-4 (10 minutes)
1. The company’s contribution margin (CM) ratio is:
Total sales ............................ $200,000
Total variable expenses ......... 120,000
= Total contribution margin ... 80,000
÷ Total sales ......................... $200,000
= CM ratio ............................ 40%

2. The change in net operating income from an increase in total sales of


$1,000 can be estimated by using the CM ratio as follows:
Change in total sales ....................................... $1,000
× CM ratio ...................................................... 40 %
= Estimated change in net operating income .... $ 400

This computation can be verified as follows:


Total sales ...................... $200,000
÷ Total units sold ............ 50,000 units
= Selling price per unit .... $4.00 per unit

Increase in total sales ...... $1,000


÷ Selling price per unit .... $4.00 per unit
= Increase in unit sales ... 250 units
Original total unit sales .... 50,000 units
New total unit sales ......... 50,250 units

Original New
Total unit sales................ 50,000 50,250
Sales .............................. $200,000 $201,000
Variable expenses ........... 120,000 120,600
Contribution margin......... 80,000 80,400
Fixed expenses ............... 65,000 65,000
Net operating income ...... $ 15,000 $ 15,400

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