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25 Minutes, Easy
a.
b.
c.
d.
PROBLEM 20–7
EASYWRITER
Contribution margin per unit:
Unit sales price
Less: Variable cost per unit ($50,000  40,000 units)
Contribution margin per unit
$ 1 75
1 25
$ 50
Margin of safety at sales of 45,000 units:
Sales revenue ($1.75 45,000 units)
Less: Sales revenue at break-even point ($1.75  40,000 units)
Margin of safety
Estimated operating loss at sales level of 38,000 units:
Sales revenue ($1.75 38,000 units)
Less: Variable costs ($1.25  38,000 units)
Fixed costs (given)
Operating income (loss)
$ 7 8 7 5 0
7 0 0 0 0
$ 8 7 5 0
$ 6 6 5 0 0
$ 4 7 5 0 0
2 0 0 0 0
6 7 5 0 0
$ (1 0 0 0 )
(1) Unit cost at production level of 40,000 units:
Variable cost per unit
Fixed cost per unit ($20,000  40,000 units)
Total unit cost
$ 1 25
50
$ 1 75
(2) Unit cost at production level of 50,000 units:
Variable cost per unit
Fixed cost per unit ($20,000  50,000 units)
Total unit cost
$ 1 25
40
$ 1 65
Total cost per unit declines at higher production levels because the fixed manufacturing costs are
allocated over a greater number of units.
Solutions Manual Vol. II, Financial and Managerial Accounting 13/e, Williams et al
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40 Minutes, Strong
a.
Unit contribution margin:
Sales price per unit
Less: Variable costs per unit:
Merchandise
Rental commission
Unit contribution margin
PROBLEM 20–8
SIMON TEGUH
$ 0 75
$ 0 25
0 05
Break-even volume in units:
Monthly fixed costs:
Depreciation ($36,000 .20  1/12)
Wages
Other
Total monthly fixed costs
Contribution margin per unit (above)
Break-even volume in units ($2,700  $0.45)
$
6
1 5
6
$ 2 7
Break-even volume in dollars:
Break-even volume in units (above)
Unit sales price
Break-even volume in dollars (6,000 units  $0.75)
b.
See following page.
c.
Sales volume to produce operating income equal to 30% return on
investment:
Total monthly fixed costs (part a )
Desired operating income ($45,000  30% 1/12)
Total desired contribution margin
Contribution margin per unit (part a )
Sales volume in units ($3,825  $0.45 per unit)
d.
154
0 30
$ 0 45
0
0
0
0
$
6 0 0
0
0
0
0
0 45
0
6 0 0 0
$ 0 75
$ 4 5 0 0
$ 2 7 0 0
1 1 2 5
$ 3 8 2 5
$ 0 45
8 5 0 0
Sales volume in dollars (8,500 units  $0.75 per unit)
$ 6 3 7 5
New monthly fixed costs [$2,700  (20 $30)]
New contribution margin per unit:
Unit sales price
Less: Variable costs per unit (only merchandise cost)
New break-even volume in units ($3,300  $0.50 per unit)
$ 3 3 0 0
$ 0 75
0 25
$ 0 50
6 6 0 0
© The McGraw-Hill Companies, Inc., 2005
PROBLEM 20–8
SIMON TEGUH (concluded)
b.
SIMON TEGUH
Cost-Volume-Profit Chart
Monthly Basis
12000
10000
Revenue
line
Profit
area
Revenues or Costs
8000
Break-even
point
6000
Total cost line
4000
Variable costs
2000
Loss
area
Fixed costs
0
0
2000
4000
6000
8000
10000
12000
14000
16000
Units sold (through 20 machines)
Solutions Manual Vol. II, Financial and Managerial Accounting 13/e, Williams et al
155
30 Minutes, Strong
a.
PROBLEM 20–9
PRECISION SYSTEMS
Variable costs per unit before 15% increase in the cost of
direct labor
Increase in cost of direct labor, 15% of $20
Variable costs and expenses per unit after 15% increase in the
cost of direct labor
$
6 0
3
$
6 3
Because the contribution 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  .60
Sales price before increase
Required increase in sales price per unit
b.
$ 1 0 5
1 0 0
$
5
Unit contribution margin:
Sales price per unit
Less: Variable costs per unit following 15% increase in direct
labor cost (part a )
Unit contribution margin
$ 1 0 0
$
6 3
3 7
Sales volume required to maintain current operating income:
Sales Volume =
=
Fixed Costs + Target Operating Income
Unit Contribution Margin
$390,000 + $350,000
= 20,000 units
$37
c.
Current
Capacity
(20,000 Units)
Total contribution margin ($37 per unit)
Less: Fixed costs
Operating income at full capacity
$7 4 0 0 0 0
3 9 0 0 0 0
$3 5 0 0 0 0
After
Expansion
(25,000 Units)
$9 2 5 0 0 0
5 3 0 0 0 0 *
$3 9 5 0 0 0
*$390,000  additional depreciation per year on new machinery,
$140,000 (20% of $700,000).
156
© The McGraw-Hill Companies, Inc., 2005
35 Minutes, Strong
a.
PROBLEM 20–10
PERCULA FARMS
Raising clownfish will result in the highest operating income.
Number of salable fish
sale price
Total revenue
Variable costs:
Eggs
Feedings
Water changes
Heating and lighting
Total variable costs
Total contribution margin
Fixed costs:
Operating income
Clownfish
1 0 0 0 0 0
$ 4
$4 0 0 0 0 0
Angelfish
5 0 0 0 0
$ 1 0
$5 0 0 0 0 0
$
$
7
3
1
$1 3
$2 6
8
$1 8
5
8
5
4
3
6
0
6
5
7
0
0
2
7
0
7
0
5
0
0
5
5
0
5
0
0
0
0
0
0
0
0
9
1 5 0
1 0 0
2 0
$2 7 9
$2 2 0
8 0
$1 4 0
5
0
0
0
5
5
0
5
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
b. The most important factors in determining operating income are survival rates, and the costs of
feeding and water changes.
c. and d. Percula will earn the highest operating income by purchasing the new filter material and
raising angelfish.
Operating income with new filter material:
Number of salable fish
sale price
Total revenue
Variable costs:
Eggs
Feedings
Water changes
Heating and lighting
Total variable costs
Total contribution margin
Fixed costs:
Operating income
Clownfish
1 2 0 0 0 0
$ 4
$4 8 0 0 0 0
Angelfish
6 0 0 0 0
$ 1 0
$6 0 0 0 0 0
$
$
8
3
1
$1 3
$3 4
8
$2 5
Solutions Manual Vol. II, Financial and Managerial Accounting 13/e, Williams et al
5
4
5
4
8
1
8
3
5
0
0
0
5
5
0
5
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
1 6
5
2
$2 3
$3 6
8
$2 7
9
0
0
0
9
0
8
2
5
0
0
0
5
5
0
5
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
157
PROBLEM 20–10
PERCULA FARMS (concluded)
Operating income with new heating and lighting equipment:
Number of salable fish
sale price
Total revenue
Variable costs:
Eggs
Feedings
Water changes
Heating and lighting
Total variable costs
Total contribution margin
Fixed costs:
Operating income
158
Clownfish
1 0 5 0 0 0
$ 4
$4 2 0 0 0 0
Angelfish
5 5 0 0 0
$ 1 0
$5 5 0 0 0 0
$
$
7
3
1
$1 2
$2 9
8
$2 0
5
8
5
0
9
0
8
2
5
7
0
5
7
2
0
2
0
5
0
0
5
5
0
5
0
0
0
0
0
0
0
0
9
1 5 0
1 0 0
1 5
$2 7 4
$2 7 5
8 8
$1 8 7
5
0
0
0
5
5
0
5
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
© The McGraw-Hill Companies, Inc., 2005
35 Minutes, Strong
a.
b.
PROBLEM 20–11
LIFEFIT PRODUCTS
Contribution margins of product lines:
Shoes ($15 contribution margin  $50 sales price)
Shorts ($4 contribution margin  $5 sales price)
30 %
8 0%
(1) Average contribution margin ratio:
From shoes (30% contribution margin  80% of sales mix)
From shorts (80% contribution margin  20% of sales mix)
Average contribution margin ratio
2 4%
1 6%
4 0%
(2) Monthly operating income:
Total sales
Average contribution margin ratio
Total contribution margin ($1,000,000  40%)
Less: Fixed costs and expenses
Operating income
(3) Monthly break-even sales volume (in dollars):
Fixed costs and expenses
Average contribution margin ratio
Break-even sales volume ($378,000  40%)
c.
$10 0 0 0 0
 4
$ 4 0 0 0 0
3 7 8 0 0
$
2 2 0 0
$
$
Assuming new sales mix (shoes, 70%; shorts, 30%)
(1) Average contribution margin ratio:
From shoes (30% contribution margin  70% of sales)
From shorts (80% contribution margin  30% of sales)
Average contribution margin ratio
(2) Monthly operating income:
Total sales
Average contribution margin ratio
Total contribution margin ($1,000,000 45%)
Less: Fixed costs and expenses
(3) Monthly break-even sales volume (in dollars):
Fixed costs and expenses
Average contribution margin ratio
Break-even sales volume ($378,000  45%)
Solutions Manual Vol. II, Financial and Managerial Accounting 13/e, Williams et al
0
0%
0
0
0
3 7 8 0 0 0
 4 0%
9 4 5 0 0 0
2 1%
2 4%
4 5%
$10 0 0 0 0
 4
$ 4 5 0 0 0
3 7 8 0 0
$
7 2 0 0
$
$
0
5%
0
0
0
3 7 8 0 0 0
 4 5%
8 4 0 0 0 0
159
PROBLEM 20–11
LIFEFIT PRODUCTS (concluded)
d. In the new sales mix, increased sales of shorts have replaced some sales of shoes. Shorts have 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.
160
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SOLUTIONS TO CASES
20 Minutes, Medium
CASE 20–1
MULTIPLE PERSPECTIVES—
ATTEND OUR SEMINAR
The following are possible reasons you could give each of the individuals to motivate them to come to
your seminar:
The factory worker who serves as her company’s labor union representative in charge of contract
negotiations
Knowledge of budgeting and budget processes is a source of empowerment in most organizations.
When it comes to negotiating a labor contract, lack of budgetary knowledge can put one at a distinct
disadvantage. The factory’s labor union representative will be directly involved in determining one of
the company’s largest variable costs—its direct labor. An understanding of cost-volume-profit relationships will enable her to better evaluate the impact of her wage requests on the company’s performance and to better scrutinize what management says they can or cannot do.
The purchasing agent in charge of ordering raw materials for a large manufacturing company
The purchasing agent is also directly involved with one of the company’s largest variable costs—raw
materials inventory. Having a general knowledge of cost-volume-profit relationships will help him to
better understand the impact of his actions on company performance. For example, what is the impact on operating income of receiving large quantity discounts from a major supplier? What is the
effect of receiving purchase discounts for prompt payment to all vendors? What is the effect on operating income of selecting one supplier over another? What is the net effect of paying a premium for
high-quality raw materials given a resulting reduction in waste and scrap?
The vice president of sales for a large automobile company
The vice president of sales plays a critical role in determining her company’s operating performance.
A knowledge of cost-volume-profit relationships will help her to evaluate important questions related
to the decisions she must make. For example, given that a target income for the company has been
imposed, what sales quotas must she establish for her dealers? Or, conversely, by imposing an established sales quota on the company’s dealers, what changes in operating income can be expected?
Given an expected level of sales, how will fixed and variable production costs be affected?
The director of research and development for a pharmaceutical company
Each year, the director of research and development must request budgetary funding for the
development of new products. Investment in research and development represents a significant fixed
cost for most pharmaceutical companies. A general understanding of cost-volume-profit relationships
will help the director to defend his budget request. By how much will new products increase total
sales? What are the variable and fixed costs associated with bringing a new product to market? What
is the effect of those costs on operating income?
Solutions Manual Vol. II, Financial and Managerial Accounting 13/e, Williams et al
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40 Minutes, Strong
CASE 20–2
DON’T MESS WITH THE PURPLE COW
a. Sales (in gallons) required to earn $10,000 per month:
Sales (in gallons) required to break even ..........................................................................
Sales (in gallons) beyond break-even point required to earn $10,000 per month,
$10,000  $7.80 ($8.00  $0.20 bonus) .............................................................................
Sales (in gallons) required to earn $10,000 per month ....................................................
b. Projected monthly results for typical drive-in store:
Average selling price per gallon ............................................................
Less: Variable cost per gallon ...............................................................
Contribution margin per gallon ............................................................
Estimated sales (gallons):
If selling price is reduced, 3,000  120% ..........................................
If selling price is not reduced, 3,000  110% ...................................
Total contribution margin earned ........................................................
Less: Total fixed costs per month ........................................................
Additional fixed cost—advertising.............................................
Projected monthly operating income ...................................................
Monthly break-even point (in gallons):
Total fixed costs per month ...............................................................
Contribution margin per gallon ........................................................
Monthly break-even point (total fixed costs  contribution margin
per gallon) .............................................................................................
(1)
Reduce
Selling
Price
$12.80
6.80
$ 6.00
 3,600
1,500
1,282
2,782
(2)
Increase
Advertising
Expense
$14.80
6.80
$ 8.00
$ 9,600
 3,300
$ 26,400
(12,000)
(3,000)
$ 11,400
$ 12,000
$ 15,000
$ 21,600
(12,000)
$6.00
2,000 gallons
$8.00
1,875 gallons
c. Memo to Management:
RE: Alternative marketing proposals: price reductions or additional advertising
The Purple Cow should adopt neither of the two proposed marketing strategies. Of these strategies, the increased advertising would be preferable to the reductions in sales prices, as indicated
by the computations of projected operating income (part b). However, neither approach is projected to achieve a higher operating income than is currently being achieved with the strategy of
paying managers a bonus of 20 cents per gallon for sales in excess of the break-even point. The
current profitability of a typical Purple Cow drive-in facility is summarized below.
Sales volume in excess of break-even point (in gallons) (3,000 gallons,
less 1,500-gallon break-even point)......................................................................................
1,500
Contribution margin per unit of sales over the break-even point ($14.80 sales price,
less $6.80 variable costs, less $0.20 per gallon manager’s bonus) .....................................
$7.80
Operating income under current conditions (1,500 gallons  $7.80 per gallon) ...............
$11,700
This amount exceeds by $300 the projected monthly operating income from the better of the two
proposed new marketing strategies.
162
© The McGraw-Hill Companies, Inc., 2005
20 Minutes, Medium
CASE 20–3
BUSINESS WEEK ASSIGNMENT
COST-VOLUME-PROFIT AT PUMA AG
a. The relationships identified include a reference to volume when discussing the large U.S. market.
In addition, note the reference to high contribution margin “style” products and the reference to
product mix.
b. The product mix will help dampen the risk associated with “style” based products because Puma
has products that are in the more stable, well-established sporting goods markets. Traditional
sporting goods markets are less affected by trend and style and more affected by performance.
Thus, by not having all products in the risky high style markets, Puma is able to minimize the risk
to their profits of operating in those style markets.
Solutions Manual Vol. II, Financial and Managerial Accounting 13/e, Williams et al
163
SOLUTION TO INTERNET ASSIGNMENT
30 Minutes, Medium
INTERNET 20–1
FORD MOTOR COMPANY
a. The total number of vehicles sold is calculated by adding together the categories of cars and
trucks for worldwide operations.
b. The average manufacturing cost per vehicle can be calculated by dividing the cost of goods sold
amount by the number of vehicles sold. The average revenue per vehicle can be calculated by
dividing the revenue from the sale of vehicles by the number of vehicles sold. Average gross profit
per vehicle sold is calculated by subtracting the average manufacturing cost per vehicle sold from
the average sales revenue per vehicle sold.
c. Contribution margin per vehicle equals the average sales revenue minus only the variable costs of
manufacturing. Gross profit per vehicle equals average sales revenue minus all the costs (variable
and fixed) of manufacturing.
d. In general, it is not possible to calculate contribution margins using only data contained in an
annual report. There is not sufficient detail given to separate out the variable costs of manufacturing. The inability to calculate contribution margin highlights the differences in information
needs between external users of annual report data and internal managers.
164
© The McGraw-Hill Companies, Inc., 2005