1 Example Problems Ch. 5 6

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Question 1: Score 0/4

Your response Correct response
Exercise 5-1 Fixed and Variable Cost Behavior [LO1]
Espresso Express operates a number of espresso coffee stands in busy suburban malls. The
fixed weekly expense of a coffee stand is $1,200 and the variable cost per cup of coffee
served is $0.22.

Requirement 1:
Fill in the following table with your estimates of total costs and cost per cup of coffee at
the indicated levels of activity for a coffee stand. (Round average cost per cup of coffee
to 3 decimal places. Omit the "$" sign in your response.)

Cups of Coffee Served in a Week
2,000 2,100 2,200
Fixed cost $ 0.60 (0%) $ 0.571 (0%) $ 0.545 (0%)
Variable cost 0.22 (0%) 0.22 (0%) 0.22 (0%)
Total cost $ 0.82 (0%) $ 0.791 (0%) $ 0.765 (0%)
Average cost per
cup of coffee served
$ 0.792 (0%) $ 0.792 (0%) $ 0.792 (0%)

Exercise 5-1 Fixed and Variable Cost Behavior [LO1]
Espresso Express operates a number of espresso coffee stands in busy suburban malls. The
fixed weekly expense of a coffee stand is $1,200 and the variable cost per cup of coffee
served is $0.22.

Requirement 1:
Fill in the following table with your estimates of total costs and cost per cup of coffee at
the indicated levels of activity for a coffee stand. (Round average cost per cup of coffee
to 3 decimal places. Omit the "$" sign in your response.)

Cups of Coffee Served in a Week
2,000 2,100 2,200
Fixed cost $ 1,200 $ 1,200 $ 1,200
Variable cost 440 462 484
Total cost $ 1,640 $ 1,662 $ 1,684
Average cost per cup of coffee served $ 0.82 $ 0.791 $ 0.765

Total grade: 0.01/12 + 0.01/12 + 0.01/12 + 0.01/12 + 0.01/12 + 0.01/12 + 0.01/12 + 0.01/12 + 0.01/12 + 0.01/12 + 0.01/12 + 0.01/12 = 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% +
0%
Feedback:

Average cost per cup of coffee served = Total cost cups of coffee served in a week

Requirement 2:
Does the average cost per cup of coffee served increase, decrease, or remain the same as
the number of cups of coffee served in a week increases?

Your Answer:
Choice Selected Correct
Increases
Decreases

Remains the
same

Feedback: The average cost of a cup of coffee declines as the number of cups of
coffee served increases because the fixed cost is spread over more cups of
coffee.


Exercise 6-2 Prepare a Cost-Volume-Profit (CVP) Graph [LO2]
Karlik Enterprises distributes a single product whose selling price is $24 and whose
variable expense is $18 per unit. The company's monthly fixed expense is $24,000.
Requirement 1:
Offline: Prepare a cost-volume-profit graph for the company up to a sales level of 8,000
units.

Requirement 2:
Estimate the company's break-even point in unit sales using your cost-volume-profit graph
analysis.

Break-even point in
sales
16.67 (0%) units

Exercise 6-2 Prepare a Cost-Volume-Profit (CVP) Graph [LO2]
Karlik Enterprises distributes a single product whose selling price is $24 and whose
variable expense is $18 per unit. The company's monthly fixed expense is $24,000.
Requirement 1:
Offline: Prepare a cost-volume-profit graph for the company up to a sales level of 8,000
units.

Requirement 2:
Estimate the company's break-even point in unit sales using your cost-volume-profit graph
analysis.

Break-even point in sales 4,000 units

Total grade: 0.01/1 = 0%
Feedback:

The break-even point is the point where the total sales revenue and the total expense lines
intersect. This occurs at sales of 4,000 units. This can be verified as follows:

Question 3: Score 2.6/4

Exercise 5-3 High-Low Method [LO3]
The Cheyenne Hotel in Big Sky, Montana, has accumulated records of the total electrical
costs of the hotel and the number of occupancy-days over the last year. An occupancy-day
represents a room rented out for one day. The hotel's business is highly seasonal, with
peaks occurring during the ski season and in the summer.

Month
Occupancy-
Days
Electrical
Costs
January 1,736 $ 4,127
February 1,904 $ 4,207
March 2,356 $ 5,083
April 960 $ 2,857
May 360 $ 1,871
June 744 $ 2,696
July 2,108 $ 4,670
August 2,406 $ 5,148
September 840 $ 2,691
Exercise 5-3 High-Low Method [LO3]
The Cheyenne Hotel in Big Sky, Montana, has accumulated records of the total electrical
costs of the hotel and the number of occupancy-days over the last year. An occupancy-day
represents a room rented out for one day. The hotel's business is highly seasonal, with
peaks occurring during the ski season and in the summer.

Month
Occupancy-
Days
Electrical
Costs
January 1,736 $ 4,127
February 1,904 $ 4,207
March 2,356 $ 5,083
April 960 $ 2,857
May 360 $ 1,871
June 744 $ 2,696
July 2,108 $ 4,670
August 2,406 $ 5,148
September 840 $ 2,691

October 124 $ 1,588
November 720 $ 2,454
December 1,364 $ 3,529

Requirement 1:
Using the high-low method, estimate the variable cost of electricity per occupancy-day and
the fixed cost of electricity per month. (Round the fixed cost to the nearest whole dollar
and the variable cost to the nearest whole cent. Omit the "$" sign in your response.)

Variable cost $ 1.56 (50%)
per occupancy
day
Fixed cost $ 1394 (0%) per month

October 124 $ 1,588
November 720 $ 2,454
December 1,364 $ 3,529

Requirement 1:
Using the high-low method, estimate the variable cost of electricity per occupancy-day and
the fixed cost of electricity per month. (Round the fixed cost to the nearest whole dollar
and the variable cost to the nearest whole cent. Omit the "$" sign in your response.)

Variable cost $ 1.56 per occupancy day
Fixed cost $ 1,395 per month

Total grade: 1.01/2 + 0.01/2 = 50% + 0%
Feedback:

Occupancy-
Days
Electrical
Costs
High activity level
(August)
2,406 $ 5,148
Low activity level
(October)
124 1,588
Change 2,282 $ 3,560

Variable
cost
= Change in cost Change in activity
= $3,560 2,282 occupancy-days
= $1.56 per occupancy-day

Total cost (August) $ 5,148
Variable cost element
($1.56 per occupancy-day 2,406 occupancy-
days)

3,753
Fixed cost element $ 1,395

Requirement 2:
Which of the following statement(s) is true? (Select all that apply.)
Choice Selected

Points
Electrical cost may reflect seasonal factors other than just the variation in occupancy days Yes

+1
Fixed cost will not be affected by the number of days in a month No
Less systematic factors such as frugality of individual guests may also affect electrical costs Yes

+1

Total correct answers: 2

Partial Grading Explained

Feedback: Electrical costs may reflect seasonal factors other than just the variation in occupancy
days. For example, common areas such as the reception area must be lighted for longer
periods during the winter than in the summer. This will result in seasonal fluctuations in
the fixed electrical costs.
Additionally, fixed costs will be affected by the number of days in a month. In other
words, costs like the costs of lighting common areas are variable with respect to the
number of days in the month, but are fixed with respect to how many rooms are occupied
during the month.
Other, less systematic, factors may also affect electrical costs such as the frugality of
individual guests. Some guests will turn off lights when they leave a room. Others will
not.


Exercise 5-4 Contribution Format Income Statement [LO4]
The Alpine House, Inc., is a large retailer of winter sports equipment. An income statement
for the company's Ski Department for a recent quarter is presented below:

The Alpine House, Inc.
Income StatementSki Department
For the Quarter Ended March 31
Sales $ 150,000
Cost of goods sold 90,000
Gross margin 60,000
Selling and administrative expenses:
Selling expenses $ 30,000
Administrative expenses 10,000 40,000
Net operating income $ 20,000

Skis sell, on the average, for $750 per pair. Variable selling expenses are $50 per pair
of skis sold. The remaining selling expenses are fixed. The administrative expenses are
20% variable and 80% fixed. The company does not manufacture its own skis; it purchases
them from a supplier for $450 per pair.

Requirement 1:
Prepare a contribution format income statement for the quarter. (Omit the "$" sign in
your response.)

Sales (6%) $ 150000 (6%)
Variable expenses:
Cost of goods sold (6%) $ 90000 (6%)
Selling expenses (6%) 10000 (6%)
Administrative expenses (6%) 2000 (6%) 102000 (6%)
Contribution margin (6%) 48000 (6%)
Exercise 5-4 Contribution Format Income Statement [LO4]
The Alpine House, Inc., is a large retailer of winter sports equipment. An income statement
for the company's Ski Department for a recent quarter is presented below:

Sales $ 150,000
Cost of goods sold 90,000
Gross margin 60,000
Selling and administrative expenses:
Selling expenses $ 30,000
Administrative expenses 10,000 40,000

Skis sell, on the average, for $750 per pair. Variable selling expenses are $50 per pair
of skis sold. The remaining selling expenses are fixed. The administrative expenses are
20% variable and 80% fixed. The company does not manufacture its own skis; it purchases
them from a supplier for $450 per pair.

Requirement 1:
Prepare a contribution format income statement for the quarter. (Omit the "$" sign in
your response.)

Sales $ 150000
Variable expenses:
Cost of goods sold $ 90000
Selling expenses 10000
Administrative expenses 2000 102000
Contribution margin 48000

Fixed expenses:
Advertising expenses (0%) 90000 (0%)
Administrative expenses (6%) 8000 (6%) 98000 (0%)
Net operating income (6%) $
-
50000 (0%)

Fixed expenses:
Selling expenses 20,000
Administrative expenses 8000 28,000

Total grade: 1.01/18 + 1.01/18 + 1.01/18 + 1.01/18 + 1.01/18 + 1.01/18 + 1.01/18 + 1.01/18 + 1.01/18 + 1.01/18 + 1.01/18 + 0.01/18 + 0.01/18 + 1.01/18 + 1.01/18 + 0.01/18 + 1.01/18 + 0.01/18 = 6% + 6% + 6% + 6% +
6% + 6% + 6% + 6% + 6% + 6% + 6% + 0% + 0% + 6% + 6% + 0% + 6% + 0%
Feedback:

Cost of goods sold (200 pairs* $450 per pair) $ 90,000
Variable selling expenses (200 pairs $50 per pair) 10,000
Variable administrative expenses (20% $10,000) 2,000
Fixed selling expenses [$30,000 (200 pairs $50
per pair)]
20,000
Fixed administrative expenses (80% $10,000) 8,000

*$150,000 $750 per pair = 200 pairs

Requirement 2:
For every pair of skis sold during the quarter, what was the contribution toward covering
fixed expenses and toward earning profits? (Omit the "$" sign in your response.)

Contribution margin per pair $ 50 (0%)
E5_4_id4
E5_4_id6
E5_4_id8
E5_4_id13
E5_4_id15

Requirement 2:
For every pair of skis sold during the quarter, what was the contribution toward covering
fixed expenses and toward earning profits? (Omit the "$" sign in your response.)

Contribution margin per pair $ 240
E5_4_id4
E5_4_id6
E5_4_id8
E5_4_id13
E5_4_id15

Feedback:

Since 200 pairs of skis were sold and the contribution margin totaled $48,000 for the
quarter, the contribution of each pair of skis toward covering fixed costs and toward
earning of profits was $240 ($48,000 200 pairs = $240 per pair). Another way to
compute the $240 is:

Selling price per pair $ 750
Variable expenses:
Cost per pair $ 450
Selling expenses 50

Administrative expenses
($2,000 200 pairs) 10 510
Contribution margin per pair $ 240


Exercise 5-5 Cost Behavior; Contribution Format Income Statement [LO1, LO4]
Harris Company manufactures and sells a single product.

Requirement 1:
A partially completed schedule of the company's total and per unit costs over the relevant
range of 30,000 to 50,000 units produced and sold annually is given. Complete the
schedule of the company's total and unit costs below (Round the "total costs" to the
nearest dollar amount and the "cost per unit" to 2 decimal places. Omit the "$" sign
in your response) :

Units Produced and Sold
30,000 40,000 50,000
Total
costs:

Variable
costs
$ 180,000 $ 190000 (0%) $ 200000 (0%)
Fixed
costs
300,000 310000 (0%) 320000 (0%)
Total
costs
$ 480,000 $ 500000 (0%) $ 520000 (0%)
Cost per
unit:

Variable
cost
$ 3.6 (0%) $ 3.8 (0%) $ 4 (0%)
Fixed
cost
6 (0%) 6.2 (0%) 6.4 (0%)
Total cost
per unit
$ 9.6 (0%) $ 10.0 (0%) $ 6.8 (0%)

Exercise 5-5 Cost Behavior; Contribution Format Income Statement [LO1, LO4]
Harris Company manufactures and sells a single product.

Requirement 1:
A partially completed schedule of the company's total and per unit costs over the relevant
range of 30,000 to 50,000 units produced and sold annually is given. Complete the
schedule of the company's total and unit costs below (Round the "total costs" to the
nearest dollar amount and the "cost per unit" to 2 decimal places. Omit the "$" sign
in your response) :

Units Produced and Sold
30,000 40,000 50,000
Total costs:
Variable costs $ 180,000 $ 240,000 $ 300,000
Fixed costs 300,000 300,000 300,000
Total costs $ 480,000 $ 540,000 $ 600,000
Cost per unit:
Variable cost $ 6 $ 6 $ 6
Fixed cost 10 7.5 6
Total cost per unit $ 16 $ 13.5 $ 12

Total grade: 0.01/15 + 0.01/15 + 0.01/15 + 0.01/15 + 0.01/15 + 0.01/15 + 0.01/15 + 0.01/15 + 0.01/15 + 0.01/15 + 0.01/15 + 0.01/15 + 0.01/15 + 0.01/15 + 0.01/15 = 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0%
+ 0% + 0% + 0% + 0% + 0%
Feedback:

The company's variable cost per unit is:

Requirement 2:
Assume that the company produces and sells 45,000 units during the year at a selling price
of $16 per unit. Prepare a contribution format income statement for the year. (Input all
amounts as positive values. Omit the "$" sign in your response.)

Income Statement
For the Year Ended
Sales (10%) $ 720000 (10%)
Variable
expenses (10%)
513000 (0%)
Contribution
margin (10%)
207000 (0%)
Fixed expense (10%) 279000 (0%)
Net operating
income (10%)
$ -70000 (0%)

Requirement 2:
Assume that the company produces and sells 45,000 units during the year at a selling price
of $16 per unit. Prepare a contribution format income statement for the year. (Input all
amounts as positive values. Omit the "$" sign in your response.)

Income Statement
For the Year Ended
Sales $ 720000
Variable expenses 270,000
Contribution margin 450,000
Fixed expense 300,000

Total grade: 1.01/10 + 1.01/10 + 1.01/10 + 0.01/10 + 1.01/10 + 0.01/10 + 1.01/10 + 0.01/10 + 1.01/10 + 0.01/10 = 10% + 10% + 10% + 0% + 10% + 0% + 10% + 0% + 10% + 0%
Feedback:

Sales (45,000 units $16 per unit) = $720,000
Variable expenses (45,000 units $6 per unit) = $270,000


Exercise 5-6 High-Low Method [LO2, LO3]
The following data relating to units shipped and total shipping expense have been
assembled by Archer Company, a wholesaler of large, custom-built air-conditioning units
for commercial buildings:

Month
Units
Shipped
Total
Shipping
Expense
January 3 $ 1,800
February 6 $ 2,300
March 4 $ 1,700
April 5 $ 2,000
May 7 $ 2,300
June 8 $ 2,700
July 2 $ 1,200

Requirement 1:
Using the high-low method, estimate the cost formula for shipping expense where X is the
number of units shipped. (Omit the "$" sign in your response.)

Y = $ 5 (0%) + $ 5 (0%) X
Exercise 5-6 High-Low Method [LO2, LO3]
The following data relating to units shipped and total shipping expense have been
assembled by Archer Company, a wholesaler of large, custom-built air-conditioning units
for commercial buildings:

Month
Units
Shipped
Total
Shipping
Expense
January 3 $ 1,800
February 6 $ 2,300
March 4 $ 1,700
April 5 $ 2,000
May 7 $ 2,300
June 8 $ 2,700
July 2 $ 1,200

Requirement 1:
Using the high-low method, estimate the cost formula for shipping expense where X is the
number of units shipped. (Omit the "$" sign in your response.)

Y = $ 700 + $ 250 X

Total grade: 0.01/2 + 0.01/2 = 0% + 0%
Feedback:

Units
Shipped
Shipping
Expense
High activity level
(June)
8 $ 2,700
Low activity level
(July)
2 1,200
Change 6 $ 1,500

Variable cost element:

Fixed cost element:

Shipping expense at the high activity level $ 2,700
Less variable cost element ($250 per unit 8
units)
2,000
Total fixed cost $ 700

The cost formula is $700 per month plus $250 per unit shipped or
Y = $700 + $250X,
where X is the number of units shipped.

Requirement 2:
What factors, other than the number of units shipped, are likely to affect the company's
total shipping expense? (Select all that apply.)
Choice Selected

Points
Weight of the units shipped No

Distance travelled Yes

+1
Size of the units shipped Yes

+1
Fixed cost Yes

-1
Variable cost No

Total correct answers: 3

Partial Grading Explained

Feedback: The cost of shipping units is likely to depend on the weight and volume of the units and the
distance traveled, as well as on the number of units shipped. In addition, higher cost
shipping might be necessary to meet a deadline.


Exercise 5-7 Cost Behavior; High-Low Method [LO1, LO3]
Hoi Chong Transport, Ltd., operates a fleet of delivery trucks in Singapore. The company
has determined that if a truck is driven 105,000 kilometers during a year, the average
operating cost is 11.4 cents per kilometer. If a truck is driven only 70,000 kilometers
during a year, the average operating cost increases to 13.4 cents per kilometer.(The
Singapore dollar is the currency used in Singapore.)
Requirement 1:
Using the high-low method, estimate the variable and fixed cost elements of the annual
cost of the truck operation. (Round the variable cost per kilometer to 3 decimal places.
Omit the "$" sign in your response.)

Variable cost per
kilometer
$ 5 (0%)
Fixed cost per year $ 5 (0%)

Exercise 5-7 Cost Behavior; High-Low Method [LO1, LO3]
Hoi Chong Transport, Ltd., operates a fleet of delivery trucks in Singapore. The company
has determined that if a truck is driven 105,000 kilometers during a year, the average
operating cost is 11.4 cents per kilometer. If a truck is driven only 70,000 kilometers
during a year, the average operating cost increases to 13.4 cents per kilometer.(The
Singapore dollar is the currency used in Singapore.)
Requirement 1:
Using the high-low method, estimate the variable and fixed cost elements of the annual
cost of the truck operation. (Round the variable cost per kilometer to 3 decimal places.
Omit the "$" sign in your response.)

Variable cost per kilometer $ 0.074
Fixed cost per year $ 4,200

Total grade: 0.01/2 + 0.01/2 = 0% + 0%
Feedback:

Kilometers
Driven
Total
Annual
Cost*
High level of
activity
105,000 $ 11,970
Low level of activity 70,000

9,380
Change 35,000 $ 2,590

* 105,000 kilometers $0.114 per kilometer =
$11,970
70,000 kilometers $0.134 per kilometer =
$9,380

Variable cost per kilometer:

Fixed cost per year:

Total cost at 105,000 kilometers $ 11,970
Less variable portion:
105,000 kilometers $0.074 per
kilometer

7,770
Fixed cost per year $ 4,200

Requirement 2:
Express the variable and fixed costs in the form Y = a + bX. (Round the variable cost per
kilometer to 3 decimal places. Omit the "$" sign in your response.)

Y = $ 5 (0%) + $ 5 (0%) X
Requirement 2:
Express the variable and fixed costs in the form Y = a + bX. (Round the variable cost per
kilometer to 3 decimal places. Omit the "$" sign in your response.)

Y = $ 4,200 + $ 0.074 X

Total grade: 0.01/2 + 0.01/2 = 0% + 0%

Requirement 3:
If a truck were driven 80,000 kilometers during a year, what total cost would you expect to
be incurred? (Omit the "$" sign in your response.)

Total annual cost $ 400000 (0%)
Requirement 3:
If a truck were driven 80,000 kilometers during a year, what total cost would you expect to
be incurred? (Omit the "$" sign in your response.)

Total annual cost $ 10,120

Feedback:

Fixed cost $ 4,200
Variable cost:
80,000 kilometers $0.074 per
kilometer

5,920
Total annual cost $ 10,120


Exercise 5-8 High-Low Method; Predicting Cost [LO1, LO3]
The Lakeshore Hotel's guest-days of occupancy and custodial supplies expense over the
last seven months were:

Month
Guest-
Days of
Occupancy
Custodial
Supplies
Expense
March 4,000 $ 7,500
April 6,500 $ 8,250
May 8,000 $ 10,500
June 10,500 $ 12,000
July 12,000 $ 13,500
August 9,000 $ 10,750
September 7,500 $ 9,750

Guest-days is a measure of the overall activity at the hotel. For example, a guest who
stays at the hotel for three days is counted as three guest-days.

The Lakeshore Hotel's guest-days of occupancy and custodial supplies expense over the
last seven months were:

Month
Guest-
Days of
Occupancy
Custodial
Supplies
Expense
March 4,000 $ 7,500
April 6,500 $ 8,250
May 8,000 $ 10,500
June 10,500 $ 12,000
July 12,000 $ 13,500
August 9,000 $ 10,750
September 7,500 $ 9,750

Guest-days is a measure of the overall activity at the hotel. For example, a guest who
stays at the hotel for three days is counted as three guest-days.

Requirement 1:
Using the high-low method, estimate a cost formula for custodial supplies expense where
X is the number of guest-days. (Round your answer to 2 decimal places. Omit the "$"
sign in your response.)

Y = $ 5 (0%) + $ 5 (0%) X
Requirement 1:
Using the high-low method, estimate a cost formula for custodial supplies expense where
X is the number of guest-days. (Round your answer to 2 decimal places. Omit the "$"

Y = $ 4,500 + $ 0.75 X
Total grade: 0.01/2 + 0.01/2 = 0% + 0%
Feedback:

Guest-
Days
Custodial
Supplies
Expense
High activity level (July) 12,000 $ 13,500
Low activity level
(March)
4,000

7,500
Change 8,000 $ 6,000

Variable cost element:

Fixed cost element:

Custodial supplies expense at high
activity level
$ 13,500
Less variable cost element:
12,000 guest-days $0.75 per guest-
day

9,000
Total fixed cost $ 4,500

The cost formula is $4,500 per month plus $0.75 per guest-day or
Y = $4,500 + $0.75X

Requirement 2:
Using the cost formula you derived above, what amount of custodial supplies expense
would you expect to be incurred at an occupancy level of 11,000 guest-days? (Omit the
"$" sign in your response.)

Variable cost $ 50 (0%)
Fixed cost 100 (0%)
Total cost $ 150 (0%)

Requirement 2:
Using the cost formula you derived above, what amount of custodial supplies expense
would you expect to be incurred at an occupancy level of 11,000 guest-days? (Omit the

Variable cost $ 8,250
Fixed cost 4,500
Total cost $ 12,750

Total grade: 0.01/3 + 0.01/3 + 0.01/3 = 0% + 0% + 0%
Feedback:

Variable cost (11,000 guest-days $0.75 per guest-day) = $8,250


St. Mark's Hospital contains 450 beds. The average occupancy rate is 80% per month. In
other words, on average, 80% of the hospital's beds are occupied by patients. At this level
of occupancy, the hospital's operating costs are $32 per occupied bed per day, assuming a
30-day month. This $32 figure contains both variable and fixed cost elements.
During June, the hospital's occupancy rate was only 60%. A total of $326,700 in
operating cost was incurred during the month.

Requirement 1:
(a) Estimate the variable cost per occupied bed on a daily basis using the high-low method.
(Omit the "$" sign in your response.)

Variable cost per bed-
day
$ 50 (0%)

St. Mark's Hospital contains 450 beds. The average occupancy rate is 80% per month. In
other words, on average, 80% of the hospital's beds are occupied by patients. At this level
of occupancy, the hospital's operating costs are $32 per occupied bed per day, assuming a
30-day month. This $32 figure contains both variable and fixed cost elements.
During June, the hospital's occupancy rate was only 60%. A total of $326,700 in
operating cost was incurred during the month.

Requirement 1:
(a) Estimate the variable cost per occupied bed on a daily basis using the high-low method.

Variable cost per bed-day $ 7

Feedback:

Difference in cost:

Monthly operating costs at 80% occupancy:
450 beds 80% = 360 beds;
360 beds 30 days $32 per bed-day $ 345,600
Monthly operating costs at 60% occupancy
(given)
326,700
Difference in cost $ 18,900

Difference in activity:
80% occupancy (450 beds 80% 30
days)
10,800
60% occupancy (450 beds 60% 30
days)
8,100
Difference in activity 2,700

(b) Estimate the total fixed operating costs per month using the high-low method. (Omit
the "$" sign in your response.)

Fixed operating costs per
month
$ 50000 (0%)

(b) Estimate the total fixed operating costs per month using the high-low method. (Omit
the "$" sign in your response.)

Fixed operating costs per month $ 270,000

Feedback:

Monthly operating costs at 80% occupancy (above) $ 345,600
Less variable costs:
360 beds 30 days $7 per bed-day

75,600
Fixed operating costs per month $ 270,000

Requirement 2:
Assume an occupancy rate of 70% per month. What amount of total operating cost would
you expect the hospital to incur? (Omit the "$" sign in your response.)

Fixed costs $ 500 (0%)
Variable costs 50 (0%)
Total expected costs $ 550 (0%)

Requirement 2:
Assume an occupancy rate of 70% per month. What amount of total operating cost would
you expect the hospital to incur? (Omit the "$" sign in your response.)

Fixed costs $ 270,000
Variable costs 66,150
Total expected costs $ 336,150

Total grade: 0.01/3 + 0.01/3 + 0.01/3 = 0% + 0% + 0%
Feedback:

450 beds 70% = 315 beds occupied:
Variable costs: 315 beds 30 days $7 per bed-day = 66,150


Exercise 6-1 Preparing a Contribution Format Income Statement [LO1]
Whirly Corporation's most recent income statement is shown below:

Total Per Unit
Sales (10,000
units)
$ 350,000 $ 35.00
Variable expenses 200,000 20.00
Contribution
margin
150,000 $ 15.00
Fixed expenses 135,000
Exercise 6-1 Preparing a Contribution Format Income Statement [LO1]
Whirly Corporation's most recent income statement is shown below:

Total Per Unit
Sales (10,000
units)
$ 350,000 $ 35.00
Contribution
margin
150,000 $ 15.00

Net operating
income
$ 15,000

Prepare a new contribution format income statement under each of the following
conditions (consider each case independently):
Requirement 1:
The sales volume increases by 100 units. (Omit the "$" sign in your response.)

Total
Sales $ 350000 (0%)
Variable
expenses
200000 (0%)
Contribution
margin
150000 (0%)
Fixed
expenses
135000 (20%)
Net operating
income
$ 15000 (0%)

Net operating
income
$ 15,000

conditions (consider each case independently):
Requirement 1:
The sales volume increases by 100 units. (Omit the "$" sign in your response.)

Total
Sales $ 353,500
Fixed expenses 135000

Total grade: 0.01/5 + 0.01/5 + 0.01/5 + 1.01/5 + 0.01/5 = 0% + 0% + 0% + 20% + 0%
Feedback:

Sales (10,100 $35.00) = $353,500
Variable expenses (10,100 $20.00) = $202,000
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

Requirement 2:
The sales volume decreases by 100 units. (Omit the "$" sign in your response.)

Total
Sales $ 350000 (0%)
Variable
expenses
200000 (0%)
Contribution
margin
150000 (0%)
Fixed
expenses
135000 (20%)
Requirement 2:
The sales volume decreases by 100 units. (Omit the "$" sign in your response.)

Total
Sales $ 346,500

Net operating
income
$ 15000 (0%)

Total grade: 0.01/5 + 0.01/5 + 0.01/5 + 1.01/5 + 0.01/5 = 0% + 0% + 0% + 20% + 0%
Feedback:

Sales (9,900 $35.00) = $346,500
Sales (9,900 $20.00) = $198,000
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

Requirement 3:
The sales volume is 9,000 units. (Leave no cells blank - be certain to enter "0"
wherever required. Omit the "$" sign in your response.)

Total
Sales $ 350000 (0%)
Variable
expenses
200000 (0%)
Contribution
margin
150000 (0%)
Fixed
expenses
135000 (20%)
Net operating
income
$ 15000 (0%)

Requirement 3:
The sales volume is 9,000 units. (Leave no cells blank - be certain to enter "0"
wherever required. Omit the "$" sign in your response.)

Total
Sales $ 315,000
Net operating income $ 0

Total grade: 0.01/5 + 0.01/5 + 0.01/5 + 1.01/5 + 0.01/5 = 0% + 0% + 0% + 20% + 0%
Feedback:

Sales (9,000 $35.00) = $315,000
Variable expenses (9,000 $20.00) = $180,000
Note: This is the company's break-even point


Exercise 6-4 Computing and Using the CM Ratio [LO3]
Last month when Holiday Creations, Inc., sold 50,000 units, total sales were $200,000, total
variable expenses were $120,000, and fixed expenses were $65,000.

Requirement 1:
What is the company's contribution margin (CM) ratio? (Omit the "%" sign in your
response.)

Contribution margin
ratio
5 (0%) %

Exercise 6-4 Computing and Using the CM Ratio [LO3]
Last month when Holiday Creations, Inc., sold 50,000 units, total sales were $200,000, total
variable expenses were $120,000, and fixed expenses were $65,000.

Requirement 1:
What is the company's contribution margin (CM) ratio? (Omit the "%" sign in your
response.)

Contribution margin ratio 40 %

Feedback:

The company's contribution margin (CM) ratio is:

Total sales $ 200,000
Total variable expenses 120,000
= Total contribution
margin
80,000
= CM ratio 40%

Requirement 2:
Estimate the change in the company's net operating income if it were to increase its total
sales by $1,000.(Omit the "$" sign in your response.).

Estimated change in net operating
income
$ 500 (0%)

Requirement 2:
Estimate the change in the company's net operating income if it were to increase its total
sales by $1,000.(Omit the "$" sign in your response.).

Estimated change in net operating income $ 400

Feedback:

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


Exercise 6-5 Changes in Variable Costs, Fixed Costs, Selling Price, and Volume
[LO4]
Data for Hermann Corporation are shown below:

Per unit
Percent
of Sales
Selling price $ 90 100 %
Variable expenses 63 70 %
Contribution
margin
$ 27 30 %

Fixed expenses are $30,000 per month and the company is selling 2,000 units per month.

Requirement 1:
(a) Calculate the change in net operating income if a $5,000 increase in the monthly
advertising budget would increase monthly sales by $9,000. (Negative amount should
be indicated by a minus sign. Omit the "$" sign in your response.)

Change in net operating income $ 500 (0%)
Exercise 6-5 Changes in Variable Costs, Fixed Costs, Selling Price, and Volume
[LO4]
Data for Hermann Corporation are shown below:

Per unit
Percent
of Sales
Contribution
margin
$ 27 30 %

Fixed expenses are $30,000 per month and the company is selling 2,000 units per month.

Requirement 1:
(a) Calculate the change in net operating income if a $5,000 increase in the monthly
advertising budget would increase monthly sales by $9,000. (Negative amount should
be indicated by a minus sign. Omit the "$" sign in your response.)

Change in net operating income $ -2,300

Feedback:

The following table shows the effect of the proposed change in monthly advertising
budget:

Current
sales
Sales with
Additional
Advertising
Budget Difference
Sales $ 180,000 $ 189,000 $ 9,000
Variable
expenses
126,000 132,300 6,300
Contribution
margin
54,000 56,700 2,700
Fixed
expenses
30,000 35,000 5,000
Net operating
income
$ 24,000 $ 21,700 ($ 2,300 )

(b) Should the advertising budget be increased as suggested in requirement 1(a) above?

Your Answer:
Choic
e
Selecte
d
Yes
No

Feedback: Assuming no other important factors need to be considered, the increase in the
advertising budget should not be approved because it would lead to a decrease in net
operating income of $2,300.

Requirement 2:
Refer to the original data. Management is considering using higher-quality components
that would increase the variable cost by $2 per unit. The marketing manager believes the
higher-quality product would increase sales by 10% per month. Should the higher-quality
components be used?

Your Answer:
Choic
e
Selecte
d
Yes

No

Feedback: The $2 increase in variable cost will cause the unit contribution margin to decrease from
$27 to $25 with the following impact on net operating income:

Expected total contribution margin
with the higher-quality components:
2,200 units $25 per unit $ 55,000
Present total contribution margin:
2,000 units $27 per unit

54,000
Change in total contribution margin $ 1,000

Assuming no change in fixed costs and all other factors remain the same, the higher-
quality components should be used.


Exercise 6-6 Compute the Level of Sales Required to Attain a Target Profit [LO5]
Lin Corporation has a single product whose selling price is $120 and whose variable
expense is $80 per unit. The company's monthly fixed expense is $50,000.

Requirement 1:
Using the equation method, solve for the unit sales that are required to earn a target profit
of $10,000.

Unit sales to earn target profit 5 (0%) units
Exercise 6-6 Compute the Level of Sales Required to Attain a Target Profit [LO5]
Lin Corporation has a single product whose selling price is $120 and whose variable
expense is $80 per unit. The company's monthly fixed expense is $50,000.

Requirement 1:
Using the equation method, solve for the unit sales that are required to earn a target profit
of $10,000.

Unit sales to earn target profit 1,500 units

Feedback:

The equation method yields the required unit sales, Q, as follows:

Profit = [Unit CM Q] Fixed expenses
$10,000 = [($120 $80) Q] $50,000

$10,000 = [($40) Q] $50,000
$40
Q
= $10,000 + $50,000
Q = $60,000 $40
Q = 1,500 units

Requirement 2:
Using the formula method, solve for the unit sales that are required to earn a target profit of
$15,000.

Unit sales to earn target profit 50 (0%) units
Requirement 2:
Using the formula method, solve for the unit sales that are required to earn a target profit of
$15,000.

Unit sales to earn target profit 1,625 units

Feedback:

The formula approach yields the required unit sales as follows:


Exercise 6-7 Compute the Break-Even Point [LO6]
Mauro Products distributes a single product, a woven basket whose selling price is $15 and
whose variable expense is $12 per unit. The company's monthly fixed expense is $4,200.

Requirement 1:
Solve for the company's break-even point in unit sales using the equation method.

Break-even point in unit
sales
500 (0%) baskets

Exercise 6-7 Compute the Break-Even Point [LO6]
Mauro Products distributes a single product, a woven basket whose selling price is $15 and
whose variable expense is $12 per unit. The company's monthly fixed expense is $4,200.

Requirement 1:
Solve for the company's break-even point in unit sales using the equation method.

Break-even point in unit sales 1,400 baskets

Feedback:

The equation method yields the break-even point in unit sales, Q, as follows:

$0 = [($15 $12) Q] $4,200
$0 = [($3) Q] $4,200

$3Q = $4,200
Q = $4,200 $3
Q = 1,400 baskets

The formula method gives an answer that is identical to the equation method for the break-
even point in unit sales:

Unit sales to break even =
Fixed
expenses
Unit CM
=
$4,200
= 1,400 baskets
$3

Requirement 2:
Solve for the company's break-even point in sales dollars using the equation method and
the CM ratio. (Omit the "$" sign in your response.)

Break-even point in
sales
$ 500 (0%)

Requirement 2:
Solve for the company's break-even point in sales dollars using the equation method and
the CM ratio. (Omit the "$" sign in your response.)

Break-even point in sales $ 21,000

Feedback:

The equation method can be used to compute the break-even point in sales dollars as
follows:

CM ratio =
Unit contribution
margin
Unit selling price
=
$3
= 0.20
$15

Profit = [CM ratio Sales] Fixed expenses
$0 = [0.20 Sales] $4,200
0.20 Sales = $4,200
Sales = $4,200 0.20
Sales = $21,000

The formula method also gives an answer that is identical to the equation method for the
break-even point in dollar sales:

Dollar sales to break even =
Fixed
expenses
CM ratio
=
$4,200
= $21,000
0.20


Exercise 6-8 Compute the Margin of Safety [LO7]
Molander Corporation is a distributor of a sun umbrella used at resort hotels. Data
concerning the next month's budget appear below:

Selling price $ 30 per unit
Variable expenses $ 20 per unit
Fixed expenses $ 7,500 per month
Unit sales 1,000
units per
month

Requirement 1:
Compute the company's margin of safety. (Omit the "$" sign in your response.)

Margin of
safety
$ 500 (0%)

Exercise 6-8 Compute the Margin of Safety [LO7]
Molander Corporation is a distributor of a sun umbrella used at resort hotels. Data
concerning the next month's budget appear below:

Selling price $ 30 per unit
Variable expenses $ 20 per unit
Fixed expenses $ 7,500 per month
Unit sales 1,000
units per
month

Requirement 1:
Compute the company's margin of safety. (Omit the "$" sign in your response.)

Margin of safety $ 7,500

Feedback:

To compute the margin of safety, we must first compute the break-even unit sales.

$0 = [($30 $20) Q] $7,500
$0 = [($10) Q] $7,500
$10Q = $7,500
Q = $7,500 $10
Q = 750 units

Sales (at the budgeted volume of
1,000 units)
$ 30,000
Less break-even sales (at 750 units) 22,500
Margin of safety (in dollars) $ 7,500

Requirement 2:
Compute the company's margin of safety as a percentage of its sales. (Omit the "%"

Margin of safety as a percentage of
sales
5 (0%) %

Requirement 2:
Compute the company's margin of safety as a percentage of its sales. (Omit the "%"

Margin of safety as a percentage of sales 25 %

Feedback:

The margin of safety as a percentage of sales is as follows:

Margin of safety (in dollars) $ 7,500
Sales $ 30,000
Margin of safety percentage

25%


Exercise 6-9 Compute and Use the Degree of Operating Leverage [LO8]
Engberg Company installs lawn sod in home yards. The company's most recent monthly
contribution format income statement follows:

Amount
Percent
of Sales
Sales $ 80,000 100 %
Variable expenses 32,000 40 %
Contribution
margin
48,000 60 %
Net operating
income
$ 10,000

Requirement 1:
Compute the company's degree of operating leverage. (Round your answer to 1 decimal
place.)

Degree of operating
leverage
1000 (0%)

Exercise 6-9 Compute and Use the Degree of Operating Leverage [LO8]
Engberg Company installs lawn sod in home yards. The company's most recent monthly
contribution format income statement follows:

Amount
Percent
of Sales
Sales $ 80,000 100 %
Variable expenses 32,000 40 %
Contribution
margin
48,000 60 %
Net operating
income
$ 10,000

Requirement 1:
Compute the company's degree of operating leverage. (Round your answer to 1 decimal
place.)

Degree of operating leverage 4.8

Feedback:

The company's degree of operating leverage would be computed as follows:

Contribution margin $ 48,000
Degree of operating
leverage
4.8

Requirement 2:
Using the degree of operating leverage, estimate the impact on net operating income of a
5% increase in sales. (Omit the "%" sign in your response.)

Estimated percent change in net operating
income
5 (0%) %

Requirement 2:
Using the degree of operating leverage, estimate the impact on net operating income of a
5% increase in sales. (Omit the "%" sign in your response.)

Estimated percent change in net operating
income
24 %

Feedback:

A 5% increase in sales should result in a 24% increase in net operating income, computed
as follows:

Percent increase in sales 5 %
Estimated percent increase in net operating
income
24 %

Requirement 3:
Verify your estimate from requirement (2) above by constructing a new contribution
format income statement for the company assuming a 5% increase in sales. (Omit the "$"
and "%" sign in your response.)

Amount
Sales $ 80000 (0%)
Variable expenses 32000 (0%)
Contribution margin 48000 (0%)
Fixed expenses 38000 (14%)
Net operating income $ 10000 (0%)
Original net operating income $ 5000 (0%)
Percent change in net
operating income
100 (0%) %

Requirement 3:
Verify your estimate from requirement (2) above by constructing a new contribution
format income statement for the company assuming a 5% increase in sales. (Omit the "$"
and "%" sign in your response.)

Amount
Sales $ 84,000
Original net operating income $ 10,000
Percent change in net operating income 24 %

Total grade: 0.01/7 + 0.01/7 + 0.01/7 + 1.01/7 + 0.01/7 + 0.01/7 + 0.01/7 = 0% + 0% + 0% + 14% + 0% + 0% + 0%


Exercise 6-10 Compute the Break-Even Point for a Multiproduct Company [LO9]
Lucido Products markets two computer games: Claimjumper and Makeover. A
contribution format income statement for a recent month for the two games appears on the
following page:

Claimjumper Makeover Total
Sales $ 30,000 $ 70,000 $ 100,000
Variable expenses 20,000 50,000 70,000
Contribution
margin
$ 10,000 $ 20,000 30,000
Net operating
income
$ 6,000

Requirement 1:
Compute the overall contribution margin (CM) ratio for the company. (Omit the "%"
Exercise 6-10 Compute the Break-Even Point for a Multiproduct Company [LO9]
Lucido Products markets two computer games: Claimjumper and Makeover. A
contribution format income statement for a recent month for the two games appears on the
following page:

Sales $ 30,000 $ 70,000 $ 100,000
Contribution
margin
$ 10,000 $ 20,000 30,000
Net operating
income
$ 6,000

Requirement 1:
Compute the overall contribution margin (CM) ratio for the company. (Omit the "%"


Overall CM
ratio
5 (0%) %


Overall CM ratio 30 %
Feedback:

The overall contribution margin ratio can be computed as follows:

Requirement 2:
Compute the overall break-even point for the company in sales dollars. (Omit the "$"

Overall break-
even
$ 500 (0%)

Requirement 2:
Compute the overall break-even point for the company in sales dollars. (Omit the "$"

Overall break-even $ 80,000

Feedback:

The overall break-even point in sales dollars can be computed as follows:

Requirement 3:
Verify the overall break-even point for the company by constructing a contribution format
income statement showing the appropriate levels of sales for the two products. (Round
your answers to the nearest dollar amount. Do not round your interim calculation.
Leave no cells blank - be certain to enter "0" wherever required. Omit the "$" and
"%" sign in your response.)

Original dollar
sales
$ 50 (0%) $ 500 (0%) $ 5000 (0%)
Sales at break-
even
$ 2 (0%) $ 10 (0%) $ 100 (0%)

Requirement 3:
Verify the overall break-even point for the company by constructing a contribution format
income statement showing the appropriate levels of sales for the two products. (Round
your answers to the nearest dollar amount. Do not round your interim calculation.
Leave no cells blank - be certain to enter "0" wherever required. Omit the "$" and
"%" sign in your response.)

Original dollar sales $ 30,000 $ 70,000 $ 100,000
Sales at break-even $ 24,000 $ 56,000 $ 80,000

Sales $ 24,000 $ 56,000 $ 80,000

Sales $ 50 (0%) $ 500 (0%) $ 5000 (0%)
Variable
expenses
20 (0%) 30 (0%) 400 (0%)
Contribution
margin
$ 30 (0%) $ 470 (0%) 4600 (0%)
Fixed
expenses
500 (0%)
Net operating
income
$ 4100 (0%)

Contribution margin $ 8,000 $ 16,000 24,000
Net operating income $ 0

Total grade: 0.01/17 + 0.01/17 + 0.01/17 + 0.01/17 + 0.01/17 + 0.01/17 + 0.01/17 + 0.01/17 + 0.01/17 + 0.01/17 + 0.01/17 + 0.01/17 + 0.01/17 + 0.01/17 + 0.01/17 + 0.01/17 + 0.01/17 = 0% + 0% + 0% + 0% + 0% + 0%
+ 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0%
Feedback:

Claimjumper variable expenses: ($24,000/$30,000) $20,000 = $16,000
Makeover variable expenses: ($56,000/$70,000) $50,000 = $40,000


Exercise 6-11 Using a Contribution Format Income Statement [LO1, LO4]
Miller Company's most recent contribution format income statement is shown below:

Total Per Unit
Sales (20,000 units) $ 300,000 $ 15.00
Contribution margin 120,000 $ 6.00

Required:
conditions (consider each case independently): (Round your per unit values to 2 decimal
places. Omit the "$" sign in your response.)

(a) The number of units sold increases by 15%.

Total Per Unit
Sales $ 300000 (0%) $ 15 (13%)
Variable expenses 180000 (0%) 9 (13%)
Contribution margin 120000 (0%) $ 6 (13%)
Net operating income $ 50000 (0%)

Exercise 6-11 Using a Contribution Format Income Statement [LO1, LO4]
Miller Company's most recent contribution format income statement is shown below:

Total Per Unit
Sales (20,000 units) $ 300,000 $ 15.00

Required:
conditions (consider each case independently): (Round your per unit values to 2 decimal
places. Omit the "$" sign in your response.)

(a) The number of units sold increases by 15%.

Total Per Unit
Sales $ 345,000 $ 15
Variable expenses 207,000 9
Contribution margin 138,000 $ 6

Total grade: 0.01/8 + 1.01/8 + 0.01/8 + 1.01/8 + 0.01/8 + 1.01/8 + 1.01/8 + 0.01/8 = 0% + 13% + 0% + 13% + 0% + 13% + 13% + 0%
Feedback:

Sales (20,000 units 1.15 = 23,000 units)

(b)
The selling price decreases by $1.50 per unit, and the number of units sold increases by
25%.

Total Per Unit
Sales $ 300000 (0%) $ 15 (0%)
Contribution
margin
120000 (0%) $ 6 (0%)
Net operating
income
$ 50000 (0%)

(b)
The selling price decreases by $1.50 per unit, and the number of units sold increases by
25%.

Total Per Unit
Sales $ 337,500 $ 13.5

Total grade: 0.01/8 + 0.01/8 + 0.01/8 + 1.01/8 + 0.01/8 + 0.01/8 + 1.01/8 + 0.01/8 = 0% + 0% + 0% + 13% + 0% + 0% + 13% + 0%
Feedback:


(c) The selling price increases by $1.50 per unit, fixed expenses increase by $20,000, and
the number of units sold decreases by 5%.

Total Per Unit
Sales $ 300000 (0%) $ 15 (0%)
Contribution
margin
120000 (0%) $ 6 (0%)
Net operating
income
$ 50000 (0%)

(c) The selling price increases by $1.50 per unit, fixed expenses increase by $20,000, and
the number of units sold decreases by 5%.

Total Per Unit
Sales $ 313,500 $ 16.5

Total grade: 0.01/8 + 0.01/8 + 0.01/8 + 1.01/8 + 0.01/8 + 0.01/8 + 0.01/8 + 0.01/8 = 0% + 0% + 0% + 13% + 0% + 0% + 0% + 0%
Feedback:


(d) The selling price increases by 12%, variable expenses increase by 60 cents per unit,
and the number of units sold decreases by 10%.

Total Per Unit
Sales $ 300000 (0%) $ 15 (0%)
Contribution
margin
120000 (0%) $ 6 (0%)
(d) The selling price increases by 12%, variable expenses increase by 60 cents per unit,
and the number of units sold decreases by 10%.

Total Per Unit
Sales $ 302,400 $ 16.8

Net operating
income
$ 50000 (0%)


Total grade: 0.01/8 + 0.01/8 + 0.01/8 + 0.01/8 + 0.01/8 + 0.01/8 + 1.01/8 + 0.01/8 = 0% + 0% + 0% + 0% + 0% + 0% + 13% + 0%
Feedback:



Exercise 6-12 Target Profit and Break-Even Analysis; Margin of Safety; CM Ratio
[LO1, LO3, LO5, LO6, LO7]
Menlo Company distributes a single product. The company's sales and expenses for last
month follow:

Total
Per
Unit
Sales $ 450,000 $ 30

Requirement 1:
What is the monthly break-even point in units sold and in sales dollars? (Omit the "$"

Monthly break-
even point
5 (0%) units
Sales $ 50000 (0%)

Exercise 6-12 Target Profit and Break-Even Analysis; Margin of Safety; CM Ratio
[LO1, LO3, LO5, LO6, LO7]
Menlo Company distributes a single product. The company's sales and expenses for last
month follow:

Total
Per
Unit
Sales $ 450,000 $ 30

Requirement 1:
What is the monthly break-even point in units sold and in sales dollars? (Omit the "$"

Monthly break-even point 12,000 units
Sales $ 360,000

Total grade: 0.01/2 + 0.01/2 = 0% + 0%
Feedback:

Profit = Unit CM Q Fixed expenses
$0Q = ($30 $12) Q $216,000
$0Q = ($18) Q $216,000
$18Q = $216,000
Q = $216,000 $18
Q = 12,000 units, or at $30 per unit, $360,000

Requirement 2:
Without resorting to computations, what is the total contribution margin at the break-even
point? (Omit the "$" sign in your response.)

Total contribution margin at the break-
even point
$ 500 (0%)

Requirement 2:
Without resorting to computations, what is the total contribution margin at the break-even
point? (Omit the "$" sign in your response.)

Total contribution margin at the break-even
point
$ 216,000

Feedback:

The contribution margin is $216,000 because the contribution margin is equal to the fixed
expenses at the break-even point.

Requirement 3:
How many units would have to be sold each month to earn a target profit of $90,000? Use
the formula method.

Units
sold
500 (0%) units

Requirement 3:
How many units would have to be sold each month to earn a target profit of $90,000? Use
the formula method.

Units sold 17,000 units

Feedback:

Requirement 4:
Refer to the original data. Compute the company's margin of safety in both dollar and
percentage terms. (Omit the "$" and "%" signs in your response.)

Dollars Percentage
Margin of
safety
$ 50 (0%) 5 (0%) %

Requirement 4:
Refer to the original data. Compute the company's margin of safety in both dollar and
percentage terms. (Omit the "$" and "%" signs in your response.)

Dollars Percentage
Margin of safety $ 90,000 20 %

Total grade: 0.01/2 + 0.01/2 = 0% + 0%
Feedback:

Margin of safety in dollar terms:

Margin of safety in percentage terms:

Requirement 5:
What is the company's CM ratio? If sales increase by $50,000 per month and there is no
change in fixed expenses, by how much would you expect monthly net operating income
to increase? (Omit the "$" and "%" signs in your response.)

CM ratio 5 (0%) %
Increase in net operating income $ 500 (0%)

Requirement 5:
What is the company's CM ratio? If sales increase by $50,000 per month and there is no
change in fixed expenses, by how much would you expect monthly net operating income
to increase? (Omit the "$" and "%" signs in your response.)

CM ratio 60 %
Increase in net operating income $ 30,000

Total grade: 0.01/2 + 0.01/2 = 0% + 0%
Feedback:

The CM ratio is 60%.

Expected total contribution margin:
($500,000 60%)
$ 300,000
Present total contribution margin: ($450,000
60%)
270,000
Increase in contribution margin $ 30,000

Given that the company's fixed expenses will not change, monthly net operating income
will also increase by $30,000.
Alternative solution:
$50,000 incremental sales 60% CM ratio = $30,000


Exercise 6-13 Target Profit and Break-Even Analysis [LO3, LO4, LO5, LO6]
Lindon Company is the exclusive distributor for an automotive product that sells for $40
per unit and has a CM ratio of 30%. The company's fixed expenses are $180,000 per year.
The company plans to sell 16,000 units this year.

Requirement 1:
What are the variable expenses per unit? (Omit the "$" sign in your response.)

Exercise 6-13 Target Profit and Break-Even Analysis [LO3, LO4, LO5, LO6]
Lindon Company is the exclusive distributor for an automotive product that sells for $40
per unit and has a CM ratio of 30%. The company's fixed expenses are $180,000 per year.
The company plans to sell 16,000 units this year.

Requirement 1:
What are the variable expenses per unit? (Omit the "$" sign in your response.)

Variable expenses per unit $ 40 (0%) Variable expenses per unit $ 28
Feedback:

Variable expenses: $40 (100% 30%) = $28.

Requirement 2:
Use the equation method for the following:

(a) What is the break-even point in units and sales dollars? (Omit the "$" sign in your
response.)

Break-even point in units 40 (0%) units
Break-even point in sales
dollars
$ 400 (0%)

Requirement 2:
Use the equation method for the following:

(a) What is the break-even point in units and sales dollars? (Omit the "$" sign in your
response.)

Break-even point in units 15,000 units
Break-even point in sales dollars $ 600,000

Total grade: 0.01/2 + 0.01/2 = 0% + 0%
Feedback:

Contribution margin $ 12 30 %

$0 = $12 Q $180,000
$12Q = $180,000
Q = $180,000 $12
Q = 15,000 units

In sales dollars: 15,000 units $40 per unit = $600,000

(b) What sales level in units and in sales dollars is required to earn an annual profit of
$60,000? (Omit the "$" sign in your response.)

Sales level in units 50 (0%) units
Sales level in dollars $ 5000 (0%)
(b) What sales level in units and in sales dollars is required to earn an annual profit of
$60,000? (Omit the "$" sign in your response.)

Sales level in units 20,000 units
Sales level in dollars $ 800,000

Total grade: 0.01/2 + 0.01/2 = 0% + 0%
Feedback:

$60,000 = [$12 Q] $180,000
$12Q = $60,000 + $180,000
$12Q = $240,000
Q = $240,000 $12
Q = 20,000 units


(c) Assume that by using a more efficient shipper, the company is able to reduce its
variable expenses by $4 per unit. What is the company's new break-even point in units
and sales dollars? (Omit the "$" sign in your response.)

New break-even point in units 50 (0%) units
New break-even point in sales
dollars
$ 5000 (0%)

(c) Assume that by using a more efficient shipper, the company is able to reduce its
variable expenses by $4 per unit. What is the company's new break-even point in units
and sales dollars? (Omit the "$" sign in your response.)

New break-even point in units 11,250 units
New break-even point in sales dollars $ 450,000

Total grade: 0.01/2 + 0.01/2 = 0% + 0%
Feedback:

The company's new cost/revenue relation will be:

Variable expenses ($28
$4)
24 60 %

$0 = [($40 $24) Q] $180,000
$16Q = $180,000
Q = $180,000 $16
Q = 11,250 units



Exercise 6-14 Missing Data; Basic CVP Concepts [LO1, LO9]
Fill in the missing amounts in each of the eight case situations below. Each case is
independent of the others. (Hint: One way to find the missing amounts would be to prepare
a contribution format income statement for each case, enter the known data, and then
compute the missing items.)

Requirement 1:
Assume that only one product is being sold in each of the four following case situations:

Case #1 Case #2 Case #3 Case #4
Units Sold 15,000 12000 (0%) 10,000 6,000
Sales $ 180,000 $ 100,000 $
250000 (0%
)
$ 300,000
Variable
Expenses
120,000
110000 (0%
)
70,000
50000 (0%
)
Contributio
n Margin
60,000 40,000 130,000 90,000
Fixed 50,000 32,000 25000 (0%) 100,000
Exercise 6-14 Missing Data; Basic CVP Concepts [LO1, LO9]
Fill in the missing amounts in each of the eight case situations below. Each case is
independent of the others. (Hint: One way to find the missing amounts would be to prepare
a contribution format income statement for each case, enter the known data, and then
compute the missing items.)

Requirement 1:
Assume that only one product is being sold in each of the four following case situations:

Units Sold 15,000 4,000 10,000 6,000
Sales $ 180,000 $ 100,000 $ 200,000 $ 300,000
Variable Expenses 120,000 60,000 70,000 210,000
Contribution Margin 60,000 40,000 130,000 90,000
Fixed expenses 50,000 32,000 118,000 100,000
Net Operating Income (Loss) 10,000 8,000 12,000 (10,000)
Contribution Margin per Unit $ 4 $ 10 $ 13 $ 15

expenses
Net
Operating
Income
(Loss)

5000 (0%
)
8,000 12,000 (10,000)
Contributio
n Margin
per Unit
$ 5 (0%) $ 10 $ 13 $ 15 (13%)

Total grade: 0.01/8 + 0.01/8 + 0.01/8 + 0.01/8 + 0.01/8 + 0.01/8 + 0.01/8 + 1.01/8 = 0% + 0% + 0% + 0% + 0% + 0% + 0% + 13%
Feedback:

Case #1 Case #2
Number of units
sold
15,000 * 4,000
Sales $ 180,000 * $ 12 $ 100,000 * $ 25
Variable Expenses 120,000 * 8 60,000 15
Contribution
margin
60,000 $ 4 40,000 $ 10 *
Fixed Expenses 50,000 * 32,000 *
Net operating
income
$ 10,000 $ 8,000 *

Case #3 Case #4
Number of units sold 10,000 * 6,000 *
Sales $ 200,000 $ 20 $ 300,000 * $ 50
Variable Expenses 70,000 * 7 210,000 35
Contribution margin 130,000 $ 13 * 90,000 $ 15
Fixed Expenses 118,000 100,000 *
Net operating
income
$ 12,000 * $ (10,000 )*

* Given

Requirement 2:
Assume that more than one product is being sold in each of the four following case
situations: (Omit the "$" and "%" signs in your response.)

Sales $ 500,000 $ 400,000 $ 300000 (0%) 600,000
Variable
Expenses
200000 (0%) 260,000 320000 (0%) 420,000
Contribution
Margin
100,000 140,000 150,000 180,000
Fixed
expenses
70000 (0%) 100,000 130,000 160000 (0%)
Requirement 2:
Assume that more than one product is being sold in each of the four following case
situations: (Omit the "$" and "%" signs in your response.)

Sales $ 500,000 $ 400,000 $ 250,000 600,000
Variable Expenses 400,000 260,000 100,000 420,000
Contribution Margin 100,000 140,000 150,000 180,000
Fixed expenses 93,000 100,000 130,000 185,000
Net Operating Income (Loss) $ 7,000 $ 40,000 $ 20,000 $ (5,000)
Average Contribution Margin Ratio 20 % 35 % 60 % 30 %

Net
Operating
Income
(Loss)
$ 7,000 $ 13500 (0%) $ 20,000 $ (5,000)
Average
Contribution
Margin
Ratio
20 % 40 (0%) % 60 % 80 (0%) %

Total grade: 0.01/8 + 0.01/8 + 0.01/8 + 0.01/8 + 0.01/8 + 0.01/8 + 0.01/8 + 0.01/8 = 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0%
Feedback:

Case #1 Case #2
Sales $ 500,000 * 100 % $ 400,000 * 100 %
Variable Expenses 400,000 80 260,000 * 65
Contribution
margin
100,000 20 %* 140,000 35 %
Fixed Expenses 93,000 100,000 *
Net operating
income
$ 7,000 * $ 40,000

Case #3 Case #4
Sales $ 250,000 100 % $ 600,000 * 100 %
Variable Expenses 100,000 40 420,000 * 70
Contribution
margin
150,000 60 %* 180,000 30 %
Fixed Expenses 130,000 * 185,000
Net operating
income
$ 20,000 * $ (5,000 )*

* Given


Exercise 6-15 Operating Leverage [LO4, LO8]
Magic Realm, Inc., has developed a new fantasy board game. The company sold 15,000
games last year at a selling price of $20 per game. Fixed costs associated with the game
total $182,000 per year, and variable costs are $6 per game. Production of the game is
entrusted to a printing contractor. Variable costs consist mostly of payments to this
contractor.

Requirement 1:
(a) Prepare a contribution format income statement for the game last year. (Omit the "$"

Exercise 6-15 Operating Leverage [LO4, LO8]
Magic Realm, Inc., has developed a new fantasy board game. The company sold 15,000
games last year at a selling price of $20 per game. Fixed costs associated with the game
total $182,000 per year, and variable costs are $6 per game. Production of the game is
entrusted to a printing contractor. Variable costs consist mostly of payments to this
contractor.

Requirement 1:
(a) Prepare a contribution format income statement for the game last year. (Omit the "$"

Total
Sales $ 300000 (20%)
Variable expenses 90000 (20%)
Contribution margin 210000 (20%)
Net operating income(loss) $ 28000 (20%)

Total
Sales $ 300000
Variable expenses 90000
Contribution margin 210000
Net operating income(loss) $ 28000

(b) Compute the degree of operating leverage. (Round your answer to 1 decimal place.)

Degree of operating
leverage
50 (0%)

(b) Compute the degree of operating leverage. (Round your answer to 1 decimal place.)


Feedback:

The degree of operating leverage is:

Requirement 2:
Management is confident that the company can sell 18,000 games next year (an increase of
3,000 games, or 20%, over last year).

(a) Compute the expected percentage increase in net operating income for next year.
(Omit the "%" sign in your response.)

Expected percentage increase in net operating
income
5 (0%) %

Requirement 2:
Management is confident that the company can sell 18,000 games next year (an increase of
3,000 games, or 20%, over last year).

(a) Compute the expected percentage increase in net operating income for next year.
(Omit the "%" sign in your response.)

Expected percentage increase in net operating
income
150 %

Feedback:

Sales of 18,000 games represent a 20% increase over last year's sales. Because the degree
of operating leverage is 7.5, net operating income should increase by 7.5 times as much, or
by 150% (7.5 20%).

(b) Compute the expected total dollar net operating income(loss) for next year. (Do not
prepare an income statement; use the degree of operating leverage to compute
your answer. Omit the "$" sign in your response.)

Total expected net operating income(loss) $ 50000 (0%)
(b) Compute the expected total dollar net operating income(loss) for next year. (Do not
prepare an income statement; use the degree of operating leverage to compute
your answer. Omit the "$" sign in your response.)

Total expected net operating income(loss) $ 70,000

Feedback:

The expected total dollar amount of net operating income for next year would be:

Last year's net operating income(loss) $ 28,000
Expected increase in net operating income next year (150%
$28,000)
42,000
Total expected net operating income(loss) $ 70,000


Exercise 6-16 Target Profit and Break-Even Analysis [LO4, LO5, LO6]
Outback Outfitters sells recreational equipment. One of the company's products, a small
camp stove, sells for $50 per unit. Variable expenses are $32 per stove, and fixed expenses
associated with the stove total $108,000 per month.

Requirement 1:
Compute the break-even point in number of stoves and in total sales dollars. (Omit the

Number of
stoves
50 (0%)
Total sales $ 50000 (0%)
Exercise 6-16 Target Profit and Break-Even Analysis [LO4, LO5, LO6]
Outback Outfitters sells recreational equipment. One of the company's products, a small
camp stove, sells for $50 per unit. Variable expenses are $32 per stove, and fixed expenses
associated with the stove total $108,000 per month.

Requirement 1:
Compute the break-even point in number of stoves and in total sales dollars. (Omit the

Number of stoves 6,000

Total grade: 0.01/2 + 0.01/2 = 0% + 0%
Feedback:

$0 = [($50 $32) Q] $108,000
$0 = [($18) Q] $108,000
$18Q = $180,000
Q = $180,000 $18
Q =
6,000 stoves, or at $50 per stove, $300,000 in
sales

Requirement 2:
If the variable expenses per stove increase as a percentage of the selling price, will it result
in a higher or a lower break-even point? (Assume that the fixed expenses remain
unchanged.)

Your Answer:
Choic Selecte Correc
e d t
Lower

Higher

Feedback: An increase in variable expenses as a percentage of the selling price would result in a
higher break-even point. If variable expenses increase as a percentage of sales, then the
contribution margin will decrease as a percentage of sales. With a lower CM ratio, more
stoves would have to be sold to generate enough contribution margin to cover the fixed
costs.

Requirement 3:
At present, the company is selling 8,000 stoves per month. The sales manager is convinced
that a 10% reduction in the selling price would result in a 25% increase in monthly sales of
stoves. Prepare two contribution format income statements, one under present operating
conditions, and one as operations would appear after the proposed changes. Show both
total and per unit data on your statements. (Omit the "$" sign in your response.)

Present: 8,000 stoves Proposed: 50 (0%) stoves
Total Per Unit Total Per Unit
Sales $ 500000 (0%) $ 500 (0%) $ 50000 (0%) $ 50 (0%)
Variable
expenses
30000 (0%) 30 (0%) 3000 (0%) 30 (0%)
Contribution
margin
470000 (0%) $ 470 (0%) 470000 (0%) $ 470 (0%)
Fixed
expenses
5000 (0%) 5000 (0%)
Net
operating
income
$ 465000 (0%) $ 465000 (0%)

Requirement 3:
stoves. Prepare two contribution format income statements, one under present operating
conditions, and one as operations would appear after the proposed changes. Show both
total and per unit data on your statements. (Omit the "$" sign in your response.)

Present: 8,000 stoves Proposed: 10,000 stoves
Total Per Unit Total Per Unit
Sales $ 400,000 $ 50 $ 450,000 $ 45

Variable expenses 256,000 32 320,000 32
Contribution margin 144,000 $ 18 130,000 $ 13
Fixed expenses 108,000 108,000
Net operating income $ 36,000 $ 22,000

Total grade: 0.01/17 + 0.01/17 + 0.01/17 + 0.01/17 + 0.01/17 + 0.01/17 + 0.01/17 + 0.01/17 + 0.01/17 + 0.01/17 + 0.01/17 + 0.01/17 + 0.01/17 + 0.01/17 + 0.01/17 + 0.01/17 + 0.01/17 = 0% + 0% + 0% + 0% + 0% + 0%
+ 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0%
Feedback:

Proposed: 8,000 stoves 1.25 = 10,000 stoves
Sales: $50 0.9 = $45
As shown above, a 25% increase in volume is not enough to offset a 10% reduction in the
selling price; thus, net operating income decreases.

Requirement 4:
stoves. How many stoves would have to be sold at the new selling price to yield a
minimum net operating income of $35,000 per month?

Number of Stoves 50 (0%)
Requirement 4:
stoves. How many stoves would have to be sold at the new selling price to yield a
minimum net operating income of $35,000 per month?

Number of Stoves 11,000

Feedback:

$35,000 = ($45 $32) Q $108,000
$35,000 = ($13) Q $108,000
$13
Q
= $143,000
Q = $143,000 $13
Q = $11,000 stoves


Exercise 6-18 Multiproduct Break-Even Analysis [LO9]
Olongapo Sports Corporation is the distributor in the Philippines of two premium golf
ballsthe Flight Dynamic and the Sure Shot. Monthly sales, expressed in pesos (P), and
the contribution margin ratios for the two products follow:

Product

Flight
Dynamic Sure Shot Total
Sales P 150,000 P 250,000 P 400,000
CM ratio 80% 36% ?

Fixed expenses total P183,750 per month.

Requirement 1:
Prepare a contribution format income statement for the company as a whole. (Round your
percentage values to one decimal place, e.g., .1234 as 12.3. Omit the "P" and "%"
signs in your response.)

Flight Dynamic Sure Shot Total Company
Amount % Amount % Amount %
Sales P
500000 (0
%)
50 (0
%)
P
500000 (0
%)
50 (0
%)
P
1000000 (0
%)
50 (0
%)
Variable
expenses

250000 (0
%)
50 (0
%)

250000 (0
%)
50 (0
%)

500000 (0%
)
50 (0
%)
Contributio
n margin
P
250000 (0
%)
50 (0
%)
P
250000 (0
%)
50 (0
%)

500000 (0%
)
50 (0
%)
Fixed
expenses
5000 (0%)
Net
operating
income
P
450000 (0%
)

Exercise 6-18 Multiproduct Break-Even Analysis [LO9]
Olongapo Sports Corporation is the distributor in the Philippines of two premium golf
ballsthe Flight Dynamic and the Sure Shot. Monthly sales, expressed in pesos (P), and
the contribution margin ratios for the two products follow:

Product

Flight
Dynamic Sure Shot Total
Sales P 150,000 P 250,000 P 400,000
CM ratio 80% 36% ?

Fixed expenses total P183,750 per month.

Requirement 1:
Prepare a contribution format income statement for the company as a whole. (Round your
percentage values to one decimal place, e.g., .1234 as 12.3. Omit the "P" and "%"
signs in your response.)

Flight Dynamic Sure Shot Total Company
Amount % Amount % Amount %
Sales P 150,000 100 P 250,000 100 P 400,000 100
Variable expenses 30,000 20 160,000 64 190,000 47.5
Contribution margin P 120,000 80 P 90,000 36 210,000 52.5
Net operating income P 26,250

Total grade: 0.01/20 + 0.01/20 + 0.01/20 + 0.01/20 + 0.01/20 + 0.01/20 + 0.01/20 + 0.01/20 + 0.01/20 + 0.01/20 + 0.01/20 + 0.01/20 + 0.01/20 + 0.01/20 + 0.01/20 + 0.01/20 + 0.01/20 + 0.01/20 + 0.01/20 + 0.01/20 =
0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0%
Feedback:

Total contribution margin percentage: (P210,000 P400,000) = 52.5%.

Requirement 2:
Compute the break-even point for the company based on the current sales mix. (Round
your answer to the nearest peso amount. Omit the "P" sign in your response.)

Break-even point P 50 (0%)
Requirement 2:
Compute the break-even point for the company based on the current sales mix. (Round
your answer to the nearest peso amount. Omit the "P" sign in your response.)

Break-even point P 350,000

Feedback:

The break-even point for the company as a whole be:

Requirement 3:
If sales increase by P100,000 a month, by how much would you expect net operating
income to increase? (Round your answer to the nearest peso amount. Omit the "P"

Expected increase in net operating
income
P 500 (0%)

Requirement 3:
If sales increase by P100,000 a month, by how much would you expect net operating
income to increase? (Round your answer to the nearest peso amount. Omit the "P"

Expected increase in net operating income P 52,500

Feedback:

The additional contribution margin from the additional sales is computed as follows:
P100,000 52.5% CM ratio = P52,500
Assuming no change in fixed expenses, all of this additional contribution margin of
P52,500 should drop to the bottom line as increased net operating income.
This answer assumes no change in selling prices, variable costs per unit, fixed expense,
or sales mix.


Problem 6-19 Basics of CVP Analysis [LO1, LO3, LO4, LO6, LO8]
Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $20 per
unit. Variable costs are $8 per unit, and fixed costs total $180,000 per year.

Requirement 1:
What is the product's CM ratio? (Omit the "%" sign in your response.)

CM ratio 5 (0%) %
Problem 6-19 Basics of CVP Analysis [LO1, LO3, LO4, LO6, LO8]
Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $20 per
unit. Variable costs are $8 per unit, and fixed costs total $180,000 per year.

Requirement 1:
What is the product's CM ratio? (Omit the "%" sign in your response.)

CM ratio 60 %

Feedback:

Sales price $ 20 100 %

Requirement 2:
Use the CM ratio to determine the break-even point in sales dollars. (Omit the "$" sign in
your response.)

Break-even point in
sales
$ 50 (0%)

Requirement 2:
Use the CM ratio to determine the break-even point in sales dollars. (Omit the "$" sign in
your response.)

Break-even point in sales $ 300,000

Feedback:

Requirement 3:
Due to an increase in demand, the company estimates that sales will increase by $75,000
during the next year. By how much should net operating income increase (or net loss
decrease) assuming that fixed costs do not change? (Omit the "$" sign in your response.)

Increase in net operating income $ 5000 (0%)
Requirement 3:
Due to an increase in demand, the company estimates that sales will increase by $75,000
during the next year. By how much should net operating income increase (or net loss
decrease) assuming that fixed costs do not change? (Omit the "$" sign in your response.)

Increase in net operating income $ 45,000

Feedback:

$75,000 increased sales 0.60 CM ratio = $45,000 increased contribution margin. Because
the fixed costs will not change, net operating income should also increase by $45,000.

Requirement 4:
Assume that the operating results for last year were:

Sales $ 400,000

(a) Compute the degree of operating leverage at the current level of sales.

Degree of operating
leverage
50 (0%)

Requirement 4:
Assume that the operating results for last year were:

Sales $ 400,000

(a) Compute the degree of operating leverage at the current level of sales.

Degree of operating leverage 4

Feedback:

(b) The president expects sales to increase by 20% next year. By what percentage should
net operating income increase? (Omit the "%" sign in your response.)

Increase in net operating
income
5 (0%) %

(b) The president expects sales to increase by 20% next year. By what percentage should
net operating income increase? (Omit the "%" sign in your response.)

Increase in net operating income 80 %

Feedback:

4 20% = 80% increase in net operating income. In dollars, this increase would be 80%
$60,000 = $48,000.

Requirement 5:
Refer to the original data. Assume that the company sold 18,000 units last year. The sales
manager is convinced that a 10% reduction in the selling price, combined with a $30,000
increase in advertising, would cause annual sales in units to increase by one-third.

(a) Prepare two contribution format income statements, one showing the results of last
year's operations and one showing the results of operations if these changes are made.
Show both total and per unit data on your statements. (Omit the "$" sign in your
response.)

Last Year:
18,000 units
Proposed:
24,000 units
Amount Per Unit Amount Per Unit
Requirement 5:
Refer to the original data. Assume that the company sold 18,000 units last year. The sales
manager is convinced that a 10% reduction in the selling price, combined with a $30,000
increase in advertising, would cause annual sales in units to increase by one-third.

(a) Prepare two contribution format income statements, one showing the results of last
year's operations and one showing the results of operations if these changes are made.
Show both total and per unit data on your statements. (Omit the "$" sign in your
response.)

Last Year:
18,000 units
Proposed:
24,000 units
Amount Per Unit Amount Per Unit

Sales $ 500000 (0%) $ 50 (0%) $ 50000 (0%) $ 5 (0%)
Variable
expenses
200000 (0%) 20 (0%) 20000 (0%) 2 (0%)
Contribution
margin
300000 (0%) $ 30 (0%) 30000 (0%) $ 3 (0%)
Fixed expenses 50000 (0%) 5000 (0%)
Net operating
income
$ 295000 (0%) $ 25000 (0%)

Sales $ 360,000 $ 20 $ 432,000 $ 18
Variable expenses 144,000 8 192,000 8
Contribution margin 216,000 $ 12 240,000 $ 10
Fixed expenses 180,000 210,000
Net operating income $ 36,000 $ 30,000

Total grade: 0.01/16 + 0.01/16 + 0.01/16 + 0.01/16 + 0.01/16 + 0.01/16 + 0.01/16 + 0.01/16 + 0.01/16 + 0.01/16 + 0.01/16 + 0.01/16 + 0.01/16 + 0.01/16 + 0.01/16 + 0.01/16 = 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0%
+ 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0%
Feedback:

18,000 units + 6,000 units = 24,000
units
$20 0.9 = $18

(b) Would you recommend that the company do as the sales manager suggests?

Your Answer:
Choic
e
Selecte
d
Correc
t
Yes

No

Feedback: No, the changes should not be made.

Requirement 6:
Refer to the original data. Assume again that the company sold 18,000 units last year. The
president does not want to change the selling price. Instead, he wants to increase the sales
commission by $1 per unit. He thinks that this move, combined with some increase in
advertising, would increase annual sales by 25%. By how much could advertising be
increased with profits remaining unchanged? (Do not prepare an income statement; use
the incremental analysis approach. Omit the "$" sign in your response.)

The amount by which advertising can be
increased
$ 50000 (0%)

Requirement 6:
Refer to the original data. Assume again that the company sold 18,000 units last year. The
president does not want to change the selling price. Instead, he wants to increase the sales
commission by $1 per unit. He thinks that this move, combined with some increase in
advertising, would increase annual sales by 25%. By how much could advertising be
increased with profits remaining unchanged? (Do not prepare an income statement; use
the incremental analysis approach. Omit the "$" sign in your response.)

The amount by which advertising can be increased $ 31,500

Feedback:

Expected total contribution margin:
18,000 units 1.25 $11 per unit* $ 247,500
Present total contribution margin:
18,000 units $12 per unit 216,000
Incremental contribution margin, and the amount by which
advertising can be increased with net operating income $ 31,500

remaining unchanged

*$20 ($8 + $1) = $11

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