Managerial Accounting
Assignment – Model Answers
Exercise (01):
Bristol Company's contribution margin income statement is presented below. Sales
for the current period consisted of 7,500 units. Compute the company's break-even
point in (a) units, and (b) dollars. Compute the margin of safety in (c) dollars and (d)
percent.
Answer:
Per unit costs:
Sales price = $225,000/7,500 = $30
Variable cost = $135,000/7,500 = $18
Contribution margin ratio = ($30 - $18)/$30 = .40
(a) Break-even in units = $48,000/$12 = 4,000 units
(b) Break-even in dollars = $48,000/.40 = $120,000
(c) Margin of safety in dollars = $225,000 - $120,000 = $105,000
(d) Margin of safety in percent = $105,000/$225,000 = 46.7%
Exercise (02):
Narrows Co. is considering the production and sale of a new product line with the
following sales and cost data: unit sales price $125; unit variable costs $75; and total
fixed costs of $140,000. Calculate the break-even point:
(a) In units.
(b) In dollar sales.
Answer:
(a) Break-even point in units = $140,000/($125 - $75)= 2,800 units
(b) Contribution margin ratio = ($125 - $75)/$125 = 40%
Break-even point in sales dollars = $140,000/0.40 = $350,000
Exercise (03):
Kelley Company and Mason Company each have sales of $200,000 and costs of
$140,000. Kelley Company's costs consist of $40,000 fixed and $100,000 variable,
while Mason Company's costs consist of $100,000 fixed and $40,000 variable.
Which company will suffer the greatest decline in profits if sales volume declines
by 15%? Prepare income statements and compute degree of operating leverage to
assess.
Answer:
Since Mason's degree of operating leverage is higher, the decrease in sales will
have a larger impact on pretax income for Mason Company than it will for Kelley.
Exercise (04):
A company is looking into two alternative methods of producing its product. The
following information about the two alternatives is available. If the company's
expected sales volume is 35,000 units, which alternative should be selected? Prepare
forecasted income statements and compute degree of operating leverage to assess
the alternatives.
Answer:
Alternative 1 provides the higher income. In addition, it has a higher degree of
operating leverage. This means that for every 1% of increase in sales, income before
tax should increase by 2.3% for alternative 1, rather than 2% for alternative 2.
Therefore, alternative 1 should be selected.
Exercise (05):
Wilton Company is analyzing two alternative methods of producing its product. The
production manager indicates that variable costs can be reduced 40% by installing a
machine that automates production, but fixed costs would increase. Alternative 1
shows costs before installing the machine; Alternative 2 shows costs after the
machine is installed. (a) Compute the break-even point in units and dollars for both
alternatives. (b) Prepare a forecasted income statement for both alternatives
assuming that 30,000 units will be sold. The statements should report sales, total
variable costs, contribution margin, fixed costs, income before taxes, income taxes,
and net income. Below the income statement, compute the degree of operating
leverage. Which alternative would you recommend and why?
Answer: (a)
Alternative 1 break-even in units = $200,000/$20 = 10,000 units
Alternative 1 break-even in dollars - $200,000/($20/$40) = $400,000
Alternative 2 break-even in units = $274,400/($40-($20x.6)) = 9,800 units
Alternative 1 break-even in dollars - $274,400/($28/$40) = $392,000
(b)
Wilton Company should definitely go with Alternative 2. Break-even is lowered
which would give the company a greater margin of safety if sales volume did start
to decline. Net income is greatly improved using Alternative 2 at the current sales
level. Degree of operating leverage is basically the same.
Exercise (06):
Magee Windows manufactures two standard size windows, F and M, in the ratio of
5:3. F has a selling price of $150 and M has a selling price of $200. The variable
cost of F is $75.00 and the variable cost of M is $90.00. Fixed costs are $352,500.
Compute the (a) weighted average contribution margin, (b) break-even point in
units, (c) number of units of each product that will be sold at the break-even point.
Answer:
(a)
(b)$352,500/$88.125 = 4,000 units
(c) F = 4,000 x .625 = 2,500 units; M = 4,000 x. 375 = 1,500 units
Exercise (07):
Thomas Co. produces and sells Ultra, Super, and Mega, and has total fixed costs of
$52,000. Sales and cost data follow:
Required: Calculate the break-even point in composite units.
Answer:
Break-even point in composite units = $52,000/$13 = 4,000 composite units
Exercise (08):
A firm sells two different products, A and B. For each unit of B, the firm sells two
units of A. Total fixed costs for this firm are $1,260,000. Additional selling prices
and cost information for both products follow:
Required:
(a) Calculate the contribution margin per composite unit.
(b) Calculate the break-even point in units of each individual product.
(c) If pretax income before taxes of $294,000 is desired, how many units of A
and B must be sold?
Answer:
(a)
Exercise (09):
The sales mix of Palm Company is 5 units of A, 3 units of B, and 1 unit of C. Per
unit sales prices for each product are $30, $40, and $50, respectively. Variable costs
per unit are $14, $24, and $34, respectively. Fixed costs are $597,600. What is the
break-even point in composite units and in units of A, B, and C?
Answer:
Contribution margin of a composite unit = $320 - $176 = $144
Break-even point in composite units = $597,600/$144 = 4,150 composite units
4,150 x 5 = 20,750 units of A
4,150 x 3 = 12,450 units of B
4,150 x 1 = 4,150 units of C
Exercise (10):
Legacy Company is considering the production and sale of a new product with the
following sales and cost data: unit sales price $18; unit variable costs $8.10; and total
fixed costs of $8,250. Legacy is subject to a 25% tax rate. Determine the dollar sales
needed to generate an after-tax income of $33,000.
Answer:
Target pretax income = $33,000/(1 - .25) = $44,000
Target income tax expense = $44,000 - $33,000 = $11,000
Contribution margin ratio = ($18 - $8.10)/$18 = 55%
Targeted dollar sales = ($8,250 + $33,000 + $11,000)/0.55 = $95,000
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