Module 15—Class Exercises
Contribution Income Statement and Basic Analyses. Wegotit Company produces a product that is sold for
$42 per unit. The company produced and sold 6,000 units during May 2012. There were no beginning or ending
inventories. Variable and fixed costs follow.
Required
a. Prepare a contribution income statement for May.
Revenues
Variable Costs
Contribution Margin
Fixed Costs
Income before taxes
6,000 x $42
b. Breakeven in units
BE = FC/(SP-VCU) =
c. Required volume to earn $85,000 before taxes.
RV=(FC+DP)/(SP-VCU) =
$252,000
Contribution Margin Concepts (LO3, 4)
The following information is taken from the 2012 records of Solid, Inc.
Required
a. Determine the annual break-even dollar sales volume.
CM% = CM/Sales = __________/$750,000 =
BE$ = FC/CM% = $210,000 /______ =
b. Determine the current margin of safety in dollars.
Determine the current margin of safety ratio:
(Sales – BE$)/Sales =
d. What is the annual break-even dollar sales volume if management makes a decision that increases fixed costs
by $35,000 and reduces variable costs by 10%?
Comprehensive Profit Planning
Chandler Manufacturing Company produces a product that it sells for $35 per unit. Last year, the company
manufactured and sold 20,000 units to obtain an after-tax profit of $54,000. Variable and fixed costs follow.
Required
a. Break-even volume in units. FC/(SP-VCU) =
b. Contribution margin income statement:
Revenues
20,000 x $35
Variable Costs
Contribution Margin
Fixed Costs
Income before taxes
Income tax
After-tax profit
$700,000
$54,000
c. Operating leverage. CM/IBT =
d. Margin of safety = _____ units $_____________
Margin of safety ratio: (S-BE)/S =
e. Determine the tax rate the company paid last year.
f. What unit sales volume is required to provide an after-tax profit of $90,000?
DP = after tax profit / (`100%-Tax Rate) = $90,000 / (1-_____) =
RV = (FC+DP)/(SP-VCU) =
g. If the company reduces the unit variable cost by $2.50 and increases fixed manufacturing costs by $20,000,
what unit sales volume is required to provide an after-tax profit of $90,000?
P15-36. Multiple-Product Profitability Analysis (LO3, 4) Hearth Manufacturing Company produces two
models of wood-burning stoves, Cozy Kitchen and All-House. Presented is sales information for the year 2012.
Required
a. Determine the current break-even point in sales dollars.
b. With the current product mix and break-even point, determine the average unit contribution margin and unit
sales.
c. Sales representatives believe that the total sales will increase to 3,000 units, with the sales mix likely shifting
to 80 percent Cozy Kitchen and 20 percent All-House over the next few years. Evaluate the desirability of this
projection.