Chapter 11 – Exercises
Exercise 7
a.
Variable Cost per Unit =
Difference in Total Costs
Difference in Production
=
$2,110,000 -- $1,535,000
70,000 units -- 45,000 units
=
$575,000
= $23 per unit
25,000 units
The fixed cost can be determined by subtracting the estimated total variable
cost from the total cost at either the highest or lowest level of production, as
follows:
Total Cost = (Variable Cost per Unit × Units of Production) + Fixed Cost
Highest level:
$2,110,000 = ($23 × 70,000 units) + Fixed Cost
$2,110,000 = $1,610,000 + Fixed Cost
$500,000 = Fixed Cost
Lowest level:
$1,535,000 = ($23 × 45,000 units) + Fixed Cost
$1,535,000 = $1,035,000 + Fixed Cost
$500,000 = Fixed Cost
b. Total Cost = (Variable Cost per Unit × Units of Production) + Fixed Cost
Total cost for 60,000 units:
Variable cost:
Units ..........................................
60,000
Variable cost per unit ...............
× $23
Total variable cost ....................
$1,380,000
Fixed cost .................................
500,000
Total cost ..................................
$1,880,000
Exercise 10
a.
Sales ......................................................................................................
Variable costs:
Food and packaging .......................................................................
Payroll ..............................................................................................
General, selling, and administrative expenses (80% × $2,394) ...
Total variable costs ...................................................................
Contribution margin .............................................................................
b.
Contribution Margin Ratio =
=
c.
$ 27,006
$ 6,167
4,606
1,915
$ 12,688
$ 14,318
Sales  Variable Costs
Sales
$14,318
= 53.0%
$27,006
Same-store sales increase............................................
Contribution margin ratio [from part (b)] .....................
Increase in income from operations ............................
$800,000,000
×
53.0%
$424,000,000
Note: Part (c) emphasizes “same-store sales” because of the assumption of no
change in fixed costs. McDonald’s will also increase sales from opening new
stores. However, the impact on income from operations for these additional sales
would need to include an increase in fixed costs in the calculation.
Chapter 11 – Problems
Problem 1
Fixed
Cost
Variable Mixed
Cost CostCost
a.
X
b.
c.
X
X
d.
X
e.
X
f.
X
g.
X
h.
X
i.
X
j.
X
k.
X
l.
X
m.
X
n.
X
o. X
p.
X
q.
X
r.
s.
t.
X
X
X
Problem 2
1.
Cost of goods sold ........................................
Selling expenses ...........................................
Administrative expenses ..............................
Total ................................................................
2.
a. $96.60 ($38,640,000 ÷ 400,000 units)
b. $150.00 ($246.60 – $96.60)
3.
Break-Even Sales (units) =
=
4.
Break-Even Sales (units) =
Fixed Costs
Variable Costs
$12,460,000
2,000,000
2,400,000
$ 16,860,000
$ 32,040,000
6,000,000
600,000
$ 38,640,000
Fixed Costs
Unit Contributio n Margin
$16,860,000
= 112,400 units
$150
Fixed Costs
Unit Contributio n Margin
$16,860,000 + $3,600,000
$150
$20,460,000
=
= 136,400 units
$150
=
5.
Sales (units) =
=
6.
7.
Fixed Costs + Target Profit
Unit Contribution Margin
$20,460,000 + $43,140,000
$63,600,000
=
= 424,000 units
$150
$150
Sales ($98,640,000 + $8,631,000)
Less: Fixed costs .....................................................
Variable costs (435,000* units × $96.60) ......
Income from operations ...........................................
*($8,631,000 ÷ $246.60) + 400,000
Present operating income........................................
Less additional fixed costs ......................................
Income from operations ...........................................
$ 107,271,000
$ 20,460,000
42,021,000
62,481,000
$ 44,790,000
$ 43,140,000
3,600,000
$ 39,540,000
Problem 2, Concluded
8.
In favor of the proposal is the possibility of increasing income from
operations by $1,650,000 from $43,140,000 to $44,790,000. However, there are
many points against the proposal, including:
a. The break-even point increases by 24,000 units (from 112,400 to 136,400).
b. The sales necessary to maintain the current income from operations of
$43,140,000 would be 424,000 units, or $5,918,400 (24,000 units × $246.60)
in excess of 20Y5 sales.
c. If future sales remain at the 20Y5 level, the income from operations of
$43,140,000 will decline to $39,540,000.
The company should determine the sales potential if the additional product is
produced and then evaluate the advantages and the disadvantages
enumerated above, in light of these sales possibilities. Unless market
research strongly indicates that $5,918,400 to $8,631,000 of additional sales
can be made, the proposal should not be accepted.
Problem 5
(Overall product is labeled E.)
1.
Unit selling price of E [($400 × 80%) + ($800 × 20%)] ................
Unit variable cost of E [($240 × 80%) + ($480 × 20%)] ...............
Unit contribution margin of E ......................................................
Break-Even Sales (units) =
Fixed Costs
Unit Contribution Margin
=
$1,440,000
= 7,500 units
$192
2.
7,500 units of E × 80% = 6,000 units of kayaks
7,500 units of E × 20% = 1,500 units of canoes
3.
Unit selling price of E [($400 × 20%) + ($800 × 80%)] .................
Unit variable cost of E [($240 × 20%) + ($480 × 80%)] ................
Unit contribution margin of E .......................................................
Fixed Costs
Break-Even Sales (units) =
Unit Contribution Margin
=
$480
288
$192
$720
432
$ 288
$1,440,000
= 5,000 units
$288
4.
5,000 units of E × 20% = 1,000 units of kayaks
5,000 units of E × 80% = 4,000 units of canoes
5.
The overall enterprise break-even point decreased from 7,500 units to 5,000
units because the sales mix is weighted more toward the product with the
higher contribution margin per unit of product. Specifically, canoes have a
contribution margin of $320 per unit compared to a contribution margin of
only $160 per unit for kayaks. Thus, the overall break-even point decreases
when the sales mix changes from “80% kayaks and 20% canoes” to “20%
kayaks and 80% canoes.”
Problem 6
1.
ORGANIC HEALTH CARE PRODUCTS INC.
Estimated Income Statement
For the Year Ended December 31, 20Y8
Sales (400,000 × $25) .........................................
$ 10,000,000
Cost of goods sold:
Direct materials (400,000 × $8).....................
$3,200,000
Direct labor (400,000 × $3)............................
1,200,000
Factory overhead
[(400,000 × $1.50) + ($200,000)] .................
800,000
Cost of goods sold ..................................
5,200,000
Gross profit.........................................................
$ 4,800,000
Expenses:
Selling expenses:
Advertising ............................................... $ 1,450,000
Sales salaries and commissions............
833,0001
Travel ........................................................
340,000
Miscellaneous selling expense ..............
42,0002
Total selling expenses .......................
$2,665,000
Administrative expenses:
Office and officers’ salaries .................... $ 300,000
Supplies ...................................................
210,0003
Miscellaneous administrative expense
25,0004
Total administrative expenses ..........
535,000
Total expenses ..............................................
3,200,000
Income from operations ....................................
$ 1,600,000
1
$93,000 + (400,000 × $1.85) = $833,000
2$2,000
+ (400,000 × $0.10) = $42,000
3
$10,000 + (400,000 × $0.50) = $210,000
4
$5,000 + (400,000 × $0.05) = $25,000
Problem 6, Continued
2.
Contribution Margin Ratio =
Sales -- Variable Costs
Sales
Contribution Margin Ratio =
$10,000,000 -- (400,000 × $15)
$10,000,000
=
3.
Break-Even Sales (units) =
=
$4,000,000
= 40%
$10,000,000
Fixed Costs
Unit Contribution Margin
$2,400,000
= 240,000 units
$25 -- $15
Break-Even Sales (dollars) =
=
Fixed Costs
Contribution Margin Ratio
$2,400,000
= $6,000,000
40%
or
Break-Even Sales (dollars) = 240,000 units × $25 per unit = $6,000,000
Problem 6, Concluded
4.
$15,000,000
$12,500,000
$10,000,000
$9,900,000
Break-Even
Point
$7,500,000
Total
Operating
Profit
Sales
$6,000,000
$5,000,000
Total
$2,500,000
Costs
$2,400,000
Operating
Loss Area $0
0
5.
100,000
200,000
300,000
400,000
500,000
Margin of safety:
In dollars:
Expected sales (400,000 units × $25) ......................................
Break-even point (240,000 units × $25)...................................
Margin of safety ........................................................................
As a percentage of sales:
Margin of Safety =
=
6.
Sales -- Sales at Break-Even Point
Sales
$4,000,000
= 40%
$10,000,000
Operating Leverage =
=
Contribution Margin
Income from Operations
[400,000 units × ($25 -- $15)]
$4,000,000
=
= 2.5
$1,600,000
$1,600,000
$ 10,000,000
6,000,000
$ 4,000,000