Managerial Accounting Chapter 6 Homework

1.
award:
4 out of
4 points

Lindon Company is the exclusive distributor for an automotive product that sells for $40 per unit and has a CM
ratio of 38%. The company's fixed expenses are $197,600 per year. The company plans to sell 14,000 units this
year.
Requirement 1:
What are the variable expenses per unit? (Round your answer to 2 decimal places. Omit the "$" sign in your
response.)
Variable expenses $ 24.8

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 13,000 units

Break-even point in sales dollars $ 520,000
(b) What sales level in units and in sales dollars is required to earn an annual profit of $76,000? (Omit the "$" sign
in your response.)

Sales level in units 18,000 units

Sales level in dollars $ 720,000

(c) Assume that by using a more efficient shipper, the company is able to reduce its variable expenses by $4.0 per
unit. What is the company's new break-even point in units and sales dollars? (Round all your answers to the
nearest whole number. Do not round intermediate calculations. Omit the "$" sign in your response.)

New break-even point in units 10,292 units

New break-even point in sales dollars $ 411,667

Explanation:
(1):
Variable expenses: $40× (100% – 38%) = $24.80.

(2-a):

Selling price $40 100%

Variable expenses 25 62%
Contribution
$15 38%
margin

Profit = Unit CM × Q − Fixed expenses

$0 = $15.20 × Q − $197,600
$15.20Q = $197,600
Q = $197,600 ÷ $15.20
Q = 13,000 units
In sales dollars: 13,000 units × $40 per unit = $520,000

(2-b):
Profit = Unit CM × Q − Fixed expenses
$76,000 = $15.2 × Q − $197,600
$15.2Q = $76,000 + $197,600
$15.2Q = $273,600
Q = $273,600 ÷ $15.2
Q = 18,000 units

In sales dollars: 18,000 units × $40 per unit = $720,000

(2-c):
The company's new cost/revenue relation will be:

Selling price $40.00 100 %

Variable expenses
20.80 52 %
($24.8 – $4)
Contribution
$19.20 48 %
margin

Profit = Unit CM × Q − Fixed expenses

$0 = ($40 − $20.80) × Q − $197,600
$19.20Q = $197,600
Q = $197,600 ÷ $19.20 per unit
Q = 10,292 units

In sales dollars: 10,292 units × $40 per unit = $411,680

2.
award:
4 out of
4 points
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 $130
per unit. Variable expenses are $91 per stove, and fixed expenses associated with the stove total $171,600 per
month.
Requirement 1:
Compute the break-even point in number of stoves and in total sales dollars. (Omit the "$" sign in your
response.)

Number of stoves 4,400

Total sales $572,000

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.)
Higher

Requirement 3:
At present, the company is selling 18,000 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. (Input all amounts as positive values. Omit the "$" sign in
your response.)

Present: 18,000 stoves Proposed: 22,500 stoves

Total Per Unit Total Per Unit
Sales $2,340,000 $130 $2,632,500 $117
Variable expenses 1,638,000 91 2,047,500 91
Contribution margin 702,000 $39 585,000 $26
Fixed expenses 171,600 171,600
Net operating income $530,400 $413,400

Requirement 4:
At present, the company is selling 18,000 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. How many stoves would have to be sold
at the new selling price to yield a minimum net operating income of $80,000 per month? (Round your answer to
the nearest whole number.)

Number of Stoves 9,677

Explanation:
(1):

Profit =Unit CM × Q − Fixed expenses

$0 =($130 − $91) × Q − $171,600
$0 =($39) × Q − $171,600
$39 Q =$171,600
Q =$171,600 ÷ $39
Q =4,400 stoves or at $130 per stove, $572,000 in sales

(2):
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.

(3):
Proposed: 18,000 stoves × 1.25 = 22,500 stoves
Sales: $130 per stove × 0.9 = $117
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.

(4):
 Profit = Unit CM × Q − Fixed expenses
$80,000 = ($117 − $91) × Q − $171,600
$80,000 = ($26) × Q − $171,600
$26 × Q = $251,600
Q = $251,600 ÷$26
Q = 9,677 stoves

3.
award:
4 out of
4 points
Exercise 6-18 Multiproduct Break-Even Analysis [LO9]

Olongapo Sports Corporation is the distributor in the Philippines of two premium golf balls—the 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 710,000 P 290,000 P 1,000,000
CM ratio 60% 77% ?

Fixed expenses total P575,000 per month.

Requirement 1:
Prepare a contribution format income statement for the company as a whole. (Round your percentage values to 2
decimal places, e.g., .1234 as 12.34. Input all amounts as positive values. Omit the "P" and "%" signs in your
response.)

Flight Dynamic Sure Shot Total Company

Amount % Amount % Amount %
Sales P710,000 100 P290,000 100 P1,000,000 100
Variable
284,000 40.00 66,700 23.00 350,700 35.07
expenses
Contribution
P426,000 60.00 P223,300 77.00 649,300 64.93
margin
Fixed expenses 575,000
Net operating
P74,300
income

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

Break-even point P885,569

Requirement 3:
If sales increase by P54,000 a month, by how much would you expect net operating income to increase? (Round
your answer to the nearest dollar amount. Omit the "P" sign in your response.)

Expected increase in net operating income P35,062

Explanation:
(1):
Total contribution margin percentage: (P649,300 ÷ P1,000,000) = 64.93%.

(2):
The break-even point for the company as a whole is:

Missing! Wouldn’t Paste

(3):
The additional contribution margin from the additional sales is computed as follows:
P54,000 × 64.93% CM ratio = P35,062
Assuming no change in fixed expenses, all of this additional contribution margin of P35,062 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.

4.
award:
4 out of
4 points

The Fashion Shoe Company operates a chain of women's shoe shops around the country. The shops carry many
styles of shoes that are all sold at the same price. Sales personnel in the shops are paid a substantial commission on
each pair of shoes sold (in addition to a small basic salary) in order to encourage them to be aggressive in their sales
efforts.

The following table contains cost and revenue data for Shop 48 and is typical of the company's many outlets:

Per Pair
of Shoes
Selling price $33.00
Variable expenses:
Invoice cost $14.50
Sales commission 5.50
Total variable expenses $20.00

Annual
Fixed expenses:
Advertising $40,000
Rent 30,000
Salaries 105,500
Total fixed expenses $175,500
Requirement 1:
Calculate the annual break-even point in dollar sales and in unit sales for Shop 48. (Omit the "$" sign in your
response.)

Break-even point in unit sales 13,500 pairs

Break-even point in sales dollars $ 445,500

Requirement 2:
If 12,700 pairs of shoes are sold in a year, what would be Shop 48's net operating income or loss? (Net loss should
be indicated by a minus sign. Omit the "$" sign in your response.)

Net operating loss $ -10,400

Requirement 3:
The company is considering paying the store manager of Shop 48 an incentive commission of 80 cents per pair of
shoes (in addition to the salesperson's commission). If this change is made, what will be the new break-even point
in dollar sales and in unit sales? (Round your break-even point in unit sales value to the nearest whole number
and consider the same for calculating break-even point in sales dollars.Do not round intermediate
calculations. Omit the "$" sign in your response.)

Break-even point in unit sales 14,385 pairs

Break-even point in sales dollars $ 474,713

Requirement 4:
Refer to the original data. As an alternative to requirement (3) above, the company is considering paying the store
manager 60 cents commission on each pair of shoes sold in excess of the break-even point. If this change is made,
what will be the shop's net operating income or loss if 17,000 pairs of shoes are sold? (Net loss should be
indicated by a minus sign. Do not round intermediate calculations. Omit the "$" sign in your response.)
Net operating income $ 43,400
Requirement 5:
Refer to the original data. The company is considering eliminating sales commissions entirely in its shops and
increasing fixed salaries by $46,500 annually. If this change is made, what will be the new break-even point in
dollar sales and in unit sales for Shop 48? (Enter answers as whole numbers. Do not round intermediate
calculations. Omit the "$" sign in your response.)

Break-even point in unit sales 12,000 pairs

Break-even point in sales dollars $ 396,000
Explanation:
1.
Profit= [Unit CM × Q] − Fixed expenses
$0= [($33 − $20) × Q] − $175,500
$0= [($13.00) × Q] − $175,500
$13.00 Q= $175,500
Q= $175,500 ÷ $13.00
Q= 13,500 pairs

13,500 pairs × $33.00 per pair = $445,500 in sales

2.
The simplest approach is:

Break-even sales 13,500 pairs

Actual sales 12,700 pairs
Sales short of
800 pairs
break-even

800 pairs × $13.00 contribution margin per pair = $10,400 loss

3.
The variable expenses will now be 20.80 ($20.00 + $0.80) per pair, and the contribution margin will be $12.20
($33.00 − $20.80) per pair.
Profit= [Unit CM × Q] − Fixed expenses
$0= [($33.00 − $20.80) × Q] − $175,500
$0= [($12.20) × Q] − $175,500
$12.20Q= $175,500
Q= $175,500 ÷ $12.20
Q= 14,385 pairs (rounded)

14,385 pairs × $33.00 per pair = $474,705 in sales

4.
The simplest approach is:

Actual sales 17,000 pairs

Break-even sales 13,500 pairs
Excess over
3,500 pairs
break-even sales

3,500 pairs × $12.40 per pair* = $43,400

*$13.00 present contribution margin - $0.60 commission = $12.40 per pair

5.
The new variable expenses will be $14.50 per pair.

Profit= [Unit CM × Q] − Fixed expenses

$0= [($33.00 − $14.50) × Q] − $222,000

$0= [($18.50) × Q] − $222,000

$18.50Q= $222,000

Q= $222,000 ÷ $18.50

Q= 12,000 pairs

12,000 pairs × $33.00 per pair = $396,000 in sales

5.
award:
4 out of
4 points
Problem 6-23A Sales Mix; Break-Even Analysis; Margin of Safety [LO7, LO9]

Island Novelties, Inc., of Palau makes two products, Hawaiian Fantasy and Tahitian Joy. Present revenue, cost, and
sales data for the two products follow:

Hawaiian Tahitian
Fantasy Joy
Selling price per
$5.40 $8.10
unit
Variable expenses
$3.24 $1.62
per unit
Number of units
220 88
sold annually

Fixed expenses total $570 per year. The Republic of Palau uses the U.S. dollar as its currency.

Requirement 1:
Assuming the sales mix given above, do the following:

(a) Prepare a contribution format income statement showing both dollar and percent columns for each product and
for the company as a whole. (Round your dollar values to 2 decimal places. Input all amounts as positive
values. Omit the "$" and "%" signs in your response.)

Hawaiian Tahitian
Fantasy Joy Total

Amount % Amount % Amount %

Sales $1,188 100 $712.8 100 $1,900.8 10

Variable expenses 712.8 60 142.56 20 855.36 4

Contribution
$475.2 40 $570.24 80 1,045.44 5
margin

Fixed expenses 570

Net operating
$475.44
income

(b) Compute the break-even point in dollars for the company as a whole and the margin of safety in both dollars and
percent. (Round your answers to 2 decimal places. Omit the "$" and "%" signs in your response.)

Break-even point in dollars $ 1,036.36

Margin of safety $ 864.44

Margin of safety percentage 45.48 %

Requirement 2:

The company has developed a new product to be called Samoan Delight. Assume that the company could sell 44
units at $10.80 each. The variable expenses would be $8.10 each. The company's fixed expenses would not change.

(a) Prepare another contribution format income statement, including sales of the Samoan Delight (sales of the other
two products would not change). (Round your dollar values to 2 decimal places. Input all amounts as
positive values. Omit the "$" and "%" signs in your response.)
 Hawaiian Tahitian Samoan
Fantasy Joy Delight Total
Amount % Amount % Amount % Amount
Sales $1,188 100 $712.8 100 $475.2 100 $2,376
Variable
expenses 712.8 60 142.56 20 356.4 75 1,211.76
Contribution
$475.2 40 $570.24 80 $118.8 25 1,164.24
margin
Fixed expenses 570
Net operating
$594.24
income

(b) Compute the company's new break-even point in dollars and the new margin of safety in both dollars and
percent. (Round your answers to 2 decimal places. Omit the "$" and "%" signs in your response.)

Break-even point in dollars $ 1,163.27

Margin of safety $ 1,212.73
Margin of safety percentage 51.04 %

Explanation:
1:
Dollar sales to Fixed expenses $570
= = = $1,036.36
break even CM ratio 0.55

Margin of safety = Actual sales – Break-even sales

= $1,900.8 – $1,036.36 = $864.44

Margin of safety Margin of safety in dollars
=
percentage Actual sales
$864.44
= = 45.48%
$1,900.8

2:
Dollar sales to Fixed expenses $570
= = = $1,163.27
break even CM ratio 0.49

Margin of safety = Actual sales – Break-even sales

= $2,376 – $1,163.27 = $1,212.73

Margin of safety Margin of safety in dollars
=
percentage Actual sales
$1,212.73
= = 51.04%
$2,376