Assignment 4 ACCT222 PDF

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Assignment 4 question & solution...

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Required information Foundational Exercises [LO1, LO3, LO4, LO5, LO6, LO7, LO8]

[The following information applies to the questions displayed below.] Oslo Company prepared the following contribution format income statement based on a sales volume of 1,000 units (the relevant range of production is 500 units to 1,500 units): Sales Variable expenses

$20,000 12,000

Contribution margin Fixed expenses

8,000 6,000

Net operating income

$ 2,000

Foundational 4-1 Required: 1. What is the contribution margin per unit? Explanation 1. The contribution margin per unit is calculated as follows:

Total contribution margin (a) Total units sold (b) Contribution margin per unit (a) ÷ (b)

$8,000 1,000

units

$ 8.00

per unit

Required information Foundational Exercises [LO1, LO3, LO4, LO5, LO6, LO7, LO8]

[The following information applies to the questions displayed below.]

Oslo Company prepared the following contribution format income statement based on a sales volume of 1,000 units (the relevant range of production is 500 units to 1,500 units): Sales Variable expenses Contribution margin Fixed expenses Net operating income

$20,000 12,000 8,000 6,000 $ 2,000

Foundational 4-2 2. What is the contribution margin ratio? Explanation 2. The contribution margin ratio is calculated as follows:

Total contribution margin (a) $ 8,000 Total sales (b) $20,000 Contribution margin ratio (a) ÷ (b) 40%

Required information Foundational Exercises [LO1, LO3, LO4, LO5, LO6, LO7, LO8]

[The following information applies to the questions displayed below.] Oslo Company prepared the following contribution format income statement based on a sales volume of 1,000 units (the relevant range of production is 500 units to 1,500 units): Sales

$20,000

Variable expenses

12,000

Contribution margin Fixed expenses

8,000 6,000

Net operating income

$ 2,000

Foundational 4-3 3. What is the variable expense ratio? Explanation 3. The variable expense ratio is calculated as follows:

Total variable expenses (a) Total sales (b) Variable expense ratio (a) ÷ (b)

$12,000 $20,000 60%

Required information Foundational Exercises [LO1, LO3, LO4, LO5, LO6, LO7, LO8]

[The following information applies to the questions displayed below.] Oslo Company prepared the following contribution format income statement based on a sales volume of 1,000 units (the relevant range of production is 500 units to 1,500 units): Sales Variable expenses Contribution margin Fixed expenses Net operating income

$20,000 12,000 8,000 6,000 $ 2,000

Foundational 4-4 4. If sales increase to 1,001 units, what would be the increase in net operating income? Explanation 4. The increase in net operating is calculated as follows:

Contribution margin per unit (a) Increase in unit sales (b) Increase in net operating income (a) × (b)

$8.00 1

per unit unit

$8.00

Required information Foundational Exercises [LO1, LO3, LO4, LO5, LO6, LO7, LO8]

[The following information applies to the questions displayed below.] Oslo Company prepared the following contribution format income statement based on a sales volume of 1,000 units (the relevant range of production is 500 units to 1,500 units): Sales Variable expenses Contribution margin Fixed expenses Net operating income

Foundational 4-5

$20,000 12,000 8,000 6,000 $ 2,000

5. If sales decline to 900 units, what would be the net operating income? Explanation 5. If sales decline to 900 units, the net operating would be computed as follows:

Sales (900 units) Variable expenses

Total

Per Unit

$

$

18,000 10,800

Contribution margin

7,200

Fixed expenses Net operating income

20.00 12.00

$

8.00

6,000 $

1,200

Required information Foundational Exercises [LO1, LO3, LO4, LO5, LO6, LO7, LO8]

[The following information applies to the questions displayed below.] Oslo Company prepared the following contribution format income statement based on a sales volume of 1,000 units (the relevant range of production is 500 units to 1,500 units): Sales Variable expenses Contribution margin Fixed expenses Net operating income

$20,000 12,000 8,000 6,000 $ 2,000

Foundational 4-6 6. If the selling price increases by $2 per unit and the sales volume decreases by 100 units, what would be the net operating income? Explanation 6. The new net operating income would be computed as follows:

Total Sales (900 units) Variable expenses

$

19,800

$

10,800

Contribution margin

9,000

Fixed expenses Net operating income

Per Unit 22.00 12.00

$

10.00

6,000 $

3,000

Required information Foundational Exercises [LO1, LO3, LO4, LO5, LO6, LO7, LO8]

[The following information applies to the questions displayed below.] Oslo Company prepared the following contribution format income statement based on a sales volume of 1,000 units (the relevant range of production is 500 units to 1,500 units): Sales Variable expenses Contribution margin Fixed expenses

$20,000 12,000 8,000 6,000

Net operating income

$ 2,000

Foundational 4-8 8. What is the break-even point in unit sales? Explanation 8. The equation method yields the break-even point in unit sales, Q, as follows:

Profit $0 $0 $8Q Q Q

= = = = = =

Unit CM × Q − Fixed expenses ($20 − $12) × Q − $6,000 ($8) × Q − $6,000 $6,000 $6,000 ÷ $8 750 units

Required information Foundational Exercises [LO1, LO3, LO4, LO5, LO6, LO7, LO8]

[The following information applies to the questions displayed below.] Oslo Company prepared the following contribution format income statement based on a sales volume of 1,000 units (the relevant range of production is 500 units to 1,500 units): Sales Variable expenses Contribution margin Fixed expenses Net operating income

Foundational 4-9

$20,000 12,000 8,000 6,000 $ 2,000

9. What is the break-even point in dollar sales? Explanation 9. The equation method yields the dollar sales to break-even as follows:

Profit $0 0.40 × Sales Sales Sales

= = = = =

CM ratio × Sales − Fixed expenses 0.40 × Sales − $6,000 $6,000 $6,000 ÷ 0.40 $15,000

Required information Foundational Exercises [LO1, LO3, LO4, LO5, LO6, LO7, LO8]

[The following information applies to the questions displayed below.] Oslo Company prepared the following contribution format income statement based on a sales volume of 1,000 units (the relevant range of production is 500 units to 1,500 units): Sales Variable expenses Contribution margin Fixed expenses Net operating income

$20,000 12,000 8,000 6,000 $ 2,000

Foundational 4-10 10. How many units must be sold to achieve a target profit of $5,000? Explanation 10. The equation method yields the target profit as follows:

Profit $5,000 $5,000 $8Q Q Q

= = = = = =

Unit CM × Q − Fixed expenses ($20 − $12) × Q − $6,000 ($8) × Q − $6,000 $11,000 $11,000 ÷ $8 1,375 units

Required information Foundational Exercises [LO1, LO3, LO4, LO5, LO6, LO7, LO8]

[The following information applies to the questions displayed below.] Oslo Company prepared the following contribution format income statement based on a sales volume of 1,000 units (the relevant range of production is 500 units to 1,500 units): Sales Variable expenses

$20,000 12,000

Contribution margin Fixed expenses Net operating income

8,000 6,000 $ 2,000

Foundational 4-11 11-a. What is the margin of safety in dollars 11-b. What is the margin of safety percentage? Explanation 11-a. The margin of safety in dollars is calculated as follows:

Sales Break-even sales (at 750 units)

$

20,000 15,000

Margin of safety (in dollars)

$

5,000

11-b. The margin of safety as a percentage of sales is calculated as follows:

Margin of safety (in dollars) (a) $ 5,000 Sales (b) $20,000 Margin of safety percentage (a) ÷ (b) 25%

Required information Foundational Exercises [LO1, LO3, LO4, LO5, LO6, LO7, LO8]

[The following information applies to the questions displayed below.] Oslo Company prepared the following contribution format income statement based on a sales volume of 1,000 units (the relevant range of production is 500 units to 1,500 units): Sales Variable expenses Contribution margin Fixed expenses Net operating income

Foundational 4-12 12. What is the degree of operating leverage?

Explanation 12.

$20,000 12,000 8,000 6,000 $ 2,000

The degree of operating leverage is calculated as follows:

Contribution margin (a) Net operating income (b) Degree of operating leverage (a) ÷ (b)

$8,000 $2,000 4.0

Required information Foundational Exercises [LO1, LO3, LO4, LO5, LO6, LO7, LO8]

[The following information applies to the questions displayed below.] Oslo Company prepared the following contribution format income statement based on a sales volume of 1,000 units (the relevant range of production is 500 units to 1,500 units): Sales Variable expenses Contribution margin Fixed expenses Net operating income

$20,000 12,000 8,000 6,000 $ 2,000

Foundational 4-13 13. Using the degree of operating leverage, what is the estimated percent increase in net operating income of a 5% increase in sales? Explanation 13. A 5% increase in sales should result in a 20% increase in net operating income, computed as follows:

Degree of operating leverage (a) Percent increase in sales (b) Percent increase in net operating income (a) × (b)

4.0 5% 20%

Problem 4-18 Basic Cost-Volume-Profit Analysis [LO1, LO3, LO4, LO5, LO8] Klein Company distributes a high-quality bird feeder that sells for $30 per unit. Variable costs are $12 per unit, and fixed costs total $270,000 annually. Required: Answer the following independent questions: 1. What is the product’s CM ratio?

2. Use the CM ratio to determine the break-even point in sales dollars. 3. The company estimates that sales will increase by $60,000 during the coming year due to increased demand. By how much should operating income increase? 4. Assume that the operating results for last year were as follows: Sales Variable expenses

$

Contribution margin Fixed expenses Operating income

600,000 240,000 360,000 270,000

$

90,000

a. Compute the degree of operating leverage at the current level of sales. b. The president expects sales to increase by 16% next year. By how much should operating income increase? 5-a. Refer to the original data. Assume that the company sold 23,000 units last year. The sales manager is convinced that a 12% reduction in the selling price, combined with a $40,000 increase in advertising expenditures, would cause annual sales in units to increase by 30%. Prepare two contribution format income statements, one showing the results of last year’s operations and one showing what the results of operations would be if these changes were made. (Round "Per Unit" answers to 2 decimal places.)

5-b. Would you recommend that the company do as the sales manager suggests?  Yes  No 6. Refer to the original data. Assume again that the company sold 23,000 units last year. The president feels that it would be unwise to change the selling price. Instead, he wants to increase the sales commission by $4 per unit. He thinks that this move, combined with some increase in advertising, would increase annual unit sales by 50%. By how much could advertising be increased with profits remaining unchanged? Do not prepare an income statement; use the incremental analysis approach. Explanation 1. The CM ratio is 60%:

Selling

$

30

100%

price Variable expenses Contributio n margin

$

12

40%

18

60%

2. Break-even point in total sales dollars

Fixed expenses = CM ratio $270,000 = 0.60

= $450,000 sales

3. $60,000 increased sales × 60% CM ratio = $36,000 increased contribution margin. Since fixed costs will not change, operating income should also increase by $36,000.

4. a. Contribution margin Degree of operating leverage

= Operating income $360,000 =

=4 $90,000

b. 4 × 16% = 64% increase in operating income. In dollars, this increase would be 64% × $90,000 = $57,600.

5-a. Proposed unit sales: 23,000 units × 1.3 = 29,900 units Sales: Per unit (Proposed ): $30 per unit × (1 – 0.12) = $26.40 per unit

5-b. No, the changes should not be made since operating income decreases.

6. Expected total contribution margin: 23,000 units × 150% × $14 per unit* Present total contribution margin: 23,000 units × $18 per unit

$

483,000 414,000

Incremental contribution margin, and the amount by which advertising can be increased with operating income remaining unchanged

$

69,000

*$30 – ($12 + $4) = $14

Problem 4-20 Sales Mix; Multi-Product BreakEven Analysis [LO9] Smithen Company, a wholesale distributor, has been operating for only a few months. The company sells three products—sinks, mirrors, and vanities. Budgeted sales by product and in total for the coming month are shown below based on planned unit sales as follows: Units

Percentage

Sinks Mirrors Vanitie

1,000 500

50% 25%

500

25%

Total

2,000

100%

s

Product

P erc ent age of tot al sal

Sinks 48%

Mirrors 20%

Vanities 32%

Total 10 % 0

es S ale s

24 0, $ 00 0

V ari abl e exp ens es

72 ,0 00

C ont rib uti on mar gin

16 8, $ 00 0

C ont rib uti on mar gin per uni t

$

16 8

10 % 0

10 0, $ 00 0

30%

80 ,0 00

70%

20 $ ,0 00

$ 40

10 % 0

16 0, $ 00 0

80%

88 ,0 00

20%

72 $ ,0 00

$

10 % 0

50 0, $ 00 0

10 % 0

55%

24 0, 00 0

48%

45%

26 0, 00 0

52%

14 4

F ixe d exp ens es

22 3, 60 0

O per ati ng inc ome

36 $ ,4 00

Fixed expenses Break-even point in sales dollars

=

Overall CM ratio

$223,600 =

= $430,000 0.52

Break-even point in unit sales: Total Fixed expenses

$223,600 =

Weighted-average CM per unit

= 1,720 units $130*

*($168 × 0.50) + ($40 × 0.25) + ($144 × 0.25)

Assume that actual sales for the month total $504,000 (2,100 units), with the CM ratio and per unit amounts the same as budgeted. Actual fixed expenses are the same as budgeted, $223,600. Actual sales by product are as follows: sinks, $126,000 (525 units); mirrors, $210,000 (1,050 units); and vanities, $168,000 (525 units). Required: 1. Prepare a contribution format income statement for the month based on actual sales data. (Round your percentage answers to the nearest whole number.)

2. Compute the break-even point in sales dollars for the month, based on the actual data. (Round your intermediate calculations to nearest whole percent. Round your final answer to the nearest whole dollar.)

3. Calculate the break-even point in unit sales for the month, based on the actual data. (Round your final answer to the nearest whole number.) Explanation 1. Contribution margin (Total): $205,000 ÷ $504,000 = 41% (rounded).

2. Break-even sales:

Total fixed expenses

$223,600 =

Contribution margin ratio

= $545,366 (rounded) 0.41

3. The break-even point in units for the company as a whole would be:

Products Sinks Mirrors Vanities

(1)

(2)

CM Per Unit $ 168 $ 40 $ 144

Sales Mix* 25% 50% 25%

Total

(3) (1) × (2) Weighted Average CM Per Unit $42 20 36 $98

*Sinks:

525 units ÷ 2,100 (525 + 1,050 + 525)

Mirrors:

1,050 units ÷ 2,100 (525 + 1,050 + 525)

Vanities:

525 units ÷ 2,100 (525 + 1,050 + 525)

Break-even units:

Total fixed expenses

$223,600 =

Weighted average CM per unit

= 2,282 units (rounded) $98...