Chapter 5 Homework - Solutions PDF

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Gianna DiGiovanni MW 12:30 Homework for Chapter 5 E5-5 Selling Price Variable Expenses Contribution Margin

Per Unit $90 $63 $27

Percent of Sales 100% 70% 30%

Fixed Expenses: $30,000/month Sales: 2,000/month 1. The marketing manager argues that a $5,000 increase in the monthly advertising budget would increase monthly sales by $9,000. Should the advertising budget be increased? Change in Net Operating Income Details Amount Expected total contribution margin $56,700 Less: Present total contribution margin $54,000 Increase in total contribution margin $2,700 Less: Increase in advertising expense $5,000 Decrease in net operating income ($2,300) The total net operating income decreased by $2,300 and the advertising budget should NOT be increased because the overall net operating income is decreased. 2. Refer to the original idea. Management is considering using higher-quality components that would increase the variable expense by $2/unit. The marketing manager believes that the higher-quality product would increase sales by 10% per month. Should the higher-quality components be used? Details Present 2,000 Expected 2,200 Difference Total /unit Total /unit Sales 180,000 90 198,000 90 18,000 Less: V. Expense 126,000 63 143,000 65 17,000 Contribution Margin 54,000 27 55,000 25 1,000 The total contribution margin increased by $1,000 and the higher-quality components are to be used because the total contribution margin is increased. E5-6 Woven Basket: $15 Variable Expenses: $12/unit Fixed Expenses: $4,200 1. Solve for the break-even point in unit sales using the equation method. Profit = (Price/Unit-Variable Expense/Unit) * Sales Unit – Fixed Cost 0 = (15-12) Sales Unit – 4,200 Break-Even = 1,400 units 2. Solve for the break-even point in dollar sales using the equation method and the CM ratio. Profit = (Price/Unit-Variable Expense/Unit)/Price/Unit * Sales Value – Fixed Cost 0 = (15-12)/15 * Sales Value – 4,200 Break-Even = $21,000 3. Solve for the break-even point in unit sales using the formula method.

Gianna DiGiovanni MW 12:30 Break-Even Sales Unit = Fixed Cost / (Price/Unit – Variable Cost/Unit) Break-Even Sales Unit = 4,200 / (15-12) Brea-Even Sales = 1,400 4. Solve for the break-even point in dollar sales using the formula method and the CM ratio. Break-Even Sales Value = Fixed Cost / (Price/Unit – Variable Cost/Unit)/Price/Unit Break-Even Sales Value = 4,200 / (15-12)/15 Break-Even Sales Value = $21,000 E5-7 Product: $120 Variable Expense: $80/unit Fixed Expense: $50,000/month 1. Using the equation method, solve for the unit sales that are required to earn a target profit of $10,000. Profit = (Price/Unit – Variable Expense/Unit) * Quantity – Fixed Expense 10,000 = (120 – 80)Q – 50,000 Sales = 1,500 2. Using the formula method, solve for the unit sales that are required to earn a target profit of $15,000. Sales in Units = (Target Profit + Fixed Cost) / (Price/Unit – Variable Cost/Unit) Sales in Units = (15,000 + 50,000) / (120 – 80) Sales in Units = 1,625 P5-23 Product: $20 Variable Expense: $8/unit Fixed Expenses: $180,000/year 1. What the product’s CM ratio? Contribution Margin Ratio = (Selling Price/Unit – Variable Price/Unit)/Selling Price/Unit Contribution Margin Ratio = (20 – 8)/20 Contribution Margin Ratio = 60% 2. Use the CM ratio to determine the break-even point in dollar sales. Break-Even Sales in Dollars = Fixed Expense / Contribution Margin Ratio Break-Even Sales in Dollars = 180,000 / 60% Break-Even Sales in Dollars = $300,000 3. Due to an increase in demand, the company estimates that sales will increase by $75,000 during the next year. By how much should net operating income increase (or net loss decrease) assuming that fixed expenses do not change? Net Operating Income = (Increased Sales Value * Contribution Margin Ratio) Net Operating Income = 75,000 * 60% Net Operating Income = $45,000 4. Assume that the operating results for last year were: Sales 400,000 Variable Expenses 160,000 Contribution Margin 240,000

Gianna DiGiovanni MW 12:30 Fixed Expenses Net Operating Income

180,000 60,000

a. Compute the degree of operating leverage at the current level of sales. Degree of Operating Leverage = Contribution Margin / Net Operating Income Degree of Operating Leverage = 240,000 / 60,000 Degree of Operating Leverage = 4 times b. The president expects sales to increase by 20% next year. By what percentage should net operating income increase? Increase % of Operating Income = Degree of Operating Leverage * Increasing % of Sales Increase % of Operating Income = 4 times * 20% Increase % of Operating Income = 80% 5. Assume that the company sold 18,000 units last year. The sales manager is convinced that a 10% reduction in the sales price, combined with a $30,000 increase in advertising, would increase annual sales by 1/3rd. Prepare two contribution format income statements, one showing the results of last year’s operations and one showing the results of operations if these changes are made. Would you recommend that the company do as the sales manager suggests? Particulars

Last Yr Income Statement Units /Unit Total Selling Price 18,000 20 360,000 Less: Variable Ex. 18,000 8 144,000 Contribution Margin 18,000 12 216,000 Less: Fixed Ex. 180,000 Net Operating Inc. 36,000

Projected Income Statement Units /Unit Total 24,000 18 432,000 24,000 8 192,000 24,000 10 240,000 24,000 210,000 30,000

36,000 – 30,000 = 6,000 It is suggested to continue the operation without changes because the proposed changes would decrease the net operating income by $6,000. 6. Assume again that the company sold 18,000 units last year. The president does not want to change the sales price. Instead, he wants to increase the sales commission by $1 per unit. He thinks that this move, combined with some increase in advertising, would increase annual sales by 25%. By how much could advertising be increased with profits remaining unchanged? Do not prepare an income statement, use the incremental analysis approach. Increase Ad. Cost = (Sales Unit * (1+Increase % in Sales) * Sales Price – (Sales Unit*(Selling Price+1)) Increase Ad. Cost = (18,000 * (1.25) * 21 – (18,000 * (21 + 1) Increase Ad. Cost = $76,500 Increasing the Advertising Expense by $76,500 would maintain the same amount of profit...