Management accounting week 5 solution PDF

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Lin Corporation has a single product whose selling price is $140 per unit and whose variable expense is $70 per unit. The company’s monthly fixed expense is $31,800. Required: 1. Calculate the unit sales needed to attain a target profit of $6,700. (Do not round intermediate calculations.) 2. Calculate the dollar sales needed to attain a target profit of $9,600. (Round your intermediate calculations to the nearest whole number.) Garrison 16e Rechecks 2017-09-08, 2017-10-23 rev: 10_21_2017_QC_CS-106269 Explanation 1. The equation method yields the required unit sales, Q, as follows:

Profit = Unit CM × Q − Fixed expenses $6,700 = ($140 − $70) × Q − $31,800 $6,700 = ($70) × Q − $31,800 $70 × Q = $6,700 + $31,800 Q = $38,500 ÷ $70 Q = 550 units 2. One approach to solving this requirement is to compute the unit sales required to attain the target profit and then multiply this quantity by the selling price per unit:

Profit=Unit CM × Q − Fixed expenses $9,600=($140 − $70) × Q − $31,800 $9,600=($70) × Q − $31,800 $70 × Q=$9,600 + $31,800 Q=$41,400 ÷ $70 Q=591 units

Unit sales to attain the target profit (a) 591 Selling price per unit (b) $ 140 Dollar sales to attain target profit (a) × $82,740

(b)

Molander Corporation is a distributor of a sun umbrella used at resort hotels. Data concerning the next month’s budget appear below: Selling price per unit $ 28 Variable expense per unit$ 13 Fixed expense per month $13,200 Unit sales per month 1,030

Required: 1. What is the company’s margin of safety? (Do not round intermediate calculations.) 2. What is the company’s margin of safety as a percentage of its sales? (Round your percentage answer to 2 decimal places (i.e. .1234 should be entered as 12.34).) rev: 07_07_2017_QC_CS-81676 Explanation 1. To compute the margin of safety, we must first compute the break-even unit sales.

Profit = Unit CM × Q − Fixed expenses $0 = ($28 − $13) × Q − $13,200 $0 = ($15) × Q − $13,200 $15Q = $13,200 Q = $13,200 ÷ $15 880 units; or, at $28 per unit, Q= $24,640

Sales (at the budgeted volume of 1,030 $28,840 units) Less break-even sales (at 880 units) 24,640 Margin of safety (in dollars) $ 4,200

2. The margin of safety as a percentage of sales is as follows:

Margin of safety (in dollars) (a) Sales (b) Margin of safety percentage (a) ÷ (b)

$ 4,200 $28,840 14.56%

Exercise 5-9 Compute and Use the Degree of Operating Leverage [LO5-8] Engberg Company installs lawn sod in home yards. The company’s most recent monthly contribution format income statement follows: Amount Sales $132,000 Variable expenses 52,800 Contribution 79,200 margin Fixed expenses 24,000 Net operating $ 55,200 income

Percent of Sales 100% 40% 60%

Required: 1. What is the company’s degree of operating leverage? 2. Using the degree of operating leverage, estimate the impact on net operating income of a 21% increase in sales. 3. Construct a new contribution format income statement for the company assuming a 21% increase in sales. Garrison 16e Rechecks 2017-09-08, 2017-09-19, 2017-09-21, 2018-08-07 Garrison 16e Rechecks 2018-07-27 Garrison 16e Rechecks 2019-08-29

Explanation 1. The company’s degree of operating leverage would be computed as follows:

Contribution margin (a) $79,200 Net operating income (b) $55,200 Degree of operating leverage (a) ÷ 1.43 (b)

2. A 21% increase in sales should result in a 30.03% increase in net operating income, computed as follows:

Degree of operating leverage (a) 1.43 Percent increase in sales (b) 21% Estimated percent increase in net operating income (a) × 30.03% (b)

3. The new income statement reflecting the change in sales is:

Net operating income reflecting change in sales $71,832 Original net operating income (a) 55,200 Change in net operating income (b) $16,632 Percent change in net operating income (b) ÷ (a) 30.13%

Exercise 5-11 Missing Data; Basic CVP Concepts [LO51, LO5-9] Fill in the missing amounts in each of the eight case situations below. Each case is independent of the others. (Hint: One way to find the missing amounts would be to prepare a contribution format income statement for each case, enter the known data, and then compute the missing items.) Required: a. Assume that only one product is being sold in each of the four following case situations: b. Assume that more than one product is being sold in each of the four following case situations: (For all requirements, Loss amounts should be indicated by a minus sign.) Explanation a.

Number of units sold Sales Variable expenses Contribution margin Fixed expenses Net operating income (loss)

Number of units sold Sales Variable expenses Contribution margin Fixed expenses Net operating income (loss)

Case #1 8,600* $240,800* 146,200* 94,600 99,000* $(4,400)

Case #3 20,300*

Case #2 14,100 $28 17 $11

$408,900* 197,400 211,500 166,000* $ 45,500*

Case #4 4,300*

$487,200 284,200* 203,000 83,000

$24 $ 137,600* 14 77,400 $10 * 60,200 79,000*

$120,000*

$(18,800)*

$32 18 $14

$29 14 $15*

b.

Sales Variable expenses Contribution margin Fixed expenses Net operating income (loss)

Sales Variable expenses Contribution margin Fixed expenses Net operating income (loss)

Case #1 $447,000* 100% 277,140 62% 169,860 38%*

Case #2 $190,000* 100% 115,900* 61% 74,100 39%

119,000

68,000*

$ 50,860*

$

Case #3 $695,000 100% 159,850 23% 535,150 77%*

Case #4 $296,000* 100% 82,880* 28% 213,120 72%

471,000* $ 64,150*

6,100

215,000 $(1,880)*

*Given

Exercise 5-12 Multiproduct Break-Even Analysis [LO59] Olongapo Sports Corporation distributes two premium golf balls—Flight Dynamic and Sure Shot. Monthly sales and the contribution margin ratios for the two products follow:

Sales CM ratio

Product Sure Flight Dynamic Shot $680,000 $320,000 69% 74%

Total $1,000,000 ?

Fixed expenses total $561,500 per month. Required:

1. Prepare a contribution format income statement for the company as a whole. 2. What is the company's break-even point in dollar sales based on the current sales mix? 3. If sales increase by $40,000 a month, by how much would you expect the monthly net operating income to increase? Garrison 16e Rechecks 2018-07-27 Explanation 1. Total contribution margin percentage: ($706,000 ÷ $1,000,000) = 70.60%.

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

Dollar sales to break = even =

Fixed expenses Overall CM ratio $561,500 0.7060

= $795,326

3. The additional contribution margin from the additional sales is computed as follows: $40,000 × 70.60% CM ratio = $28,240

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Exercise 5-18 Break-Even and Target Profit Analysis; Margin of Safety; CM Ratio [LO5-1, LO5-3, LO5-5, LO56, LO5-7]

Menlo Company distributes a single product. The company’s sales and expenses for last month follow:

Total Sales Variable expenses Contribution margin

$616,000 431,200 184,800

Fixed expenses Net operating income

153,600 $ 31,200

Per Unit $40 28 $12

Required: 1. What is the monthly break-even point in unit sales and in dollar sales? 2. Without resorting to computations, what is the total contribution margin at the break-even point? 3-a. How many units would have to be sold each month to attain a target profit of $68,400? 3-b. Verify your answer by preparing a contribution format income statement at the target sales level. 4. Refer to the original data. Compute the company's margin of safety in both dollar and percentage terms. 5. What is the company’s CM ratio? If sales increase by $50,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase? Garrison 16e Rechecks 2017-08-02, 2018-07-27 Explanation 1.

Profit = Unit CM × Q − Fixed expenses $0 = ($40 − $28) × Q − $153,600 $0 = ($12) × Q − $153,600 $12Q = $153,600 Q = $153,600 ÷ $12 per unit Q = 12,800 units, or at $40 per unit, $512,000

2.

The contribution margin is $153,600 because the contribution margin is equal to the fixed expenses at the break-even point.

3-a. The unit sales to attain the target profit is computed as follows:

Unit sold to attain target = profit =

Target profit + Fixed expenses Unit contribution margin $68,400 + $153,600 = 18,500 units $12

3-b. Sales (18,500 units × $40 per unit) = $740,000 Variable expenses (18,500 units × $28 per unit) = $518,000

4. Margin of safety in dollar terms:

Margin of safety in dollars = Total sales − Break even sales = $616,000 − $512,000 = $104,000 Margin of safety in percentage terms:

Margin of safety percentage =

=

Margin of safety in dollars Total sales $104,000 $616,000

= 16.88%

5. The CM ratio is 30% [ = ($40 − $28) ÷ $40].

Expected total contribution margin: ($666,000 × 30%)$199,800 Present total contribution margin: ($616,000 × 30%) 184,800 Increased contribution margin $ 15,000

Northwood Company manufactures basketballs. The company has a ball that sells for $25. At present, the ball is manufactured in a small plant that relies heavily on direct labor workers. Thus, variable expenses are high, totaling $15.00 per ball, of which 60% is direct labor cost. Last year, the company sold 36,000 of these balls, with the following results: Sales (36,000 balls) Variable expenses Contribution margin Fixed expenses Net operating income

$900,000 540,000 360,000 263,000 $ 97,000

Required: 1. Compute (a) last year's CM ratio and the break-even point in balls, and (b) the degree of operating leverage at last year’s sales level. 2. Due to an increase in labor rates, the company estimates that next year's variable expenses will increase by $3.00 per ball. If this change takes place and the selling price per ball remains constant at $25.00, what will be next year's CM ratio and the break-even point in balls? 3. Refer to the data in (2) above. If the expected change in variable expenses takes place, how many balls will have to be sold next year to earn the same net operating income, $97,000, as last year? 4. Refer again to the data in (2) above. The president feels that the company must raise the selling price of its basketballs. If Northwood Company wants to maintain the same CM ratio as last year (as computed in requirement 1a), what selling price per ball must it charge next year to cover the increased labor costs?

5. Refer to the original data. The company is discussing the construction of a new, automated manufacturing plant. The new plant would slash variable expenses per ball by 40.00%, but it would cause fixed expenses per year to double. If the new plant is built, what would be the company’s new CM ratio and new break-even point in balls? 6. Refer to the data in (5) above. a. If the new plant is built, how many balls will have to be sold next year to earn the same net operating income, $97,000, as last year? b. Assume the new plant is built and that next year the company manufactures and sells 36,000 balls (the same number as sold last year). Prepare a contribution format income statement and compute the degree of operating leverage. Garrison 16e Rechecks 2017-05-02, 2017-08-02, 2017-09-13, 2017-09-19, 2017-09-21 rev: 09_27_2017_QC_CS-102710, 10_02_2017_QC_CS-103110, 10_20_2017_QC_CS-105195, 02_08_2018_QC_CS-117411 Garrison 16e Rechecks 2018-09-04 Garrison 16e Rechecks 2019-09-24 Explanation 1. a.

Selling price Variable expenses Contribution margin

Profit = $0 = $10.00Q = Q= Q=

$ 25.00 15.00

100 % 60.00 %

$ 10.00

40.00 %

Unit CM × Q – Fixed expenses $10.00 × Q − $263,000 $263,000 $263,000 ÷ $10.00 26,300 balls

1. b. The degree of operating leverage is:

Degree of operating leverage

=

=

Contribution margin Net operating income

$360,000 $97,000

= 3.71 (rounded)

2. The new CM ratio will be:

Selling price $ 25.00 Variable expenses 18.00 Contribution margin $ 7.00

100 % 72.00 % 28.00 %

The new break-even point will be:

Profit $0 $7.00Q Q Q

= = = = =

Unit CM × Q – Fixed expenses $7.00 × Q – $263,000 $263,000 $263,000 ÷ $7.00 37,571 balls

Profit = $97,000 = $7.00Q = Q= Q=

Unit CM × Q – Fixed expenses $7.00 × Q – $263,000 $97,000 + $263,000 $360,000 ÷ $7.00 51,429 balls (rounded)

3.

4. The contribution margin ratio last year was 40.00%. If we let P equal the new selling price, then:

= $18.00 + 0.4000P 0.6000P = $18.00 = $18.00 ÷ P 0.6000 P = $30.00 P

To verify:

Selling price Variable expense Contribution margin

$30.00 100 % 18.00 60.00 % $12.00 40.00 %

Therefore, to maintain a 40.00% CM ratio, a $3.00 increase in variable costs would require a $5.00 increase in the selling price.

5. The new CM ratio would be:

Selling price $25.00 100 % Variable expenses 9.00* 36.00 % Contribution margin $16.00 64.00 % *$15.00 – ($15.00 × 40.00%) = $9.00

The new break-even point would be:

Profit = $0 = $16.00Q = Q= Q=

Unit CM × Q – Fixed expenses $16.00 × Q − ($263,000 × 2) $526,000 $526,000 ÷ $16.00 32,875 balls

6. a.

Profit = $97,000 = $16.00Q = Q= Q=

Unit CM × Q – Fixed expenses $16.00 × Q − $526,000 $97,000 + $526,000 $623,000 ÷ $16.00 38,938 balls

b. Sales: (36,000 balls × $25 per ball) = $900,000 Variable expenses: (36,000 balls × $9.00 per ball) = $324,000

Degree of operating leverage

=

=

Contribution margin Net operating income

$576,000 $50,000

= 11.52

Problem 5-22 CVP Applications; Contribution Margin Ratio; Break-Even Analysis; Cost Structure [LO5-1, LO5-3, LO5-4, LO5-5, LO5-6] Due to erratic sales of its sole product—a high-capacity battery for laptop computers—PEM, Inc., has been experiencing financial difficulty for some time. The company’s contribution format income statement for the most recent month is given below: Sales (13,000 units × $20 per unit) Variable expenses Contribution margin Fixed expenses Net operating loss

$260,000 156,000 104,000 116,000 $(12,000)

Required: 1. Compute the company’s CM ratio and its break-even point in unit sales and dollar sales. 2. The president believes that a $6,300 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an $82,000 increase in monthly sales. If the president is right, what will be the increase (decrease) in the company’s monthly net operating income? 3. Refer to the original data. The sales manager is convinced that a 10% reduction in the selling price, combined with an increase of $33,000 in the monthly advertising budget, will double unit sales. If the sales manager is right, what will be the revised net operating income (loss)? 4. Refer to the original data. The Marketing Department thinks that a fancy new package for the laptop computer battery would grow sales. The new package would increase packaging costs by $0.70 per unit. Assuming no other changes, how many units would have to be sold each month to attain a target profit of $4,800? 5. Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $50,000 each month. a. Compute the new CM ratio and the new break-even point in unit sales and dollar sales. b. Assume that the company expects to sell 20,600 units next month. Prepare two contribution format income statements, one assuming that operations are not automated and one assuming that they are. (Show data on a per unit and percentage basis, as well as in total, for each alternative.) c. Would you recommend that the company automate its operations (Assuming that the company expects to sell 20,600)? Garrison 16e Rechecks 2017-05-02, 2017-08-02, 2017-09-12, 2017-09-19, 2017-09-21, 2017-10-23, 2017-10-25 rev: 09_14_2017_QC_CS-98910 Garrison 16e Rechecks 2018-07-28, 2018-09-04 rev: 07_30_2019_QC_CS-174099 Garrison 16e Rechecks 2019-09-24 Explanation 1. The CM ratio is 40%.

Total Sales (13,000 $260,000 units) Variable expenses 156,000 Contribution margin $104,000

Per Unit

Percent of Sales

$20.00

100%

12.00 $ 8.00

60% 40%

The break-even point is:

Profit = $0 = $0 = $8Q = Q= Q=

Unit CM × Q – Fixed expenses ($20 − $12) × Q − $116,000 ($8) × Q − $116,000 $116,000 $116,000 ÷ $8 14,500 units

14,500 units × $20 per unit = $290,000 in sales

2.

Incremental contribution margin: $82,000 increased sales × 0.40 CM ratio Less increased advertising cost Increase in monthly net operating income

$ 32,800 6,300 $ 26,500

Since the company is now showing a loss of $12,000 per month, if the changes are adopted, the loss will turn into a profit of $14,500 each month ($26,500 − $12,000 = $14,500).

3.

Sales (26,000 units @ $18.00 per unit*)

$ 468,000

Variable expenses (26,000 units @ $12 per unit)

$ 312,000

Contribution margin

156,000

Fixed expenses ($116,000 + $33,000)

149,000

Net operating income

$

7,000

*$20.00 − ($20.00 × 0.10) = $18.00

4.

Profit $4,800 $4,800 $7.30Q Q Q

= Unit CM × Q – Fixed expenses = ($20.00 − $12.70*) × Q − $116,000 = ($7.30) × Q − $116,000 = $120,800 = $120,800 ÷ $7.30 = 16,548 units

*$12.00 + $0.70 = $12.70.

5. a. The new CM ratio would be:

Per Unit Sales $20.00 Variable expenses 9.00 Contribution $11.00 margin

Percent of Sales 100 % 45 % 55 %

The new break-even point would be:

Unit sales to break even

=

Fixed expenses Unit contribution margin

=

$116,000 + $50,000 $11.00

= 15,091 units

Dollar sales to break = even

=

Fixed expenses CM ratio

$116,000 + $50,000 0.55

= $301,818

c. Whether or not the company should automate its operations depends on how much risk the company is willing to take and on prospects for future sales. The proposed changes would increase the company’s fixed costs and its break-even point. However, the changes would also increase the company’s CM ratio (from 0.40 to 0.55). The higher CM ratio means that once the break-even point is reached, profits will increase more rapidly than at present. If 20,600 units are sold next month, for example, the higher CM ratio will generate $11,800 (= $60,600 – $48,800) more in profits than if no changes are made.

The greatest risk of automating is that future sales may drop back down to present levels (only 13,000 units per month), and as a result, losses will be even larger than at present due to the company’s greater fixed costs. (Note the problem states that sales are erratic from month to month.) In sum, the proposed changes will help the company if sales continue to trend upward in future months; the changes will hurt the company if sal...