Topic 06 HW Solution PDF

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22747 – AUTUMN 2011 SOLUTION TO HOMEWORK QUESTIONS FROM TOPIC 6 MCQ6-1

Solution: B

MCQ6-2

Solution: A

MCQ6-3

Solution: B

MCQ6-4

Solution: C

AQ6-1 (i) Sales ($40 x 80,000) Variable Costs: Manufacturing/product cost ($2,260,000 - $500,000) Operating expenses ($4 x 80,000) Contribution margin Fixed Cost: Manufacturing/product costs Operating expenses ($620,000 $320,000) Profit before taxes Less tax at 30% Profit after taxes

3,200,000

1,760,000 320,000 2,080,000 1,120,000 500,000 300,000 800,000 320,000 96,000 224,000

(ii) Break-even volume Total fixed costs 800,000 Unit variable cost ($2,080,000/80,000) 26 Unit contribution margin ($1,120,000/80,000) 14 Break-even volume ($800,000/$14) 57,143

(iii) Sales = FC + UVC*Q + PBT 70,000*P = 800,000 + 26*70,000 + (0.12*70,000*P )/0.7 70,000*P = 800,000 + 1,820,000 + 12,000*P 58,000*P = 2,620,000 p = 45.18

(iv) Sales = FC + UVC*Q + PBT 43*Q = 800,000 + 26*Q + 0.08*(8000,000 + 26*Q)/0.7 43*Q = 800,000 + 26*Q + 91,429 + 2.9714*Q 14.0286*Q = 891,429 Q = 63,544 (v) Sales = FC + UVC*Q + PBT (70,000*42) + (15,000*p) = 800,000 + (70,000*26) + (15,000*26) + 0.1*(70,000*42 + 15,000*p)/0.7 2,940,000 + 15,000*p = 800,000 + 1,820,000 + 390,000 + 420,000 + 2,142.857*p 12,857.143*p = 490,000 P= 38.11 (vi) Incremental Sale Price per unit Less Variable cost per unit Incremental Profit per unit Additional sales units Pre-tax loss incurred

$25.00 26.00 -1.00 15,000 -$15,000

AQ 6-2 a) Sales (2008) Less: variable costs Contribution margin Less: fixed costs Profit before taxes Less: tax (40%) Profit after taxes

$500,000 $275,000 $225,000 $135,000 $90,000 $36,000 $54,000

b) Break even (in units): Total fixed costs UCM ($25 - $13.75) Break-even units

135,000 11.25 12,000

c) Sales (2009) Less: variable costs (22,000 x $13.75) Contribution margin Less fixed costs: Total fixed costs 2008 Additional Selling Expense Profit before taxes Less taxes (40%) Profit after taxes

$550,000 $302,500 $247,500 $135,000 $11,250 $146,250 $101,250 $40,500 $60,750

d) Break even (in $) CM ratio = (25 - 13.75)/25 Total fixed costs + advertising Break-even (in $)

0.45 $146,250 $325,000

e) Sales = 25*Q = 11.25*Q = Q= Sales level in $ = =

FC + UVC*Q + PBT 146250 + 13.75*Q + 54,000/0.6 236250 21,000 21,000*$25 $525,000

f) 22,000*$25 = $135,000 + advertising + $13.75*22,000 + $60,000/0.6 $550,000 = $537,500 + advertising advertising = $12,500

Case 16-1 Question 1 Total fixed costs (TFC) = fixed costs per unit times normal volume = ($660 + $770)*3,000 = $4,290,000. Contribution margin per unit = unit price minus unit variable costs = $4,350 - $2,070 = $2,280.

Break  even volume 

$4,290,000  1,882 units $2,280

 $4,350 - 2,070  Break  even sales  $4,290,000/   $8,185,461 $4,350   (actually, 1,882 *$4,350 = $8,186,700)

Question 2 Recommendation: Lowering prices reduces income. Other factors, such as the reduction of available capacity and the capacity and the impact on market share, could also affect the decision. Impact: Price................................................. Quantity ........................................... Revenue ........................................... Variable mfg. costs ......................... Variable mktg. costs........................ Contribution margin ..................... Fixed mfg. costs .............................. Fixed mktg. costs ............................ Income........................................

Before Price Reduction $ 4,350 3,000 $13,050,000 ( 5,385,000) (825,000) 6,840,000 (1,980,000) (2,310,000) $ 2,550,000

After Price Reduction $ 3,850 3,500 $13,475,000 (6,282,500) (962,500) 6,230,000 (1,980,000) (2,310,000) $ 1,940,000

Difference $ (500) 500 $ 425,000 (897,500) (137,500) (610,000) --$(610,000)

Note that the differential contribution margin and differential income are the same....