Exercise 4.

19
1. Contribution margin ratio
= ($570,000 - $388,000)/$570,000
= 0.3193
Break-even sales dollars
= Total fixed cost/contribution margin ratio
= $54,600/0.3193
= $171,000

Exercise 4.19
2.
Head-First Company
Contribution Margin Income Statement
At Break-Even Sales Dollars

Total
Sales..................................................................... $171,000
Total variable expense ($170,999 0.6807)........... 116,400
Total contribution margin...................................... $ 54,600
Total fixed expense................................................... 54,600
Operating income........................................................... $ 0

Exercise 4.27
1. Contribution margin ratio
= Contribution margin/Sales
= $18,000/$90,000 = 0.20, or 20%
Variable cost ratio = $72,000/$90,000
= 0.80, or 80%
OR Variable cost ratio = 1 Contribution margin
ratio = 1.00 0.20 = 0.80
2. Break-even revenue = Fixed cost/contribution
margin ratio = $6,900/0.2 = $34,500

Exercise 4.28
1.

Break-even units
= ($231,650 + $315,390)($6.28 $3.65)- = 208,000

2.

Expected sales in units...................................... 380,000

Break-even units............................................. (208,000)
Margin of safety (in units)................................. 172,000

3.

Expected sales revenue ($6.28 380,000) $2,386,400

Break-even sales revenue*............................ 1,306,240
Margin of safety (in dollars)......................... $1,080,160

*Break-even revenue = Price Break-even units = $6.28 208,000 units

Exercise 4.29
1. Break-even units = ($131,650 + $18,350)/($2.45 $1.65)
= $150,000/$0.8 = 187,500
2. Unit variable cost includes all variable costs on a
unit basis:
Direct materials.............................................. $0.27
Direct labor...................................................... 0.58
Variable overhead............................................ 0.63
Variable selling................................................. 0.17
Unit variable cost........................................... $1.65

Exercise 4.38

Exercise 4.29 (contd)

Unit variable manufacturing cost includes the variable costs
of production on a unit basis:
Direct materials..................................................... $0.27
Direct labor............................................................. 0.58
Variable overhead................................................... 0.63
Unit variable manufacturing cost.......................... $1.48
Unit variable cost is used in CVP because it includes all
variable costs, not just manufacturing costs.
3. Units to earn $12,600
= ($131,650 + $18,350 + $12,600)/($2.45 - $1.65)
= 203,250
4. Sales revenue to earn $12,600
= 203,250 $2.45 = $497,962.50

Exercise 4.38 (contd)

Exercise 4.39

Exercise 4.39 (contd)

Problem 4.40

Problem 4.41

1. Break-even units
= Fixed cost/(Price - Unit variable cost)
= $96,000($10 - $5) = 19,200 units
2. Break-even units
= ($96,000 - $13,500)/($10 - $5)
= 16,500 units
3. The reduction in fixed costs reduces the break-even
point because less con-tribution margin is needed to
cover the new, lower fixed costs. Operating in-come
goes up, and the margin of safety also goes up.

Problem 4.41 (contd)

Problem 4.42
1. Sales mix:
Squares: $300,000/$30 = 10,000 units
Circles: $2,500,000/$50 = 50,000 units

* $100,000/10,000 = $10; $500,000/50,000 = $10

Break-even packages = $1,628,000/$220 = 7,400 packages

Break-even squares = 7,400 1 = 7,400
Break-even circles = 7,400 5 = 37,000

Problem 4.42 (contd)

Problem 4.42 (contd)

3.
Increase in contribution margin for squares (25,000 $20)... $ 500,000
Decrease in contribution margin for circles (5,000 $40)....... (200,000)
Increase in total contribution margin...................................... $ 300,000
Less: Additional fixed expenses................................................. 245,000
Increase in income.................................................................... $ 55,000

2.

* $100,000/10,000 = $10; $500,000/50,000 = $10

Break-even packages = $1,628,000/$260 = 6,262 packages

Break-even squares = 6,262 3 = 19,786
Break-even circles = 6,262 5 = 31,310

Gosnell would gain $55,000 by increasing advertising for the squares.

This is a good strategy.

Problem 4.44
1. Contribution margin ratio
= $302,616/$560,400 = 0.54, or 54%
2. Revenue = $150,000/0.54 = $277,778
3. $560,400 110% = $616,440
$257,784 110% = 283,562
$332,878
Contribution Margin Ratio = $332,878/$616,440 =
0.54. The contribution margin ratio remains at
0.54.

Problem 4.44 (contd)

5. Present contribution margin........................ $302,616
Projected contribution margin*.................. 326,604
Increase in contribution margin/profit...... $ 23,988
*($560,400 + $80,000) 0.51 = $326,604
Operating leverage will decrease because the
increase in variable costs (the sales commission)
causes a decrease in the contribution margin.
Doerhing should pay the commission because
profit would increase by $23,988.

Problem 4.44 (contd)

4. Additional variable expense:
= $560,400 0.03 = $16,812
New contribution margin
= $302,616 $16,812 = $285,804
New contribution margin ratio
= $285,804/$560,400 = 0.51
Break-even point = $150,000/0.51 = $294,118
The effect is to increase the break-even point.

Problem 4.45

Problem 4.45 (contd)

Problem 4.46

Problem 4.46 (contd)

Problem 4.46 (contd)

Problem 4.47

Problem 4.47 (contd)

Problem 4.47 (contd)

Problem 4.50

Problem 4.50 (contd)