# CHAPTER 8

Cost-Volume-Profit Analysis
8-1

a. In the contribution-margin approach, the break-even point in units is calculated
using the following formula:
Break-even point =

fixed expenses
unit contribution margin

b. In the equation approach, the following profit equation is used:
sales volume ⎞ ⎛ unit variable
sales volume ⎞
⎛ unit
fixed
⎜⎜
⎟⎟ − ⎜⎜
⎟⎟ −
×
×
= 0
in units ⎠ ⎝ expense
in units ⎠ expenses
⎝ sales price

This equation is solved for the sales volume in units.
c. In the graphical approach, sales revenue and total expenses are graphed. The
break-even point occurs at the intersection of the total revenue and total expense
lines.
8-2

The term unit contribution margin refers to the contribution that each unit of sales
makes toward covering fixed expenses and earning a profit. The unit contribution
margin is defined as the sales price minus the unit variable expense.

8-3

In addition to the break-even point, a CVP graph shows the impact on total expenses,
total revenue, and profit when sales volume changes. The graph shows the sales
volume required to earn a particular target net profit. The firm's profit and loss areas
are also indicated on a CVP graph.

8-4

The safety margin is the amount by which budgeted sales revenue exceeds breakeven sales revenue.

8-5

An increase in the fixed expenses of any enterprise will increase its break-even
point. In a travel agency, more clients must be served before the fixed expenses are
covered by the agency's service fees.

8-6

A decrease in the variable expense per pound of oysters results in an increase in the
contribution margin per pound. This will reduce the company's break-even sales
volume.

McGraw-Hill/Irwin
Managerial Accounting, 6/e

© 2005 The McGraw-Hill Companies, Inc.
8-1

8-7

The president is correct. A price increase results in a higher unit contribution
margin. An increase in the unit contribution margin causes the break-even point to
decline.
The financial vice president's reasoning is flawed. Even though the break-even
point will be lower, the price increase will not necessarily reduce the likelihood of a
loss. Customers will probably be less likely to buy the product at a higher price.
Thus, the firm may be less likely to meet the lower break-even point (at a high price)
than the higher break-even point (at a low price).

8-8

When the sales price and unit variable cost increase by the same amount, the unit
contribution margin remains unchanged. Therefore, the firm's break-even point
remains the same.

8-9

The fixed annual donation will offset some of the museum's fixed expenses. The
reduction in net fixed expenses will reduce the museum's break-even point.

8-10

A profit-volume graph shows the profit to be earned at each level of sales volume.

8-11

The most important assumptions of a cost-volume-profit analysis are as follows:
(a) The behavior of total revenue is linear (straight line) over the relevant range. This
behavior implies that the price of the product or service will not change as sales
volume varies within the relevant range.
(b) The behavior of total expenses is linear (straight line) over the relevant range.
This behavior implies the following more specific assumptions:
(1) Expenses can be categorized as fixed, variable, or semivariable.
(2) Efficiency and productivity are constant.
(c) In multiproduct organizations, the sales mix remains constant over the relevant
range.
(d) In manufacturing firms, the inventory levels at the beginning and end of the
period are the same.

8-12

Operating managers frequently prefer the contribution income statement because it
separates fixed and variable costs. This format makes cost-volume-profit

McGraw-Hill/Irwin
8-2

© 2005 The McGraw-Hill Companies, Inc.
Solutions Manual

8-13

The gross margin is defined as sales revenue minus all variable and fixed
manufacturing expenses. The total contribution margin is defined as sales revenue
minus all variable expenses, including manufacturing, selling, and administrative
expenses.

8-14

East Company, which is highly automated, will have a cost structure dominated by
fixed costs. West Company's cost structure will include a larger proportion of
variable costs than East Company's cost structure.
A firm's operating leverage factor, at a particular sales volume, is defined as its
total contribution margin divided by its net income. Since East Company has
proportionately higher fixed costs, it will have a proportionately higher total
contribution margin. Therefore, East Company's operating leverage factor will be
higher.

8-15

When sales volume increases, Company X will have a higher percentage increase in
profit than Company Y. Company X's higher proportion of fixed costs gives the firm
a higher operating leverage factor. The company's percentage increase in profit can
be found by multiplying the percentage increase in sales volume by the firm's
operating leverage factor.

8-16

The sales mix of a multiproduct organization is the relative proportion of sales of its
products.
The weighted-average unit contribution margin is the average of the unit
contribution margins for a firm's several products, with each product's contribution
margin weighted by the relative proportion of that product's sales.

8-17

The car rental agency's sales mix is the relative proportion of its rental business
associated with each of the three types of automobiles: subcompact, compact, and
full-size. In a multi-product CVP analysis, the sales mix is assumed to be constant
over the relevant range of activity.

8-18

Cost-volume-profit analysis shows the effect on profit of changes in expenses, sales
prices, and sales mix. A change in the hotel's room rate (price) will change the
hotel's unit contribution margin. This contribution-margin change will alter the
relationship between volume and profit.

McGraw-Hill/Irwin
Managerial Accounting, 6/e

© 2005 The McGraw-Hill Companies, Inc.
8-3

Contribution margin ..... However.....................400 1.......000 \$ 400 600 \$1... Company A Sales revenue: 350 units at \$10........000 \$ 400 8-21 The statement makes three assertions.............................. the low-price firm can afford to charge a lower price and still earn the same profit as the high-price company... Inc............... Cost-volume-profit analysis can be used to show the effect on profit when variable or fixed expenses change........ The effect on profit of changes in variable or fixed advertising expenses is one factor that management would consider in making a decision about advertising.. Thus the statement is false...........000 2.... Solutions Manual ... sales volumes.... Fixed expenses............. Costs that are fixed with respect to sales volume may not be fixed with respect to other important cost drivers............ 100 units at \$6....................... By spreading its fixed expense across a larger sales volume... An ABC system recognizes these nonvolume cost drivers........ 8-22 Activity-based costing (ABC) results in a richer description of an organization's cost behavior and CVP relationships...... for example... Cost-volume-profit analysis can be used to determine the profit that will be achieved at the budgeted sales volume.... and profits......... A CVP analysis also shows how profit will change if the sales volume deviates from budgeted sales...... that companies A and B have the following expenses................. Company B \$3. McGraw-Hill/Irwin 8-4 © 2005 The McGraw-Hill Companies......400 1................ Variable expenses: 350 units at \$6...8-19 Budgeting begins with a sales forecast................. Profit .... but only two of them are true...... Suppose.....................100 \$1............................ A company with an advanced manufacturing environment typically will have a larger proportion of fixed costs in its cost structure................... 100 units at \$20....................... sales prices..... 8-20 The low-price company must have a larger sales volume than the high-price company....... whereas a traditional costing system does not. This will result in a higher break-even point and greater operating leverage...... the firm's higher break-even point will result in a reduced safety margin..500 \$2..

000 \$4X = \$114. 3.SOLUTIONS TO EXERCISES EXERCISE 8-23 (20 MINUTES) 1.000 X = 28.500 pizzas McGraw-Hill/Irwin Managerial Accounting.000 = 13. 6/e © 2005 The McGraw-Hill Companies. 2.000 .4 \$10 Contribution-margin ratio Break-even point (in sales dollars) = fixed expenses contribution-margin ratio = \$54.000.000 = \$135. 4.500 pizzas \$10 − \$6 = unit contribution margin unit sales price = \$10 − \$6 = . Break-even point (in units) = fixed expenses unit contribution margin = \$54.4 Let X denote the sales volume of pizzas required to earn a target net profit of \$60.000 = \$60. Inc. \$10X – \$6X – \$54. 8-5 .

000 ÷ (2/3).........000 b\$31.000 80.000...... = \$25............250b 80.000 30........000 Fixed Expenses \$90... so fixed expenses must be equal to the contribution margin of \$30.......000 a 31...000d Net Income \$150.000 25......000 60...........000 Total Contribution Margin \$240....................000/......000 19.... sales revenue is \$320...000 \$20.000. where 2/3 is the contribution-margin ratio.000 180.... d\$160.. Fixed expenses........000 240.000 160........................ where .........000 320...........000 Variable Expenses \$120..... Variable expenses .000 44...250 = \$90.. Inc.......000 130....... variable expenses are 25 percent of sales revenue....... \$80.000 -0- Break-Even Sales Revenue \$135.................EXERCISE 8-24 (25 MINUTES) 1 2 3 4 Sales Revenue \$360....................000 and profit must be zero... When variable expenses amount to \$80..80 is the contribution-margin ratio... cBreak-even sales revenue ..000 55..000 60.......................000 Therefore. McGraw-Hill/Irwin 8-6 © 2005 The McGraw-Hill Companies.......000 11.....000 30.........80..........000 c 160.........000 Explanatory notes for selected items: a\$135.. Solutions Manual ....000 is the break-even sales revenue....

8-7 .000 Profit area Variable expense (at 30.000 20.EXERCISE 8-25 (25 MINUTES) 1. Cost-volume-profit graph: Dollars per year Total revenue \$600.000 \$300. Inc.000 5.000 year © 2005 The McGraw-Hill Companies.000 Annual fixed expenses \$100.000 Tickets sold per 30. 6/e 10.000 Loss area \$200.000 McGraw-Hill/Irwin Managerial Accounting.000 15.000 tickets \$500.000 tickets) • \$400.000 25.000 Total expenses Break-even point: 20.

..........000 Attendance per game The team must play 5 games to break even. Attendance rate ...........................EXERCISE 8-25 (CONTINUED) 2......even point (tickets) 20. Attendance per game.............000 = =5 4...... McGraw-Hill/Irwin 8-8 © 2005 The McGraw-Hill Companies..000 × 2/3 4.......................................... Inc........000 Break .. 6................. Solutions Manual .............. Stadium capacity...

000 15.000 10.000 Break-even point: 20.000) Annual fixed expenses \$(300. Profit-volume graph: Dollars per year \$300.000 tickets 0 \$(100.000 \$200.000 \$100.000) 5.EXERCISE 8-26 (25 MINUTES) 1.000 25. 6/e © 2005 The McGraw-Hill Companies. 8-9 . Inc.000 Profit area • 20.000) McGraw-Hill/Irwin Managerial Accounting.000) \$(360.000 Tickets sold per year Loss area \$(200.

..000)(.....................................................40)(\$12) – \$360..000P = \$408.........000)(.000 \$140................ \$540.....000 seats × .......... Break-even sales revenue (20.....40)P – (10)(6.............. Safety margin: Budgeted sales revenue (10 games × 6......000 400....................000 tickets × \$20)..............000 P = \$17 per ticket McGraw-Hill/Irwin 8-10 © 2005 The McGraw-Hill Companies........EXERCISE 8-26 (CONTINUED) 2.........................000 Let P denote the break-even ticket price.45 full × \$20) ......... Inc.............000 = 0 24........ Safety margin ........... assuming a 10-game season and 40 percent attendance: (10)(6....... Solutions Manual .. 3......

..................000.000p ) (1...............000p) ............ Net income ..................000p 1..........500p Sales revenue: (7..........000p 8.... Fixed costs.......200 components 500p 3. Break-even point (in units) = fixed costs unit contribution margin = 2..100.....200...........................000p 1...500............000p The price cut should not be made.400p 11....000p 2.........000..................000p 1............000p Fixed expenses ...............S................ 10......000p 1........500...... Contribution margin ....500.000....05) 1.........500p − 1..000.... New break-even point (in units) = 10......000p (8....000 × 1....000...............000 components 1..........400p − 1............. McGraw-Hill/Irwin Managerial Accounting.. Inc..... worth 1..................000 × 1.. dollars on the day this exercise was written..... New break-even point (in units) = (2.. since projected net income will decline by 300...500................500.................000p = 4. Analysis of price change decision: Price 1. 2.......000p Net income (loss)....500p) ..000p 2.. Variable costs: (7. Variable costs (7..............000........000p = 5...000p 7......500p) ..... 7. Sales revenue (7...003 U.... 3...500p − 1...............EXERCISE 8-27 (25 MINUTES) 1...............000p = 2.....000p.000... 4............................... 1.......000p p denotes Argentina’s peso.200..000 × 1..500.......000 × 1................ 8-11 .000p) .......200......000 p = 4... 6/e © 2005 The McGraw-Hill Companies..000. Contribution margin..000p (8.......000p 3.......................000p 3........000p) ........000............000 × 1..400p) ... 2............000 × 1....000p 2.......000 components 5.....

... Fixed selling....................................000 = = 4........... 20XX Sales ..............000 (b) Contribution income statement: PACIFIC RIM PUBLICATIONS.........000 Operating leverage factor (at \$1..............000 \$500............................000 \$75...........................000 565............................... Less: Cost of goods sold .......35 \$100......000 \$ 435...000 \$ 100...000..............................................................................000 \$ 250............. Less: Variable expenses: Variable manufacturing....000 150............... Administrative expenses .. Contribution margin.......000.... INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31.........................................000 \$ 100....................000 335........ (a) Traditional income statement: PACIFIC RIM PUBLICATIONS..... Net income ..... \$1..000 750...... Solutions Manual .................... Variable administrative ...........................000 75.....000 60...000 50.........EXERCISE 8-28 (25 MINUTES) 1..................... 20XX Sales .. Net income ............................................000 \$ 250... Gross margin ....................................... Fixed administrative.....................000 15.. 2............................... INC..... Inc....................000 contribution margin net income \$435................ Variable selling .................................. INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31............000...........000 sales level) = McGraw-Hill/Irwin 8-12 © 2005 The McGraw-Hill Companies... Less: Fixed expenses: Fixed manufacturing ............................ \$1.. Less: Operating expenses: Selling expenses ... INC.................................000 25.

Inc. ⎛ percentage increase ⎞ ⎛ operating ⎞ ⎟⎟ × ⎜⎜ ⎟⎟ Percentage increase in net income = ⎜⎜ ⎝ in sales revenue ⎠ ⎝ leverage factor ⎠ = 12% × 4.35 = 52. Most operating managers prefer the contribution income statement for answering this type of question. 8-13 . most airlines report a breakeven load factor of around 65 percent. The contribution format highlights the contribution margin and separates fixed and variable expenses. 6/e © 2005 The McGraw-Hill Companies. McGraw-Hill/Irwin Managerial Accounting. In a typical year.EXERCISE 8-28 (CONTINUED) 3. depending on the airline selected as well as the year of the inquiry. EXERCISE 8-29 (30 MINUTES) Answers will vary on this question.2% 4.

.......000 \$324...500 = = 450 bicycles \$330 Break .. Sales Price \$1...even point (in units) = Bicycle Type High-quality bicycles Medium-quality bicycles Total 5............70) © 2005 The McGraw-Hill Companies............................000 \$330 = 750 bicycles Sales volume required to earn target net income of \$99......... fixed expenses weighted .............. Weighted-average unit contribution margin 30% 70% = (\$400 × 30%) + (\$300 × 70%) = \$330 4................................................30) 315 (450 × .. Inc......000 Target net income: \$148.....500 + \$99............................................. Bicycle Type High-quality Medium-quality 2..000 600 Unit Variable Cost \$600 (\$550 + \$50) 300 (\$270 + \$30) Unit Contribution Margin \$400 300 Sales mix: High-quality bicycles......... Break-Even Sales Volume 135 (450 × ....... Medium-quality bicycles ...................... 3............. McGraw-Hill/Irwin 8-14 225 (750 × ..EXERCISE 8-30 (30 MINUTES) 1....................................70) Sales Price \$1..........000 600 Sales Revenue \$135. Solutions Manual ....30) 525 (750 × ...............000 = This means that the shop will need to sell the following volume of each type of bicycle to earn the target net income: High-quality.... Medium-quality .........................000 189........average unit contribution margin \$148.

........000 contribution margin net income \$600... often called a common-size income statement. Fixed expenses............500...........000 \$ 150.....000 Percent 100 60 40 30 10 2..EXERCISE 8-31 (25 MINUTES) 1..500................. provides a convenient way to show the cost structure....................... Decrease in Revenue \$300......................500........ 6/e © 2005 The McGraw-Hill Companies...000* × Contribution Margin Percentage 40%† Decrease in Net Income \$120............000 = =4 \$150.............000 3................000 = *\$300. Variable expenses .............000) = 4............000 × 20% †40% = \$600...... Operating leverage factor (at revenue of \$1...000 900. Revenue.000 = \$1......... 8-15 .......... Contribution margin ........ Inc....000/\$1.000 \$600.. Amount \$1...........500........... Percentage change in net income = ⎜⎜ ⎛ percentage increase ⎞ ⎛ operating leverage ⎞ ⎟⎟ ⎟⎟ × ⎜⎜ in revenue factor ⎝ ⎠ ⎝ ⎠ = 25% × 4 = 100% McGraw-Hill/Irwin Managerial Accounting.. The following income statement..000 450..... Net income .....

........000 Requirement (2) \$1..000 \$ (650..875. McGraw-Hill/Irwin 8-16 © 2005 The McGraw-Hill Companies... Solutions Manual .................... Less: Variable expenses . Contribution margin ..tax income = target after .000 \$ (300.... Requirement (1) \$1.000 \$200... Service revenue required to earn target after-tax income of \$120..........000 675... Net Income (loss).....000 \$ 75........000 1.............500..... At the breakeven point....EXERCISE 8-32 (10 MINUTES) Revenue.........25 fixed expenses + 3....000 = = \$200........000 1..000 \$ 750.125.. Less: Fixed expenses..............000 + 1 − .... Target before .....25 1.... Break ..........even volume of service revenue = 2.600...000 ..000 = .000) EXERCISE 8-33 (20 MINUTES) fixed expenses contribution margin ratio \$200............. A change in the tax rate will have no effect on the firm's break-even point...........tax net income 1 − tax rate \$120...tax net income (1 − t ) = contribution margin ratio \$120.. Inc....40 = \$1.000 4..000) 350..000 1 − .. the firm has no profit and does not have to pay any income taxes........40 target after .000 = = \$800.......800...........

Break-even point in sales dollars. using contribution-margin approach: fixed expenses + target net income unit contribution margin \$756.000 Break .890.margin ratio \$540.SOLUTIONS TO PROBLEMS PROBLEM 8-34 (30 MINUTES) 1.000 units Sales units required to earn income of \$540.000 \$1.000 = 3. Target net income. 6/e © 2005 The McGraw-Hill Companies. Inc. 8-17 .00 .296.000 + \$216.000 + \$540.36 \$30 = \$2.000 = = \$30 − \$12 − \$6 .000 \$756. New unit variable manufacturing cost = \$12 × 110% = \$13.100.even point = 2.000 = \$30.000 = = \$30 − \$12 − \$6 \$12 = 108.20 − \$6. using the contribution-margin ratio: fixed expenses contribution .000 \$756.even point = McGraw-Hill/Irwin Managerial Accounting.4 \$30 = \$1.20 Break-even point in sales dollars: \$756.00 − \$13.000 Break .

6P P = \$19.6 P = \$32.PROBLEM 8-34 (CONTINUED) 4.4P = P − \$19.00 = P \$30.00 − \$6.20 − \$6. Inc.00 \$30.00 = .20 − \$6.00 McGraw-Hill/Irwin 8-18 © 2005 The McGraw-Hill Companies.00 Check: New contribution-margin ratio is: \$32.20 \$19.20 = .4 \$32.00 − \$13.00 P − \$19.4 = P . Solutions Manual .20/. Let P denote the selling price that will yield the same contribution-margin ratio: P − \$13.20 .00 − \$12.

375.00 – \$8.even point (in sales dollars) = 3.000 = = \$3.80 Break-even point = McGraw-Hill/Irwin Managerial Accounting.000 units \$25.60 = \$4.000 = = 135.80 fixed costs new unit contribution margin \$702.80 \$25.250 units \$4.00 – \$1. Number of sales units required to earn target net profit 4. Break-even point if direct-labor costs increase by 10 percent: New unit contribution margin = \$25.00 fixed costs + target net profit unit contribution margin \$702.10) – \$6.000 + \$390.00)(1.80 1.000 \$25.80 = = (140. 8-19 .margin ratio \$702. Margin of safety = budgeted sales revenue – break-even sales revenue fixed cost contribution .00 − \$19.00 − \$19.000 = = 146. Break .00 − \$19.20 – (\$4. 6/e © 2005 The McGraw-Hill Companies.000 5. Break .000 = = 210.000 = \$125.PROBLEM 8-35 (30 MINUTES) fixed costs unit contribution margin \$702. Inc.000)(\$25) – \$3.000 units \$25.even point (in units) = 2.375.

00)(1.00 − \$19.10) − \$6.208 Old contribution-margin ratio = Let P denote sales price required to maintain a contribution-margin ratio of .792P = \$20.20 = .51 = . Then P is determined as follows: P − \$8.20 − (\$4.00 − \$1. Contribution margin ratio = unit contribution margin sales price \$25.10) − \$6.208P . Solutions Manual .00)(1.208 (rounded) = © 2005 The McGraw-Hill Companies.208 P P − \$20.20 P = \$25.51 − \$8.00 = .20 − (\$4.00 − \$1.51 (rounded) Check: McGraw-Hill/Irwin 8-20 New contributionmargin ratio \$25.PROBLEM 8-35 (CONTINUED) 6. Inc.60 = .80 \$25.60 \$25.208.

000 X = \$1.800.000 units Net income = (440.000 Volume of sales dollars required = McGraw-Hill/Irwin Managerial Accounting.800.000 = \$840.000 = \$2. Break-even point in units.000 = 0 \$6X = \$1.800.000 × 110% = 440.50 Volume of sales dollars required: fixed expenses + target net profit contribution . 8-21 . New projected sales volume = 400.640.0625 \$24 = \$38.400.800.000 – \$1. 6/e © 2005 The McGraw-Hill Companies.000 (from original problem data) New disk purchase price = \$15 × 130% = \$19.000 = = \$24 − \$19.800.800.000 = (440.000 units 2.000 + \$600.000)(\$6) – \$1.000 3. Inc. Target net income = \$600.000 \$6 = 300.50 − \$3 .margin ratio \$1.000 \$2.000)(\$24 – \$18) – \$1.400.800. using the equation approach: \$24X – (\$15 + \$3)X – \$1.PROBLEM 8-36 (30 MINUTES) 1.

50 = .50 = .PROBLEM 8-36 (CONTINUED) 4.50 − \$3 \$24 − \$15 − \$3 = P \$24 P − \$22.50 . Inc.75 P = \$30 Check: New contribution-margin ratio is: \$30 − \$22.25 \$30 McGraw-Hill/Irwin 8-22 © 2005 The McGraw-Hill Companies.25 = P .50/.25P = P − \$22. Solutions Manual .75P P = \$22. Let P denote the selling price that will yield the same contribution-margin ratio: P − \$19.50 \$22.

00………………….000 units x \$8.177. Model A is more profitable when sales and production average 184.000 ÷ 5 years) because of straight-line depreciation associated with the new equipment..000 ÷ 184.200 ÷ \$22.200 \$1.00 9.000 \$ 294.000 units).000 \$1.416.888.60 \$22.000 X = 160.400 1.200 + \$1.600 \$1.000 \$5. \$32.000 units.971.400 \$4. to \$2.200 \$2.200 \$2.40 Break-even point = fixed costs ÷ unit contribution margin = \$1..200 + \$180. Net income……………………………………… 3. Inc.40………………….227.800 Annual fixed costs will increase by \$180.407.00 Unit contribution margin……………….200 (\$2.150.912. Less variable costs: Sales commissions (\$5. Unit contribution margin: Sales price………………………………… Less variable costs: Sales commissions (\$32 x 5%)…… \$ 1.60X = \$256.000 x 5%)… System variable costs:…………………… 184.971. Thus: Required sales = (fixed costs + target net profit) ÷ unit contribution margin = (\$2. 184.227.000 2.00X + \$1.. Model A Model B \$5.00)…….PROBLEM 8-37 (30 MINUTES) 1.000 units x \$32.40 = 88..888.971.000).888. Sales revenue (184.000 units McGraw-Hill/Irwin Managerial Accounting.600 1..000 (\$900.40X + \$2.000 units 4. The unit contribution margin is \$24 (\$4..60 System variable costs……………… 8. Total variable costs………………………. Less: Annual fixed costs…………………….416..227.407. 8-23 . 6/e © 2005 The McGraw-Hill Companies.121.400 \$ 294. Contribution margin………………………….188.766.472.000 units 2.000 units x \$6.800) ÷ \$24 = 180. Let X = volume level at which annual total costs are equal \$8.200 = \$6.400 1.472.000 \$4.

..................000 72.....................000 \$ -0\$108..................................................... Decrease in fixed expenses (15%)... Decrease in operating income .......................000) Savings of fixed cost at Mall Store (75%) ............. \$ (32............. (14.................... Inc....................... \$(21............600) 18...................................... Promotional campaign: Increase in contribution margin (10%)............ we have: Decrease in contribution margin on other items (20%).................................... Less: variable expenses ..............400) 2.........................000* 180......000 is one half of the Mall Store's dollar sales for November 20x4.........000) \$(4......................... \$10.000 If the items sold at their variable cost are eliminated.....................200) Elimination of items sold at their variable cost: We can restate the November 20x4 data for the Mall Store as follows: Sales .............800 (15..................................000* \$180.......400) Total decrease in operating income................................................ Contribution margin .....................000 Loss of contribution margin at Downtown Store (10%) ..... Decrease in operating income ................... Mall Store Items Sold at Their Variable Cost Other Items \$180.......000 \$ (3...............600) *\$180............................................................ Increase in monthly promotional expenses (\$180........ McGraw-Hill/Irwin 8-24 © 2005 The McGraw-Hill Companies...... 90...............000/12).................... Closing of mall store: Loss of contribution margin at Mall Store ............. 3...... \$(108................................PROBLEM 8-38 (25 MINUTES) 1... Solutions Manual ...................................

. (c) 21..000 x 10%)... (a) Yes.................. 8-25 ..... McGraw-Hill/Irwin Managerial Accounting....... Total .500 45...... Sales mix refers to the relative proportion of each product sold when a company sells more than one product..000 60....500 units x \$43 ....678... Inc... Mister Ice Cream sales: 19....... Cold King... Total .......000 units (19.......... Commissions will total \$267. Sales personnel earn a commission based on gross dollar sales.................... (b) Yes... Cold King sales: 45..500 units x \$37 .. which compares favorably against current sales of 60.....000 39..... 2.....000 units...500 + 45.000 Sales Mix 30% 70% 100% Yes...... \$37).......... As the following figures show. Cold King sales will comprise a greater proportion of total sales under Plan A.500 1.000 © 2005 The McGraw-Hill Companies.500)..956...000......800 (\$2......PROBLEM 8-39 (40 MINUTES) 1... Current Units Mister Ice Cream.678. 6/e \$ 721...000 Sales Mix 35% 65% 100% Plan A Units 19....500 65....... Plan A sales are expected to total 65....500 \$2.... This is not surprising in light of the fact that Cold King has a higher selling price than Mister Ice Cream (\$43 vs.... which compares favorably against the current flat salaries of \$200.

......000 \$2........750 1.........000 200... (a) Plan A \$ 777.500 \$ 399..\$20..............\$32.500 \$2............. Cold King has a contribution margin of \$10....300 \$ 531. Cold King: 39.....267....... Total ......50.50). The company would be less profitable under the new plan.677.50.50...........700 \$1.. Cold King.................... Sales commissions (10% of sales revenue) ...000 units x \$20..... Cold King: 39..000 65..........750 267....... Net income ...... and Mister Ice Cream has a contribution margin of \$16............000 Plan B Sales Mix 30% 70% 100% Units 39..........500 1........ Less fixed cost (salaries)...... 45...............956.000 The total units sold under both plans are the same. Plan A Units Mister Ice Cream. 45.. 19............ Solutions Manual .500 units x \$43..............500 1...800 \$2...........500 units x \$20..........00 ..000 \$ 756........... Total variable cost ....000 \$ 721...................... Total revenue ...............................698...........50)...50 (\$43.....454......50...500 units x \$32................00 .......146....... 19..000 units x \$32.................000 units x \$37..... Contribution margin...........................500 65..................................000 26.... McGraw-Hill/Irwin 8-26 Current 19. however...............50 (\$37... Inc.......... Sales revenue: Mister Ice Cream: 21........000 units x \$43......................678..............................000 \$ 430.000 \$ 556..........700 ----___ \$ 531...........500 45.....500 units x \$37......000 Sales Mix 60% 40% 100% © 2005 The McGraw-Hill Companies..... the sales mix has shifted under Plan B in favor of the more profitable product as judged by the contribution margin...............PROBLEM 8-39 (CONTINUED) (d) No...478.000 1. 3. Less variable cost: Mister Ice Cream: 21....

..50................443....950 vs....................500 x 30%).................000 1..... Cold King: 39......................000 1...000 units x \$20.........................50 .... McGraw-Hill/Irwin Managerial Accounting......677...000)....... Less: Sales force compensation: Flat salaries ......... \$200.......... \$556.. 39....... 6/e Current Plan B \$ 777...............000 units x \$20.....000 units x \$43. Cold King: 39.............500 1.. Salespeople earn more money under this arrangement (\$274.......... Inc...000 units x \$37 ....000 \$ 556.........550 vs.................50 .........454....................000 \$ 799.....267.....000 units x \$37.........698..................... 26.000 units x \$32..000 \$1..000 274.......500 200... and the company is more profitable (\$641..000 \$1..... Total revenue...................500 \$1...000).........561................ 8-27 ..550 © 2005 The McGraw-Hill Companies..500 \$ 916......PROBLEM 8-39 (CONTINUED) (b) Plan B is more attractive both to the sales force and to the company......................... Less variable cost: Mister Ice Cream: 21.....000 units x \$32...............950 \$ 641. Contribution margin .000 \$ 756........................644.....118..........................000 units x \$43 .... Sales revenue: Mister Ice Cream: 21. Commissions (\$916............. 26..500 845.000 \$2...................... 39.. Total variable cost ..000 \$2..........000 \$ 430........... Net income..............50....

40 (\$96.000 units 3.416.000) ÷ 42.000 sets x \$96) 2.000 sets] and desires to increase income to \$576.000 Net income…………………………….000 units X = \$85.032.736.000 sets).000)..000 Fixed costs…………………….000 x 2).000 units X = \$2.000-unit break-even point.000 (b) As the following calculations show. If operations are shifted to Mexico..50 McGraw-Hill/Irwin 8-28 © 2005 The McGraw-Hill Companies. Let X = unit contribution margin \$2. In addition.000 .00 .000 CompTronics has a contribution margin of \$72 [(\$4. (a) CompTronics desires to have a 32. Current income: Sales revenue………………………. or \$4.000 3.000 (\$288.008. Thus: Required sales = (fixed costs + target net profit) ÷ unit contribution margin = (\$2. Given the current variable cost of \$24.032.\$72.50) is needed. Solutions Manual .00 . 2.000 (\$2.380. Less: Variable costs………………… \$1.008.736.000 (46.00 .736.000 \$2.50 per unit (\$24. as follows: Let X = fixed costs X ÷ \$72 = 32.40 = 32. Based on an \$96.304.\$10. a decrease of \$13. Thus: Break-even point = fixed costs ÷ unit contribution margin = \$2.000 sets.50 per unit.00 selling price.PROBLEM 8-40 (35 MINUTES) 1.736.800 ÷ \$74. CompTronics will have to generate a contribution margin of \$85.50 to produce a 32. this means that the company can incur variable costs of only \$10. the current selling price is \$96 (\$4.\$21.000 ÷ 42.304.00 (\$96.000 \$ 288. Inc. \$4.000 ÷ X = 32.\$1.744.00).60).000 + \$576. Fixed costs must therefore drop by \$432.032.000) ÷ \$72 = 46. the new unit contribution margin will be \$74.000-unit break-even point with a \$72 unit contribution margin.

86 Break .50 − \$2. 6/e © 2005 The McGraw-Hill Companies.52 Super model: Giant model: McGraw-Hill/Irwin Managerial Accounting.000 tubs \$3.50 − \$2.70 Break .500 tubs \$3. 8-29 . Inc.50 − \$2.000 = 25.even volume = \$40. (a) Increase (b) No effect (c) Increase (d) No effect PROBLEM 8-41 (45 MINUTES) 1. Break-even sales volume for each model: Break-even volume = (a) (b) (c) annual rental cost unit contribution margin Standard model: Break .even volume = \$22.000 = 27.816 tubs (rounded) \$3.even volume = \$16.PROBLEM 8-40 (CONTINUED 4.000 = 40.

816 tubs 0 10 20 30 • 40 Profit area 50 Tubs sold per year (in thousands) Loss Loss area (\$20) (\$40) McGraw-Hill/Irwin 8-30 Fixed rental cost: \$40. Solutions Manual . Inc. Profit-volume graph: Dollars per year (in thousands) Profit \$40 \$20 Break-even point: 40.PROBLEM 8-41 (CONTINUED) 2.000 per year © 2005 The McGraw-Hill Companies.

... Inc............ the sales revenue will be the same under either alternative.......16 X = 37.....000 – 16...........16 = 37...500 × \$2..... 37........ where the total costs are the same.......................250 22.86 – 2..000 \$123...... the same profit (or loss) will be achieved with the Standard and Super models at the sales volume. Super \$107....... Super..... Super........... Total cost.........86X = 22....500 tubs = Check: the total cost is the same with either model if 37..000/...70X Rearranging terms yields the following: (2... McGraw-Hill/Irwin Managerial Accounting..000 .. The sales price per tub is the same regardless of the type of machine selected........................ Model Standard .........250 \$101... Super......16X = 6...000.000 This reasoning leads to the following equation: 16...500 × \$2..250 16. 37.....250 Since the sales price for popcorn does not depend on the popper model........PROBLEM 8-41 (CONTINUED) 3..000 \$123... 8-31 .. Variable Cost per Tub \$2. 6/e © 2005 The McGraw-Hill Companies.... Standard Variable cost: Standard....... \$16..............000 + 2..000 .......70 Total Fixed Cost \$16........................86 2.....000 + 2...500 tubs are sold......000 X = 6.....000 = \$...... X.............. Fixed cost: Standard...500 Or...... Therefore.......... \$22....70)X = 22..86............. stated slightly differently: Volume at which both machines produce the same profit fixed cost differential variable cost differential \$6....000 22............70 ...

PROBLEM 8-42 (40 MINUTES) 1.000. Inc. Solutions Manual .000 units or \$8. CVP graph: Total revenue Dollars per year (in millions) 20 18 Profit area Break-even point: 80.000 of sales 16 14 Total expenses 12 10 8 6 4 Loss area Fixed expenses 2 50 McGraw-Hill/Irwin 8-32 100 150 200 Units sold per year (in thousands) © 2005 The McGraw-Hill Companies.

......000..............000.......0 75....000. Dollar sales required to earn target net profit = 6............. Margin of safety = budgeted sales revenue – break-even sales revenue = \$16...5 37...000 Break .. Variable expenses .....000 contribution margin (at budgeted sales) net income (at budgeted sales) \$12.......000.........000 – \$8..5 © 2005 The McGraw-Hill Companies......... Net income .. Break-even point: contribution margin \$12...margin ratio \$6............000. 6/e Amount \$16.............000 \$12.000 \$ 6............000 ...000...000 4...000....75 sales \$16......000.000..............000 + \$9.........000 6.... Fixed expenses ...000 = \$8.. McGraw-Hill/Irwin Managerial Accounting.... 8-33 .000 = = \$20.000 = = .margin ratio ...... Inc.......... Contribution margin ..0 37..... fixed expenses + target net profit contribution .....000....000 Contribution ...000..000 4.......000 fixed expenses \$6..................0 25.000...............000 Percent 100....... Operating leverage factor (at budgeted sales) = 5..000 = =2 \$6.000.even point = = contribution ........75 = \$8.000.....75 Cost structure: Sales revenue..000.margin ratio = 3........000.........000....PROBLEM 8-42 (CONTINUED) 2..

Inc. Operating leverage refers to the use of fixed costs in an organization’s overall cost structure. Plan A break-even point = fixed costs ÷ unit contribution margin = \$33. An organization that has a relatively high proportion of fixed costs and low proportion of variable costs has a high degree of operating leverage.000 ÷ \$33* = 1. Solutions Manual .\$75 2.000 ÷ \$45** = 2.PROBLEM 8-43 (35 MINUTES) 1.[(\$120 x 10%) + \$75] ** \$120 . McGraw-Hill/Irwin 8-34 © 2005 The McGraw-Hill Companies.200 units * \$120 .000 units Plan B break-even point = fixed costs ÷ unit contribution margin = \$99.

000 ----__ \$450.000 \$171.58 (rounded) Plan B has the higher degree of operating leverage.000 \$375.000 = 1.000 \$165. Less variable costs: Cost of purchasing product: 5.5%) compared to Plan B (62.PROBLEM 8-43 (CONTINUED) 3. Contribution margin……………………………… Fixed costs………………………………………… Net income………………………………………….000 x 10%…….000 \$522..000 60.000 ---. Sales commissions: \$600. Calculation of profit at 5.000 \$450.000 \$720.000 \$435..000 72. Net income…………………………………………. 6/e Plan A Plan B \$600.000 \$132.000 units x \$120………………. Inc. 8-35 .000 99. McGraw-Hill/Irwin Managerial Accounting. 4 & 5.000 = 1.__ \$375. Calculation of contribution margin and profit at 6.000 units x \$120……………….000 © 2005 The McGraw-Hill Companies.000 units x \$75…………………….000 \$198. Total variable cost……………………….58%.000 x 10%…….5%).…… Sales commissions: \$720.2 Plan B: \$270.000 \$225. Total variable cost……………………….000 \$165. Plan B’s fixed costs are 13. Plan A Plan B \$720.000 33.000 \$375.000 units of sales: Sales revenue: 6.000 \$270.000 \$600..000 ÷ \$171..000 \$450.000 ÷ \$165. Operating leverage factor = contribution margin ÷ net income Plan A: \$198.000 units x \$75…………………………. Contribution margin……………………………… Fixed costs………………………………………….000 \$126.000 Plan A has a higher percentage of variable costs to sales (72.000 33...000 units: Sales revenue: 5.000 99. compared to Plan A’s 4. Less variable costs: Cost of purchasing product: 6.75% of sales..

McGraw-Hill/Irwin 8-36 © 2005 The McGraw-Hill Companies. these firms typically suffer a significant decrease in profitability.000. In a severe economic downturn.000 units to 5.000 = \$45.000 = 26. Plan B’s cost structure produces a greater percentage decline in profitability from the drop-off in sales revenue.000 ÷ \$165. Inc.PROBLEM 8-43 (CONTINUED) Plan A profitability decrease: \$165.\$126. Such firms would be a more risky investment when compared with firms that have a low degree of operating leverage. This situation arises because Plan B has a higher degree of operating leverage.000 .58 = 26.67% x 1.000.2 = 20.\$132. Solutions Manual .0% Plan B: 16. \$33. Note: The percentage decreases in profitability can be computed by multiplying the percentage decrease in sales revenue by the operating leverage factor.67% x 1. Heavily automated manufacturers have sizable investments in plant and equipment. increases in sales would tend to have a very favorable effect on earnings in a company with high operating leverage.3% (rounded) 6. along with a high percentage of fixed costs in their cost structures. Thus: Plan A: 16. \$45. As a result. Stated differently. Of course.67%. when times are good.000 ÷ \$171.000 = 20% Plan B profitability decrease: \$171. or 16. there is a high degree of operating leverage.3% (rounded) PneumoTech would experience a larger percentage decrease in income if it adopts Plan B.000 . Sales dropped from 6.000 = \$33.000 units.

....980...410.000 = \$21 = 210..... Variable costs: Direct material ....000 \$21 \$4................20 3....... 8-37 ... Variable selling cost ......730.........50 3........ Direct labor ...60 = 175........even point in units = (b) Computer-assisted manufacturing system: \$3.....80 7.... Inc.660.00 4..000 units Break .000 + \$750.00 \$7.........60 ComputerAssisted Manufacturing System \$45. 6/e © 2005 The McGraw-Hill Companies........ Variable overhead . Break-even point in units: Break-even point = fixed costs unit contribution margin Calculation of contribution margins: Selling price .....50 9. Contribution margin per unit (a) LaborIntensive Production System \$45.00 24..PROBLEM 8-44 (45 MINUTES) 1..40 10.000 = \$15...000 units Break .000 \$15....40 \$15.....00 29...............60 \$2..even point in units = McGraw-Hill/Irwin Managerial Accounting.......00 \$8..00 Labor-intensive production system: \$1.................000 + \$750..00 \$21.

The greater the degree of operating leverage.410. the computer-assisted manufacturing method utilizes a greater degree of operating leverage.730.000 \$5.111 units. • The ability to discontinue production and marketing of the new product while incurring the least amount of loss. Inc.40X = \$1.000 = \$24X + \$4. Among these are: • Variability or uncertainty with respect to demand quantity and selling price. McGraw-Hill/Irwin 8-38 © 2005 The McGraw-Hill Companies.111 units and the labor-intensive manufacturing method if annual sales are not expected to exceed 311.680.000 X = 311. Zodiac’s management would be indifferent between the two manufacturing methods at the volume (X) where total costs are equal.PROBLEM 8-44 (CONTINUED) 2. there is a higher degree of variability in operating income if operating leverage is high. The greater the proportion of fixed costs used to produce a product. 5. Zodiac’s management should consider many other business factors other than operating leverage before selecting a manufacturing method. Thus. Thus. \$29. the greater the change in operating income (loss) relative to a small fluctuation in sales volume. • The ability to produce and market the new product quickly. the greater the degree of operating leverage.40X + \$2. Management should employ the computer-assisted manufacturing method if annual sales are expected to exceed 311. Operating leverage is the extent to which a firm's operations employ fixed operating costs. 4.111 units* *Rounded 3. Solutions Manual .

......................... 74....983..... 360.......PROBLEM 8-45 (40 MINUTES) 1.............. Fixed expenses: Advertising..........5) + (200 × \$20 × 1...... In order to break even........... \$821...149....................... 15..............................000 Wages and fringe benefits: Regular wages (\$50 + \$40 + \$30 + \$20) × 16 hours × 360 days ........000 × \$56).....5) ........560 1......................000 Total wages.. 8-39 . \$ 980.................................... as the following calculations show........................................400 Fringe benefits at 40% ....................................... 54................... 328..............960 McGraw-Hill/Irwin Managerial Accounting.000 Malpractice insurance....................... 10..............................................................400 Overtime wages (200 × \$30 × 1.................. \$806.............. 6/e © 2005 The McGraw-Hill Companies.............220 clients must visit the law office being considered by Steven Clark and his colleagues. 30................ 336............. \$2...000/4) ......960 Total fixed expenses ............................... Inc.....000 Property insurance....................000 Utilities .............................000 Rent (6............ during the first year of operations.........................000 Depreciation (\$120.............................................

multiplied by the 20% of the clients whose judgments are expected to be favorable.960 X = 10. 2.960 0 = \$60X + \$240X – \$8X – \$2.780 = \$2.220 × .000 × 18.983.30)] = [\$60 + (\$4.000 × .000) + (\$4.2X × .20 × .000 McGraw-Hill/Irwin 8-40 © 2005 The McGraw-Hill Companies.983.PROBLEM 8-45 (CONTINUED) Break-even point: 0 = revenue – variable cost – fixed cost 0 = \$60X + (\$4.220 clients (rounded) *Revenue calculation: \$60X represents the \$60 consultation fee per client.20 × .2X × .30) represents the predicted average settlement of \$4.000.334.30)] – [(\$60 × 10.3)* – \$8X – \$2. (\$4.220 (rounded) Safety margin = [(\$60 × 18. Safety margin: Safety margin = budgeted sales revenue − break-even sales revenue Budgeted (expected) number of clients = 50 × 360 = 18. multiplied by the 30% of the judgment that goes to the firm.000 × .000 – 10.000 Break-even number of clients = 10.220) + (\$4.983.30)] × (18.000 × .960 \$292X = \$2.000 × 10.220) = \$300 × 7.20 × . Solutions Manual . Inc.000 × .

125 units \$20 − \$4 † *Annual straight-line depreciation on new machine †\$4. fixed costs unit contribution margin \$300.000 = 15.050.even point (in units) = = = fixed costs + target net profit unit contribution margin = \$300. given manufacturing changes new fixed costs + target net profit new unit contribution margin \$306.000 units = \$20 per unit Break . 6/e © 2005 The McGraw-Hill Companies.000 = 29.000 − \$750.000 25. 8-41 .000 = \$200.000 + (\$36. Unit contribution margin = \$1.000/6) * = 19.PROBLEM 8-46 (35 MINUTES) 1. 3.000 units \$20 Number of sales units required to earn target net profit New break .000 * = \$16 = 31.000 + \$200.250. Inc.625 units = *Last year's profit: (\$50)(25. = \$9.000 + \$280.00 – \$5.00 increase in the unit cost of the new part Number of sales units required to earn target net profit.even point (in units) = = 2.000) – \$1.00 4.000 units \$20 new fixed costs new unit contribution margin \$300.000 McGraw-Hill/Irwin Managerial Accounting.

Inc.67 = .67 (rounded) *Old unit variable cost = \$30 = \$750.40 = . Let P denote the price required to cover increased direct-material cost and maintain the same contribution margin ratio: P − \$30 * − \$4 † P P − \$34 .margin ratio = = .40 \$50 * Contribution .PROBLEM 8-46 (CONTINUED) unit contribution margin sales price \$20 Old contribution .margin ratio = McGraw-Hill/Irwin 8-42 © 2005 The McGraw-Hill Companies.000 units †Increase in direct-material cost = \$4 Check: \$56.60P P = .40 (rounded) New contribution . *Sales price. Solutions Manual . given in problem.40P = \$34 = \$56.67 − \$30 − \$4 \$56.margin ratio = 5.000 ÷ 25.

. Costs that are variable (with respect to sales volume): Unit variable cost (.000 fixed costs unit contribution margin \$476......... General factory overhead........ This cost will not increase with increases in sales volume.. Student.....000 60. 6/e © 2005 The McGraw-Hill Companies........ Unit contribution margin ................000 ÷ 25................. Engineering (800 hours at \$56 per hour) ..........................M................... not just sales volume..........................even point (in units) = = \$52 24 \$28 \$ 30..... Controller Subject: Activity-Based Costing The \$300.. Total costs that are fixed (with respect to sales volume) .................................... 2.... Inspection (100 inspections at \$90 per inspection).........PROBLEM 8-47 (40 MINUTES) 1. However....8 × \$750................................................................... Fixed selling and administrative costs ...... 8-43 .....000 \$476..................... Costs that are fixed (with respect to sales volume): Setup (300 setups at \$100 per setup)................................ Inc.......... This is the difference between a traditional costing system and an ABC system..000 units McGraw-Hill/Irwin Managerial Accounting........ Total............200 \$416....................................... as the activitybased costing analysis demonstrates..........800 9.....000 44................ Saturn Game Company From: I............................. Break ..............................................000 332......... these costs are not fixed with respect to other important cost drivers. The latter recognizes that costs vary with respect to a variety of cost drivers................................000 \$28 = 17...000 cost that has been characterized as fixed is fixed with respect to sales volume........ Memorandum Date: Today To: Vice President for Manufacturing.. New break-even point if automated manufacturing equipment is installed: Sales price..000).........

000: Number of sales units required to earn target net profit 4.000 + \$280.000 units). Solutions Manual .PROBLEM 8-47 (CONTINUED) 3. McGraw-Hill/Irwin 8-44 © 2005 The McGraw-Hill Companies. (c) These results are typical of situations where firms adopt advanced manufacturing equipment and practices.000 will be lower (27.000 units). Inc. the larger unit contribution margin (\$28 instead of \$20) earns a profit at a faster rate. (b) The number of sales units required to show a profit of \$280. However.000 units instead of 29.000 = \$28 = 27. Sales (in units) required to show a profit of \$280. at higher levels of sales after fixed costs have been covered. This results in the firm needing to sell fewer units to reach a given target profit level. The break-even point increases because of the increased fixed costs due to the large investment in equipment.000 units = If management adopts the new manufacturing technology: (a) Its break-even point will be higher (17. fixed cost + target net profit unit contribution margin \$476.000 units instead of 15.

The break-even point is a relevant piece of information. Disclose fully all relevant information that could reasonably be expected to influence an intended user's understanding of the reports. as in requirement (3) of this problem. To withhold the break-even analysis from the controller's report would be a violation of the following ethical standards: (a) Competence: Prepare complete and clear reports and recommendations after appropriate analysis of relevant and reliable information. Inc. The controller should include the break-even analysis in the report. McGraw-Hill/Irwin Managerial Accounting. 8-45 . The controller should accompany the break-even analysis with an explanation as to why the break-even point will increase. It would also be appropriate for the controller to point out in the report that the advanced manufacturing equipment would require fewer sales units at higher volumes in order to achieve a given target profit. The Board of Directors needs a complete picture of the financial implications of the proposed equipment acquisition.PROBLEM 8-47 (CONTINUED) 5. (c) Objectivity: Communicate information fairly and objectively. and recommendations presented. 6/e © 2005 The McGraw-Hill Companies. (b) Integrity: Communicate unfavorable as well as favorable information and professional judgments or opinions. comments.

.............................. Foreign Order 1..even volume in tons = fixed costs unit contribution margin = 2.......000 Contribution margin on foreign order....000 © 2005 The McGraw-Hill Companies........................ Contribution margin on Regular sales.... Contribution margin per ton: Foreign order (\$900 – \$550) ..............................................................................200......000 per ton Sales in tons......... \$945.......000 495.100 tons \$450 Projected net income for sales of 2................ Total contribution margin...........000 \$450...................................................................100 × \$450)............................ McGraw-Hill/Irwin 8-46 Regular Sales 1............800 = \$1.....................800 Break ....000 \$ 705...............100 tons: Projected contribution margin (2........... Projected fixed costs ..........000 \$ 525.......................................................000 675...... 3.........000 = 1...........................000 = \$450 per ton 1............ Inc..................000 495....... Total contribution margin ....500 × \$450 \$675.............. \$495.................................000 – \$550)................. Net income .800........ Regular sales (\$1..........000 \$1..... Unit contribution margin = \$810...................................... Projected net income.................................................000 Projected net income including foreign order: Variable cost per ton = \$990.........................800 = \$550 per ton Sales price per ton for regular orders = \$1....000/1........ Solutions Manual ...................... Fixed costs...................................500 × \$350 \$525..................PROBLEM 8-48 (45 MINUTES) 1............000/1.........

6/e © 2005 The McGraw-Hill Companies.224.000 per ton = \$1.PROBLEM 8-48 (CONTINUED) 4.30 = \$2. New sales territory: To maintain its current net income. fixed costs in new territory unit contribution margin on sales in new territory \$123. Inc.30 New contribution margin ratio = fixed costs + target net profit contribution margin ratio \$495. Break .000 + \$189.000 + \$117. Central Pennsylvania Limestone Company just needs to break even on sales in the new territory.000 Dollar sales required to earn target net profit = McGraw-Hill/Irwin Managerial Accounting.even point in tons = = 5.000 \$450 + \$50 \$612.224 tons × \$1.even point in sales dollars = 1.000 6.000)(90%) = .000 = 307.even point in tons = = \$495.000)(90%) − (\$550 + \$80) = \$270 \$270 (\$1.000 = .000 = 1. 8-47 .5 tons \$450 − \$50 Automated production process: Break .280.224 tons \$500 Break . Changes in selling price and unit variable cost: New unit contribution margin = (\$1.

................. Solutions Manual ...500...............600.PROBLEM 8-49 (45 MINUTES) 1.000 \$1...........000... Unit sales ............25 . Total fixed costs ...800.25 ...............800.............000 \$5...... Total \$9... Weighted-average unit contribution margin.. Total variable cost........00 25..........000 \$1........................500 units \$48 Total unit sales to break even = McGraw-Hill/Irwin 8-48 © 2005 The McGraw-Hill Companies..... Contribution margin per unit .. Income taxes (40%)........ TOLEDO TOOL COMPANY BUDGETED INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31.000 \$6........000....................50 15.........000 Line Trimmers \$108 \$ 36 12 \$ 48 \$ 60 × 50...........800............00 total fixed costs weighted ......000 Leaf Blowers \$144 \$ 75 18 \$ 93 \$ 51 × 100......000 720.............000 \$7...080................000 = = 162................. 20X4 Unit selling price ........................000 \$1.. (b) Sales Proportion .... Variable manufacturing cost...average unit contribution margin \$7........ Budgeted net income. Total contribution margin ..... Fixed selling and administrative costs.................... \$30 Line Trimmers.. Inc...............800......000 \$3......... (a) Unit Contribution Hedge Clippers ...... Income before taxes.. Hedge Clippers \$84 \$39 15 \$54 \$30 × 50...50 \$48...... Variable selling cost........... 60 51 Leaf Blowers ..000 Fixed manufacturing overhead...............100...000 1.......000 2.........50 (a) × (b) \$ 7.........

Inc.... †The variable manufacturing cost increases 20 percent. ...................................20 Line Trimmers*.......60 Leaf Blowers.......500 40......000 200........ Weighted-average unit contribution margin... (a) × (b) \$ 6................................................500 3.....PROBLEM 8-49 (CONTINUED) Sales proportions: Hedge Clippers ..25 ......60 Leaf Blowers .............800. Total............................ \$30 ...................000 © 2005 The McGraw-Hill Companies.............00 11.................................000 200.......... Leaf Blowers .............. Total........000 120........625 162........40 21.......... Line Trimmers........................000 units \$39 Total unit sales to break even = Sales proportions: Sales Proportions Hedge Clippers........000 = = 200.........250 162..20 Line Trimmers .........20 ................average unit contribution margin \$7................ Thus........ Thus........000 40.............. 6/e Total Unit Sales 200.500 40..............2 × \$75) – \$18]......000 200. the unit contribution decreases to \$36 [\$144 – (1............... McGraw-Hill/Irwin Managerial Accounting.....60 \$39..00 *Variable selling cost increases...............................50 Total Unit Product Line Sales Sales 162...............000 Product Line Sales 40...... 57 ...625 162............... (a) (b) Unit Sales Contribution Proportion Hedge Clippers .................. the unit contribution decreases to \$57 [\$108 – (\$36 + \$12 + \$3)]. total fixed costs weighted ................25 ..500 81.......20 † 36 .................... 8-49 ....... Sales Proportion ................... ....

PROBLEM 8-50 (35 MINUTES)
1.

(a)

Unit contribution margin =
=

sales − variable costs
units sold
\$2,000,000 − \$1,400,000
= \$6 per unit
100,000

Break - even point (in units) =

fixed costs
unit contribution margin

=

\$420,000
= 70,000 units
\$6

Contribution - margin ratio =

(b)

=
Break - even point (in sales dollars) =
=

2.

Number of units of sales required
to earn target after-tax net income

contribution margin
sales revenue
\$2,000,000 − \$1,400,000
= .3
\$2,000,000
fixed costs
contribution - margin ratio
\$420,000
= \$1,400,000
.3
target after - tax net income
(1 − t )
unit contribution margin

fixed costs +
=

\$180,000
\$720,000
(1 − .4)
=
\$6
\$6

\$420,000 +
=

= 120,000 units

3.

If fixed costs increase by \$63,000:
Break - even point (in units) =

McGraw-Hill/Irwin
8-50

\$420,000 + \$63,000
= 80,500 units
\$6

© 2005 The McGraw-Hill Companies, Inc.
Solutions Manual

PROBLEM 8-50 (CONTINUED)
4. Profit-volume graph:

Dollars per year
\$1,500,000

\$1,000,000

\$500,000

0

Break-even point:
70,000 units

Loss 25,000
area

50,000

75,000

Profit
area

100,000

Units sold
per year

\$(500,000)

\$(1,000,000)

\$(1,500,000)

McGraw-Hill/Irwin
Managerial Accounting, 6/e

© 2005 The McGraw-Hill Companies, Inc.
8-51

PROBLEM 8-50 (CONTINUED)
5.

Number of units of sales
required to earn target
after-tax net income

target after - tax net income
(1 − t )
unit contribution margin

fixed costs +
=

\$420,000 +
=

\$180,000
(1 − .5)

\$6

=

\$780,000
\$6

= 130,000 units

McGraw-Hill/Irwin
8-52

© 2005 The McGraw-Hill Companies, Inc.
Solutions Manual

500Y = \$784. 8-53 . Contribution margin ratio = \$120. McGraw-Hill/Irwin Managerial Accounting.20 = .800 Y = \$74.tax net income (1 − t) unit contribution margin fixed expenses + Number of units of sales required to earn target after-tax income = \$33. 2.000 − 10.74).500 units \$132.80 \$475.400 X= = \$120.20 \$40. Break-even point (in units) for the touring model = \$554. the variable cost per unit would have to decrease by \$4.46 (\$79.20 – \$74.200 10.120 (1 − .200 \$120.500Y = \$475. Inc.500 = \$1. 6/e © 2005 The McGraw-Hill Companies.000 units 3.00 − \$79.PROBLEM 8-51 (35 MINUTES) 1.500 units.20 Let Y denote the variable cost of the mountaineering model such that the break-even point for the mountaineering model is 10.400 = 10.00 − Y (10.260.40) \$530.34 \$120.74 (rounded) Thus.00 − \$79.200 + X = 13.00 − Y ) = \$475.00 target after .200 10.500) × (\$120.00 − \$79. Then we have: \$475.

.720 = \$48.......................000] ........ If the company employs its own sales force: Additional sales force costs ............600 (1.........00 − (\$79...average unit contribution margin \$514...............400 \$7............225 – ............729 units (rounded) 4......................... Solutions Manual .. Reduced commissions [(........ New break .......200 \$7..000 units (or 5....10) × \$24........600) 3.80 PROBLEM 8-52 (45 MINUTES) 1... Interest .... Costs with agents paid increased commissions........................... Costs from budgeted income statement... 5.....510 3......................000]......000 \$ 16............200 3...15 – ...even point = Weighted-average unit contribution margin Break-even point = (50% × \$52.................. Inc..................800 (3..........10) × \$24.500 of each type) \$46.. Selling and administrative.....200 © 2005 The McGraw-Hill Companies.........20)(90%) \$522.......800 \$3......200) \$ 13.......200 × 110% \$120.... Increased commissions [(... If the company sells through agents: Deduct cost of sales force .......80 fixed costs = weighted ............PROBLEM 8-51 (CONTINUED) \$475................600 2........ SUMMARY OF EXPENSES Manufacturing .....880 810 \$ 14....200 \$10..72 = 10..........80) = \$46............800 = = 11.....80) + (50% × \$40...... Costs with own sales force.. McGraw-Hill/Irwin 8-54 Expenses per Year (in thousands) Variable Fixed \$ 10.....

PROBLEM 8-52 (CONTINUED) total fixed expenses contribution margin ratio total variable expenses Contribution-margin ratio = 1 − sales revenue Break-even sales dollars = (a) \$14.000.60 = .000 = 1 − .325 Contribution margin ratio = 1 − \$7.800.538. 6/e © 2005 The McGraw-Hill Companies.200 \$24.000 = .325 = \$29.600.55 = .325 \$9. 8-55 .200.000.000 = 1 − .000 \$24. \$13.000 .45 \$10.200.40 = \$18.400.400.000 \$24.even sales dollars = . Inc.200.40 Contribution margin ratio = 1 − \$7.000.675 = .even sales dollars = (b) 2.462 (rounded) Required sales dollars to break even = McGraw-Hill/Irwin Managerial Accounting.000 Break .000 Contribution margin ratio = 1 − Required sales dollars = total fixed costs + target income before income taxes contribution margin ratio \$16.000 + \$2.000.000 Break .000 = 1 − .000 .45 = \$24.

Inc. McGraw-Hill/Irwin 8-56 © 2005 The McGraw-Hill Companies.800.675 X + \$7.000 .000.800.000 X + \$7.000 Therefore.000 X = \$28.000 \$24.800.000 \$13.200.200.000 .55 X + \$10. Solutions Manual .000 \$24. the company will earn equal before-tax income under either alternative.600.200.000. Total expenses with agents paid increased commission = total expenses with own sales force \$16.800.125 X = \$3.000 = . The volume in sales dollars (X) that would result in equal net income is the volume of sales dollars where total expenses are equal. so is after-tax net income.000. at a sales volume of \$28.200.000 = X + \$10. Since before-tax income is the same.PROBLEM 8-52 (CONTINUED) 3.

Columbus Canopy Company must sell 500 units. management should select the first alternative. Inc. Calculations for the three alternatives follow.PROBLEM 8-53 (45 MINUTES) 1. 8-57 . McGraw-Hill/Irwin Managerial Accounting. a.000 \$400X = \$1.700 units are sold during the remainder of the year.000 \$400X = \$200. To achieve its annual after-tax profit objective.000 + \$800.500 units 2. This amount represents the point where revenue equals total costs. where the sales price is reduced by \$80 and 2.4)] \$800X = \$400X + \$200. In order to achieve its after-tax profit objective.000 + [\$480.tax profit \$800X = \$400X + \$200.000 ÷ (1 − .500 units. In order to break even. Revenue = variable costs + fixed costs + before .000.000 X = 500 units b. 6/e © 2005 The McGraw-Hill Companies. Revenue = variable costs + fixed costs \$800X = \$400X + \$200. This amount represents the point where revenue equals total costs plus the before-tax profit objective.000 X = 2. Columbus Canopy Company must sell 2. This alternative results in the highest profit and is the only alternative that equals or exceeds the company’s profit objective.

Solutions Manual .PROBLEM 8-53 (CONTINUED) Alternative (1): Re venue = (\$800)(350) + (\$720)( 2.224.tax profit = \$804.908.000 − \$200.tax profit = \$798.000 After .800.4) = \$408.000 − \$180.350 = \$940.050 = \$1.000 = \$804.000 − \$200.224.000 − \$910.000 Variable cost = (\$400)(350) × (\$350)( 2.000 × (1 − .800.220.000) = \$1.000 × (1 − .000 Variable cost = \$400 × 3.4) = \$478.000 Variable cost = \$400 × 2.700) = \$2.4) = \$482.000 × (1 − .000 − \$940.000 After .220.000 Before .000 After .000 − \$1.800 Alternative (3): Re venue = (\$800)(350) + (\$760)( 2.200) = \$910. Inc.200) = \$1.000 Before .000 Before .000 McGraw-Hill/Irwin 8-58 © 2005 The McGraw-Hill Companies.000 = \$680.908.400 Alternative (2): Re venue = (\$800)(350) + (\$740)( 2.tax profit = \$1.tax profit = \$680.tax profit = \$2.tax profit = \$1.000 = \$798.

..........056............................................................................000 patient-days) (\$2......000 patient-days)............................000 216. 120 \$240 Break-even point in patient-days McGraw-Hill/Irwin Managerial Accounting...........800 × 20) .200................ The break-even point is 16............. Total fixed costs ..................... Inc....................... \$360 Variable cost per patient-day: (\$7..............900 patient-days calculated as follows: SUSQUEHANNA MEDICAL CENTER COMPUTATION OF BREAK-EVEN POINT IN PATIENT-DAYS: PEDIATRICS FOR THE YEAR ENDED JUNE 30......000 \$4..............day \$240 = 16............................................ \$3...................................................000 ÷ 20.................................................................................................. 6/e total fixed costs \$4..........000 120.............000 Contribution margin per patient-day: Revenue per patient-day............................. Nurses (\$24..........000 = contribution margin per patient ....... Supervising nurses (\$30.. 20X6 Total fixed costs: Medical center charges......................400......056. Aids (\$10..................SOLUTIONS TO CASES CASE 8-54 (50 MINUTES) 1........ Contribution margin per patient-day ..................................900 patient days = © 2005 The McGraw-Hill Companies....480................000 × 10) .......000 × 4) ...000 240.......... 8-59 ..........000 ÷ \$360 = 20.......

............ Solutions Manual .......... calculated as follows: SUSQUEHANNA MEDICAL CENTER COMPUTATION OF LOSS FROM RENTAL OF ADDITIONAL 20 BEDS: PEDIATRICS FOR THE YEAR ENDED JUNE 30...160................................ \$ 648.......................... therefore.....................000 patient-days before additional 20 beds + 20 additional beds × 90 days = 21... Net change in earnings from rental of additional 20 beds ................800... 20X6 Increase in revenue (20 additional beds × 90 days × \$360 charge per day) ......................000 \$ (728..000 Increase in expenses: Variable charges by medical center (20 additional beds × 90 days × \$120 per day) ................... 1. \$ 216............... -0\$1...........000 per bed) (\$58.................. Inc...000 patient-days..376................000) McGraw-Hill/Irwin 8-60 © 2005 The McGraw-Hill Companies.CASE 8-54 (CONTINUED) 2... no additional personnel are required) .......... Net earnings would decrease by \$728................. Total increase in expenses...000...........000 Fixed charges by medical center (\$3......480...... which does not exceed 22...........................000 ÷ 60 beds = \$58......000 × 20 beds).................000 Salaries (20.............

.................margin ratio \$525..................................... Sales personnel salaries (3 x \$45...................000 − \$3........... Total .000..000......... Contribution ..........000)....................000 fixed expenses contribution ........................ \$ \$ 150..000 525... Sales managers’ salaries (2 × \$120.................000.....000.....000 750................35 \$15...000...............000 − \$9...........................000.........000 = = \$1.........margin ratio \$150......................................................000).......................................... 8-61 ...20 Contribution ....500...........................................35 Estimated break ................ Contribution margin....... Commissions (at 5%) ......000 135............000 = .......... Inc................000 \$ 5..... Cost of goods sold...........................even point = contribution .....................................000 = = \$750....even point = McGraw-Hill/Irwin Managerial Accounting............250...000...... Break-even point given employment of sales personnel: New fixed expenses: Previous fixed expenses ......................................000 \$ 6.........margin ratio = \$15......000 .......000 9.000 New contribution-margin ratio: Sales . based on current budget: \$15.........000 \$5... 6/e © 2005 The McGraw-Hill Companies..000.......................CASE 8-55 (50 MINUTES) 1....... Break-even point for 20x4..20 \$15.................000 240..000 fixed expenses Break ......................000 ....000 = ...........margin ratio = 2. Gross margin .........250...........................

....000.........000 © 2005 The McGraw-Hill Companies...................000 \$ 2....000 3.tax net income (1 − t ) contribution ...000 = ..... Income before taxes....000 5............ Contribution margin...............995...............000 \$2....... Contribution .....margin ratio = Sales volume in dollars required to earn after-tax net income \$15.000 150.........000...........000...250...............000 \$ 5..000 12.....250..................................................000............................. Cost of goods sold...........................000 \$ 8...........................................15 . Cost of goods sold (60% of sales)......750.................. Income tax expense (30%)...000 (1 − .................................000..................................000 target after ..... Net income ........ Selling and administrative expenses: Commissions..000 \$150................................................................. Gross margin .000.................000 \$ 2......150..........850..................................000 9................000....................................000 855............................3) = = ..... Gross margin . Assuming a 25% sales commission: New contribution-margin ratio: Sales ..................margin ratio fixed expenses + = \$1..........000 \$ 1................ Inc.......................15 \$15...... Commissions (at 25%) ............... McGraw-Hill/Irwin 8-62 \$ 20..15 = \$20..............000 + Check: Sales ..................000 \$3......... Solutions Manual ....000....000.....000........ All other expenses (fixed) ......................995...................000 \$ 6......CASE 8-55 (CONTINUED) 3....................

..............) ..000 × 5% = \$93.........875 468.... Check: Sales ............ were computed in the preceding two requirements..000 \$ 750................750† 150..000 \$ 131.20 X = \$1............ 6/e © 2005 The McGraw-Hill Companies.....000 \$ 750..000 1. Inc.875 *\$1.......... Income before taxes.....750* 525..... 8-63 . Cost of goods sold (60% of sales).......000 \$ 131..875.........000 1............................... the company will have the same before-tax income under the two alternatives if the sales volume is \$1.....000 93.... Net income ..........................000/..000.....250 39. Gross margin .. respectively...........CASE 8-55 (CONTINUED) 4......... All other expenses (fixed)... Selling and administrative expenses: Commissions....................000 = .....875........875........ Since the tax rate is the same regardless of which approach management chooses.................. we can find X so that the company’s before-tax income is the same under the two alternatives............750 McGraw-Hill/Irwin Managerial Accounting..375 \$ 91.................15...000 X = \$375..750 †\$1..... Sales dollar volume at which Lake Champlain Sporting Goods Company is indifferent: Let X denote the desired volume of sales.....20X = \$375... the contribution-margin ratios of .......... Income tax expense (30%).....250 39........... Alternatives Employ Sales Pay 25% Personnel Commission \$1...15X – \$150......................875....................000 × 25% = \$468.................. (In the following equations..375 \$ 91.....................000 Thus..35X – \$525...........875....125....125..........875....35 and ...........000 .000 \$1..

namely lowcost transportation. A3. B1. JAN 29. DELTA TURNS TO SONG. 2003. It traditionally had a price structure that depended on tax-base funding to fund fixed infrastructure expenses. As a result. ALLAN SLOAN. The airlines. ISSUE 8-57 “TO REDRESS INDUSTRY BLUES. The break-even point is the volume of operating activity at which revenue and expenses are equal. but just 25% at Jet Blue. high labor costs. SEPTEMBER 9. and the effects of September 11. 2002. have developed very high labor costs because (1) most of their staff belong to labor unions. NICOLE HARRIS. The point-to-point model provides an added cost advantage to the low-cost airlines. allowing the latter to operated profitably. “COSTLY RACE IN THE SKY: SAME ROUTE. by contrast. P.” THE WALL STREET JOURNAL. both these industries should be encouraged to cut costs in order to break even.” BUSINESS WEEK. along with other security issues. 2001. Southwest and JetBlue have both successfully achieved this goal. the low-cost airlines have tended to offer “point-to-point” services.” THE WALL STREET JOURNAL. which have accumulated because of overexpansion. By contrast. Major airlines. Another significant source of costs for airlines is ground crews. Now. 49. YET UNITED'S FLIGHT COSTS MORE TO OPERATE THAN JETBLUE'S. which may offer lower passenger volumes. were from the outset privately owned. Labor costs are a significant proportion of any airline’s cost structure. However. TRAINS AND POLITICIANS. McGraw-Hill/Irwin 8-64 © 2005 The McGraw-Hill Companies. 2002. It is not an impossible mission.CURRENT ISSUES IN MANAGERIAL ACCOUNTING ISSUE 8-56 “PLANES. allowing them to offer lower prices to customers. which allows them to increase passenger loads by funneling all flights through major hubs. such as United Airlines. since the earliest days the airlines have struggled to be profitable. SUSAN CAREY. The larger airlines have pioneered a “hub-and-spoke” model. and (2) wages tend to be tied to seniority rather than productivity. Amtrak was originally established to provide a public service. huge debt. By comparison. Solutions Manual . P. but also require smaller ground crews. P. the low cost competitors such as Jet Blue pay their air and ground crews lower wages and benefits. Inc. It is only in recent years that the government has acted to transition Amtrak to a self-sufficient operation. SAME PLANE. which have strong wage and benefits negotiation power. OCTOBER 7. for-profit businesses. they are now asking for a massive subsidy to offset losses. labor costs account for 47% of revenue at United.

8-65 . With decreasing sales. Fixed costs are the lever that managers use to take a small increase in sales and obtain a much larger increase in net income. each additional sale decreases the average cost per unit. Managers apply operating leverage to convert small changes in sales into large changes in a firm’s profitability. SHUT SIX PLANTS IN RESTRUCTURING. BIG BLUE”." THE WALL STREET JOURNAL. 2002. its stock rating was downgraded. This is beneficial if sales are increasing. In the article. Inc. profit is very sensitive to changes in volume. P. Having a cost structure with relatively high fixed costs provides rewards and risks to a firm. equipment. SPENCER E. The cost structure is the relative proportion of fixed to variable costs. As fixed costs are reduced. the company moves toward a cost structure with a larger proportion of variable costs. however. TERI AGINS. In organizations like these.” THE WALL STREET JOURNAL. if it enables a company to divest of fixed assets (such as plant and equipment) or eliminate salaried personnel (such as department supervisors). 2000. the fixed costs do not decrease. ISSUE 8-59 "RELIANCE GROUP MAY SEE SHIELD FROM CREDITORS. Inc. POPE. BUSINESS WEEK. The cost structure is the relative proportion of fixed to variable costs. 6/e © 2005 The McGraw-Hill Companies. analysts are concerned that IBM should be making significant efforts to reduce fixed costs (by shutting down manufacturing lines) rather than making minor adjustments to labor levels. AND FRANCINE L. With a high degree of operating leverage. ISSUE 8-60 “LEVI WILL CUT 20% OF WORK FORCE. Each dollar of revenue becomes pure profit once the fixed costs are covered. high-technology. ANTE. and profit declines significantly more than revenue. it is characterized by very high fixed costs. the reverse is true if sales are decreasing. AUGUST 15. GREGORY ZUCKERMAN. 2002. 43. Outsourcing can lead to lower fixed costs. For this reason. APRIL 9. JUNE 3. high operating leverage was not working to benefit Reliance Group Holdings. DEVON SPURGON. Because semiconductor manufacturing requires capital-intensive. Consequently. McGraw-Hill/Irwin Managerial Accounting.ISSUE 8-58 “IT’S TIME TO CASH IN SOME CHIPS.