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CHAPTER 5

Cost-Volume-Profit
ASSIGNMENT CLASSIFICATION TABLE
Learning Objectives

Questions

Brief
Exercises

Do It!

Exercises

A
Problems

B
Problems

1.

Distinguish between
variable and fixed costs.

1, 2, 3, 6

1, 2, 3, 4,
5, 6

1A, 6A

1B, 6B

2.

Explain the significance


of the relevant range.

4, 5

3.

Explain the concept of


mixed costs.

6, 7, 8

1, 3, 4, 5

1A

1B

4.

List the five components of


cost-volume-profit analysis.

5.

Indicate what contribution


margin is and how it can
be expressed.

10, 11, 17

6, 7

8, 9, 10, 11,
12, 13, 17

1A, 2A, 3A,


4A, 5A, 6A

1B, 2B, 3B,


4B, 5B, 6B

6.

Identify the three ways to


determine the break-even
point.

12, 13, 14

8, 9

3, 4

8, 9, 10,
11, 12, 13,
14, 16, 17

1A, 2A, 3A,


4A, 5A

1B, 2B, 3B,


4B, 5B

7.

Give the formulas for


determining sales required
to earn target net income.

16

10, 12

14, 15, 17

2A, 5A, 6A

2B, 5B, 6B

8.

Define margin of safety,


and give the formulas
for computing it.

15

11

16, 17

2A, 4A,
5A, 6A

2B, 4B,
5B, 6B

2
1, 2

1, 3, 4,
5, 6
7

Copyright 2012 John Wiley & Sons, Inc.Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)

5-1

ASSIGNMENT CHARACTERISTICS TABLE


Problem
Number

5-2

Description

Difficulty
Level

Time
Allotted (min.)

1A

Determine variable and fixed costs, compute break-even


point, prepare a CVP graph, and determine net income.

Simple

2030

2A

Prepare a CVP income statement, compute break-even


point, contribution margin ratio, margin of safety ratio,
and sales for target net income.

Moderate

3040

3A

Compute break-even point under alternative courses


of action.

Simple

2030

4A

Compute break-even point and margin of safety ratio,


and prepare a CVP income statement before and after
changes in business environment.

Moderate

2030

5A

Compute contribution margin, fixed costs, break-even point,


sales for target net income, and margin of safety ratio.

Moderate

2030

6A

Determine contribution margin ratio, break-even point, and


margin of safety.

Moderate

2030

1B

Determine variable and fixed costs, compute break-even


point, prepare a CVP graph, and determine net income.

Simple

2030

2B

Prepare a CVP income statement, compute break-even


point, contribution margin ratio, margin of safety ratio,
and sales for target net income.

Moderate

3040

3B

Compute break-even point under alternative courses


of action.

Simple

2030

4B

Compute break-even point and margin of safety ratio,


and prepare a CVP income statement before and after
changes in business environment.

Moderate

2030

5B

Compute break-even point and margin of safety ratio, and


prepare a CVP income statement before and after changes
in business environment.

Moderate

2030

6B

Determine contribution margin ratio, break-even point, and


margin of safety.

Moderate

2030

Copyright 2012 John Wiley & Sons, Inc.Weygandt, Managerial Accounting, 6/e, Solutions Manual(For Instructor Use Only)

Learning Objective
*1.

Distinguish between variable and


fixed costs.

*2.

Knowledge Comprehension

Analysis

Synthesis

Evaluation

Q5-1
Q5-2
Q5-3
Q5-6

BE5-1 E5-5
E5-1
E5-2
DI5-1

E5-3
E5-6
P5-1A
P5-1B

Explain the significance of the


relevant range.

Q5-4
Q5-5

E5-2

BE5-2

*3.

Explain the concept of mixed costs. E5-4


E5-5

Q5-6
Q5-7
BE5-1

*4.

List the five components of


cost-volume-profit analysis.

Q5-9

*5.

Indicate what contribution margin


is and how it can be expressed.

Q5-10

Q5-11
Q5-17
BE5-6
BE5-7
E5-8
E5-9

E5-10
E5-11
E5-12
E5-13
E5-17

BE5-6
P5-1A
P5-2A
P5-1B
P5-2B

P5-3A
P5-3B
P5-4A
P5-5A
P5-6A
P5-4B

*6.

Identify the three ways to determine


the break-even point.

Q5-12
Q5-14

Q5-13
BE5-8
BE5-9
DI5-3
DI5-4
E5-8
E5-9

E5-10
E5-11
E5-12
E5-13
E5-14
E5-17

E5-16
P5-1A
P5-2A
P5-1B
P5-2B

P5-3A
P5-4A
P5-3B
P5-4B
P5-5A
P5-5B

*7.

Give the formulas for determining


sales required to earn target net
income.

Q5-16
BE5-10
BE5-12
DI5-4

E5-12 P5-2A
E5-14 P5-2B
E5-15
E5-17

P5-5A
P5-6A
P5-5B
P5-6B

*8.

Define margin of safety, and give


the formulas for computing it.

Q5-15
BE5-11
DI5-4

E5-17 E5-16
P5-2A
P5-2B

Broadening Your Perspective

E5-4

Application

E5-7

BYP5-6

DI5-1 Q5-8
E5-1 BE5-4
BE5-5

BYP5-4

DI5-2 BE5-3
E5-5 E5-3
E5-6 P5-1A

BYP5-1
BYP5-2

P5-6A
P5-6B

P5-1B

P5-5A
P5-5B

P5-4A
P5-6A
P5-4B
BYP5-5

BYP5-3
BYP5-7
BYP5-8

P5-5B
P5-6B

P5-6B

BLOOMS TAXONOMY TABLE

Copyright 2012 John Wiley & Sons, Inc.Weygandt, Managerial Accounting, 6/e, Solutions Manual(For Instructor Use Only)

Correlation Chart between Blooms Taxonomy, Learning Objectives and End-of-Chapter Exercises and Problems

5-3

ANSWERS TO QUESTIONS
1.

(a) Cost behavior analysis is the study of how specific costs respond to changes in the level of activity
within a company.
(b) Cost behavior analysis is important to management in planning business operations and in deciding
between alternative courses of action.

2.

(a) The activity index identifies the activity that causes changes in the behavior of costs. Once the
index is determined, it is possible to classify the behavior of costs in response to changes in
activity levels into three categories: variable, fixed, or mixed.
(b) Variable costs may be defined in total or on a per-unit basis. Variable costs in total vary directly
and proportionately with changes in the activity level. Variable costs per unit remain the
same at every level of activity.

3.

Fixed costs remain the same in total regardless of changes in the activity level. In contrast, fixed costs
per unit vary inversely with activity. As volume increases, fixed costs per unit decline and vice versa.

4.

(a) The relevant range is the range of activity over which a company expects to operate during the
year.
(b) Disagree. The behavior of both fixed and variable costs are linear only over a certain range
of activity. CVP analysis is based on the assumption that both fixed and variable costs
remain linear within the relevant range.

5.

This is true. Most companies operate within the relevant range. Within this range, it is possible to
establish a linear (straight-line) relationship for both variable and fixed costs. If a relevant range
cannot be established, segregation of costs into fixed and variable becomes extremely difficult.

6.

Apartment rent is fixed because the cost per month remains the same regardless of how much Adam
uses the apartment. Rent on a Hertz rental truck is a mixed cost because the cost usually includes a
per day charge (a fixed cost) plus an activity charge based on miles driven (a variable cost).

7.

For CVP analysis, mixed costs must be classified into their fixed and variable elements. One approach
to the classification of mixed costs is the high-low method.

8.

Variable cost per unit is $1.30, or [($165,000 $100,000) (90,000 40,000)]. At any level of activity,
fixed costs are $48,000 per month [$165,000 (90,000 X $1.30)].

9.

No. Only two of the basic components of cost-volume-profit (CVP) analysis, unit selling prices and
variable cost per unit, relate to unit data. The other components, volume, total fixed costs, and
sales mix, are not based on per-unit amounts.

10.

There is no truth in Fayes statement. Contribution margin is sales less variable costs. It is the
revenue that remains to cover fixed costs and to produce income (profit) for the company.

11.

Contribution margin is $14 ($40 $26). The contribution margin ratio is 35% ($14 $40).

5-4

Copyright 2012 John Wiley & Sons, Inc.Weygandt, Managerial Accounting, 6/e, Solutions Manual(For Instructor Use Only)

$
,5.3
1
8
0
+
,6
$
9
0

Questions Chapter 5 (Continued)


12.

Disagree. Knowledge of the break-even point is useful to management in deciding whether to introduce
new product lines, change sales prices on established products, and enter new market areas.

13.

$26,000 25% = $104,000

14.

(a) The break-even point involves the plotting of three lines over the full range of activity: the total
revenue line, the total fixed cost line, and the total cost line. The break-even point is determined at the intersection of the total revenue and total cost lines.
(b) The break-even point in units is obtained by drawing a vertical line from the break-even point to the
horizontal axis. The break-even point in sales dollars is obtained by drawing a horizontal line from
the break-even point to the vertical axis.

15.

Margin of safety is the difference between actual or expected sales and sales at the break-even
point. 1,250 X $12 = $15,000; $15,000 $13,200 = $1,800; $1,800 $15,000 = 12%.

16.

At break-even sales, the contribution margin is equal to the fixed costs. The contribution margin
ratio is:
= 36%

The sales volume to achieve net income of $90,000 is as follows:


= $750,000

17.

PACE COMPANY
CVP Income Statement

Sales..................................................................................................
Variable expenses
Cost of goods sold ($600,000 X .70)..........................................
Operating expenses ($200,000 X .70)........................................
Total variable expenses......................................................
Contribution margin............................................................................

$900,000
$420,000
140,000

560,000
$340,000

Copyright 2012 John Wiley & Sons, Inc.Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)

5-5

SOLUTIONS TO BRIEF EXERCISES


BRIEF EXERCISE 5-1
Indirect labor is a variable cost because it increases in total directly and
proportionately with the change in the activity level.
Supervisory salaries is a fixed cost because it remains the same in total regardless of changes in the activity level.
Maintenance is a mixed cost because it increases in total but not proportionately
with changes in the activity level.
BRIEF EXERCISE 5-2
VARIABLE COST
Relevant Range
$10,000

$10,000

8,000

8,000

6,000

6,000

4,000

4,000

2,000

2,000

20

40

60

80 100

Activity Level

5-6

FIXED COST
Relevant Range

20

40

60

80 100

Activity Level

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COST

BRIEF EXERCISE 5-3


$60,000
Total Cost Line
45,000
Variable Cost Element

30,000

15,000
Fixed Cost Element
0

500

1,000

1,500

2,000

2,500

Direct Labor Hours

BRIEF EXERCISE 5-4


High
Low
Difference
$15,000 $13,500 =
$1,500
8,500 7,500 =
1,000
$1,500 1,000 = $1.50Variable cost per mile.

Total cost
Less: Variable costs
8,500 X $1.50
7,500 X $1.50
Total fixed costs

High
$15,000
12,750
$ 2,250

Low
$13,500
11,250
$ 2,250

The mixed cost is $2,250 plus $1.50 per mile.

Copyright 2012 John Wiley & Sons, Inc.Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)

5-7

BRIEF EXERCISE 5-5


High
Low
Difference
$66,100 $32,000 = $34,100
40,000 18,000 =
22,000
$34,100 22,000

= $1.55 per unit.

Total cost
Less: Variable costs
40,000 X $1.55
18,000 X $1.55
Total fixed costs

Activity Level
High
Low
$66,100
$32,000
62,000
000,000
$4,100

27,900
$4,100

BRIEF EXERCISE 5-6


1.

(a)
(b)

$288 = ($640 $352)


45% ($288 $640)

2.

(c)
(d)

$207 = ($300 $93)


31% ($93 $300)

3.

(e)
(f)

$1,300 = ($325 25%)


$975 ($1,300 $325)

BRIEF EXERCISE 5-7


RADIAL INC.
CVP Income Statement
For the Quarter Ended March 31, 2014
Sales...................................................................................
Variable costs ($920,000 + $70,000 + $86,000)................
Contribution margin..........................................................
Fixed costs ($440,000 + $45,000 + $98,000).....................
5-8

$2,400,000
1,076,000
1,324,000
583,000

Copyright 2012 John Wiley & Sons, Inc.Weygandt, Managerial Accounting, 6/e, Solutions Manual(For Instructor Use Only)

Net income.........................................................................

$ 741,000

BRIEF EXERCISE 5-8


(a)

$520Q $286Q $163,800 = $0


$234Q = $163,800
Q = 700 units

(b) Contribution margin per unit $234, or ($520 $286)


X = $163,800 $234
X = 700 units
BRIEF EXERCISE 5-9
Contribution margin ratio = [($300,000 $180,000) $300,000] = 40%
Required sales in dollars = $170,000 40% = $425,000
BRIEF EXERCISE 5-10
If variable costs are 70% of sales, the contribution margin ratio is ($1 $0.70)
$1 = .30.
Required sales in dollars = ($195,000 + $75,000) .30 = $900,000
BRIEF EXERCISE 5-11
Margin of safety = $1,000,000 $840,000 = $160,000
Margin of safety ratio = $160,000 $1,000,000 = 16%
BRIEF EXERCISE 5-12
Contribution margin per unit $1.60 is ($6.00 $4.40)
Required sales in units = ($480,000 + $1,500,000) $1.60 = 1,237,500.

Copyright 2012 John Wiley & Sons, Inc.Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)

5-9

SOLUTIONS FOR DO IT! REVIEW EXERCISES


DO IT! 5-1
Variable costs: Indirect labor, direct labor, and direct materials.
Fixed costs:
Property taxes and depreciation.
Mixed costs:
Utilities and maintenance.
DO IT! 5-2
(a)

Variable cost:
Fixed cost:

($18,580 $16,200) (10,500 8,800) = $1.40 per unit


$18,580 ($1.40 X 10,500 units) = $3,880

or $16,200 ($1.40 X 8,800) = $3,880


(b)

Total cost to produce 9,200 units: $3,880 + ($1.40 X 9,200) =


$16,760

DO IT! 5-3
(a)

The formula is $250Q $170Q $140,000 = 0. Therefore, 80Q = $140,000,


and the breakeven point in units is 1,750 ($140,000 $80).

(b)

The contribution margin per unit is $80 ($250 $170). The formula
therefore is $140,000 $80, and the breakeven point in units is 1,750.

DO IT! 5-4
(a)

5-10

CM per unit = Unit selling price Unit variable costs


$12 = $30 $18
CM ratio = CM per unit/Unit selling price
40% = $12/$30
Break-even point in dollars = Fixed costs Contribution margin ratio
= $220,000 40%
= $550,000

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DO IT! 5-4 (Continued)


(b)

Margin of safety

Actual sales Break-even sales


Actual sales
$800,000 $550,000
=
$800,000
=

=
(c)

31.25%

Sales Variable costs Fixed costs = Net income


$30Q $18Q = $220,000 + $140,000
$12Q = $360,000
Q = 30,000 units
30,000 units X $30 = $900,000 required sales

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5-11

SOLUTIONS TO EXERCISES
EXERCISE 5-1
(a) The determination as to whether a cost is variable, fixed, or mixed can
be made by comparing the cost in total and on a per-unit basis at two
different levels of production.
Variable Costs
Fixed Costs
Mixed Costs

Vary in total but remain constant on a per-unit basis.


Remain constant in total but vary on a per-unit basis.
Contain both a fixed element and a variable element.
Vary both in total and on a per-unit basis.

(b) Using these criteria as a guideline, the classification is as follows:


Direct materials
Direct labor
Utilities

Variable
Variable
Mixed

Rent
Maintenance
Supervisory salaries

Fixed
Mixed
Fixed

EXERCISE 5-2
(a)

5-12

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Copyright 2012 John Wiley & Sons, Inc.Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)

5-13

$
4
,9
,73
0

$
2
5
0$
2
,4
0

EXERCISE 5-2 (Continued)


(b)
(c)

The relevant range is 3,000 8,000 units of output since a straight-line


relationship exists for both direct materials and rent within this range.
Variable cost per unit

Within the relevant range


(3,000 8,000 units)

=
=

Cost
Units
$15,000*
5,000*

$3 per
unit

*Any costs and units within the relevant range could have been used
to calculate the same unit cost of $3.
(d) Fixed cost within the
relevant range
(3,000 8,000 units)

$8,000

EXERCISE 5-3

(a) Maintenance Costs:


=

Total costs
Less: Variable costs
700 X $6
300 X $6
Total fixed costs

= $6 variable cost per machine hour


700
Machine Hours
$4,900
4,200

$ 700

300
Machine Hours
$2,500
1,800
$ 700

Thus, maintenance costs are $700 per month plus $6 per machine hour.

5-14

Copyright 2012 John Wiley & Sons, Inc.Weygandt, Managerial Accounting, 6/e, Solutions Manual(For Instructor Use Only)

(b)

COSTS

EXERCISE 5-3 (Continued)


$5,000

Total Cost Line

$4,900

$4,000
$3,000
Variable Cost Element
$2,000
$1,000
$ 700

Fixed Cost Element


0 100 200 300 400 500 600 700
Machine Hours

EXERCISE 5-4
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.

Wood used in the production of furniture.


Fuel used in delivery trucks.
Straight-line depreciation on factory building.
Screws used in the production of furniture.
Sales staff salaries.
Sales commissions.
Property taxes.
Insurance on buildings.
Hourly wages of furniture craftsmen.
Salaries of factory supervisors.
Utilities expense.
Telephone bill.

Variable.
Variable.
Fixed.
Variable.
Fixed.
Variable.
Fixed.
Fixed.
Variable.
Fixed.
Mixed.
Mixed.

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5-15

$
,8
5
0
$
,3
2
7
5
0
$
,4
2
5
0
=

EXERCISE 5-5

(a) Maintenance Costs:

= $.50 variable cost per machine hour

High
$5,000

Total cost
Less: Variable costs
8,000 X $.50
3,500 X $.50
Total fixed costs

Activity Level

4,000
00,000
$1,000

Low
$2,750
1,750
$1,000

(b)

COSTS

Thus, maintenance costs are $1,000 per month plus $.50 per
machine hour.
$5,000

Total Cost Line

$4,000
Variable Cost Element

$3,000
$2,000
$1,000

Fixed Cost Element


0

2,000

4,000

6,000

8,000

Machine Hours

5-16

Copyright 2012 John Wiley & Sons, Inc.Weygandt, Managerial Accounting, 6/e, Solutions Manual(For Instructor Use Only)

EXERCISE 5-6
(a)

(b)

Cost
Direct materials
Direct labor
Utilities
Property taxes
Indirect labor
Supervisory salaries
Maintenance
Depreciation

Fixed

X
X

Variable
X
X

X
X

Fixed costs

Mixed

= $1,000 + $1,900 + $2,400 +


$300 + $200
= $5,800

Variable costs to produce 3,000 units = $7,500 + $18,000 + $4,500


= $30,000
Variable cost per unit

= $30,000/3,000 units
= $10 per unit

Variable cost portion of mixed cost

= Total cost Fixed portion

Utilities:
Variable cost to produce 3,000 units = $2,100 $300
= $1,800
Variable cost per unit

= $1,800/3,000 units
= $.60 per unit

Maintenance:
Variable cost to produce 3,000 units = $1,100 $200
= $900
Variable cost per unit

= $900/3,000 units
= $.30 per unit

Cost to produce 5,000 units = (Variable costs per


+ Fixed cost
unit X 5,000 units)
= (($10 + $.60 + $.30) X 5,000) +
$5,800
= $54,500
+ $5,800

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5-17

= $60,300

5-18

Copyright 2012 John Wiley & Sons, Inc.Weygandt, Managerial Accounting, 6/e, Solutions Manual(For Instructor Use Only)

EXERCISE 5-7
MEMO
To:

Jim Taylor

From:

Student

Re:

Assumptions underlying CVP analysis

CVP analysis is a useful tool in analyzing the effects of changes in costs


and volume on a companys profits. However, there are some assumptions
which underline CVP analysis. When these assumptions are not valid,
the results of CVP analysis may be inaccurate.
The five assumptions are:
1. The behavior of both costs and revenues is linear throughout
the relevant range of the activity index.
2. All costs can be classified accurately as either fixed or variable.
3. Changes in activity are the only factors that affect costs.
4. All units produced are sold.
5. When more than one type of product is sold, the sales mix will
remain constant.
If you want further explanation of any of these assumptions, please
contact me.
EXERCISE 5-8
(a) Contribution margin per lawn

$60 ($12 + $10 + $2)

Contribution margin per lawn

$36

Contribution margin ratio

$36 $60 = 60%

Fixed costs = $1,400 + $200 + $2,000 = $3,600


Break-even point in lawns = $3,600 $36 = 100
(b) Break-even point in dollars = 100 lawns X $60 per lawn
= $6,000 per month
OR
Fixed costs Contribution margin ratio = $3,600 .60
= $6,000 per month

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5-19

EXERCISE 5-9
1.

Contribution margin per room


Contribution margin per room
Contribution margin ratio

$
2
1
,%
0
4
8
=

$60 ($11 + $28)

$21

$21 $60 = 35%

Fixed costs = $6,200 + $1,100 + $1,000 + $100 = $8,400


Break-even point in rooms = $8,400 $21 = 400
2.

Break-even point in dollars

OR
Fixed costs Contribution margin ratio

EXERCISE 5-10

= 400 rooms X $60 per room


= $24,000 per month
= $8,400 .35
= $24,000 per month

(a) Contribution margin in dollars: Sales = 560 X $120 =

$67,200
Variable costs = $67,200 X .60 = 40,320
Contribution margin
$26,880

Contribution margin per unit:


Contribution margin ratio:
(b) Break-even sales in dollars:
Break-even sales in units:

5-20

$120 $72 ($120 X 60%) = $48.


$48 $120 = 40%.
= $52,560.
= 438.

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EXERCISE 5-11

iB
F
x
e
d
c
o
s
t
r(3
e
-$
l5
a
i1
k
v
n
a
n
u
s
2
,0

$
5
)

(a) 1. Contribution margin ratio is: $27,000 = 75%


$36,000
Break-even point in dollars =
2. Round-trip fare =

$15,000 = $20,000
75%

$36,000 = $25
1,440 fares

Break-even point in fares = $20,000 = 800 fares


$25

(b) At the break-even point fixed costs and contribution margin are equal.
Therefore, the contribution margin at the break-even point would be
$15,000.
EXERCISE 5-12
(a) Unit contribution margin =
=

= $1.60
Variable cost per unit
OR

= Unit selling price Unit contribution margin


= $5.00 $1.60
= $3.40
= 70,000 X $5.00 = 70,000X + $112,000
= where X = Variable cost per unit
= Variable cost per unit = $3.40

Contribution margin ratio = $1.60 $5.00 = 32%

Copyright 2012 John Wiley & Sons, Inc.Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)

5-21

EXERCISE 5-12 (Continued)


(b) Fixed costs Contribution margin ratio = Break-even sales in dollars
Fixed costs .32
= $420,000
= $134,400 ($420,000 X.32)
Since fixed costs were $112,000 in 2013, the increase in 2014 is $22,400
($134,400 $112,000).
EXERCISE 5-13
(a)

CANNES COMPANY
CVP Income Statement
For the Month Ended September 30, 2014

Sales (600 video game consoles)...................


Variable costs...................................................
Contribution margin.........................................
Fixed costs.......................................................
Net income........................................................
(b)

(c)

Per Unit
$400
275
$125

Sales = Variable costs + Fixed costs


$400X = $275X + $52,000
$125X = 52,000
X = 416 units
CANNES COMPANY
CVP Income Statement
For the Month Ended September 30, 2014

Sales (416 video game consoles)...................


Variable costs...................................................
Contribution margin.........................................
Fixed costs........................................................
Net income........................................................
5-22

Total
$240,000
165,000
75,000
52,000
$ 23,000

Total
$166,400
114,400
52,000
52,000
$ 0

Per Unit
$400
275
$125

Copyright 2012 John Wiley & Sons, Inc.Weygandt, Managerial Accounting, 6/e, Solutions Manual(For Instructor Use Only)

Copyright 2012 John Wiley & Sons, Inc.Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)

5-23

$
5
7
0
,
+
$
2
1
0
,
1

9
6
0
*
$
5
0
$
$
5
7
0
,X
,
+
$
2
6
0
9

EXERCISE 5-14

(a) Units sold in 2013 =

= 13,000 units

(b) Units needed in 2014 =

= 13,867 units (rounded)

*$210,000 + $52,000 = $262,000

(c)

= 13,000 units, where X = new selling price

$832,000 = 13,000X $1,170,000

$2,002,000 = 13,000X
X = $154

EXERCISE 5-15
1.

Unit sales price = $400,000 5,000 units = $80


Increase selling price to $88, or ($80 X 110%).
Net income = $440,000 $210,000 $90,000 = $140,000.

2.

Reduce variable costs to 45% of sales.


Net income = $400,000 $180,000 $90,000 = $130,000.

Alternative 1, increasing selling price, will produce the highest net income.

5-24

Copyright 2012 John Wiley & Sons, Inc.Weygandt, Managerial Accounting, 6/e, Solutions Manual(For Instructor Use Only)

DOLLARS (000)

EXERCISE 5-16
(a)

$3,200

Sales Line

2,800
2,400

Break-even Point

Total Cost Line

2,000
1,600
1,200
800

Fixed Cost Line

400

100 200 300 400 500 600 700 800


Number of Units (in thousands)

(b) 1.

Break-even sales in units:


$4X = $2.50X + $600,000
$1.50X = $600,000
X = 400,000 units

2.

Break-even sales in dollars:


X = .625X + $600,000
.375X = $600,000
X = $1,600,000 or $600,000 37.5%

(c) 1.
2.

Margin of safety in dollars:$2,000,000 $1,600,000 = $400,000


Margin of safety ratio:$400,000 $2,000,000 = 20%

Copyright 2012 John Wiley & Sons, Inc.Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)

5-25

EXERCISE 5-17
(a) Contribution ratio = Contribution margin Sales
($40 $16) $40 = 60%
(b) Break-even in dollars: $19,500 60% = $32,500
(c) Margin of safety = (2,600 X $40) $32,500 = $71,500
$71,500 $104,000 = 68.75%
(d) Current contribution margin $40 $16 = $24
Total contribution margin is $24 X 2,600 = $62,400
30% increase in contribution margin is $62,400 X 30% = $18,720
Total increase in sales required: $18,720 60% = $31,200

5-26

Copyright 2012 John Wiley & Sons, Inc.Weygandt, Managerial Accounting, 6/e, Solutions Manual(For Instructor Use Only)

SOLUTIONS TO PROBLEMS
PROBLEM 5-1A

(a) Variable costs (per haircut)


Barbers commission
Barber supplies
Utilities
Total variable cost per
haircut

(c)

DOLLARS (000)

(b) $10.00X = $5.00X + $6,000


$ 5.00X = $6,000
X = 1,200 haircuts

$4.50
.30
.20
$5.00

Fixed costs (per month)


Barbers salaries
Managers extra salary
Advertising
Rent
Utilities
Magazines
Total fixed

$4,000
500
200
1,100
175
25
$6,000

1,200 haircuts X $10 = $12,000

18

Sales Line

15

Break-even Point

Total Cost Line

12
9
Fixed Cost Line

6
3

300

600

900 1,200 1,500 1,800

Number of Haircuts

(d) Net income = $17,000 [($5.00 X 1,700) + $6,000]

Copyright 2012 John Wiley & Sons, Inc.Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)

5-27

= $2,500

5-28

Copyright 2012 John Wiley & Sons, Inc.Weygandt, Managerial Accounting, 6/e, Solutions Manual(For Instructor Use Only)

PROBLEM 5-2A
(a)

JORGE COMPANY
CVP Income Statement (Estimated)
For the Year Ending December 31, 2014
Sales................................................................
Variable expenses
Cost of goods sold.................................
Selling expenses....................................
Administrative expenses.......................
Total variable expenses..................
Contribution margin.......................................
Fixed expenses
Cost of goods sold.................................
Selling expenses....................................
Administrative expenses.......................
Total fixed expenses.......................
Net income......................................................

$1,800,000
$1,170,000*
70,000
20,000

280,000
65,000
60,000

1,260,000
540,000

405,000
$ 135,000

*Direct materials $430,000 + direct labor $360,000 + variable manufacturing


overhead $380,000.
(b) Variable costs = 70% of sales ($1,260,000 $1,800,000) or $.35 per
bottle ($.50 X 70%). Total fixed costs = $405,000.
1.

$.50X = $.35X + $405,000


$.15X = $405,000
X = 2,700,000 units

2.

2,700,000 X $.50 = $1,350,000

(c) Contribution margin ratio = ($.50 $.35) $.50


= 30% (or 1 .70)
Margin of safety ratio

= ($1,800,000 $1,350,000) $1,800,000


= 25%

(d) Required sales

Copyright 2012 John Wiley & Sons, Inc.Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)

5-29

X=

5-30

$
4
0
5
,.3
+
$
1
8
0
,
= $1,950,000

Copyright 2012 John Wiley & Sons, Inc.Weygandt, Managerial Accounting, 6/e, Solutions Manual(For Instructor Use Only)

$
9
0
,.3
2
,$
$
9
0
.8
4
3
1
,.2
0
7
PROBLEM 5-3A

(a) Sales were $2,500,000, variable expenses were $1,700,000 (68% of sales),
and fixed expenses were $900,000. Therefore, the break-even point in
dollars is:
= $2,812,500

(b) 1.

The effect of this alternative is to increase the selling price per unit
to $6 ($5 X 120%). Total sales become $3,000,000 (500,000 X $6).
Thus, the contribution margin ratio changes to 43% [($3,000,000
$1,700,000) $3,000,000]. The new break-even point is:
= $2,093,023 (rounded)

2.

The effects of this alternative are to change total fixed costs


to $810,000 ($900,000 $90,000) and to change the contribution
margin to 27% [($2,500,000 $1,700,000 $125,000) $2,500,000].
The new break-even point is:
= $3,000,000

Alternative 1 is the recommended course of action because it has a


lower break-even point.

Copyright 2012 John Wiley & Sons, Inc.Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)

5-31

((2
,2
)4
0
X
$
4
0

(
1
6
,
8
7
5
X
$
4
0
)
(,0X
,(2
2
X
$
4
0
)
$
)4
3
(,0X
8

2
1
,$
)3
X
$
3
8
8
)

PROBLEM 5-4A

(a) Current break-even point: $40X = $24X + $270,000


(where X = pairs of shoes)
$16X = $270,000
X = 16,875 pairs of shoes
New break-even point:

$38X = $24X + ($270,000 + $24,000)


$14X = $294,000
X = 21,000 pairs of shoes

(b) Current margin of safety ratio =

= 16% (rounded)
New margin of safety ratio

= 13% (rounded)
(c)

BARGAIN SHOE STORE


CVP Income Statement

Sales (20,000 X $40)


Variable expenses (20,000 X $24)
Contribution margin
Fixed expenses
Net income

Current

New

$800,000
480,000
320,000
270,000
$ 50,000

$912,000
576,000
336,000
294,000
$ 42,000

(24,000 X $38)
(24,000 X $24)

The proposed changes will raise the break-even point 4,125 units. This
is a significant increase. Margin of safety is 3% lower and net income

5-32

Copyright 2012 John Wiley & Sons, Inc.Weygandt, Managerial Accounting, 6/e, Solutions Manual(For Instructor Use Only)

is $8,000 lower. The recommendation is to not accept the proposed


changes.

Copyright 2012 John Wiley & Sons, Inc.Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)

5-33

PROBLEM 5-5A
(a) (1)

Current Year
$1,500,000

Sales
Variable costs
Direct materials
Direct labor
Manufacturing overhead ($350,000 X .70)
Selling expenses ($250,000 X .40)
Administrative expenses ($270,000 X .20)
Total variable costs
Contribution margin

511,000
290,000
245,000
100,000
54,000
1,200,000
$ 300,000

Sales

Current Year
$1,500,000 X 1.1

Variable costs
Direct materials
Direct labor
Manufacturing overhead
Selling expenses
Administrative expenses
Total variable costs
Contribution margin

511,000
290,000
245,000
100,000
54,000
1,200,000
$ 300,000

X 1.1
X 1.1
X 1.1
X 1.1
X 1.1
X 1.1
X 1.1

Projected Year
$1,650,000
562,100
319,000
269,500
110,000
59,400
1,320,000
$ 330,000

(2)
Fixed Costs
Current Year
Manufacturing overhead ($350,000 X .30)
$105,000
Selling expenses ($250,000 X .60)
150,000
Administrative expenses ($270,000 X .80)
216,000
Total fixed costs
$471,000

5-34

Projected year
$105,000
150,000
216,000
$471,000

Copyright 2012 John Wiley & Sons, Inc.Weygandt, Managerial Accounting, 6/e, Solutions Manual(For Instructor Use Only)

PROBLEM 5-5A (Continued)


(b) Unit selling price = $1,500,000 100,000 = $15
Unit variable cost = $1,200,000 100,000 = $12
Unit contribution margin = $15 $12 = $3
Contribution margin ratio = $3 $15 = .20
Break-even point in units = Fixed costs Unit contribution margin
157,000 units
=
$471,000
$3
Break-even point in dollars = Fixed costs Contribution margin ratio
$2,355,000
=
$471,000
.20

(c) Sales dollars

required for = (Fixed costs + Target net income) Contribution margin ratio
target net
income
$3,355,000

($471,000

$200,000)

.20

(d) Margin of safety = (Expected sales Break-even sales) Expected sales


ratio
29.8%

($3,355,000

$2,355,000)

$3,355,000

Copyright 2012 John Wiley & Sons, Inc.Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)

5-35

PROBLEM 5-6A

(a) 1.

Let variable selling and administrative expenses = VSA


Sales Variable cost of goods sold VSA = Contribution Margin
$1,200,000 ($400,000 + $500,000 + $50,000 + VSA) = $180,000
VSA = $70,000

2.

Let fixed manufacturing overhead = FMO


Sales Variable cost of goods sold FMO = Gross profit
$1,200,000 ($400,000 + $500,000 + $50,000 + FMO) = $180,000
FMO = $70,000

3.

Let fixed selling and administrative expenses = FSA


Contribution margin ratio = $180,000 $1,200,000 = 15%
Contribution margin at break-even = $1,300,000 X 15% = $195,000
At break-even, Contribution margin = Fixed costs (FSA + FMO)
$195,000 = FSA + $70,000
FSA = $125,000

(b) Incremental sales = $1,200,000 X 25% = $300,000


Incremental contribution margin = $300,000 X 15% = $45,000
The maximum increased advertising expenditure would be equal to
the incremental contribution margin earned on the increased sales,
which is $45,000. The other fixed costs are irrelevant to this decision,
because they would be incurred whether or not the advertising expenditure is increased.

5-36

Copyright 2012 John Wiley & Sons, Inc.Weygandt, Managerial Accounting, 6/e, Solutions Manual(For Instructor Use Only)

PROBLEM 5-1B
(a) Variable costs (per haircut)
Barbers commission
$3.00
Rent
.60
Barber supplies
.40
Total variable
$4.00

Fixed costs (per month)


Barbers salaries
Rent
Depreciation
Utilities
Advertising
Total fixed

$7,500*
700
400
300
100
$9,000

*($1,500 X 3) + $3,000

(c)

DOLLARS (000)

(b) $10X = $4X + $9,000


$6X = $9,000
X = 1,500 haircuts

1,500 haircuts X $10 = $15,000

Break-even Point

18

Sales Line
Total Cost Line

15
12

Fixed Cost Line

9
6
3

300

600

900 1,200 1,500 1,800

Number of Haircuts

(d) Net income = $18,000 [($4.00 X 1,800) + $9,000]


= $1,800

Copyright 2012 John Wiley & Sons, Inc.Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)

5-37

PROBLEM 5-2B
(a)

ALL FRUTE COMPANY


CVP Income Statement (Estimated)
For the Year Ending December 31, 2014
Sales........................................................
Variable expenses
Cost of goods sold.........................
Selling expenses.............................
Administrative expenses................
Total variable expenses..........
Contribution margin...............................
Fixed expenses
Cost of goods sold.........................
Selling expenses.............................
Administrative expenses................
Total fixed expenses...............
Net income..............................................

$2,500,000
$1,080,000 (1)
80,000
40,000

380,000
250,000
150,000

1,200,000
1,300,000

780,000
$ 520,000

(1) Direct materials $360,000 + direct labor $450,000 + variable manufacturing overhead $270,000.
(b) Variable costs = 48% of sales ($1,200,000 $2,500,000) or $.24 per
bottle ($.50 X 48%). Total fixed costs = $780,000.
1.

$.50X = $.24X + $780,000


$.26X = $780,000
X = 3,000,000 units (breakeven)

2.

3,000,000 X $.50 = $1,500,000

(c) Contribution margin ratio = ($.50 $.24) $.50


= 52%
Margin of safety ratio

= ($2,500,000 $1,500,000) $2,500,000


= 40%

(d) Required sales

5-38

Copyright 2012 John Wiley & Sons, Inc.Weygandt, Managerial Accounting, 6/e, Solutions Manual(For Instructor Use Only)

X=

$
7
8
0
,.5
+
$
6
2
4
,0
= $2,700,000

Copyright 2012 John Wiley & Sons, Inc.Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)

5-39

$
8
4
,.3
0
5
,$
$
8
4
0
.6
,.3
0
PROBLEM 5-3B

(a) Sales were $1,800,000 and variable expenses were $1,170,000, which
means contribution margin was $630,000 and CM ratio was 35%. Fixed
expenses were $840,000. Therefore, the breakeven point in dollars is:
= $2,400,000

(b) 1.

The effect of this alternative is to increase the selling price per unit
to $37.50 ($30 X 125%). Total sales become $2,250,000 (60,000 X
$37.50). Thus, the contribution margin ratio changes to 48%
[($2,250,000 $1,170,000) $2,250,000]. The new breakeven point is:
= $1,750,000

2.

The effects of this alternative are to change total fixed costs to


$660,000 ($840,000 $180,000) and to change the contribution margin
to .30 [($1,800,000 $1,170,000 $90,000) $1,800,000]. The new
breakeven point is:
= $2,200,000

3.

The effects of this alternative are:(1) variable and fixed cost of


goods sold become $675,000 each, (2) total variable costs become
$915,000 ($675,000 + $125,000 + $115,000), and (3) total fixed costs
are $1,095,000 ($675,000 + $355,000 + $65,000). The new breakeven
point is:

X = ($915,000 $1,800,000)X + $1,095,000


X = .51X + $1,095,000
.49X = $1,095,000
X = $2,234,694 (rounded)

Alternative 1 is the recommended course of action using breakeven


analysis because it has the lowest breakeven point.

5-40

Copyright 2012 John Wiley & Sons, Inc.Weygandt, Managerial Accounting, 6/e, Solutions Manual(For Instructor Use Only)

(2
,4X
0
)(2
$
(4
3
,,7
0

1
2
0
X
$
3
0
)
)0
X
$
3
*5
6
2
7
2
7

PROBLEM 5-4B

(a) Current break-even point: $30X = $12X + $216,000


(where X = pairs of shoes)
$18X = $216,000
X = 12,000 pairs of shoes
New break-even point:

$27X = $12X + ($216,000 + $18,000)


$15X = $234,000
X = 15,600 pairs of shoes

(b) Current margin of safety ratio =

= 40%
New margin of safety ratio

= 35%
*$30 X $90
(c)

COSTLESS SHOE STORE


CVP Income Statement

Sales (20,000 X $30)


Variable expenses (20,000 X $12)
Contribution margin
Fixed expenses
Net income

Current

New

$600,000
240,000
360,000
216,000
$144,000

$648,000
288,000
360,000
234,000
$126,000

(24,000 X $27)
(24,000 X $12)

No, the changes should not be made because net income will be lower
than the net income currently earned. In addition, the break-even point

Copyright 2012 John Wiley & Sons, Inc.Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)

5-41

would be higher by 3,600 units and the margin of safety ratio would
decrease from 40% to 35%.

5-42

Copyright 2012 John Wiley & Sons, Inc.Weygandt, Managerial Accounting, 6/e, Solutions Manual(For Instructor Use Only)

PROBLEM 5-5B
(a) (1)

Current Year
$1,800,000

Sales
Variable costs
Direct materials
Direct labor
Manufacturing overhead ($480,000 X .40)
Selling expenses ($400,000 X .30)
Administrative expenses ($484,000 X .50)
Total variable costs
Contribution margin

456,000
250,000
192,000
120,000
242,000
1,260,000
$ 540,000

Sales

Current Year
$1,800,000 X 1.2

Variable costs
Direct materials
Direct labor
Manufacturing overhead
Selling expenses
Administrative expenses
Total variable costs
Contribution margin

456,000
250,000
192,000
120,000
242,000
1,260,000
$ 540,000

(2)
Fixed Costs
Manufacturing overhead ($480,000 X .60)
Selling expenses ($400,000 X .70)
Administrative expenses ($484,000 X .50)
Total fixed costs

X 1.2
X 1.2
X 1.2
X 1.2
X 1.2
X 1.2
X 1.2

Projected Year
$2,160,000
547,200
300,000
230,400
144,000
290,400
1,512,000
$ 648,000

Current
Year
$288,000
280,000
242,000
$810,000

Projected
Year
$288,000
280,000
242,000
$810,000

Copyright 2012 John Wiley & Sons, Inc.Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)

5-43

PROBLEM 5-5B (Continued)


(b) Unit selling price = $1,800,000 100,000 = $18.00
Unit variable cost = $1,260,000 100,000 = $12.60
Unit contribution margin = $18.00 $12.60 = $5.40
Contribution margin ratio = $5.40 $18.00 = .30
Break-even point in units = Fixed costs Unit contribution margin
150,000 units
= $810,000
$5.40
Break-even point in dollars = Fixed costs Contribution margin ratio
$2,700,000
= $810,000
.30
(c)

Sales dollars
required for = (Fixed costs + Target net income) Contribution margin ratio
target net income
$3,410,000
=
($810,000 +
$213,000)

.30

(d)

Margin of safety = (Expected sales Break-even sales) Expected sales


ratio
21*%
=
($3,410,000
$2,700,000)

3,410,000

*(Rounded)
(e) (1)

5-44

Sales

$1,800,000

Variable costs
Direct materials
Direct labor ($250,000 $100,000)
Manufacturing overhead ($480,000 X .10)
Selling expenses ($400,000 X .80)
Administrative expenses ($484,000 X .50)
Total variable costs
Contribution margin

456,000
150,000
48,000
320,000
242,000
1,216,000
$ 584,000

Copyright 2012 John Wiley & Sons, Inc.Weygandt, Managerial Accounting, 6/e, Solutions Manual(For Instructor Use Only)

PROBLEM 5-5B (Continued)


(2)Contribution margin ratio = $584,000 $1,800,000 = .32 (Rounded)
(3)Break-even point in dollars = $754,000 .32 = $2,356,250
Fixed costs
Manufacturing overhead ($480,000 X .90)
Selling expenses ($400,000 X .20)
Administrative expenses ($484,000 X .50)
Total fixed costs

$432,000
80,000
242,000
$754,000

The break-even point in dollars declined from $2,700,000 to $2,356,250.


This means that overall the companys risk has declined because it
doesnt have to generate as much in sales. The two changes actually
had opposing effects on the break-even point. By changing to a more
commission based approach to compensate its sales staff, the company
reduced its fixed costs, and therefore reduced its break-even point. In
contrast, the purchase of the new equipment increased the companys
fixed costs (by increasing its equipment depreciation) and reduced its
variable direct labor cost, both of which would increase the break-even
point.

Copyright 2012 John Wiley & Sons, Inc.Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)

5-45

PROBLEM 5-6B

(a) 1.

Let variable selling and administrative expenses = VSA


Sales Variable cost of goods sold VSA = Contribution Margin
$2,000,000 ($600,000 + $700,000 + $200,000 + VSA) = $150,000
VSA = $350,000

2.

Let fixed manufacturing overhead = FMO


Sales Variable cost of goods sold FMO = Gross profit
$2,000,000 ($600,000 + $700,000 + $200,000 + FMO) = $400,000
FMO = $100,000

3.

Let fixed selling and administrative expenses = FSA


Contribution margin ratio = $150,000 $2,000,000 = 7.50%
Contribution margin at break-even = $2,400,000 X 7.50% = $180,000
At break-even, Contribution margin = Fixed costs (FSA + FMO)
$180,000 = FSA + $100,000
FSA = $80,000

(b) Incremental sales = $2,000,000 X 15% = $300,000


Incremental contribution margin = $300,000 X 7.50% = $22,500
The maximum increased advertising expenditure would be equal to
the incremental contribution margin earned on the increased sales,
which is $22,500. The other fixed costs are irrelevant to this decision,
because they would be incurred whether or not the advertising
expenditure is increased.

5-46

Copyright 2012 John Wiley & Sons, Inc.Weygandt, Managerial Accounting, 6/e, Solutions Manual(For Instructor Use Only)

BYP 5-1

DECISION-MAKING AT CURRENT DESIGNS

(a) $250 + $100 + $170 + $420 + $400 = $1,340 total variable costs
(b) Contribution margin per unit = $2,000 $1,340 = $660
(c) $359,700* $660 = 545 units
*$119,700 $240,000
(d) ($359,700 + $270,600) $660 = 955 units
(e) Actual (expected) sales = $2,000 X 1,000 = $2,000,000
Break-even sales = $2,000 X 545 = $1,090,000
Margin of safety in dollars = $2,000,000 $1,090,000
= $910,000
Margin of safety ratio = $910,000 $2,000,000
= 45.5%

Copyright 2012 John Wiley & Sons, Inc.Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)

5-47

BYP 5-2

DECISION-MAKING ACROSS THE ORGANIZATION

(a)
(1)

Capital-Intensive

Fixed manufacturing costs


Incremental selling expenses
Total fixed costs
Selling price
Variable costs
Direct materials
Direct labor
Variable overhead
Selling expenses
Contribution margin

(2)
$2,524,000
502,000
$3,026,000
$32.00

$5.00
6.00
3.00
2.00

Total fixed costs (1)

16.00
$16.00
$3,026,000

Contribution margin per unit (2)


Break-even in units (1) (2)

$16.00
189,125

Labor-Intensive

Fixed manufacturing costs


Incremental selling expenses
Total fixed costs
Selling price
Variable costs
Direct materials
Direct labor
Variable overhead
Selling expenses
Contribution margin

$1,550,000
502,000
$2,052,000
$32.00

$5.50
8.00
4.50
2.00

Total fixed costs (1)


Contribution margin per unit (2)
Break-even in units (1) (2)

20.00
$12.00
$2,052,000
$12.00
171,000

(b) Creative Ideas Company would be indifferent between the two manufacturing methods at the volume (X) where total costs are equal.
$16X + $3,026,000 = $20X + $2,052,000
$4X = $974,000
X = 243,500 units
(c) Creative Ideas should employ the capital-intensive manufacturing
method if annual sales are expected to exceed 243,500 units and the
labor-intensive manufacturing method if annual sales are not expected
to exceed 243,500 units. The labor-intensive method is more profitable
for sales up to 243,500 units because the fixed costs are lower. The
capital-intensive method is more profitable for sales above 243,500
units because its contribution margin is higher.

5-48

Copyright 2012 John Wiley & Sons, Inc.Weygandt, Managerial Accounting, 6/e, Solutions Manual(For Instructor Use Only)

BYP 5-3

MANAGERIAL ANALYSIS

(a) The variable costs per unit are:


Cost of goods sold ($600,000 240,000).....................
Selling expenses ($117,600 240,000).........................
Administrative expenses ($60,000 240,000)..............
Total.........................................................................
Fixed costs are:
Cost of goods sold ($800,000 X .25).............................
Selling expenses ($280,000 X .58)................................
Administrative expenses ($150,000 X .60)...................

$2.50
.49
.25
$3.24
$200,000
162,400
90,000
$452,400

The break-even points are:


X = ($3.24 $5.00) X + $452,400
X = .65X + $452,400
.35X = $452,400
X = $1,292,571 (rounded)
$5.00X = $3.24X + $452,400
$1.76X = $452,400
X = 257,045 units (rounded)
(b) Variable unit cost of goods sold = $2.75
($600,000 240,000 = $2.50; $2.50 + $.25)
Sales volume = 300,000 units (240,000 X 125%)
Total sales = 300,000 X $5.25 = $1,575,000
Net income computation:
Sales........................................................
Variable expenses
Cost of goods sold
(300,000 X $2.75)..........................
Selling expenses
(300,000 X $.49)............................
Administrative expenses
(300,000 X $.25)............................
Total variable expenses..........
Contribution margin...............................

$1,575,000
$825,000
147,000
75,000

1,047,000
528,000

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5-49

BYP 5-3 (Continued)


Fixed expenses
Cost of goods sold.........................
Selling expenses.............................
Administrative expenses................
Total fixed expenses...............
Net income..............................................

$200,000
162,400
90,000

452,400
$ 75,600

X = ($1,047,000 $1,575,000)X + $452,400


X = .66X + $452,400
.34X = $452,400
X = $1,330,588 (rounded)
Profits and the break-even point would both increase.
(c) Sales [384,000 (1) X ($5.00 $.25)]................
Variable expenses
Cost of goods sold
(384,000 X $2.50).................................
Selling expenses (384,000 X $.59).........
Administrative expenses
(384,000 X $.25) ..................................
Total variable expenses..................
Contribution margin.......................................
Fixed expenses
Cost of goods sold.................................
Selling expenses
($162,400 + $40,000)............................
Administrative expenses........................
Total fixed expenses.......................
Net income......................................................

$1,824,000
$960,000
226,560
96,000

1,282,560
541,440

$200,000
202,400
90,000

492,400
$ 49,040

(1) Sales volume = 240,000 X 160% = 384,000


X = ($1,282,560 $1,824,000)X + $492,400
X = .70X + $492,400
.30X = $492,400
X = $1,641,333
Profits and the break-even point would both increase.

5-50

Copyright 2012 John Wiley & Sons, Inc.Weygandt, Managerial Accounting, 6/e, Solutions Manual(For Instructor Use Only)

(d) Peris plan should be accepted. It produces a higher net income and
a lower break-even point than Pauls plan.

Copyright 2012 John Wiley & Sons, Inc.Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)

5-51

BYP 5-4

REAL-WORLD FOCUS

(a) Sweeteners and packaging are a variable cost to Coca-Cola because


their use is directly proportional to the amount of product produced. If
the unit cost of a variable cost item increases, the contribution margin
will decline. This will lead to a decline in net income unless the company
can increase its selling price, increase the number of units it sells, or
reduce other costs.
(b) This description makes the marketing expenditures sound like they are
a variable cost, since it suggests that they vary with the amount of units
sold. However, unlike variable costs, the relationship of marketing costs is
not directly proportional to sales, since other factors also influence
units sold. Thus, it is not a pure variable cost. However, it is also not a
fixed cost, in that there usually is a relationship between marketing
expenditures and sales. For CVP purposes, it might best be handled as
a mixed cost, having both a fixed and variable component.
(c) The first measure, gallon shipments of concentrates and syrups, is the
activity index, since it best reflects the companys production and sales
activity at the wholesale level, its primary line of business. The second
measure, unit cases of finished product, indicates the amount of
activity by Cokes primary customers, the bottlers. Coke also keeps
track of this since it provides information about what is happening at
the retail level.

5-52

Copyright 2012 John Wiley & Sons, Inc.Weygandt, Managerial Accounting, 6/e, Solutions Manual(For Instructor Use Only)

BYP 5-5

REAL-WORLD FOCUS

(a) Barnes and Noble has 1,362 stores with a total of 18.8 million square
feet. That is a huge investment in fixed costs that have very little value
in an e-book environment.
(b) Barnes and Nobles big advantage (which enabled it to put lots of small
independent book sellers out of business), was that each of its
superstores had 150,000 books in stock. However, that is no longer as
impressive when you consider that booksellers websites now give you
access to millions of e-book titles which can be downloaded directly to
e-readers.
(c) The authors say that the arrival of Apples iPad has huge implications
for e-books. ITunes has more than 125 million customers. They represent
a very wide potential audience for e-books.
(d) Barnes and Nobel earns about $12.50 on a $25 hardcover book. The
same book, as an e-book, would sell for $12.99 and Barnes and Noble
would earn $3.90. Obviously they cant afford this decline unless they
can dramatically reduce their fixed costs.
(e) Barnes and Noble was one of the first companies to have an e-reader,
called the Rocket e-book. However, it abandoned its e-reader in 2003
because sales of e-books had been very low. Four years later Amazon
introduced its Kindle e-reader, which has been hugely popular. A second
mistake was that Barnes and Noble was very slow to upgrade its website
to encourage the sale of e-books. Again, Amazon was more than happy
to fill the void.

Copyright 2012 John Wiley & Sons, Inc.Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)

5-53

BYP 5-6
To:

COMMUNICATION ACTIVITY
My Roommate

From:

Your Roommate

Subject:

Cost-Volume-Profit Questions

In response to your request for help, I provide you the following:


(a) The mathematical formula for break-even sales is:
Break-even Sales = Variable Costs + Fixed Costs
Break-even sales in dollars is found by expressing variable costs as a
percentage of unit selling price. For example, if the percentage is 70%,
the break-even formula becomes X = .70X + Fixed Costs. The answer will
be in sales dollars.
Break-even sales in units is found by using unit selling price and unit
variable costs in the formula. For example, if the selling price is $300
and variable costs are $210, the break-even formula becomes $300X =
$210X + Fixed Costs. The answer will be in sales units.
(b) The formulas for contribution margin per unit and contribution margin
ratio differ as shown below:
Unit Selling Price Unit Variable Costs = Contribution Margin per Unit
Contribution Margin per Unit Unit Selling Price = Contribution Margin Ratio
You can see that CM per Unit is used in computing the CM ratio.
(c) When contribution margin is used to determine break-even sales, total
fixed costs are divided by either the contribution margin ratio or contribution margin per unit. Using the CM ratio results in determining the
break-even point in dollars. Using CM per unit results in determining
the break-even point in units.
5-54

Copyright 2012 John Wiley & Sons, Inc.Weygandt, Managerial Accounting, 6/e, Solutions Manual(For Instructor Use Only)

BYP 5-6 (Continued)


The formula for determining break-even sales in dollars is:
Fixed Costs Contribution Margin Ratio = Break-even Sales in Dollars
The formula for determining break-even sales in units is:
Fixed Costs Contribution Margin per Unit = Break-even Sales in Units
I hope this memo answers your questions.

Copyright 2012 John Wiley & Sons, Inc.Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)

5-55

BYP 5-7

ETHICS CASE

(a) The stakeholders in this situation are:

Scott Bestor, accountant of Westfield Company.


The dislocated personnel of Westfield.
The senior management who made the decision.

(b) Scott is hiding an error and is knowingly deceiving the companys


management with inaccurate data.
(c) Scotts alternatives are:

Keep quiet.
Confess his mistake to management.

The students recommendations should recognize the practical aspects


of the situation but they should be idealistic and ethical. If the students
cant be totally ethical when really nothing is at stake, how can they
expect to be ethical under real-world pressures?

5-56

Copyright 2012 John Wiley & Sons, Inc.Weygandt, Managerial Accounting, 6/e, Solutions Manual(For Instructor Use Only)

BYP 5-8

ALL ABOUT YOU

(a)

The variable gasoline cost of going one mile in the hybrid car would
be $0.09 ($3.60/40). The variable gasoline cost of going one mile in the
traditional car would be $0.12 ($3.60/30).

(b)

The savings per mile of driving the hybrid vehicle would be $0.03
($0.12 $0.09).

(c)

In order to break even on your investment, you would need to drive


150,000 miles. This is determined by dividing the additional fixed cost
of $4,500 by the cost savings per mile of $0.03.

(d)

There are many other factors that you would want to consider in your
analysis. For example, do the vehicles differ in their expected repair
bills, insurance costs, licensing fees, or ultimate resale value. Also, some
states and some employers offer rebates for the purchase of hybrid
vehicles. In addition, your decision might be influenced by non-financial
factors, such as a desire to reduce emissions.

Copyright 2012 John Wiley & Sons, Inc.Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)

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