Solutions Manual Chapter07 Exercise Problem Managerial Acc

CHAPTER 7
Cost-Volume-Profit Analysis
ANSWERS TO REVIEW QUESTIONS

7-1 a. In the contribution-margin approach, the break-even point in units is calculated
using the following formula:
fixed expenses
Break-even point 
unit contribution margin
b. In the equation approach, the following profit equation is used:
 unit sales volume   unit variable sales volume  fixed

        0
 sales price in units   expense in units  expenses
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.
7-2 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.
7-3 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.
7-4 The safety margin is the amount by which budgeted sales revenue exceeds break-
even sales revenue.
7-5 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.
7-6 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  2011 The McGraw-Hill Companies, Inc.

Managerial Accounting, 9/e Global Edition 7-1
7-7 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).
7-8 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.
7-9 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.
7-10 A profit-volume graph shows the profit to be earned at each level of sales volume.
7-11 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.
7-12 Operating managers frequently prefer the contribution income statement because it
separates fixed and variable costs. This format makes cost-volume-profit
relationships more readily discernible.

7-2 Solutions Manual
7-13 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.
7-14 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 operating 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.
7-15 When sales volume increases, Company X will have a higher percentage increase in
operating 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
operating income can be found by multiplying the percentage increase in sales
volume by the firm's operating leverage factor.
7-16 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.
7-17 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.
7-18 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.

7-19 Budgeting begins with a sales forecast. Cost-volume-profit analysis can be used to
determine the profit that will be achieved at the budgeted sales volume. A CVP
analysis also shows how profit will change if the sales volume deviates from
budgeted sales.
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.
7-20 The low-price company must have a larger sales volume than the high-price
company. By spreading its fixed expense across a larger sales volume, the low-price
firm can afford to charge a lower price and still earn the same profit as the high-price
company. Suppose, for example, that companies A and B have the following
expenses, sales prices, sales volumes, and profits.
Company A Company B
Sales revenue:
350 units at $10 .............................................. $3,500
100 units at $20 .............................................. $2,000
Variable expenses:
350 units at $6 ................................................ 2,100
100 units at $6 ................................................ 600
Contribution margin............................................. $1,400 $1,400
Fixed expenses .................................................... 1,000 1,000
Operating Profit .................................................... $ 400 $ 400
7-21 The statement makes three assertions, but only two of them are true. Thus the
statement is false. A company with an advanced manufacturing environment
typically will have a larger proportion of fixed costs in its cost structure. This will
result in a higher break-even point and greater operating leverage. However, the
firm's higher break-even point will result in a reduced safety margin.
7-22 Activity-based costing (ABC) results in a richer description of an organization's cost

behavior and CVP relationships. Costs that are fixed with respect to sales volume
may not be fixed with respect to other important cost drivers. An ABC system
recognizes these nonvolume cost drivers, whereas a traditional costing system does
not.

SOLUTIONS TO EXERCISES
EXERCISE 7-23 (25 MINUTES)
Total Break-Even
Sales Variable Contribution Fixed Operating Sales
Revenue Expenses Margin Expenses Income Revenue
1 $160,000a $40,000 $120,000 $30,000 $90,000 $40,000
2 80,000 65,000 15,000 15,000 b -0- 80,000
3 120,000 40,000 80,000 30,000 50,000 45,000c
4 110,000 22,000 88,000 50,000 38,000 62,500d
Explanatory notes for selected items:
aBreak-even sales revenue............................................................................... $40,000

Fixed expenses ................................................................................................ 30,000
Variable expenses ........................................................................................... $10,000
Therefore, variable expenses are 25 percent of sales revenue.
When variable expenses amount to $40,000, sales revenue is $160,000.
b$80,000 is the break-even sales revenue, so fixed expenses must be equal to the
contribution margin of $15,000 and profit must be zero.
c$45,000 = $30,000  (2/3), where 2/3 is the contribution-margin ratio.
d$62,500 = $50,000/.80, where .80 is the contribution-margin ratio.
fixed expenses
1. Break-even point (in units) =
$40,000
= = 10,000 pizzas
$10  $6

2. Contribution-margin ratio =
unit sales price
$10  $6
= = .4
$10

EXERCISE 7-24 (CONTINUED)
fixed expenses
3. Break-even point (in sales dollars) =
contribution-margin ratio
$40,000
= = $100,000
.4
4. Let X denote the sales volume of pizzas required to earn a target operating income of
$80,000.
$10X – $6X – $40,000 = $80,000
$4X = $120,000
X = 30,000 pizzas
fixed costs
1. Break-even point (in units) =
$4,000,000
= = 4,000 components
$3,000  $2,000
($4,000,000) (1.10)
2. New break-even point (in units) =
$3,000  $2,000
$4,400,000
= = 4,400 components
$1,000
3. Sales revenue (5,000  $3,000) ................................................. $15,000,000

Variable costs (5,000  $2,000) ........................................................ 10,000,000
Contribution margin ......................................................................... 5,000,000
Fixed costs ........................................................................................ 4,000,000
Operating income ............................................................................. $ 1,000,000

$4,000,000
4. New break-even point (in units) =
$2,500  $2,000
= 8,000 components
5. Analysis of price change decision:

Price
$3,000 $2,500
Sales revenue: (5,000  $3,000) ................................ $15,000,000
(6,200  $2,500) ................................ $15,500,000
Variable costs: (5,000  $2,000) ................................ 10,000,000
(6,200  $2,000) ................................ 12,400,000
Contribution margin....................................................5,000,000 3,100,000
Fixed expenses ...........................................................4,000,000 4,000,000
Operating income (loss) ............................................. $ 1,000,000 ($900,000)
The price cut should not be made, since projected operating income will decline.

1. Cost-volume-profit graph:
Dollars per year

Total revenue
$300,000
Break-even point: Total expenses

$250,000 20,000 tickets Profit
area
Variable
$200,000  expense
(at 30,000
tickets)
$150,000
Loss area
$100,000 Annual
fixed
expenses
$50,000
Tickets
sold per
5,000 10,000 15,000 20,000 25,000 30,000 year

2. Stadium capacity ................................................ 10,000

Attendance rate ...................................................  50%
Attendance per game ......................................... 5,000
Break-even point (tickets) 20,000

 4
Attendanceper game 5,000
The team must play 4 games to break even.

1. Profit-volume graph:
Dollars per year
$150,000
$100,000
$50,000
Break-even point: Profit
20,000 tickets area
0  Tickets sold
5,000 10,000 15,000 20,000 25,000 per year
Loss
area
$(50,000)
$(100,000)
Annual fixed
expenses
$(150,000)
$(180,000)

2. Safety margin:
Budgeted sales revenue

(12 games  10,000 seats  .30 full  $10) ............................................. $360,000
Break-even sales revenue
(20,000 tickets  $10) ............................................................................... 200,000
Safety margin ................................................................................................. $160,000
3. Let P denote the break-even ticket price, assuming a 12-game season and 50 percent
attendance:
(12)(10,000)(.50)P – (12)(10,000)(.50)($1) – $180,000 = 0

60,000P = $240,000
P = $4 per ticket

1. (a) Traditional income statement:

EUROPA PUBLICATIONS, INC.
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 20XX
Sales ......................................................................... $2,200,000
Less: Cost of goods sold ......................................... 1,500,000
Gross margin ............................................................... $ 700,000
Less: Operating expenses:
Selling expenses ............................................ $150,000
Administrative expenses ............................... 150,000 300,000
Operating income ........................................................ $ 400,000
(b) Contribution income statement:

EUROPA PUBLICATIONS, INC.
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 20XX
Sales ......................................................................... $2,200,000
Less: Variable expenses:
Variable manufacturing.................................. $1,000,000
Variable selling ............................................... 100,000
Variable administrative .................................. 30,000 1,130,000
Contribution margin .................................................... $ 1,070,000
Less: Fixed expenses:
Fixed manufacturing ...................................... $ 500,000
Fixed selling ................................................... 50,000
Fixed administrative ....................................... 120,000 670,000
Operating income ........................................................ $ 400,000
contribution margin
2. Operating leverage factor (at $2,200,000 sales level) 
operating income
$1,070,000
  2.6
$400,000

 percentage increase   operating 

3. Percentage increase in operating income      
 in sales revenue   leverage factor 
= 10%  2.6
= 26%
4. Most operating managers prefer the contribution income statement for answering this
type of question. The contribution format highlights the contribution margin and
separates fixed and variable expenses.
1.
Sales Unit Unit
Bicycle Type Price Variable Cost Contribution Margin
High-quality $500 $300 ($275 + $25) $200
Medium-quality 300 150 ($135 + $15) 150
2. Sales mix:
High-quality bicycles ........................................................................................ 25%

Medium-quality bicycles ................................................................................... 75%
3. Weighted-average unit
contribution margin = ($200  25%) + ($150  75%)
= $162.50
fixed expenses
4. Break-even point (in units) 
weighted-average unit contribution margin
$65,000
  400 bicycles
$162.50
Break-Even Sales
Bicycle Type Sales Volume Sales Price Revenue
High-quality bicycles 100 (400  .25) $500 $ 50,000
Medium-quality bicycles 300 (400  .75) 300 90,000
Total $140,000

5. Target operating income:
$65,000  $48,750
Sales volume required to earn target operating income of $48,750 
$162.50
 700 bicycles
This means that the shop will need to sell the following volume of each type of
bicycle to earn the target operating income:
High-quality ........................................................................... 175 (700  .25)
Medium-quality ..................................................................... 525 (700  .75)

Answers will vary on this question, depending on the airline selected as well as the year of
the inquiry. All publicly-owned airlines disclose load factors; some disclose break-even
load factors. In a typical year, most airlines report a load factor of about 80% and a
breakeven load factor of around 65 percent, though it can vary quite dramatically from
company to company and year to year.
1. The following income statement, often called a common-size income statement,

provides a convenient way to show the cost structure.
Amount Percent
(rounded)
Revenue .............................................................. $550,000 100.0
Variable expenses .............................................. 300,000 54.5
Contribution margin........................................... $250,000 45.5
Fixed expenses .................................................. 200,000 36.4
Operating income............................................... $ 50,000 9.1
2.
Decrease in Contribution Margin Decrease in
Revenue Percentage Operating Income
$55,000*  45.5%† = $25,025
*$55,000 = $550,000  10%

†45.5% = $250,000/$550,000 (rounded; at full precision, decrease is $25,000)

contribution margin
3. Operating leverage factor (at revenueof $550,000) 
operating income
$250,000
 5
$50,000
 percentageincrease  operating leverage

4. Percentage changein operating income      
 in revenue   factor 
20 % 5
 100%
Requirement (1) Requirement (2)

Revenue ....................................................... $660,000 $ 550,000
Less: Variable expenses........................... 360,000 600,000
Contribution margin ................................... $300,000 $ (50,000)
Less: Fixed expenses ............................... 280,000 175,000
Operating Income (loss) ............................. $ 20,000 $ (225,000)
fixed expenses
1. Break - even volume of service revenue 
contribution margin ratio
$120,000
  $600,000
.20
target after - tax net income

2. Target pre - tax income 
1  tax rate
$48,000
  $80,000
1  .40


fixed expenses 
3. Service revenue required to earn (1  t )

target after-tax income of $48,000 contribution margin ratio
$48,000
$120,000 
 1  .40  $1,000,000
.20
4. A change in the tax rate will have no effect on the firm's break-even point. At the break-
even point, the firm has no profit and does not have to pay any income taxes.

SOLUTIONS TO PROBLEMS
PROBLEM 7-34 (30 MINUTES)
1. Break-even point in units, using the equation approach:
$16X – ($10 + $2)X – $600,000 = 0

$4X = $600,000
$600,000
X =
$4
= 150,000 units
2. New projected sales volume = 200,000  110%

= 220,000 units
Operating income = (220,000)($16 – $12) – $600,000
= (220,000)($4) – $600,000
= $880,000 – $600,000 = $280,000
3. Target operating income = $200,000 (from original problem data)
New disk purchase price = $10  130% = $13
Volume of sales dollars required:
fixed expenses  target operating income

Volume of sales dollars required 
contribution - margin ratio
$600,000  $200,000 $800,000
 
$16  $13  $2 .0625
$16
 $12,800,000

PROBLEM 7-34 (CONTINUED)
4. Let P denote the selling price that will yield the same contribution-margin ratio:
$16  $10  $2 P  $13  $2

$16 P
P  $15
.25 
P
.25P  P  $15
$15  .75P
P  $15/.75
P  $20
Check: New contribution-margin ratio is:
$20  $15
 .25
$20
5. In the electronic version of the solutions manual, press the CTRL key and click on the
following link: Build a Spreadsheet 07-34.xls
1. Break-even point in sales dollars, using the contribution-margin ratio:

fixed expenses
Break - even point 
$180,000  $72,000 $252,000
 
$20  $8  $2 .5
$20
 $504,000

2. Target operating income, using contribution-margin approach:

fixed expenses  target operating income
Sales units to earn operating income of $180,000 
$252,000  $180,000 $432,000
 
$20  $8  $2 $10
 43,200 units
3. New unit variable manufacturing cost = $8  110%

= $8.80
Break-even point in sales dollars:
$252,000 $252,000
Break - even point  
$20.00  $8.80  $2.00 .46
$20
 $547,826 (rounded)
4. Let P denote the selling price that will yield the same contribution-margin ratio:
$20.00  $8.00  $2.00 P  $8.80  $2.00

$20.00 P
P  $10.80
.5 
P
.5P  P  $10.80
$10.80  .5P
P  $10.80/.5
P  $21.60
Check: New contribution-margin ratio is:
$21.60  $8.80  $2.00
 .5
$21.60

1. Unit contribution margin:

Sales price………………………………… $64.00
Less variable costs:
Sales commissions ($64 x 5%)…… $ 3.20
System variable costs……………… 16.00 19.20
Unit contribution margin……………….. $44.80
Break-even point = fixed costs ÷ unit contribution margin

= $985,600 ÷ $44.80
= 22,000 units
2. Model no. 4399 is more profitable when sales and production average 46,000 units.
Model Model
No. 6754 No. 4399
Sales revenue (46,000 units x $64.00)……... $2,944,000 $2,944,000

Sales commissions ($2,944,000 x 5%)… $ 147,200 $ 147,200
System variable costs:……………………
46,000 units x $16.00…………………. 736,000
46,000 units x $12.80…………………. 588,800
Total variable costs……………………….. $ 883,200 $ 736,000
Contribution margin…………………………... $2,060,800 $2,208,000
Less: Annual fixed costs…………………….. 985,600 1,113,600
Operating income.……………..……………… $1,075,200 $1,094,400
3. Annual fixed costs will increase by $90,000 ($450,000 ÷ 5 years) because of straight-
line depreciation associated with the new equipment, to $1,203,600 ($1,113,600 +
$90,000). The unit contribution margin is $48 ($2,208,000 ÷ 46,000 units). Thus:
Required sales = (fixed costs + target net profit) ÷ unit contribution margin
= ($1,203,600 + $956,400) ÷ $48
= 45,000 units
4. Let X = volume level at which annual total costs are equal

$16.00X + $985,600 = $12.80X + $1,113,600
$3.20X = $128,000
X = 40,000 units

1. Current income:
Sales revenue………………………... $3,360,000

Less: Variable costs………………… $ 924,000
Fixed costs……………………. 2,280,000 3,204,000
Operating income….………………. $ 156,000
Advanced Electronics has a contribution margin of $58 [($3,360,000 - $924,000) ÷

42,000 sets] and desires to increase income to $312,000 ($156,000 x 2). In addition,
the current selling price is $80 ($3,360,000 ÷ 42,000 sets). Thus:
Required sales = (fixed costs + target net profit) ÷ unit contribution margin
= ($2,280,000 + $312,000) ÷ $58
= 44,690 sets (rounded), or $3,575,200 (44,690 sets x $80)
2. If operations are shifted to Slovakia, the new unit contribution margin will be $64
($80 - $16). Thus:
Break-even point = fixed costs ÷ unit contribution margin

= $1,984,000 ÷ $64
= 31,000 units
3. (a) Advanced Electronics desires to have a 31,000-unit break-even point with a

$58 unit contribution margin. Fixed cost must therefore drop by $482,000
($2,280,000 - $1,798,000), as follows:
Let X = fixed costs

X ÷ $58 = 31,000 units
X = $1,798,000
(b) As the following calculations show, Advanced Electronics will have to

generate a contribution margin of $73.55 to produce a 31,000-unit break-even
point. Based on an $80.00 selling price, this means that the company can
incur variable costs of only $6.45 per unit. Given the current variable cost of
$22.00 ($80.00 - $58.00), a decrease of $15.55 per unit ($22.00 - $6.45) is
needed.
Let X = unit contribution margin

$2,280,000 ÷ X = 31,000 units
X = $73.55 (rounded)

PROBLEM 7-37 (CONTINUED
4. (a) Increase
(b) No effect
(c) Increase
(d) No effect
1. Sales mix refers to the relative proportion of each product sold when a company
sells more than one product.
2. (a) Yes. Plan A sales are expected to total 65,000 units (45,500 + 19,500), which
compares favorably against current sales of 60,000 units.
(b) Yes. Sales personnel earn a commission based on gross dollar sales. As the
following figures show, Deluxe sales will comprise a greater proportion of
total sales under Plan A. This is not surprising in light of the fact that Deluxe
has a higher selling price than Basic ($86 vs. $74).
Current Plan A
Sales Sales
Units Mix Units Mix
Deluxe……... 39,000 65% 45,500 70%

Basic………. 21,000 35% 19,500 30%
Total 60,000 100% 65,000 100%
(c) Yes. Commissions will total $535,600 ($5,356,000 x 10%), which compares
favorably against the current flat salaries of $400,000.
Deluxe sales: 45,500 units x $86… $3,913,000

Basic sales: 19,500 units x $74….. 1,443,000
Total………………………………. $5,356,000

(d) No. The company would be less profitable under the new plan.
Current Plan A
Sales revenue:
Deluxe: 39,000 units x $86; 45,500 units x $86… $3,354,000 $3,913,000
Basic: 21,000 units x $74; 19,500 units x $74….. 1,554,000 1,443,000
Total revenue……………………………………. $4,908,000 $5,356,000
Less variable cost:
Basic: 21,000 units x $41; 19,500 units x $41….. 861,000 799,500
Sales commissions (10% of sales revenue)……. 535,600
Total variable cost……………………………… $3,396,000 $4,292,600
Contribution margin…………………………………….. $1,512,000 $1,063,400
Less fixed cost (salaries)………………………………. 400,000 ----
Operating income….…………………………………... $1,112,000 $1,063,400
3. (a) The total units sold under both plans are the same; however, the sales mix
has shifted under Plan B in favor of the more profitable product as judged by
the contribution margin. Deluxe has a contribution margin of $21 ($86 - $65),
and Basic has a contribution margin of $33 ($74 - $41).
Plan A Plan B
Sales Sales
Units Mix Units Mix
Deluxe……... 45,500 70% 26,000 40%

Basic………. 19,500 30% 39,000 60%
Total…… 65,000 100% 65,000 100%

(b) Plan B is more attractive both to the sales force and to the company.
Salespeople earn more money under this arrangement ($549,900 vs. $400,000)
and the company is more profitable ($1,283,100 vs. $1,112,000).
Current Plan B
Sales revenue:
Basic: 21,000 units x $74; 39,000 units x $74….. 1,554,000 2,886,000
Total revenue……………………………………. $4,908,000 $5,122,000
Less variable cost:
Basic: 21,000 units x $41; 39,000 units x $41….. 861,000 1,599,000
Total variable cost……………………………… $3,396,000 $3,289,000
Contribution margin…………………………………….. $1,512,000 $1,833,000
Less: Sales force compensation:
Flat salaries…………………………………………... 400,000
Commissions ($1,833,000 x 30%)………………… 549,900
Operating Income ……………………………….…….. $1,112,000 $1,283,100
1. Plan A break-even point = fixed costs ÷ unit contribution margin

= $34,100 ÷ $31*
= 1,100 units
Plan B break-even point = fixed costs ÷ unit contribution margin

= $72,000 ÷ $40**
= 1,800 units
* $90 - [($90 x 10%) + $50]

** $90 - $50
2. Operating leverage refers to the use of fixed costs in an organization’s overall cost
structure. An organization that has a relatively high proportion of fixed costs and
low proportion of variable costs has a high degree of operating leverage.

3. Calculation of contribution margin and profit at 6,000 units of sales:
Plan A Plan B
Sales revenue: 6,000 units x $90………………. $540,000 $540,000

Cost of purchasing product:
6,000 units x $50…………………….…… $300,000 $300,000
Sales commissions: $540,000 x 10%……... 54,000 ----
Total variable cost……………………….. $354,000 $300,000
Contribution margin……………………………… $186,000 $240,000
Fixed costs…………………………………………. 34,100 72,000
Net income…………………………………………. $151,900 $168,000
Operating leverage factor = contribution margin ÷ net income

Plan A: $186,000 ÷ $151,900 = 1.22 (rounded)
Plan B: $240,000 ÷ $168,000 = 1.43 (rounded)
Plan B has the higher operating leverage factor.
4 & 5. Calculation of profit at 5,000 units:

Plan A Plan B
Sales revenue: 5,000 units x $90………………. $450,000 $450,000

Cost of purchasing product:
5,000 units x $50………………………….. $250,000 $250,000
Sales commissions: $450,000 x 10%……... 45,000 ----
Total variable cost……………………….. $295,000 $250,000
Contribution margin……………………………… $155,000 $200,000
Fixed costs………………………………………… 34,100 72,000
Net income…………………………………………. $120,900 $128,000
Plan A profitability decrease:

$151,900 - $120,900 = $31,000; $31,000 ÷ $151,900 = 20.4% (rounded)
Plan B profitability decrease:

$168,000 - $128,000 = $40,000; $40,000 ÷ $168,000 = 23.8% (rounded)

Consolidated would experience a larger percentage decrease in income if it adopts

Plan B. This situation arises because Plan B has a higher degree of operating
leverage. Stated differently, Plan B’s cost structure produces a greater percentage
decline in profitability from the drop-off in sales revenue.
Note: The percentage decreases in profitability can be computed by multiplying the

percentage decrease in sales revenue by the operating leverage factor. Sales
dropped from 6,000 units to 5,000 units, or 16.67%. Thus:
Plan A: 16.67% x 1.22 = 20.3% (difference due to rounding)

Plan B: 16.67% x 1.43 = 23.8% (rounded)
6. Heavily automated manufacturers have sizable investments in plant and equipment,

along with a high percentage of fixed costs in their cost structures. As a result,
there is a high degree of operating leverage.
In a severe economic downturn, these firms typically suffer a significant

decrease in profitability. Such firms would be a more risky investment when
compared with firms that have a low degree of operating leverage. Of course, when
times are good, increases in sales would tend to have a very favorable effect on
earnings in a company with high operating leverage.

fixed costs
1. Break - even point (in units) 
$468,000
  90,000 units
$25.00  $19.80
fixed cost
2. Break - even point (in sales dollars) 
$468,000
  $2,250,000
$25.00  $19.80
$25.00
fixed costs  target operating income

3. Number of sales units required to 
earn target operating income
$468,000  $260,000
  140,000 units
$25.00  $19.80
4. Margin of safety = budgeted sales revenue – break-even sales revenue

= (120,000)($25) – $2,250,000 = $750,000
5. Break-even point if direct-labor costs increase by 8 percent:
New unit contribution margin = $25.00 – $6.00 – ($5.00)(1.08) – $4.50 – $3.00 – $1.30
= $4.80
fixed costs
new unit contribution margin
$468,000
  97,500 units
$4.80


6. Contribution margin ratio 
sales price
$25.00  $19.80
Old contribution-margin ratio 
$25.00
 .208
Let P denote sales price required to maintain a contribution-margin ratio of .208. Then
P is determined as follows:
P  $6.00  ($5.00)(1.08)  $4.50  $3.00  $1.30
 .208
P
P  $20.20  .208P
.792P  $20.20
P  $25.51 (rounded)
Check: New contribution- $25.51  $6.00  ($5.00)(1.08)  $4.50  $3.00  $1.30

margin ratio $25.51
 .208 (rounded)

1. CVP graph:
Total revenue
Dollars per year
(in millions)
20
18 Profit
Break-even point: area
16 80,000 units or
$8,000,000 of sales
14
Total expenses
12
10
8
6
Loss
4 area
Fixed expenses
2
Units sold per year
50 100 150 200 (in thousands)

2. Break-even point:
contribution margin $12,000,000
Contribution - margin ratio    .75
sales $16,000,000
fixed expenses $6,000,000
Break - even point  
contribution - margin ratio .75
 $8,000,000
3. Margin of safety = budgeted sales revenue – break-even sales revenue

= $16,000,000 – $8,000,000 = $8,000,000
4. Operating leverage factor contribution margin (at budgeted sales)


(at budgeted sales) operating income (at budgeted sales)
$12,000,000
 2
$6,000,000
5. Dollar sales required to fixed expenses  target operating income


earn target operating contribution - margin ratio
income $6,000,000  $9,000,000
  $20,000,000
.75
6. Cost structure:
Amount Percent
Sales revenue ....................................................... $16,000,000 100.0
Variable expenses ................................................ 4,000,000 25.0
Contribution margin............................................. $12,000,000 75.0
Fixed expenses .................................................... 6,000,000 37.5
Operating income................................................. $6,000,000 37.5

sales  variable costs

1. (a) Unit contribution margin 
units sold
$1,000,000  $700,000
  $3 per unit
100,000
fixed costs
Break-even point (in units) 
$210,000
  70,000 units
$3
contribution margin
(b) Contribution-margin ratio 
sales revenue
$1,000,000  $700,000
  .3
$1,000,000
fixed costs
Break-even point (in sales dollars) 
contribution-margin ratio
$210,000
  $700,000
.3
target after-tax net income

2. Number of units of sales required fixed costs 
(1  t )
to earn target after-tax net income 
$90,000
$210,000 
(1  .4) $360,000
 
$3 $3
 120,000 units
3. If fixed costs increase by $31,500:

$210,000  $31,500
Break-even point (in units)   80,500 units
$3

Dollars per year
$750,000
$500,000
$250,000 Profit
Break-even point: area
70,000 units
Units sold
0  per year
Loss 25,000 50,000 75,000 100,000
area
$(250,000)
$(500,000)
$(750,000)

target after- tax net income

5. Number of units of sales fixed costs 
(1  t )
required to earn target 
after-tax net income unit contribution margin
$90,000
$210,000 
(1  .5) $390,000
 
$3 $3
 130,000 units
6. In the electronic version of the solutions manual, press the CTRL key and click on
the following link: Build a Spreadsheet 07-42.xls
1. In order to break even, during the first year of operations, 10,220 clients must visit the
law office being considered by Martin Wong and his colleagues, as the following
calculations show.
Fixed expenses:
Advertising ............................................................................... $ 350,000
Rent (600  $480) ..................................................................... 288,000
Property insurance .................................................................. 27,000
Utilities ..................................................................................... 37,000
Malpractice insurance ............................................................. 160,000
Depreciation ($120,000/4) ........................................................ 30,000
Wages and fringe benefits:
Regular wages
($25 + $20 + $15 + $10)  16 hours  360 days .......... $403,200
Overtime wages
(200  $15  1.5) + (200  $10  1.5) ........................... 7,500
Total wages ............................................................ $410,700
Fringe benefits at 40% ....................................................... 164,280 574,980
Total fixed expenses...................................................................... $1,466,980

Break-even point:
0 = revenue – variable cost – fixed cost
0 = $30X + ($2,000  .2X  .3)* – $4X – $1,466,980
0 = $30X + $120X – $4X – $1,466,980
$146X = $1,466,980
X = 10,048 clients (rounded)
*Revenue calculation:
$30X represents the $30 consultation fee per client. ($2,000  .2X  .30) represents
the predicted average settlement of $2,000, multiplied by the 20% of the clients
whose judgments are expected to be favorable, multiplied by the 30% of the
judgment that goes to the firm.
2. Safety margin:
Safety margin = budgeted sales revenue  break-even sales revenue
Budgeted (expected) number of clients = 50  360 = 18,000
Break-even number of clients = 10,048 (rounded)
Safety margin = [($30  18,000) + ($2,000  18,000  .20  .30)]

– [($30  10,048) + ($2,000  10,048  .20  .30)]
= [$30 + ($2,000  .20  .30)]  (18,000 – 10,048)
= $150  7,852
= $1,192,800

1. Break-even point in units:

fixed costs
Calculation of contribution margins:
Computer-Assisted Labor-Intensive
Manufacturing System Production System
Selling price...................................... $30.00 $30.00
Variable costs:
Direct material.............................. $5.00 $5.60
Direct labor .................................. 6.00 7.20
Variable overhead ........................ 3.00 4.80
Variable selling cost .................... 2.00 16.00 2.00 19.60
Contribution margin per unit $14.00 $10.40
(a) Computer-assisted manufacturing system:
$2,440,000  $500,000
Break-even point in units 
$14
$2,940,000

$14
 210,000 units
(b) Labor-intensive production system:
$1,320,000  $500,000
Break-even point in units 
$10.40
$1,820,000

$10.40
 175,000 units

2. Celestial Products, Inc. would be indifferent between the two manufacturing

methods at the volume (X) where total costs are equal.
$16X + $2,940,000 = $19.60X + $1,820,000
$3.60X = $1,120,000
X = 311,111 units (rounded)
3. Operating leverage is the extent to which a firm's operations employ fixed operating
costs. The greater the proportion of fixed costs used to produce a product, the
greater the degree of operating leverage. Thus, the computer-assisted
manufacturing method utilizes a greater degree of operating leverage.
The greater the degree of operating leverage, the greater the change in
operating income (loss) relative to a small fluctuation in sales volume. Thus, there
is a higher degree of variability in operating income if operating leverage is high.
4. Management should employ the computer-assisted manufacturing method if annual

sales are expected to exceed 311,111 units and the labor-intensive manufacturing
method if annual sales are not expected to exceed 311,111 units.
5. Celestial Products’ management should consider many other business factors

other than operating leverage before selecting a manufacturing method. Among
these are:
 Variability or uncertainty with respect to demand quantity and selling price.
 The ability to produce and market the new product quickly.
 The ability to discontinue production and marketing of the new product while
incurring the least amount of loss.

1. Break-even sales volume for each model:

annualrental cost
Break-even volume 
(a) Economy model:

$8,000
Break - even volume   25,000 liters
$1.75  $1.43
(b) Regular model:

$11,000
Break - even volume   27,500 liters
$1.75  $1.35
(c) Super model:

$20,000
Break - even volume   40,816 liters (rounded)
$1.75  $1.26

Dollars per year (in

thousands)
$20
Profit
$10
Break-even point:
40,816 liters
Profit
area Liters sold
0  per year
10 20 30 40 50 (in thousands)
Loss
area
Loss
($10)
Fixed rental cost: $20,000 per year

($20)

3. The sales price per liter is the same regardless of the type of machine selected.
Therefore, the same profit (or loss) will be achieved with the Economy and Regular
models at the sales volume, X, where the total costs are the same.
Variable Cost Total
Model per Liter Fixed Cost
Economy .................................................... $1.43 $ 8,000
Regular ...................................................... 1.35 11,000
This reasoning leads to the following equation: 8,000 + 1.43X = 11,000 + 1.35X
Rearranging terms yields the following: (1.43 – 1.35)X = 11,000 – 8,000

.08X = 3,000
X = 3,000/.08
X = 37,500
Or, stated slightly differently:
Volume at which both machines fixed cost differential


produce the same profit variable cost differential
$3,000

$.08
 37,500 liters
Check: the total cost is the same with either model if 37,500 liters are sold.
Economy Regular
Variable cost:
Economy, 37,500  $1.43 .......................... $53,625
Regular, 37,500  $1.35 ............................. $50,625
Fixed cost:
Economy, $8,000 ....................................... 8,000
Regular, $11,000 ........................................ 11,000
Total cost ......................................................... $61,625 $61,625
Since the sales price for popcorn does not depend on the popper model, the sales
revenue will be the same under either alternative.

$625,000  $375,000
1. Unit contribution margin 
25,000 units
 $10 per unit
fixed costs
Break-even point (in units) 
$150,000
  15,000 units
$10
2. Number of sales units required fixed costs  target operating income


to earn target operating income unit contribution margin
$150,000  $140,000
  29,000 units
$10
new fixed costs

3. New break - even point (in units) 
$150,000  ($24,000/6) *
  19,250 units
$10  $2 †
*Annual straight-line depreciation on new machine

†$2.00 = $4.50 – $2.50 increase in the unit cost of the new part
4. Number of sales units required new fixed costs  target net profit
to earn target operating 
income, given
manufacturing changes $154,000  $100,000 *

$8
 31,750 units
*Last year's profit: ($25)(25,000) – $525,000 = $100,000


5. Contribution-margin ratio 
sales price
$10
Old contribution-margin ratio   .40
$25*
*Given in problem.
Let P denote the price required to cover increased direct-material cost and maintain
the same contribution margin ratio:
P  $15*  $2 †
 .40
P
P  $17  .40P
.60P  $17
P  $28.33 (rounded)
*Old unit variable cost = $15 = $375,000  25,000 units

†Increase in direct-material cost = $2
Check:
$28.33  $15  $2
New contribution-margin ratio 
$28.33
 .40 (rounded)

1. Memorandum
Date: Today
To: Vice President for Manufacturing, Halong Game Company
From: Controller
Subject: Activity-Based Costing
The $150,000 cost that has been characterized as fixed is fixed with respect to sales volume.
This cost will not increase with increases in sales volume. However, as the activity-based
costing analysis demonstrates, these costs are not fixed with respect to other important
cost drivers. This is the difference between a traditional costing system and an ABC system.
The latter recognizes that costs vary with respect to a variety of cost drivers, not just sales
volume.
2. New break-even point if automated manufacturing equipment is installed:
Sales price ..................................................................................................... $26

Costs that are variable (with respect to sales volume):
Unit variable cost (.8  $375,000  25,000) ........................................... 12
Unit contribution margin .............................................................................. $14
Costs that are fixed (with respect to sales volume):

Setup (300 setups at $40 per setup) ............................................. $ 12,000
Engineering (800 hours at $28 per hour) ..................................... 22,400
Inspection (100 inspections at $45 per inspection) .................... 4,500
General factory overhead .............................................................. 176,100
Total .......................................................................................... $215,000
Fixed selling and administrative costs .............................................. 30,000
Total costs that are fixed (with respect to sales volume) ........... $245,000
fixed costs
Break - even point (in units) 
$245,000

$14
 17,500 units

3. Sales (in units) required to show operating income of $140,000:
Number of sales units required fixed cost  target operating income


to earn target operating income unit contribution margin
$245,000  $140,000

$14
 27,515 units (rounded)
4. If management adopts the new manufacturing technology:
(a) Its break-even point will be higher (17,500 units instead of 15,000 units).
(b) The number of sales units required to show operating income of $140,000 will be
lower (27,515 units instead of 29,000 units).
(c) These results are typical of situations where firms adopt advanced manufacturing
equipment and practices. The break-even point increases because of the
increased fixed costs due to the large investment in equipment. However, at
higher levels of sales after fixed costs have been covered, the larger unit
contribution margin ($14 instead of $10) earns a profit at a faster rate. This results
in the firm needing to sell fewer units to reach a given target profit level.

5. The controller should include the break-even analysis in the report. The Board of
Directors needs a complete picture of the financial implications of the proposed
equipment acquisition. The break-even point is a relevant piece of information. 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, 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: Provide decision support information and recommendations that are
accurate, clear, concise, and timely.
(b) Integrity: Refrain from engaging in any conduct that would prejudice carrying out
duties ethically.
(c) Credibility: Communicate information fairly and objectively. Disclose all relevant
information that could reasonably be expected to influence an intended user's
understanding of the reports, analyses, and recommendations.

1. Closing of downtown store:
Loss of contribution margin at Downtown Store .......................................... $(36,000)

Savings of fixed cost at Downtown Store (75%) ........................................... 30,000
Loss of contribution margin at Mall Store (10%) ........................................... (4,800)
Total decrease in operating income ............................................................... $(10,800)
2. Promotional campaign:
Increase in contribution margin (10%) ........................................................... $ 3,600

Increase in monthly promotional expenses ($60,000/12) ............................. (5,000)
Decrease in operating income ........................................................................ $(1,400)
3. Elimination of items sold at their variable cost:
We can restate the November 20x1 data for the Downtown Store as follows:
Downtown Store
Items Sold at
Their
Variable Cost Other Items
Sales .................................................................................. $60,000* $60,000*
Less: variable expenses ................................................... 60,000 24,000
Contribution margin.......................................................... $ -0- $ 36,000
If the items sold at their variable cost are eliminated, we have:

Decrease in contribution margin on other items (20%) .............................. $(7,200)
Decrease in fixed expenses (15%) ................................................................ 6,000
Decrease in operating income ...................................................................... $(1,200)
*$60,000 is one half of the Downtown Store's dollar sales for November 20x1.
4. In the electronic version of the solutions manual, press the CTRL key and click on the
following link: Build a Spreadsheet 07-48.xls

1.
CHENNAI TOOL COMPANY
BUDGETED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 20X2
Hedge
Weeders Clippers Leaf Blowers Total
Unit selling price ............................... $28 $36 $48
Variable manufacturing cost ........... $13 $12 $25
Variable selling cost ......................... 5 4 6
Total variable cost ............................ $18 $16 $31
Contribution margin per unit ........... $10 $20 $17
Unit sales ..........................................  50,000  50,000  100,000
Total contribution margin ............ $500,000 $1,000,000 $1,700,000 $3,200,000
Fixed manufacturing overhead........ $2,160,000

Fixed selling and
administrative costs .................... 600,000
Total fixed costs ........................... $2,760,000
Income before taxes ......................... $440,000
Income taxes (40%) .......................... 176,000
Budgeted net income ....................... $ 264,000
2.
(a) (b)
Unit Sales
Contribution Proportion (a)  (b)
Weeders ...................................................... $10 .25 $ 2.50
Hedge Clippers ........................................... 20 .25 5.00
Leaf Blowers ............................................... 17 .50 8.50
Weighted-average unit
contribution margin .............................. $16.00
total fixed costs
Total unit sales to break even 
weighted - average unit contribution margin
$2,760,000
  172,500 units
$16

Sales proportions:
Sales Total Unit Product Line

Proportion Sales Sales
Weeders ........................................................ .25 172,500 43,125
Hedge Clippers ............................................. .25 172,500 43,125
Leaf Blowers ................................................. .50 172,500 86,250
Total ............................................................... 172,500
3.
(a) (b)
Unit Sales
Contribution Proportion (a)  (b)
Weeders ................................................................... $10 .20 $ 2.00
Hedge Clippers* ...................................................... 19 .20 3.80
Leaf Blowers† .......................................................... 12 .60 7.20
Weighted-average unit contribution margin ......... $13.00
*Variable selling cost increases. Thus, the unit contribution decreases to

$19 [$36 – ($12 + $4 + $1)].
†The variable manufacturing cost increases 20 percent. Thus, the unit contribution
decreases to $12 [$48 – (1.2  $25) – $6].
total fixed costs
Total unit sales to break even 
weighted - average unit contribution margin
$2,760,000
  212,308 units (rounded)
$13
Sales proportions:
Sales Total Unit Product Line

Proportions Sales Sales
Weeders .............................................................. .20 212,308 53,077
Hedge Clippers ................................................... .20 212,308 53,077
Leaf Blowers ....................................................... .60 212,308 106,154
Total ..................................................................... 212,308

1. $405,000
Unit contribution margin   $225 per ton
1,800
fixed costs
Break-even volume in tons 
$247,500
  1,100 tons
$225
2. Projected operating income for sales of 2,100 tons:
Projected contribution margin (2,100  $225) ....................................... $472,500

Projected fixed costs .............................................................................. 247,500
Projected operating income ................................................................... $225,000
3. Projected operating income including German order:

Variable cost per ton = $495,000/1,800 = $275 per ton
Sales price per ton for regular orders = $900,000/1,800 = $500 per ton
German Regular
Order Sales
Sales in tons ..................................................................... 1,500 1,500
Contribution margin per ton:
German order ($450 – $275) ......................................  $175
Regular sales ($500 – $275) .......................................  $225
Total contribution margin ................................................ $262,500 $337,500
Contribution margin on German order...................................................... $262,500

Contribution margin on regular sales ....................................................... 337,500
Total contribution margin .......................................................................... $600,000
Fixed costs .................................................................................................. 247,500
Operating income ....................................................................................... $352,500

4. New sales territory:
To maintain its current operating income, Ohio Limestone Company just needs to
break even on sales in the new territory.
fixed costsin new territory

Break-even point in tons 
unit contribution margin on sales in new territory
$61,500
  307.5 tons
$225  $25
5. Automated production process:

$247,500  $58,500
Break-even point in tons 
$225  $25
$306,000
  1,224 tons
$250
Break-even point in sales dollars  1,224 tons $500 per ton

 $612,000
6. Changes in selling price and unit variable cost:

New unit contribution margin  ($500)(90%)  ($275  $40)
 $135
$135
New contribution margin ratio 
($500)(90%)
 .30
fixed costs  target operating income

Dollar sales required to earn targe t operating income 
$247,500  $94,500

.30
 $1,140,000

$162.50  $117.00
1. Contribution margin ratio   .28
$162.50

fixed expenses 
2. Number of units of sales required (1  t)
to earn target after-tax net income 
$44,160
$540,650 
(1  .40) $614,250
X 
$162.50  $117.00 $45.50
X  13,500 units
3. Break-even point (in units) for the $693,000

  11,000 units
mountaineering model $180.00  $117.00
Let Y denote the variable cost of the touring model such that the break-even point
for the touring model is 11,000 units.
Then we have:
$540,650
11,000 
$162.50  Y
(11,000)  ($162.50  Y )  $540,650
$1,787,500  11,000Y  $540,650
11,000Y  $1,246,850
Y  $113.35
Thus, the variable cost per unit would have to decrease by $3.65 ($117.00 – $113.35).

4. $540,650  110%
New break - even point 
$162.50  ($117.00)(90%)
$594,715

$57.20
 10,397 units (rounded)
5. Weighted-average unit
 (50%  $63.00)  (50%  $45.50)
contribution margin
 $54.25
fixed costs

Break-even point weighted - average unit contribution margin
$616,825
  11,370 units (rounded; or 5,685 of each type)
$54.25
1. SUMMARY OF EXPENSES
Expenses per Year

(in thousands)
Variable Fixed
Manufacturing .................................................................... $ 7,200 $2,340
Selling and administrative ................................................ 2,400 1,920
Interest ............................................................................... 540
Costs from budgeted income statement ..................... $ 9,600 $4,800
If the company employs its own sales force:
Additional sales force costs ......................................... 2,400
Reduced commissions [(.15 – .10)  $16,000]............. (800)
Costs with own sales force ............................................... $ 8,800 $7,200
If the company sells through agents:
Deduct cost of sales force ............................................ (2,400)
Increased commissions [(.225 – .10)  $16,000] ......... 2,000
Costs with agents paid increased commissions ............ $ 10,800 $4,800

totalfixed expenses
Break-even sales dollars 
total variable expenses
Contribution-margin ratio  1 
sales revenue
$9,600,000
(a) Contribution margin ratio  1 
$16,000,000
 1  .60
 .40
$4,800,000
.40
 $12,000,000
$8,800,000
(b) Contribution margin ratio  1 
$16,000,000
 1  .55
 .45
$7,200,000
.45
 $16,000,000
totalfixed costs  target income beforeincome taxes

2. Requiredsales dollars 
$10,800
Contribution margin ratio  1 
$16,000
 1  .675
 .325
$4,800,000  $1,600,000
Required sales dollars to break even 
.325
$6,400,000

.325
 $19,692,308

3. The volume in sales dollars (X) that would result in equal net income is the volume
of sales dollars where total expenses are equal.
Total expenses with agents paid = total expenses with own sales force
increased commission
$10,800,000 $8,800,000
X  $4,800,000  X  $7,200,000
$16,000,000 $16,000,000
.675 X  $4,800,000  .55 X  $7,200,000
.125 X  $2,400,000
X  $19,200,000
Therefore, at a sales volume of $19,200,000, the company will earn equal before-tax
income under either alternative. Since before-tax income is the same, so is after-tax
net income.


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CHAPTER 7

ANSWERS TO REVIEW QUESTIONS

b. In the equation approach, the following profit equation is used:

 unit sales volume   unit variable sales volume  fixed

This equation is solved for the sales volume in units.

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7-11 The most important assumptions of a cost-volume-profit analysis are as follows:

(1) Expenses can be categorized as fixed, variable, or semivariable.

(2) Efficiency and productivity are constant.

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A firm's operating leverage factor, at a particular sales volume, is defined as its

The weighted-average unit contribution margin is the average of the unit

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Cost-volume-profit analysis can be used to show the effect on profit when

7-22 Activity-based costing (ABC) results in a richer description of an organization's cost

McGraw-Hill/Irwin  2011 The McGraw-Hill Companies, Inc.

Explanatory notes for selected items:

aBreak-even sales revenue............................................................................... $40,000

Therefore, variable expenses are 25 percent of sales revenue.

When variable expenses amount to $40,000, sales revenue is $160,000.

c$45,000 = $30,000  (2/3), where 2/3 is the contribution-margin ratio.

d$62,500 = $50,000/.80, where .80 is the contribution-margin ratio.

EXERCISE 7-24 (20 MINUTES)

unit contribution margin

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$10X – $6X – $40,000 = $80,000

EXERCISE 7-25 (25 MINUTES)

3. Sales revenue (5,000  $3,000) ................................................. $15,000,000

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5. Analysis of price change decision:

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Dollars per year

Break-even point: Total expenses

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2. Stadium capacity ................................................ 10,000

Break-even point (tickets) 20,000

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Dollars per year

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Budgeted sales revenue

(12)(10,000)(.50)P – (12)(10,000)(.50)($1) – $180,000 = 0

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1. (a) Traditional income statement:

(b) Contribution income statement:

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 percentage increase   operating 

EXERCISE 7-29 (30 MINUTES)

High-quality bicycles ........................................................................................ 25%

McGraw-Hill/Irwin  2011 The McGraw-Hill Companies, Inc.

EXERCISE 7-30 (30 MINUTES)

EXERCISE 7-31 (25 MINUTES)

1. The following income statement, often called a common-size income statement,

*$55,000 = $550,000  10%

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 percentageincrease  operating leverage

EXERCISE 7-32 (10 MINUTES)

Requirement (1) Requirement (2)

EXERCISE 7-33 (20 MINUTES)

target after - tax net income

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target after - tax net income

McGraw-Hill/Irwin  2011 The McGraw-Hill Companies, Inc.

1. Break-even point in units, using the equation approach: