MANAGERIAL ACCOUNTING – CHAPTER # 8 - ANSWERS

Exercise 8-23 (Fill in Blanks; Basic CVP Relationships)

Sales Variable Total Fixed Net Income Break-Even

Revenue Expenses Contribution Expenses Sales
Margin Revenue
1. 160,000a 40,000 120,000 30,000 90,000 40,000
2. 80,000 65,000 15,000 15,000b 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:

(Rs.)
a
Break-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 Rs. 40,000, sales revenue is Rs. 160,000.
b
Rs. 80,000 is the break even sales revenue, so fixed expenses must be equal to the contribution margin of
Rs. 15,000 and profit must be zero.
c
Rs. 45,000 = Rs. 30,000 / (2/3), where 2/3 is the contribution-margin ratio.
d
Rs. 62,500 = Rs. 50,000/0.80, where 0.80 is the contribution-margin ratio.

Exercise 8-24 (Pizza Delivery Business Basic CVP Analysis)

1. Break-even point (in units) = fixed expenses

Unit contribution margin

= Rs. 40,000 = 8,000 pizzas

Rs. 10 – Rs. 5

2. Contribution-margin ratio = unit contribution margin

Unit sales price
= Rs. 10 – Rs. 5 = 0.5
Rs. 10

3. Break-even point (in sales rupees) = fixed expenses

Contribution-margin ratio

= Rs. 40,000 = Rs. 80,000

0.5

4. Let X denote the sales volume of pizzas required to earn a target net profit of Rs. 65,000.

Rs. 10X – Rs. 5X – Rs. 40,000 = Rs. 65,000

Rs. 5X = Rs. 105,000

X = 21,000 pizzas

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 MANAGERIAL ACCOUNTING – CHAPTER # 8 - ANSWERS
Exercise 8-25 (Manufacturing; Using CVP Analysis)

1. Break-even point (in units) = fixed costs

Unit contribution margin

= 4,000,000p = 4,000 components

3,000p – 2,000p
P denotes Argentina’s peso

2. New break-even point (in units) = (4,000,000p) (1.10)

3,000 p – 2,000 p

= 4,400,000 p = 4,400 components

1,000 p

3. Sales revenue (5,000 x 3,000p) 15,000,000p

Variable costs (5,000 x 2,000p) 10,000,000p
Contribution margin 5,000,000p
Fixed costs 4,000,000p
Net Income 1,000,000p

4. New break-even point (in units) = 4,000,000 p

2,500 p – 2,0000 p

= 8,000 components

5. Analysis of price change decision:

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

Exercise 8-28 (Publishing; Contribution Income Statement)

1. (a) Traditional income statement:

Europa Publications, Inc.

Income Statement
For the year Ended December 31, 20xx
(Rs.) (Rs.)
Sales 2,000,000
Less: Cost of goods sold 1,500,000
Gross margin 500,000
Less: Operating expenses:
Selling expenses 150,000
Administrative expenses 150,000 300,000
Net income 200,000

Europa Publications, Inc.

Income Statement
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 MANAGERIAL ACCOUNTING – CHAPTER # 8 - ANSWERS
For the year Ended December 31, 20xx
(Rs.) (Rs.)
Sales 2,000,000
Less: Variable expenses:
Variable manufacturing 1,000,000
Variable selling 100,000
Variable administrative 30,000 1,130,000
Contribution margin 870,000
Less: Fixed expenses:
Fixed manufacturing 500,000
Fixed selling 50,000
Fixed administrative 120,000 670,000
Net income 200,000

2. Operating leverage factor (at Rs. 2,000,000 sales level) = contribution margin
Net income
= Rs. 870,000 = 4.35
Rs. 200,000

3. Percentage increase in net income = percentage increase x operating

In sales revenue leverage factor

= 10% x 4.35
= 43.5%
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.

Exercise 8-29 (Retail; CVP Analysis with Multiple Products)

1.
Bicycle Type Sales Unit Variable Cost Unit Contribution
Price (Rs.) Margin (Rs.)
(Rs.)
High-quality 500 300 (Rs. 275 + Rs. 2 200
Medium-quality 300 150 (Rs. 135 + Rs. 1 150

2. Sales mix:

High-quality bicycle 25%

Medium-quality bicycles 75%

3. Weighted-average unit
Contribution margin = (Rs. 200 x 25%) / (Rs. 150 x 75%)
= Rs. 162.50

4. Break-even point (in units) = fixed expenses

Weighted-average unit contribution margin

= Rs. 65,000 = 400 bicycles

Rs. 162.50

Bicycle Type Break-even Sales Sales Price Sales Revenue

Volume (Rs.) (Rs.)
High-quality bicycle 100 (400 x 0.25) 500 50,000
Medium-quality bicycles 300 (400 x 0.75) 300 90,000
140,000

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 MANAGERIAL ACCOUNTING – CHAPTER # 8 - ANSWERS
5. Target net income:
Sales volume required to earn target net income of Rs. 47,750 = Rs. 65,000 + Rs. 48,750
Rs. 162.50

This means that the shop will need to sell the following volume of each type of bicycle to
earn the target net income:

High-quality 175 (700 x 0.25)

Medium-quality 525 (700 x 0.75)

Problem 8-34 (Basic CVP Relationships; Retailer)

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

Rs. 16X – (Rs. 10 + Rs. 2)X – Rs. 600,000 = 0
Rs. 4X = Rs. 600,000
X = Rs. 600,000
Rs. 4
= 150,000 units

2. New projected sales volume = 200,000 x 110%

= 220,000 units
Net income = (220,000)(Rs. 16 – Rs. 12) – Rs. 600,000
= (220,000)(Rs. 4) – Rs. 600,000
= Rs. 880,000 – Rs. 600,000 = Rs. 280,000

3. Target net income = Rs. 200,000 (from original problem data)

New disk purchase price = Rs. 10 x 130% = Rs. 13

Volume of sales rupees required:

Volume of sales rupees required = fixed expenses + target net profit

Contribution-margin ratio

= Rs. 600,000 + Rs. 200,000 = Rs. 800,000

Rs. 16 – Rs. 13 – Rs. 2 0.0625
Rs. 16

= Rs. 12,800,000

4. Let P denote the selling price that will yield the same contribution margin ratio:

Rs. 16 – Rs. 10 – Rs. 2 = P – Rs. 13 – Rs. 2

Rs. 16 P

0.25 = P – Rs. 15
P

0.25P = P – Rs. 15
Rs. 15 = 0.75P

P = Rs. 15/0.75

P = Rs. 20
Check: New contribution margin ratio is:

Rs. 20 – Rs. 15 = 0.25

Rs. 20

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 MANAGERIAL ACCOUNTING – CHAPTER # 8 - ANSWERS

Problem 8-35 (Basic CVP Computations)

1. Break even point in sales rupees, using the contribution margin ratio:

Break even point = fixed expenses

Contribution margin ratio

= Rs. 180,000 + Rs. 72,000 = Rs. 252,000

Rs. 20 – Rs. 8 – Rs. 4 0.4
Rs. 20
= Rs. 630,000

2. Target net income, using contribution margin approach:

Sales units required to earn-income of Rs. 180,000 = fixed expenses + target net income
Unit contribution margin

= Rs. 252,000 + Rs. 180,000 = Rs. 432,000

Rs. 20 – Rs. 8 – Rs. 4 Rs. 8

3. New unit variable manufacturing cost = Rs. 8 x 110%

= Rs. 8.80

Break even point in sales rupees:

Break – even point = Rs. 252,000 = Rs. 252,000

Rs. 20.00 – Rs. 8.80 – Rs. 4.00 0.36

4. Let P denote the selling price that will yield the same contribution margin ratio:

Rs. 20.00 – Rs. 8.00 – Rs. 4.00 = P-Rs. 8.80 – Rs. 4.00
Rs. 20.00 P

0.4 = P – Rs. 12.80

P
0.4P = P – Rs. 12.80

Rs. 12.80 = 0.6 P

P = Rs. 12.80 / 0.6

P = Rs. 21.33 (rounded)

Check: New contribution margin ratio is:

Rs. 21.33 – Rs. 8.80 – Rs. 4.00 = 0.4 (rounded)

Rs. 21.33

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 MANAGERIAL ACCOUNTING – CHAPTER # 8 - ANSWERS
Problem 8-37 (CVP Analysis; Impact of Operating Changes)

1. Current income:
(Rs.) (Rs.)
Sales revenue 3,360,000
Less: Variable Costs 840,000
Fixed costs 2,280,000 3,120,000
Net income 240,000

Advanced Electronics has a contribution margin of Rs. 60 [(Rs. 3,360,000 – Rs. 840,000) / 42,000 sets] and
desired to increase income to Rs. 480,000 (Rs. 240,000 x 2). In addition, the current selling price is Rs. 80
(Rs. 3,360,000 / 42,000 sets). Thus:

Required sales = (fixed costs + target net profit) / unit contribution margin

= (Rs. 2,280,000 + Rs. 480,000) / Rs. 60

= 46,000 sets, or Rs. 3,680,000 (46,000 sets x Rs. 80)

2. If operations are shifted to Mexico, the new unit contribution margin will be Rs. 62 (Rs. 80 – Rs.
18). Thus:

Break even point = fixed costs / unit contribution margin

= Rs. 1,984,000 / Rs. 62
= Rs. 32,000 units

(a) Advanced Electronics desires to have a 32,000 – unit break even point with .a Rs. 60 unit
contribution margin. Fixed costs must therefore drop by Rs. 360,000 (Rs. 2,280,000 – Rs.
1,920,000), as follows:

Let X = fixed costs

X / Rs. 60 = 32,000 units
X = Rs. 1,920,000

(b) As the following calculations show, Advanced Electronics will have to generate a
contribution margin of Rs. 71.25 to produce a 32,000-unit break even point. Based on an
Rs. 80.00 selling price, this means that the company can incur variable costs of only Rs.
8.75 per unit. Given the current variable cost of Rs. 20.00 (Rs. 80.00 – Rs. 60.00), a
decrease of Rs. 11.25 per unit (Rs. 20.00 – Rs. 8.75) is needed.

Let X = unit contribution margin

Rs. 2,280,000 / X = 32,000 units
X = Rs. 71.25

4. (a) Increase

(b) No effect

(c) Increase

(d) No effect

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 MANAGERIAL ACCOUNTING – CHAPTER # 8 - ANSWERS
Problem 8-42 (Break-Even Point; After-Tax Net Income; Profit-Volume Graph;
International Issues (Appendix))

1. (a) Unit contribution margin = sales – variable costs

Units sold

= Rs. 1,000,000 – Rs. 700,000 = Rs. 3 per unit

100,000

Break even point (in units)= fixed costs

Unit contribution margin

= Rs. 210,000 = 70,000 units

Rs. 3

(b) Contribution margin ratio = contribution margin

Sales revenue

= Rs. 1,000,000 – Rs. 700,000 = 0.3

Rs. 1,000,000

Break even point (in units)= fixed costs

contribution margin ratio

= Rs. 210,000 = Rs. 700,000

0.3

2. Number of units of sales fixed costs + target after-tax net income

Required to earn target after = (1 – t)
Tax unit income unit contribution margin

Rs. 210,000 + Rs. 90,000

= (1 – 0.4) = Rs. 360,000
Rs. 3 Rs. 3

= 120,000 units

3. If fixed costs increase by

Rs. 31,500:

Break even point (in units)= Rs. 210,000 + Rs. 31,500 = 80,500 units
Rs. 3

4. Profit volume graph

5. Number of units of sales fixed costs + target after-tax net income

required to earn target after = (1 – t)
tax net income unit contribution margin

Rs. 210,000 + Rs. 90,000

= (1 – 0.5) = Rs. 390,000
Rs. 3 Rs. 3

= 130,000 units

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