MANAGEMENT ACCOUNTING

Name: Gale Methuselah G. Bocota

Activity: Please answer the following:

Managerial Accounting by Stacey M. Whitecotton

1. Page 288-289 E6-8 Matching Terms to Definitions

Match the definitions on the left with the most appropriate term on the right. Terms may be
used once, more than once, or not at all.

Answer Description Terms

1. Buffer zone that identifies how much sales A. Weighted-average
B
can drop before the business suffers a loss. contribution margin
2. An investment in technology that increases
I total fixed costs while reducing the variable B. Margin of safety
cost per unit.
3. Total Fixed Costs + Target Profit
G C. Product mix
Contribution Margin Ratio
4. How a company uses variable costs versus
D D. Cost structure
fixed costs to perform its operations.
5. The proportion of units sold from each
C E. Indifference point
product or service line.
6. When two profit equations yield the same F. Target contribution
E
profit. margin
7. Actual or budgeted sales minus breakeven
B G. Target sales revenue
sales.
H. Degree of operating
F 8. Total fixed costs plus target profit.
leverage
9. Contribution Margin
H I. Automation
Net Operating Income
10. Total Fixed Costs + Target Profit
J J. Target units
Unit Contribution Margin

2. Page 289 E6-9 Analyzing Break-Even Point

Joyce Murphy runs a courier service in downtown Seattle. She charges clients $0.50 per mile
driven. Joyce has determined that if she drives 3,300 miles in a month, her total operating cost
is $875. If she drives 4,400 miles in a month, her total operating cost is $1,095. Joyce has used
the high-low method (covered in Chapter 5) to determine that her monthly cost equation is total
monthly cost = $215 + $0.20 per mile driven.
Given:
Sales per mile = $0.50
Variable Cost per mile = $0.20
Total Fixed Cost = $215
Contribution Margin = $0.50-$0.20 = $0.30/mile

Required:
1. Determine how many miles Joyce needs to drive to break even.

𝑇𝑜𝑡𝑎𝑙 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡 215

Breakeven = 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑀𝑎𝑟𝑔𝑖𝑛
= 0.30/𝑚𝑖𝑙𝑒
= $716.67 miles

2. Calculate Joyce’s degree of operating leverage if she drives 4,200 miles.

@4,200 miles
0.20
Variable Cost = 4,200 miles x 1 𝑚𝑖𝑙𝑒
= $840
0.50
Sales = 4,200 miles x 1 𝑚𝑖𝑙𝑒
= $2,100
CM = $2100 - $840 = 1260

Net Operating Income = CM – FC

= $1260 – $215
= $1045

Degrees of Operating Leverage = $1260/1045 = 1.21

3. Suppose Joyce took a week off and her sales for the month decreased by 25
percent. Using the degree of operating leverage, calculate the effect this will have
on her profit for that month.
% net income
Degrees of operating leverage =[ ]
% net sales
% net income
= - 0.25 [1.206 −25%
]- 0.25
= 0.3015 = % net income

Therefore, there’s a decrease of -30.15% in net income

3. Page 289 E6-10 Calculating Contribution Margin
Last month, Laredo Company sold 450 units for $25 each. During the month, fixed costs were
$2,520 and variable costs were $9 per unit.

Given:
No. of units = 450
Selling price per unit = $25
Fixed Cost = $2520
Variable Cost =$9/unit

Required:
1. Determine the unit contribution margin and contribution margin ratio.
Contribution Margin per unit = Selling price per unit – Variable cost
= $25 - $9
= $16 per unit

Contribution Margin Ratio = Contribution margin per unit / Selling price per
unit
= $16 / $25
= 0.64 or 64%

2. Calculate the break-even point in units and sales dollars.

Break-even point in units = Fixed costs / Contribution Margin per unit
= $2,520 / $16 per unit
= 157.5 or 158 units

Break-even point in sales = Fixed cost / Contribution Margin Ratio

= $2520 / 64%
= $3,937.5

3. Compute Laredo’s margin of safety in units and as a percentage of sales.

Margin of Safety = Actual / Budget Sales – Breakeven Sales
Margin Safety Percentage = Actual / Budgeted Sales – Break-even Sales
Actual / Budgeted Sales

Margin of Safety in units = 450 units – 157.5 units = 292.5 units

292.5 units x $25 = $7,312.5

Margin of Safety in Percentage of Sales = $7,312.5/$11,250

= 0.65 or 65%