Midterm - Ch.

1, 2, 3
Chapter 1 - The Accountant’s Vital Role in Decision Making
1-21 (Five-Step Decision-Making Process, Service Firm)
Brite Exteriors is a firm that provides house painting services. Robert Brite, the owner, is trying to find new ways to increase
revenues. Mr. Brite performs the following actions, not in the order list.
Classify each action below according to its step in the five-step decision-making process (identify the problem and uncertainties,;
obtain information; make predictions about the future; decide on one of the available alternatives; implement that decision, evaluate
performance, adn learn).
Action Decision-Making Process Step
1. Mr. Brite calls Home Depot to ask the price of
paint sprayers. Obtain information
2. Mr. Brite discussed with his employees the possibility
of growing revenues of the firm. Identify the problem and uncertainties
3. One of Mr. Brite’s project managers suggest that using
paint sprayers instead of hand painting will increase
productivity and thus revenues. Make predictions about the future
4. The workers who are not familiar with paint sprayers
take more time to finish a job than they did when painting
by hand. Implement the decision, evaluate performance, and learn
5. Mr. Brite compares the expected cost of buying
sprayers to the expected cost of hiring more workers
who paint by hand, and estimates profits from both
alternatives. Make predictions about the future
1-17 (Value Chain and Classification of Costs, Fast Food Restaurant)
Burger King, a hamburger fast food restaurant, incurs the following costs. Classify each cost item as one of the business functions
of the value chain.
Cost Item Value Chain Business Function
1. Cost of oil for the deep fryer Production
2. Wages of the counter help who give customers the
food they order Distribution
3. Cost of the costume for the King on the Burger King
television commercials Marketing
4. Cost of children’s toys given away free with kids’
Meals Marketing
5. Cost of the posters indicating the special “two
cheeseburgers for $2” Marketing
6. Costs of frozen onion rings and French fries Production
7. Salaries of the food specialists who create new
sandwiches for the restaurant chain Design
8. Cost of “to-go” bags requested by customers who
could not finish their meals in the restaurant Customer Service
1-19 (Planning and Control Decisions)
Connor Company makes and sells brooms and mops. It takes the following actions, not necessarily in the order given below. For
each action, state whether it is a planning decision or a control decision.
Action Decision
1. Conner asks its marketing team to consider ways
to get back market share from its newest competitor,
Swiffer. Planning Decision
2. Conner calculates market share after introducing its
newest product. Control Decision
3. Conner compares costs it actually incurred with
costs it expected to incur for the production of the
new product. Control Decision
4. Conner’s design team proposes a new product to
compete directly with the Swiffer. Planning Decision
5. Conner estimates the costs it will incur to sell
30,000 units of the new product in the first quarter
of the next fiscal year. Planning Decision
Chapter 2 - An Introduction to Cost Terms and Purposes
2-33 (Comprehensive Problem on Unit Costs, Product Costs)
Canadian Office Equipment manufactures and sells metal shelving. It began operations on January 1,
2019.
Costs incurred for 2019 are as follows:
Direct materials used costs $142,000 V
Direct manufacturing labour costs 32,000 V
Plant energy costs 7,000 V
Indirect manufacturing labour costs 10,000 V
Indirect manufacturing labour costs 15,000 F
Other indirect manufacturing costs 12,000 V
Other indirect manufacturing costs 18,000 F
Marketing, distribution, and customer-service costs 120,000 V
Marketing, distribution, and customer-service costs 42,000 F
Administrative costs 53,000 F
Inventory data are as follows
Beg, Jan 1, 2019 End, Dec 31, 2019

Direct materials 0 kilograms 2,100 kilograms

Work in process 0 units 0 units

Finished goods 0 units ?

Production in 2019 was 100,000 units. Two kilograms of direct materials is used to make one unit of
finished product.
Revenues in 2019 were $387,200. The selling price per unit and the purchase price per kilogram of direct
materials were stable throughout the year. The company's ending inventory of finished goods is carried at
the average unit manufacturing costs for 2019. Finished goods inventory at December 31, 2019, was
$28,320.
a) Calculate direct materials inventory, total cost, December 31, 2019.
Ending Direct Materials Total Cost = Ending Direct Materials in Kilograms X Direct materials Cost per Kilogram
= 2,100 kg X 0.71*
= $1,491
*2 Kg of DM = 1 Unit of Product
100,000 units x 2kg of DM = 200,000 kg
$142,000 of direct materials used costs / 200,000 kg = 0.71
b) Calculate finished goods inventory, total units, Dec 31, 2019.
Manufacturing Costs for 100,000 units
Variable Fixed Total
Direct materials used $142,000 $142,000
Direct manufacturing labour costs 32,000 32,000
Plant energy costs 7,000 7,000
Indirect manufacturing labor costs 10,000 $15,000 25,000
Other indirect manufacturing costs 12,000 18,000 30,000
Cost of goods manufactured $203,000 $33,000 $236,000
Ending FInished Goods Inventory in Total Units
End Finished Goods
End Finished Goods Inv in Units =
Total COGM /Total Units Produced
28,320
=
236,000/100,000
= 12,000 units
c) Calculate selling price per unit in 2019.
Selling Price per Unit = Total Revenues / Total Units Sold
= $387,200 / 88,000* units sold
= $4.40 per unit
*100,000 units - 12,000 end finished goods = 88,000 units sold
d) Calculate operating income for 2019.
Canadian Office Equipment
Income Statement
Year Ended December 31, 2019
Revenues $387,200
Cost of Goods Sold:
Beg Finished Goods, Jan 1, 2019 $0
Cost of Goods Manufactured 236,000*
Cost of Goods Available for Sale 236,000
End Finished Goods, Dec 31, 2019 28,320 207,680
Gross Margin 179,520
Operating Costs:
Marking, Distribution, and Customer-Service Costs 162,000
Administrative Costs 53,000 215,00
Operating Income / Loss $(35,480)

*from part b)
2-35 (Cost of Goods Manufactured)
Consider the following account balances (in thousands) for the Canseco Company:
Beg of 2019 End of 2019
Direct materials inventory $22,000 $26,000
Work in process inventory 21,000 20,000
Finished goods inventory 18,000 23,000
Purchases of direct materials 75,000
Direct manufacturing labour 25,000
Indirect manufacturing labour 15,000
Plant insurance 9,000
Depreciation - plant building and equipment 11,000
Repairs and maintenance - plant 4,000
Marketing, distribution, and customer-service costs 93,000
General and administrative costs 29,000
a) Prepare a schedule of cost of goods manufactured for 2019.
Canseco Company
Schedule of Cost of Goods Manufactured
For the Year Ended December 31, 2016
(in thousands)
Direct materials costs:
Beg Inv, Jan 1, 2016 $22,000
Purchases of direct materials 75,000
Cost of direct materials available for use 97,000
End Inv, Dec 31, 2016 26,000
Direct materials used $71,000
Direct manufacturing labour costs 25,000
Indirect manufacturing costs
Indirect manufacturing costs $15,000
Plant insurance 9,000
Depreciation - plant building and equipment 11,000
Repairs and maintenance - plant 4,000 39,000
Manufacturing costs incurred during 2016 135,000
Add beg work in process inventory, Jan 1, 2016 21,000
Total manufacturing costs to account for 156,000
Less ending work in process inventory, Dec 31, 2016 20,000
Cost of goods manufactured $136,000

b) Revenues in 2019 were $300 million. Prepare the 2019 statement of comprehensive income.
Canseco Company
Statement of Comprehensive Income
For the Year Ended December 31, 2016
(in thousands)
Revenue $300,000
Cost of goods sold:
Beg finished goods, Jan 1, 2016 $18,000
Cost of goods manufactured (Requirement 1) 136,000
Cost of goods available for sale 154,000
Ending finished goods, Dec 31, 2016 23,000 131,000
Gross margin $169,000
Operating costs:
Marketing, distribution, and customer-service $93,000
General and administrative 29,000 122,000
Operating income $47,000
2-36 (Flow of Inventoriable Costs)
Herschel Plastics Inc.’s selected data for the month of August 2019 are provided below (in millions).
Work-in-process inventory, Aug 1, 2019 $230
Direct materials inventory, Aug 1, 2019 115
Direct materials purchased 375
Direct materials used 350
Variable manufacturing overhead 265
Total manufacturing overhead 455
Total manufacturing costs incurred during Aug 2019 1,630
Cost of goods manufactured 1,660
Cost of goods sold 1,740
Finished goods inventory, Aug 1, 2019 205
a) Calculate direct materials inventory on August 31, 2019.
Direct Materials Inventory, Aug 1, 2019 $115
Direct Materials Purchased 375
Direct Materials Available for Production 490
Direct Materials Used (350)
Direct Materials Inventory, Aug 31, 2019 $140
b) Calculate fixed manufacturing overhead costs for August.
Total Manufacturing Overhead Costs $455
Variable Manufacturing Overhead Costs (265)
Fixed Manufacturing Overhead Costs $190
c) Calculate direct manufacturing labour costs for August.
Total Manufacturing Costs Incurred $1,630
Direct Materials Used (350)
Total Manufacturing Overhead Costs (455)
Direct manufacturing Labour Costs for August $825
d) Calculate work-in-process inventory on August 31, 2019.
Work-in-Process Inventory, Aug 1, 2019 $230
Total Manufacturing Costs Incurred 1,630
Work-in-Process Available for Production 1,860
Cost of Goods Manufactured (1,660)
Work-in-Process Inventory, Aug 31, 2019 $200
e) Calculate cost of goods available for sale in August.
Finished goods inventory, Aug 1, 2019 $205
Cost of Goods Manufactured 1,660
FInished Goods Available for Sale in August $1,865
f) Calculate finished goods inventory on August 31, 2019.
Finished Goods Available for Sale in August $1,865
Cost of Goods Sold (1,740)
Finished Goods Inventory, Aug 31, 2019 $125
2-17 (Classification of Costs, Merchandising Sector)
Home Entertainment Centre (HEC) operates a large store in Halifax. The store has both a DVD section
and a music section (compact disks, MP3 players, ect). HEC reports revenues for the DVD section
separately from the music section.
Classify each of the following cost items (a) as either Direct or Indirect (D or I) and Variable or Fixed or
Variable and Fixed (F or V).
(a) (b)
Cost Item D or I V or F
Annual retainer paid to a DVD distributor D F
Electricity cost of HEC store (single bill covers entire store) I F
Costs of DVDs purchased for sale to customers D V
Subscription to DVD Trends magazine I F
Leasing of computer software used for financial budgeting at HEC store I F
Cost of popcorn provided free to all HEC customers I F or V
Fire insurance policy for HEC store I F
Freight-in costs of DVDs purchased by HEC D V
2-26 (Computing Cost of Goods Manufactured and Cost Goods Sold)
The following are account balances relating to 2019 (in thousands).
Property tax on plant building $3,600
Marketing, distribution, and customer service costs 44,250
Finished goods inventory, Jan 1, 2019 32,000
Plant utilities 20,400
WIP inventory, Dec 31, 2019 31,250
Depreciation of plant building 10,500
General and admin costs (nonplant) 51,800
direct materials used 104,500
Finished goods inventory, Dec 31, 2019 40,100
Depreciation of plant equipment 12,950
Plant repairs and maintenance 18,900
WIP Inv, Jan 1, 2019 24,100
Direct manufacturing labour 40,200
Indirect manufacturing labour 27,600
Indirect materials used 12,900
Miscellaneous plant overhead 5,600
Compute the cost of goods manufactured and the cost of goods sold.
Schedule of Cost of Goods Manufactured
For the Year Ended December 31, 2019
(in thousands)
Direct materials used $104,500
Direct manufacturing labour costs 40,200
Indirect manufacturing costs:
Property tax on plant building $3,600
Plant utilities 20,400
Depreciation of plant building 10,500
Depreciation of plant equipment 12,950
Plant repairs and maintenance 18,900
Indirect manufacturing labour costs 27,600
Indirect materials used 12,900
Miscellaneous plant overhead 5,600 112,450
Manufacturing costs incurred during 2019 257,150
Add beg WIP inv, Jan 1, 2019 24,100
Total manufacturing costs to account for 281,250
Deduct ending WIP inv, Dec 31, 2019 31,250
Cost of goods manufactured $249,900

Schedule of Cost of Goods Sold

For the Year Ended December 31, 2019
(in thousands)
Beg finished goods, Jan 1, 2019 $32,000
Cost of goods manufactured 249,900
Cost of good available for sale 282,900
End finished goods, Dec 31, 2019 40,100
Cost of goods sold $241,800
2-30 (Cost Drivers and Functions)
The list of representative cost drivers in the right column of the table are randomized with respect to the
list of functions in the left column. That is, they do not match.
Function Representative Cost Driver
1. Accounting A. Number of invoices sent
2. Human resources B. Number of purchase orders
3. Data processing C. Number of research scientists
4. Research and development D. Hours of computer processing unit (CPU)
5. Purchasing E. Number of employees
6. Distribution F. Number of transactions processed
7. Billing G. Number of deliveries made
a) Match each function with its representative cost driver.
Function Representative Cost Driver
1. Accounting Number of transactions processed
2. Human resources Number of employees
3. Data processing Hours of computer processing unit (CPU)
4. Research and development Number of research scientists
5. Purchasing Number of purchase orders
6. Distribution Number of deliveries made
7. Billing Number of invoices sent
b) Give a second example of the cost driver for each function.
Function Representative Cost Driver
1. Accounting Number of journal entries made
2. Human resources Salaries and wages of employes
3. Data processing Number of computer transactions
4. Research and development Number of new products being developed
5. Purchasing Number of different types of materials purchase
6. Distribution Distance travelled to make deliveries
7. Billing Number of credit sales transactions
2-41 (Inventory Decision, Opportunity Costs)
Lawn World, a manufacturer of lawn mowers, predicts that it will purchase 264,000 spark plugs next year.
Lawn World estimates that 22,000 spark plugs will be required each month. A supplier quotes a price of
$7.00 per spark plug. The supplier also offers a special discount option: If all 264,000 spark plugs are
purchased at the start of the year, a discount of 2% off the $7.00 price will be given. Lawn World can
invest its cash at 10% per year. It costs Lawn World $260 to place each purchase order.
a) What is the opportunity cost of interest forgone from purchasing all 264,000 units at the start of the
year instead of in 12 monthly purchases of 22,000 units per order?

Opportunity Cost = Difference in Average Investment x Investment Percentage

= $828,520* x 10%
= $82,852

*$7 x (1 - 2%) = $6.86

264,000 x $6.86 = $1,811,040 /2 = $905,520
22,000 x $7 = $154,000 / 2 = $77,000
$905,520 - $77,000 = $828,520
b) Would this opportunity cost be recorded in the accounting system? Why?
The opportunity cost would not be recorded in the accounting system due to no actual transaction being recorded in
the accounting system.
c) Should Lawn World purchase 264,000 units at the start of the year or 22,000 units each month? Show
your calculations.
Purchase 264,000Purchase 22,000
Spark Plugs at Spark Plug at Beg
Beg of Year of Each Month Difference
Annual purchase-order costs $260 $3,120* (2,860)
Annual purchase cost 1,811,040^ 1,848,000^^ (36,960)
Annual interest income that could be earned
if investment in inventory were invested 90,522** 7,700*** 82,852
Relevant costs $1,901,852 $1,858,820 $43,032
The difference column indicates that purchasing 22,000 spark plugs at the beginning of each month is preferred
relative to purchasing 264,000 spark plugs at the beginning of the year.
*2(64,000 / 22,000) x $260 = $3,120
^264,000 x $7.00 = $1,848,000
^^(264,000 x $7.00) x (1 - 0.02) = $1,811,040
**$905,520 x 10% = $90,522
***$77,000 x 10% = $7,700
2-24 (Variable Costs, Fixed Costs, Relevant Range)
Chocolate Brand Ltd. manufactures jaw-breaker candies in a fully automated process. The machine that
produces candies was purchased recently and can make 4,600 per month. The machine costs $7,500
and is depreciated using straight-line depreciation over 10 years assuming zero residual value. Rent for
the factory space and warehouse and other fixed manufacturing overhead costs total $1,300 per month.
Chocolate Brand currently makes and sells 3,800 jaw-breakers per month. Chocolate Brand buys just
enough materials each month to make the jaw-breakers it needs to sell. Materials cost 40 cents perjaw-
breaker. Next year the company expects demand to increase by 100%. At this volume of materials
purchased, it will get a 10% discount on price. Rent and other fixed manufacturing overhead costs will
remain the same.
a) What is the current annual relevant range of output?
Chocolate Brand’s current annual relevant range of output is 0 to 55,200 jaw-breakers (4,600 x 12)
b) What is the current annual fixed manufacturing cost within the relevant range? What are the variable
manufacturing costs?
Chocolate Bran’s current annual fixed manufacturing costs = $16,350
Chocolate Brand’s current annual variable manufacturing costs = $18,240
c) What will the relevant range of output be next year? How will total fixed and variable manufacturing
costs change next year?
If the demand increases by 100%, annual production will have to increase to 91,200 jaw-breakers next year to meet
the expected increase. Chocolate Brand has two options:
a) leave demand in excess of the current capacity unfilled or b) purchase an additional machine in order to meet
demand
How will total fixed and variable manufacturing costs change next year? Complete the statements below.
If the company decides to go with option a), the variable cost per unit produced will stay the same and the annual
fixed costs will stay the same. Should the company decide to go with option b), the variable cost per unit produced
will decrease by the amount of the discount and the annual fixed costs will increase due to additional depreciation.
2-22 (Computing and Interpreting Manufacturing Unit Costs)
Merrickville Office Products (MOP) produces three different paper products at its Vernon lumber plant
—Supreme, Deluxe, and Regular. Each product has its own dedicated production line at the plant. MOP
currently uses the following three-part classification for its manufacturing costs: direct materials, direct
manufacturing labour, and indirect manufacturing costs. Total indirect manufacturing costs of the plant in
May 2018 are $150 million ($27 million of which are fixed). This total amount is allocated to each product
line on the basis of the direct manufacturing labour costs of each line. Summary data (in millions) for May
2018 are provided in the accompanying table.
Supreme Deluxe Regular
Direct material cost $87 $52 $61
Direct manufacturing labour costs $12 $29 $19
Indirect manufacturing costs $40 $83 $27
Kilograms produced 60 100 90
Compute the total manufacturing cost per kilogram for each product produced in May 2018. Compute the
total variable manufacturing cost per kilogram for each product produced in May 2018.
Supreme Deluxe Regular
Direct material costs $87 $52 $61
Direct manufacturing labour costs $12 $29 $19
Indirect manufacturing costs $40 $83 $27
Total manufacturing costs $139 $164 $107
Mfg. fixed cost allocation $5.40* $13.05 $8.55
Variable costs $133.60 $150.95 $98.45
Kilograms produced 60 100 90
Total manufacturing cost per kg $2.32** $1.64 $1.19
Variable mfg. cost per kg $2.23^ $1.51 $1.09
*(27m / [12m + 29m + 19m]) x 12 = $5.40
**Total Manufacturing Costs / Kilograms produced = $139 / 60 = $2.32
^Variable costs / Kilograms produced = $133.60 / 60 = $2.23
2-15 (Inventoriable Costs Versus Period Costs)
Each of the following cost items pertains to one of the following companies: Toyota (a manufacturing-
sector company), Sobeys (a merchandising-sector company), and Google (a service-sector company).
1. Spring water purchased by Sobeys for sale to its customers.
2. Electricity used to provide lighting for assembly-line workers at a Toyotatruck-assembly plant.
3. Depreciation on computer equipment at Google used to update directories of websites.
4. Electricity used to provide lighting for Sobeys store aisles.
5. Depreciation on computer equipment at Toyota used for quality testing of truck components
during the assembly process.
6. Salaries of Sobeys marketing personnel planning local newspaper advertising campaigns.
7. Spring water purchased by Google for consumption by its software engineers.
8. Salaries of Google marketing personal selling banner advertising.
Classify each of the (1-8) cost items as an inventoriable cost or a period cost.
Inventoriable Cost or Period Cost Reason
1. Inventoriable costs Will become cost of goods sold
2. Inventoriable costs Part of manufacturing overhead
3. Period costs Company has no inventory of goods for sale
4. Period costs Benefits current period and is not traceable to goods purchased
5. Inventoriable costs Part of manufacturing overhead
6. Period costs Benefits current period and is not traceable to goods purchased
7. Period costs Company has no inventory of goods for sale
8. Period costs Company has no inventory of goods for sale
2-19 (Variable Costs, Fixed Costs, Total Costs)
AnaLogue is getting ready to open a small restaurant. She is on a tight budget and must choose between
the following long-distance phone plans:
Plan A: Pay 12 cents per minute of long-distance calling.
Plan B: Pay a fixed monthly fee of $15 for up to 280 long-distance minutes, and 7 cents per
minute thereafter (if she uses fewer than 280 minutes in any month, she still pays $15
for the month).
Plan C: Pay a fixed monthly fee of $22 for up to 460 long-distance minutes and 6 cents per
minute thereafter (if she uses fewer than 460 minutes, she still pays $22 for the month).
Which plan should Logue choose if she expects to make 100 minutes of long-distance calls? 2080
minutes? 480 minutes?
Plan 100 minutes 280 minutes 480 minutes
Plan A Plan B Plan C
2-31 (Labour Cost, Overtime, and Idle Time)
Larry Lippart is a line worker in the assembly department of Marston Manufacturing. He normally earns
$18 per hour, but gets time and a half ($27 per hour) for overtime, over 40 hours per week. He earns
double time if he works holidays even if he has not worked 40 hours that week.
Sometimes the assembly-line equipment goes down and Larry has to wait for the mechanics to repair the
equipment or there is a scheduling mix-up. Larry is paid for this time and Marston considers this idle time.
In May, Larry worked two 41-hour weeks, one 42 hour week, and last week he worked 40 hours, but one
of those days was a national holiday. During regular hours, the assembly-line equipment was down 4.7
hours in May, and Larry had one hour of idle time because of a scheduling mix-up.
a) Calculate (i) direct manufacturing labour, (ii) idle time, (iii) overtime holiday premium, and (iv) total
earnings for Larry in May.
i) Direct Mfg Labour Costs = (Total Hours for Month - Total Idle Time for Month) x Regular Hourly Rate
= ([41 + 41 + 42 + 40] - [4.7 + 1]) x 18
= $2,849.40
ii) Idle Time Costs = Total Idle Time for Month x Regular Hourly Rate
= [4.7 + 1] x 18
= $102.60
iii) Overtime Holiday Premium = (Total Overtime Hours * Overtime Premium per Hr) + (Holiday Hours x
Holiday Premium per Hr)
= (4 x $27) + (2 x $36)
= $180
iv) During the month of May, Larry Lippart had total earnings of $3,132 (add up all amounts).
b) Is idle time and overtime premium a direct or indirect cost of the jobs that Larry worked on in May?
Explain.
Idle time caused by equipment breakdown and scheduling mixups is a(n) indirect cost of the job because it is not
related to a specific job.
Overtime premium caused by the heavy overall volume of work is a(n) indirect cost because it is not related to a
particular job that happened to be worked on during the overtime hours. If the overtime is the result of a demanding
“rush job,” the overtime premium is a(n) direct cost of that job.
Chapter 3 - Cost-Volume-Profit Analysis
3-32 (Sales Mix, New and Upgrade Customers)
Tapo 1-2-3 is a top-selling electronic spreadsheet product. Tapo is about to release version 5.0. It divides
its customers into two groups: new customers and upgrade customers (those who previously purchased
Tapo 1-2-3, 4.0 or earlier versions). Although the same physical product is provided to each customer
group, sizable differences exist in selling prices and variable marketing costs:
New Customer Upgrade Customer
Selling price $295 $105
Variable costs
Manufacturing $20 $20
Marketing $75 $95 $10 $30
Contribution margin $200 $75
The fixed costs of Tapo 1-2-3 5.0 are $12,000,000. The planned sales mix in units is 60% new customers
and 40% upgrade customers.
a) What is the Tapo 1-2-3 version 5.0 break even points in units, assuming that the planned 60/40 sales
mix is attained?
Begin by determining the sales mix. For every bundle, 3 unit(s) is/are sold to new customers and 2 unit(s) is/are sold
to customers who bought upgrades.
Contribution Margin of the Bundle = (3 x $200) + (2 x $75) = $750
Break Even Point in Bundles = Fixed Costs / Contribution Margin per Bundle
= $12,000,000 / $750
= 16,000
Break Even Point in Units is:
Sales to New Customers - 16,000 bundles x 3 units per bundle 48,000 units
Sales to Upgrade Customers - 16,000 bundles x 2 units per bundle 32,000 units
Total number of units to breakeven (rounded) 80,000 units
The breakeven point is 48,000 units for new customers and 32,000 units for upgrade customers.
b) If the sales mix is attained, what is the operating income when 180,000 total units are sold?
New Customers Upgrade Customers Total
Units sold 108,000* 72,000 180,000
Total revenue $31,860,000** $7,560,000 $39,420,000
Total variable costs 10,260,000*** 2,160,000 12,420,000
Contribution margin $21,600,000 $5,400,000 27,000,000
Fixed costs 12,000,000
Operating income $15,000,000
*180,000 units x 60% = 108,000 units **108,000 units x $295 = $31,860,000
***108,000 units x $95 = $10,260,000
c) Show how the breakeven point in units changes with the following customer mixes:
i. New 40% and upgrade 60%.
Begin by determining the sales mix. For every bundle, 2 unit(s) is/are sold to new customers and 3 unit(s) is/are sold
to customers who bought upgrades.
The breakeven point is 19,200 bundles. This translates to a breakeven point of 38,400 units for new customers and
57,600 units for upgrade customers.
ii. New 90% and upgrade 10%.
Begin by determining the sales mix. For every bundle, 9 unit(s) is/are sold to new customers and 1 unit(s) is/are sold
to customers who bought upgrades.
The breakeven point is 6,400 bundles. This translates to a breakeven point of 57,600 units for new customers and
6,400 units for upgrade customers.
iii. Comment on the results.
As Tapo increases its percentage of new customers, which have a higher contribution margin per unit than upgrade
customers, the number of bundles required to break even decreases.

3-35 (CVP Analysis, Service Firm)

Wildlife Escapes generates average revenues of $9,200 per person on its five-day package tours to
wildlife parks in Kenya. The variable costs per person are:
Airfare $3,500
Hotel accommodations 1,200
Meals 480
Ground transportation 920
Park tickets and other costs 240
Annual fixed costs total $1,287,000.
a) Calculate the number of package tours that must be sold to break even.
Revenue per package $9,200
Variable cost per package 6,340
Contribution margin per package $2,860

Breakeven (units)= Fixed costs / Contribution margin per package

= $1,287,000 / $2,860
= 450 package tours
b) Calculate the revenue needed to earn a target operating income of $214,500.
Contribution margin ratio = Contribution margin per package / selling price
= $2,860 / $9,200
= 31.09%
Units needed to achieve target income = (Fixed costs + target OI) / CM Ratio
= ($1,287,000 + $214,500) / 0.3109
= $4,829,527
c) If fixed costs increased by $40,500, what decrease in variable costs must be achieved to maintain the
breakeven point calculated in part a)?
Fixed costs = $1,287,000 + $40,500 = $1,327,500
Breakeven (units) = Fixed costs / Contribution margin per unit
Contribution margin per unit = $1,327,500 / 450
= $2,950 per tour package
Desired variable cost per tour package = $9,200 - $2,950 = $6,250
3-37 (CVP, Target Income, Service Firm)
Snowy Owl Daycare provides daycare for children Mondays through Fridays. Snowy Owl charges each
parent $610 per child. Its monthly variable cost per child are:
Lunch and snacks $135
Educational supplies 65
Other supplies (paper products, toiletries, etc) 10
Total $210
Monthly fixed costs consist of:
Rent $1,850
Utilities 200
Insurance 400
Salaries 2,150
Miscellaneous 600
Total $5,200
a) Calculate the breakeven point.
Revenue per Child $610
Variable Cost per Child $210
Contribution Margin per Child $400
 ¿ Costs
Break Even Quality =
CM per Child
5200
=
400
= 13 children

b) Snowy Owl’s target operating income is $10,400 per month. Compute the number of children who must
be enrolled to achieve the target operating income.
¿ Costs+Target Operating Income
Target Quantity =
CM per Child
$ 5,200+ $ 10,400
=
$ 400
= 39 children
c) Snowy Owl lost its lease and had to move to another building. Monthly rent for the new building is
$3,550. At the suggestion of parents, Snowy Owl plans to take children on field trips. Monthly costs of the
field trips are $2,200. By how much should Snowy Owl increase fees per child to meet the target
operating income of $10,400 per month, assuming the same number of children as in a)?
Total Increase∈¿ Costs
Fee Increase per Child = of Children Enrolled ¿
Target ¿
( $ 3,550−$ 1,850)+$ 2,200
=
39
= 100
3-34 (Contribution Margin, Gross Margin, and Margin of Safety)
Royalty Beauty manufactures and sells a face cream to small specialty stores in the greater Los Angeles
area. It presents the monthly operating income statement shown here to George Diaz, a potential investor
in the business. Help Mr. Diaz understand Royalty Beauty’s cost structure.
Royalty Beauty
Operating Income Statement, June 2017
Units sold 10,000
Revenues $150,000
Cost of goods sold
Variable manufacturing costs $50,000
Fixed manufacturing costs 28,165
Total 78,165
Gross margin 71,835
Operating costs
Variable marketing costs $38,500
Fixed marketing and administrative costs 15,500
Total operating costs 54,000
Operating income $17,835
a) Recast the income statement to emphasize contribution margin.
Royalty Cosmetics
Operating Income Statement, June 2017
Units sold 10,000
Revenues $150,000
Variable costs
Variable manufacturing costs $50,000
Variable marketing costs 38,500
Total variable costs 88,500
Contribution margin 61,500
Fixed costs
Fixed manufacturing costs $28,165
Fixed marketing and administrative costs 15,500
Total fixed costs 43,665
Operating income $17,835
b) Calculate the contribution margin percentage and breakeven point in units and revenues for June
2017.

Contribution Margin Percentage = Contribution Margin / Revenues

= $61,500 / $150,000
= 41%
Break Even Points in Units = Fixed Costs / Contribution Margin per Unit
= $43,665 / ($61,500 / 10,000 units)
= 7,100 units

Break Even Point in Revenues = Fixed Costs / Contribution Margin Percentage

= $43,665 / 0.41
= $106,500
c) What is the margin of safety (in units) for June 2017?
Margin of Safety = Current Sales Level in Units - Break Even Point in Units
= 10,000 - 7,100
= 2,900 units
d) If sales in June were only 9,500 units and Royalty’s tax rate is 30%, calculate its net income.
Contribution Margin $58,425
Less: Fixed Costs 43,665
Operating Income 14,760
Less: Tax Expense 4,428
Net Income $10,332
3-21 (Alternate Cost Structures, Uncertainty, and Sensitivity Analysis)
The St. John Company manufactures and sells pens. Resent sale output is 5,000,000 units per year at a
selling price of $0.60 per unit. FIxed costs are $880,000 per year. Variable costs are $0.40 per unit.
a) What is the present operating income for a year?
Operating Income = [ Units Sold X (Selling Price - Variable Costs) ] - Fixed Costs
= [5,000,000 (0.6 - 0.4) ] - 880,000
= $120,000
b) What is the present breakeven point in revenues?
Contribution Margin = Revenue - Variable Costs
= (5,000,000 X $0.60) - (5,000,000 X $0.40)
= $1,000,000
CM per Unit = CM / Units Sold
= $1,000,000 / 5,000,000
= $0.20 per unit
Break Even Units = Fixed Costs / CM per Unit
= $880,000 / 0.2
= 4,400,000 units
Break Even Revenues = Break Even Units X Selling Price
= 4,400,000 X $0.60
= $2,640,000
c) Compute the new operating income or loss for the following cases:
i. A $0.08 unit increase in variable costs results in a new operating income or loss of...
Operating Income = [ Units Sold X (Selling Price - Variable Costs) ] - Fixed Costs
= [5,000,000 (0.6 - 0.48) ] - 880,000
= $(280,000)
ii. A 10% increase in fixed costs and a 10% increase in units sold results in a new operating income or loss of...
Operating Income = [5,500,000 (0.6 - 0.40) ] - 968,000
= $132,000
iii. A 40% decrease in fixed costs, a 40% decrease in selling price, a 30% decrease in variable cost per
unit, and a 45% increase in units sold results in a new operating income or loss of…
Operating Income = [7,250,000 (0.36 - 0.28) ] - 528,000
= $52,000
d) Compute the new breakeven points in units for the following cases:
i. A 10% increase in fixed costs creates a new breakeven point at __ units…
Break Even Units = Fixed Costs / CM per Unit
= $968,000 / 0.2
= 4,840,000 units

ii. A 10% increase in selling price and a $30,000 increase in fixed costs creates a new breakeven point at
__ units…
Contribution Margin = Revenue - Variable Costs
= (5,000,000 X $0.66) - (5,000,000 X $0.40)
= $1,300,000
CM per Unit = CM / Units Sold
= $1,300,000 / 5,000,000
= $0.26 per unit
Break Even Units = Fixed Costs / CM per Unit
= $910,000 / 0.26
= 3,500,000 units
3-33 (Uncertainty and Expected Costs)
Bargainmart is an international retail store. Bargainmart's managers are considering implementing a new
business-to-business (B2B) information system for processing merchandise orders. The current system
costs Bargainmart $2,500,000 per month and $45 per order. Bargainmart has two options, a partially
automated B2B and a fully automated B2B system. The partially automated B2B system will have a fixed
cost of $10,000,000 per month and a variable cost of $30 per order. The fully automated B2B system will
have a fixed cost of $22,000,000 per month and a variable cost of $15 per order. Based on data from the
past twoyears, Bargainmart has determined the following distribution on monthly orders:
Monthly Number of Orders Probability
400,000 0.15
600,000 0.25
800,000 0.40
a) Prepare a table showing the cost of each plan for each quantity of monthly orders. What is the
expected cost of each plan?
Order Level Total Monthly Costs of Orders Probability Total Expensed Cost of Orders
400,000 $20,500,000* 0.15 $3,075,000
600,000 29,500,000 0.25 7,375,000
800,000 38,500,000 0.40 15,400,000
$25,850,000
*$2,500,000 + 45(400,000) = $20,500,000
Order Level Total Monthly Costs of Orders Probability Total Expensed Cost of Orders
400,000 $22,000,000* 0.15 $3,300,000
600,000 28,000,000 0.25 7,000,000
800,000 34,000,000 0.40 13,600,000
$23,900,000
*$10,000,000 + 35(400,000) = $22,000,000
Order Level Total Monthly Costs of Orders Probability Total Expensed Cost of Orders
400,000 $28,000,000* 0.15 $4,200,000
600,000 31,000,000 0.25 7,750,000
800,000 34,000,000 0.40 13,600,000
$25,550,000
*$22,000,000 + 15(400,000) = $28,000,000
b) In addition to the information systems costs, what other factors should Bargainmart consider before
deciding to implement a new B2B system?
They should consider the impact system has on its suppliers as well as aspects such as reliability, ease of use and
maintainability.

3-44 (Revenue Mix, Two Products)

The Ready Company retails two products, a standard and a deluxe version of a luggage carrier. The
budgeted income statement is as follows:
Standard Carrier Deluxe Carrier Total
Units sold 176,000 44,000
220,000
Revenues at $20 and $37 per unit $3,520,000 $1,628,000 $5,148,000
Variable costs at $15 and $17 per unit 2,640,000 748,000
3,388,000
Contribution margin at $5 and $20 per unit $880,000 $880,000 1,760,000
Fixed costs 1,200,000
Operating income $560,000
a) Compute the breakeven point in units, assuming that the planned revenue mix is maintained.
Begin by determining the sales mix. For every 1 deluxe unit(s) sold 4 standard units are sold.
Break Even Point in Bundles = Fixed Costs / Contribution Margin per Bundle
= $1,200,000 / 40
= 30,000
The break even point is 120,000 standard units and 30,000 deluxe units.
b) Compute the breakeven point in units (i) if only standard carriers are sold and (ii) if only deluxe carriers
are sold.
i) If only standard carriers are sold the breakeven point is 240,000 units.
ii) If only deluxe carriers are sold the breakeven point is 60,000 units.
c) Suppose 220,000 units are sold, but only 22,000 of them are deluxe. Compute the operating income.
Compute the breakeven point if these relationships persist in the next period. Compare your answers with
the original plans and the answer in requirement 1. What is the major lesson of this problem?
Standard Carrier Deduce Carrier Total
Units sold 198,000 22,000 220,000
Revenues at $20 and $37 per unit $3,960,000 $814,000 $4,774,000
Variable costs at $15 and $17 per unit 2,970,000 374,000 3,344,000
Contribution margin $990,000 $440,000 1,430,000
Fixed costs 1,200,000
Operating income $230,000

The major lesson of this problem is that changes in the sales mix change break even points and operating incomes.
In this example, the budgeted and actual total sales in the number of units were identical, but the proportion of the
product having the higher contribution margin declined. Operating income suffered and the breakeven point rose.

● CM = Sales Revenue - Variable Expenses

CM per unit
● CM Ratio =
Selling Price per unit
¿ Expenses
● BEP Units =
CM per unit
¿ Expenses
● BEP Revenue =
CM Ratio
 Contribution Margin
● Degree of Operating Leverage =
Operating Income
● % Change in Operating Income = Degree of Operating Leverage x % Change in Sales
● Operating Income = Revenue - Variable Expenses - Fixed Expenses
○ Operating Income = (Unit Sales Price X Q) - (Unit Variable Cost X Q) - (Fixed Costs)
● Gross Margin = Revenue - Cost of Goods Sold
● Target Operating Income = Revenue - Total Variable Costs - Fixed Costs
Target Net Income
○ Target Operating Income =
1−Tax Rate
● Operating Margin = Operating Revenue - Operating Costs
¿ Expenses +Target Operating Profit
● Units Sold to Attain Target Profit =
Unit Contribution Margin
Target Net Income
¿ Costs+
○ Volume of Units Required to be Sold = 1−Tax Rate
Contribution Margin per Unit
¿ Expenses +Target Operating Profit
● Dollar Sales to Attain Target Profit =
CM Ratio
Profit After Taxes
● B= , where B is profit before tax and T is tax rate
1−T
● Margin of Safety Revenue = Total Sales - Break Even Revenue
● Margin of Safety Revenue = Total Sales (Units) - Break Even Units
Margin of Safety ∈$
● Margin of Safety Percentage =
Total Budgeted (¿ actual)Sales
Variable Expense
● Variable Expense Ratio =
Sales
○ CM Ratio = 1 - Variable Expense Ratio