Professional Documents
Culture Documents
Req. 1
Sales revenue − Variable expenses − Fixed expenses = Operating income
Sale Variable
price × Units sold − cost × Units sold − Fixed expenses = Operating income
per unit per unit
$1,095,000
Units sold =
$8.00
Req. 2
Contribution margin = $12.00 − $4.00
= $8.00
$1,095,000 + $312,000
Target sales in dollars =
0.67
$1,407,000
=
0.67
= $2,100,000
Req. 3
Spirit Calendars
Contribution Margin Income Statement
Month Ended June 30
Sales revenue (450,000 × $12.00) $5,400,000
Less variable expenses:
Cost of goods sold (450,000 × $4.00 × 0.73) $1,314,000
Operating expenses (450,000 × $4.00 × 0.27) 486,000 1,800,000
Contribution margin 3,600,000
Less: Fixed expenses 1,095,000
Operating income $2,505,000
(continued) P7-63A
Req. 4
Margin of safety = Sales − Sales at breakeven
Margin of safety = $5,400,000 − (136,875 cartons × $12.00 per carton)
Margin of safety = $5,400,000 − $1,642,500
Margin of safety = $3,757,500
Contribution margin
Operating leverage factor =
Operating income
$3,600,000
Operating leverage factor =
$2,505,000
Operating leverage factor = 1.437 (rounded)
Req. 5
If volume increases 10%, then operating income will increase 14.37% (operating leverage factor of 1.437 multiplied
by 10%).
Proof:
Original volume (cartons)…..…………………... 450,000
Add: Increase in volume (10% × 450,000)… 45,000
New volume (cartons)………………………... 495,000
Multiplied by: Unit contribution margin……… $8.00
New total contribution margin……………… $3,960,000
Less: Fixed expenses………………………. (1,095,000)
New operating income………………………. $2,865,000
vs. Operating income before change in
volume…………………………………….. 2,505,000
Increase in operating income………………. $ 360,000
E8-27A
Req. 1
Shaw Enterprises
Outsourcing Decision Analysis
Operating income for Shaw Enterprises will increase by $25,000 by outsourcing the component and making the
new product.
Req. 2
Total relevant cost to make (see Req. 1) $1,275,000
Plus opportunity cost 30,000
Total $1,305,000
Divided by number of units ÷ 100,000
Price per unit $ 13.05
$13.05 per unit is the maximum price Shaw Enterprises would be willing to pay if it outsources the component.
E8-22A
Req. 1
Jasper McKnight
Incremental Analysis of Special Sales Order
Revenue from special order (17,000 × $63) $1,071,000
Less: variable expenses associated with order (17,000 × $60)* (1,020,000)
Contribution margin $51,000
Less: Additional fixed costs associated with order 0
Increase in operating income from special order $ 51,000
Variable marketing expenses are irrelevant because no variable marketing expenses are incurred for the special
sales order. Fixed manufacturing expenses are irrelevant because no extra fixed expenses are incurred for the
special sales order — the plant has enough idle capacity to produce the 17,000 extra pairs of sunglasses for Arizona
Glasses’ special order.
In addition to determining the special order's effect on operating profits, Jasper McKnight’s managers should also
consider the following:
Will Jasper McKnight’s other customers find out about the lower sale price Jasper McKnight’s offered to
Arizona Glasses? If so, will these other customers demand lower sale prices?
How will Jasper McKnight’s competitors react? Will they retaliate by cutting their prices and starting a
price war?
Will lowering the sale price tarnish Jasper McKnight’s image as a high-quality brand?
Req. 2
When deciding whether to accept a special order, we should compare the extra revenues we will receive against
the extra costs we will incur to fill the order. Costs that we will incur whether or not we fill the order are irrelevant
to our decision. This is why comparing the $63 price Arizona Glasses offered us with our $88 total cost of making
the sunglasses is misleading.
What is relevant are the extra revenues and extra costs we will incur to fill the special order. If we accept Arizona
Glasses special order, we will incur only $60 extra cost per pair of sunglasses:
E10-33B
Req. 1
Residential Professional
Operating income $ 63,550 $165,000
÷ Total assets ÷$205,000 ÷$375,000
Return on investment 31% 44%
Each division’s ROI is very high; however, the Professional Division has an even higher ROI (44%) than the
Residential Division.
Req. 2
Residential Professional
Operating income $ 63,550 $165,000
÷ Sales ÷$635,500 ÷$1,031,250
Sales margin 10% 16%
The Professional Division is earning about $0.16 on each dollar of sales whereas the Residential Division is only
earning about $0.10 on each dollar of sales. The Professional Division’s higher sales margin helps to account for
Req. 3
Residential Professional
Sales $635,500 $1,031,250
÷ Total assets ÷$205,000 ÷$ 375,000
Capital turnover 3.10 times 2.75 times
The Professional Division is generating $2.75 of sales for every dollar of assets invested in the division. The
Residential Division is generating $3.10 of sales for every dollar of assets invested. The Residential Division is even
more efficient.
Req. 4
Residential Professional
Sales margin 10% 16%
× Capital turnover ×3.10 ×2.75
ROI 31% 44%
Does your answer for the residential ROI agree with the basic ROI? Yes.
Does your answer for the professional ROI agree with the basic ROI? Yes.
What can you conclude?
Even though the Residential Division’s efficiency (as measured by the capital turnover) is higher than that of the
Professional Division, the Professional Division’s profitability (as measured by the sales margin) is so much higher
that it causes the Professional Division’s ROI to be much higher than the Residential Division’s.
Req. 5
RI = Operating income – Minimum acceptable income
= Operating income – (Target rate of return × Total assets)
E11-23A
The favorable direct materials price variance combined with the unfavorable direct material quantity variance
suggests that managers may have used lower quality materials that resulted in more waste. The net effect is
favorable.
The unfavorable direct labor rate variance combined with the favorable direct labor efficiency variance suggests
that managers may have used higher paid workers who performed more efficiently. The net effect is
unfavorable.