Managerial Accounting The Cornerstone of Business Decision Making 7Th Edition Mowen Solutions Manual Full Chapter PDF

Managerial Accounting The
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7 COST-VOLUME-PROFIT ANALYSIS
DISCUSSION QUESTIONS
1. CVP analysis allows managers to focus on selling prices, volume, costs, profits, and
sales mix. Many different “what-if” questions can be asked to assess the effect of
changes in key variables on profits.
2. The units sold approach defines sales volume in terms of units of product and gives
answers in these same terms. The unit contribution margin is needed to solve for the
break-even units. The sales revenue approach defines sales volume in terms of revenues
and provides answers in these same terms. The overall contribution margin ratio can be
used to solve for the break-even sales dollars.
3. Break-even point is the level of sales activity where total revenues equal total costs or
where zero profits are earned.
4. At the break-even point, all fixed costs are covered. Above the break-even point, only
variable costs need to be covered. Thus, contribution margin per unit is profit per unit,
provided that the unit selling price is greater than the unit variable cost (which it must be
for break-even to be achieved).
5. Variable Cost Ratio = Unit Variable Cost/Price
Contribution Margin Ratio = Contribution Margin/Sales
Contribution Margin Ratio = 1 – Variable Cost Ratio
6. No. The increase in contribution is $9,000 (0.30 × $30,000), and the increase in advertising
expense is $10,000. If the contribution margin ratio is 0.4, then the increased contribution
margin is $12,000 (0.40 × $30,000). This is $2,000 above the increased advertising
expense, so the increased advertising would be a good decision.
7. Sales mix is the relative combination of products being sold by a firm. For example, a
sales mix of 3:2 means that three units of one product are sold for every two units of
another product.
8. Packages of products, based on the expected sales mix, are defined as a single product.
Selling price and cost information for this package can then be used to carry out CVP
analysis.
9. This statement is wrong; break-even analysis can be easily adjusted to focus on targeted
profit.
10. The basic break-even equation is adjusted for targeted profit by adding the desired
targeted profit to total fixed cost in the numerator. The denominator remains the
contribution margin per unit.
11. A change in sales mix will change the contribution margin of the package (defined by the
sales mix), and thus will change the units needed to break even (assuming the different
products in the mix have different contribution margins).
7-1
© 2018 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CHAPTER 7 Cost-Volume-Profit Analysis
12. Margin of safety is the sales activity in excess of that needed to break even. The higher the
margin of safety, the lower the risk.
13. Operating leverage is the use of fixed costs to extract higher percentage changes in profits as
sales activity changes. It is achieved by increasing fixed costs while lowering variable costs.
Therefore, increased leverage implies increased risk, and vice versa.
14. Sensitivity analysis is a “what-if” technique that examines the impact of changes in underlying
assumptions on an answer. A company can input data on selling prices, variable costs, fixed
costs, and sales mix and set up formulas to calculate break-even points and expected profits.
Then, the data can be varied as desired to see what impact changes have on the expected
profit.
15. A declining margin of safety means that sales are moving closer to the break-even point.
Profit is going down, and the possibility of loss is greater. Managers should analyze the
reasons for the decreasing margin of safety and look for ways to increase revenue and/or
decrease costs.
MULTIPLE-CHOICE QUESTIONS
7-1. b
7-2. d
7-3. a
7-4. d
7-5. e
7-6. c
7-7. a
7-8. d
7-9. d Break-Even Units = $7,200/($12 – $3) = 800
7-10. c Variable Cost Ratio = $3/$12 = 0.25, or 25%

Contribution Margin Ratio = ($12 – $3)/$12 = 0.75, or 75%
7-11. d
7-12. c Units to Be Sold = ($15,000 + $3,600)/($8 – $6) = 9,300
7-2
BRIEF EXERCISES: SET A
BE 7-13
1. Variable Cost per Unit = Direct Materials + Direct Labor + Variable
Factory Overhead + Variable Selling Expense
= $30 + $8 + $4 + $3
= $45
2. Total Fixed Expense = $20,000 + $29,500 = $49,500
3. Head-First Company
Contribution Margin Income Statement
For the Coming Year
Total Per Unit
Sales ($75 × 5,000 helmets)………………………… $375,000 $75.00
Total variable cost ($45 × 5,000 helmets)………… 225,000 45.00
Total contribution margin………………………… $150,000 $30.00
Total fixed cost………………………....……………… 49,500
Operating income ………………...……………… $100,500
BE 7-14
Total Fixed Cost
1. Break-Even Units =
Unit Contribution Margin
= $49,500/($75 – $45)
= 1,650 helmets
At Break-Even Point
Total
Sales ($75 × 1,650 helmets)……………….…….………….…….…… $123,750
Total variable cost ($45 × 1,650 helmets)……………….…….……… 74,250
Total contribution margin…………………………………………. $ 49,500
Total fixed cost……………………………………………………...…… 49,500
Operating income…………………………………………………... $ 0
7-3
BE 7-15
Variable Cost per Unit
1. Variable Cost Ratio =
Price
= $45/$75
= 0.60, or 60%
2. Contribution Margin Price – Variable Cost per Unit

=
Ratio Price
Contribution Margin per Unit
=
Price
= ($75 – $45)/$75
= 0.40, or 40%
For the Coming Year
Percent
of Sales
Sales ($75 × 5,000 helmets)……………………………… $375,000 100%
Total variable cost ($45 × 5,000 helmets)……………… 225,000 60%
Total contribution margin……………………………… $150,000 40%
Total fixed cost…………………...………………………… 49,500
Operating income ……………………………………… $100,500
BE 7-16
1. Break-Even Sales Total Fixed Cost
=
Dollars Contribution Margin Ratio
= $49,500/0.40
= $123,750
At Break-Even Point
Total
Sales…………………………………………………………………………… $123,750
Total variable cost ($123,750 × 0.60)……………………….…………… 74,250
Total contribution margin……………………………………………… $ 49,500
Total fixed cost……………………………………………………………… 49,500
Operating income………………………………………………………… $ 0
7-4
BE 7-17
Total Fixed Cost + Target Income
= ($49,500 + $81,900)/($75 – $45)
= 4,380 helmets
At 4,380 Helmets Sold
Total
Sales ($75 × 4,380 helmets)……………………………………………… $328,500
Total variable cost ($45 × 4,380 helmets)……………………………… 197,100
Total contribution margin……………………………………………… $131,400
Total fixed cost……….……………………………………………………… 49,500
Operating income…………………...………………………………… $ 81,900
BE 7-18
1. Sales for Target Income =
Contribution Margin Ratio
= ($49,500 + $81,900)/0.40
= $328,500
At 4,380 Helmets Sold
Total
Sales…………………………………………………………………………… $328,500
Total variable cost ($328,500 × 0.60)…………………………………… 197,100
Total contribution margin……………………………………………… $131,400
Total fixed cost…………………………………………………..….……… 49,500
Operating income……………..………………………………………… $ 81,900
7-5
BE 7-19
1. Any package with 5 bicycle helmets for every 2 motorcycle helmets is fine. For
example, 5:2, or 10:4, or 30:12. Throughout the rest of this exercise, we will use
5:2.
Package
Unit Unit Unit
Variable Contribution Sales Contribution
Product Price – Cost = Margin × Mix = Margin
Bicycle helmet $ 75.00 $ 45.00 $30.00 5 $150.00
Motorcycle helmet 220.00 140.00 80.00 2 160.00
Package total $310.00
Total Fixed Cost

2. Break-Even Packages =
Package Contribution Margin
= $58,900/$310
= 190 packages
Break-Even Bicycle Helmets = Number of Packages × Sales Mix Amount
= 190 × 5
= 950
Break-Even Motorcycle Helmets = Number of Packages × Sales Mix Amount
= 190 × 2
= 380
At Break-Even Point
Total
Sales [($75 × 950) + ($220 × 380)]…………………………………………… $154,850
Total variable cost [($45 × 950) + ($140 × 380)]…………………………… 95,950
Total contribution margin………………………………………………… $ 58,900
Total fixed cost…..……………………………………………………………… 58,900
Operating income…………………………………………………………… $ 0
7-6
BE 7-20
Sales – Total Variable Cost
1. Contribution Margin Ratio =
Sales
= ($570,000 – $388,000)/$570,000
= 0.3193*
Total Fixed Cost
Break-Even Sales Dollars =
= $58,900/0.3193
= $184,466 *
* Rounded
At Break-Even Sales Dollars
Total
Sales……………………………………………...…………………………… $184,466
Total variable cost ($184,466 × 0.6807)………………………………… 125,566
Total contribution margin……………………………….…………… $ 58,900
Total fixed cost…………………………………………………….………. 58,900
Operating income………………………………………..……………… $ 0
BE 7-21
1. Margin of Safety in Units = Budgeted Units – Break-Even Units
= 5,000 – 1,650
= 3,350
2. Margin of Safety in Sales Revenue = Budgeted Sales – Break-Even Sales

= $375,000 – $123,750
= $251,250
7-7
BE 7-22
Total Contribution Margin
Degree of Operating Leverage =
Operating Income
= $150,000/$100,500
= 1.5*
*Rounded
BE 7-23
1. Percent Change in Operating Income = DOL × Percent Change in Sales
= 1.5 × 10%
= 15%
2. Expected Operating Income = Original Income + (Percent Change ×

Original Income)
= $100,500 + (0.15 × $100,500)
= $115,575
7-8
BRIEF EXERCISES: SET B

BE 7-24
1. Variable Cost per Unit = Direct Materials + Direct Labor + Variable
Factory Overhead + Variable Selling Expense
= $12 + $4 + $2 + $3
= $21
2. Total Fixed Expense = $30,000 + $48,000 = $78,000
3. Chillmax Company
For the Coming Year
Total Per Unit
Sales ($60 × 3,500 pairs)………………………………...… $210,000 $60.00
Total variable cost ($21 × 3,500 pairs)…………………... 73,500 21.00
Total contribution margin……………………………… $136,500 $39.00
Total fixed cost………………………....…………………… 78,000
Operating income ………………...……………………… $ 58,500
BE 7-25
Total Fixed Cost
= $78,000/($60 – $21)
= 2,000 pairs
2. Chillmax Company
At Break-Even Point
Total
Sales ($60 × 2,000 pairs)……………….…….………….…….……………… $120,000
Total variable cost ($21 × 2,000 pairs)……………….…….………….…… 42,000
Total contribution margin…………………………………………...…… $ 78,000
Total fixed cost……………………………………………………...………… 78,000
Operating income…………………………………………………...……… $ 0
7-9
BE 7-26
Variable Cost per Unit
Price
= $21/$60
= 0.35, or 35%
2. Contribution Margin Price – Variable Cost per Unit
=
Ratio Price
Contribution Margin per Unit
=
Price
= ($60 – $21)/$60
= 0.65, or 65%
3. Chillmax Company
For the Coming Year
Percent
of Sales
Sales ($60 × 3,500 pairs)………………………………………… $210,000 100%
Total variable cost ($21 × 3,500 pairs)……………………… 73,500 35%
Total contribution margin…………………………………… $136,500 65%
Total fixed cost…………………...……………………………… 78,000
Operating income …………………………………………… $ 58,500
BE 7-27
1. Break-Even Sales Total Fixed Cost
=
Dollars Contribution Margin Ratio
= $78,000/0.65
= $120,000
2. Chillmax Company
At Break-Even Point
Total
Sales……………………………………………………………………………….. $120,000
Total variable cost ($120,000 × 0.35)……………………….………………… 42,000
Total contribution margin…………………………………………………… $ 78,000
Total fixed cost……………………………………………………………….…… 78,000
Operating income……………………………………………………………… $ 0
7-10
BE 7-28
= ($78,000 + $81,900)/($60 – $21)
= 4,100 pairs of shoes
2. Chillmax Company
At 4,100 Pairs of Shoes Sold
Total
Sales ($60 × 4,100 pairs)…………………………………………………………… $246,000
Total variable cost ($21 × 4,100 pairs)………………………………………… 86,100
Total contribution margin……………………………………………………… $159,900
Total fixed cost……….……………………………………………………………… 78,000
Operating income…………………...………………………………………… $ 81,900
BE 7-29
1. Sales for Target Income =
= ($78,000 + $81,900)/0.65
= $246,000
2. Chillmax Company
At 4,100 Pairs of Shoes Sold
Total
Sales…………………………………………………………………………………… $246,000
Total variable cost ($246,000 × 0.35)…………………………………………… 86,100
Total contribution margin……………………………………………………… $159,900
Total fixed cost…………………………………………………..….……………… 78,000
Operating income……………..………………………………………………… $ 81,900
7-11
BE 7-30
1. Any package with 4 pairs of shoes for every 1 carryall is fine. For
example, 4:1, or 8:2, or 24:6. Throughout the rest of this exercise, we will use
4:1.
Package
Unit Unit Unit
Variable Contribution Sales Contribution
Product Price – Cost = Margin × Mix = Margin
Shoes $60.00 $21.00 $39.00 4 $156.00
Carryall 36.00 9.00 27.00 1 27.00
Package total $183.00
Total Fixed Cost

2. Break-Even Packages =
Package Contribution Margin
= $91,500/$183
= 500 packages
Break-Even Pairs of Shoes = Number of Packages × Sales Mix Amount

= 500 × 4
= 2,000
Break-Even Carryalls = Number of Packages × Sales Mix Amount
= 500 × 1
= 500
3. Chillmax Company
At Break-Even Point
Total
Sales [($60 × 2,000) + ($36 × 500)]………………………………………… $138,000
Total variable cost [($21 × 2,000) + ($9 × 500)]…………………………… 46,500
Total contribution margin………………………………………………… $ 91,500
Total fixed cost…..…………………………………………………………… 91,500
7-12
BE 7-31
Sales – Total Variable Cost
1. Contribution Margin Ratio =
Sales
= ($210,000 – $81,375)/$210,000
= 0.6125*
Total Fixed Cost

Break-Even Sales Dollars =
= $91,500/0.6125
= $149,388*
* Rounded
2. Chillmax Company
At Break-Even Sales Dollars
Total
Sales……………………………………………...…………………………… $149,388
Total variable cost ($149,388 × 0.3875)…………………………………… 57,888
Total contribution margin……………………………….……………… $ 91,500
Total fixed cost…………………………………………………….……….… 91,500
Operating income………………………………………..……………… $ 0
BE 7-32
1. Margin of Safety in Units = Budgeted Units – Break-Even Units
= 3,500 – 2,000
= 1,500
2. Margin of Safety in Sales Revenue = Budgeted Sales – Break-Even Sales
= $210,000 – $120,000
= $90,000
7-13
BE 7-33
Total Contribution Margin
Degree of Operating Leverage =
Operating Income
= $136,500/$58,500
= 2.3*
*Rounded
BE 7-34
1. Percent Change in Operating Income = DOL × Percent Change in Sales
= 2.3 × 10%
= 23%
2. Expected Operating Income = Original Income + (Percent Change ×
Original Income)
= $58,500 + (0.23 × $58,500)
= $71,955
7-14
EXERCISES
E 7-35
1. Direct materials…………………………………….……………….……… $ 4.98
Direct labor………………………………………….……………….……… 2.10
Variable factory overhead………………………….……………….…… 1.00
Variable selling and administrative expense………………………… 2.00
Unit variable cost………………………...……………………………….… $10.08
Unit Contribution Margin = Price – Unit Variable Cost
= $24.00 – $10.08
= $13.92
2. Contribution Margin Ratio = $13.92/$24.00 = 0.58, or 58%
Variable Cost Ratio = $10.08/$24.00 = 0.42, or 42%
3. Break-Even Units = ($26,500 + $15,260)/($24.00 – $10.08) = 3,000
4. Sales ($24 × 3,000)……..……………….……………………….………… $72,000
Variable cost ($10.08 × 3,000)……..…………………….……………… 30,240
Total contribution margin…………………………………….……… $41,760
Fixed cost ($26,500 + $15,260).………………….……………….……… 41,760
Operating income…………………....……………….………………… $ 0
E 7-36
1. At break-even:
Total Fixed Cost = Total Contribution Margin = $349,600
Contribution Margin per Unit = Total Contribution Margin/Break-Even Units
= $349,600/115,000
= $3.04
Contribution Margin per Unit = Price – Variable Cost per Unit
$3.04 = Price – $4.56
Price = $3.04 + $4.56 = $7.60
2. Operating Income = (Price × Quantity) – (Variable Cost per Unit × Quantity) –
Fixed Cost
$166,000 = ($120 × 15,600) – (Variable Cost per Unit × 15,600) – $458,000
$166,000 = $1,872,000 – (Variable Cost per Unit × 15,600) – $458,000
Variable Cost per Unit × 15,600 = $1,248,000
Variable Cost per Unit = $1,248,000/15,600 = $80
Contribution Margin Ratio = Unit Contribution Margin/Unit Selling Price
= ($120 – $80)/$120
= 0.3333
7-15
E 7-36 (Continued)
3. Total Contribution Margin = Actual Revenue × Contribution Margin Ratio
= $235,000 × 0.25
= $58,750
Total Fixed Cost = Total Contribution Margin – Operating Income
= $58,750 – $22,500 = $36,250
4. Break-Even Units = Total Fixed Cost/(Price – Variable Cost per Unit)

23,600 = $103,840/[Price – (0.56 × Price)]
Price – (0.56 × Price) = $103,840/23,600
Price(1.00 – 0.56) = $4.40
Price = $4.40/(1.00 – 0.56)
Price = $4.40/0.44 = $10.00
OR
$103,840/0.44 = $236,000
$236,600/23,600 = $10.00
Variable Cost per Unit = Price × Variable Cost Ratio
= $10.00 × 0.56 = $5.60
Contribution Margin per Unit = Price – Variable Cost per Unit
= $10.00 – $5.60 = $4.40
7-16
E 7-37
1. Contribution Margin Contribution Margin
=
Ratio Sales
= $64,240/$88,000 = 0.73, or 73%
2. Variable Cost Ratio = $23,760/$88,000 = 0.27, or 27%

OR
Variable Cost Ratio = 1 – Contribution Margin Ratio
= 1.00 – 0.73 = 0.27
Total Fixed Cost

3. Break-Even Sales Revenue =
= $43,800/0.73 = $60,000
4. To increase operating income without increasing sales revenue, Ashton

would have to find a way to decrease variable cost (thus decreasing the
variable cost ratio and increasing the contribution margin ratio), decrease
fixed cost, or do a combination of both.
E 7-38
1. Sales ($18.00 × 19,000)………………..………………………..…… $342,000
Variable cost ($14.60 × 19,000)…………………....………………… 277,400
Total contribution margin……………………………………….. $ 64,600
Fixed cost…………………………………………………………...…. 68,000
Operating income (loss)………………………….……………...… $ (3,400)
2. Break-Even Units = $68,000/($18.00 – $14.60) = 20,000

3. Units to Earn Target Income = ($68,000 + $20,400)/($18.00 – $14.60)
= 26,000
E 7-39
1. Break-Even Units = ($111,425 + $48,350)/($2.75 – $1.65)
= $159,775/$1.10
= 145,250
2. Unit variable cost includes all variable costs on a unit basis:
Direct materials…………………………………………………….…… $0.37
Direct labor………………………………………………………….…… 0.63
Variable factory overhead…………………………………………… 0.53
Variable selling expense……………………………………………… 0.12
Unit variable cost……………………………………………………… $1.65
7-17
E 7-39 (Concluded)
Unit variable manufacturing cost includes the variable costs of production
on a unit basis:
Direct materials………………………………………………………… $0.37
Direct labor…………………..…………………………………………… 0.63
Variable factory overhead…………………………………………… 0.53
Unit variable manufacturing cost…………………………………… $1.53
Unit variable cost is used in CVP because it includes all variable costs, not
just manufacturing costs.
3. Units to earn $13,530 = ($111,425 + $48,350 + $13,530)/($2.75 – $1.65)

= 157,550
4. Sales revenue to earn $13,530 = 157,550 × $2.75 = $433,263
E 7-40
1. Break-Even Units = ($245,650 + $297,606)/($8.12 – $4.56) = 152,600
2. Expected sales in units……………………………………………..… 225,000

Break-even units………………………………………………………. (152,600)
Margin of safety (in units)……………………………………………. 72,400
3. Expected sales revenue ($8.12 × 225,000)………………………… $1,827,000

Break-even sales revenue*…………………………………………… 1,239,112
Margin of safety (in dollars)…………………………………………… $ 587,888
*Break-Even Revenue = Price × Break-Even Units = $8.12 × 152,600 units
4. If the price decreases, then the risk facing the company will go up. The
price decrease means that the contribution margin per unit will decrease
and the break-even units will increase. The increase in the break-even units
will lead to a decrease in the margin of safety, as Comer, then, would be
operating closer to the break-even point.
7-18
E 7-41
Laertes Ophelia Fortinbras Claudius
Sales $15,000 $15,600 * $16,250* $10,600
Total variable cost 5,000 11,700 9,750 5,300*
Total contribution margin $10,000 $ 3,900 $ 6,500* $ 5,300 *
Total fixed cost 9,500 * 4,000 6,136* 4,452
Operating income (loss) $ 500 $ (100) * $ 364 $ 848
Units sold 3,000 * 1,300 125 1,000
Price per unit $5.00 $12.00 * $130.00 $10.60*
Variable cost per unit $1.67* $9.00 $78.00 * $5.30*
Contribution margin per unit $3.33* $3.00 $52.00* $5.30*
Contribution margin ratio 67%* 25%* 40% 50%*
Break-even units 2,853 * 1,333 * 118 * 840*
* Designates calculated amount.
(Note: Calculated break-even units that include a fractional amount have been
rounded to the nearest whole unit.)
Laertes
Total fixed cost = $10,000 – $500 = $9,500
Units sold = $15,000/$5.00 = 3,000
Variable cost per unit = $5,000/3,000 = $1.67 (rounded)
Contribution margin per unit = $5.00 – $1.67 = $3.33
Contribution margin ratio = $10,000/$15,000 = 0.67, or 67% (rounded)
Break-even units = $9,500/$3.33 = 2,853 (rounded)
Ophelia
Sales = $11,700 + $3,900 = $15,600
Operating loss = $3,900 – $4,000 = ($100)
Price per unit = $15,600/1,300 = $12.00
Contribution margin ratio = $3,900/$15,600 = 0.25, or 25%
Break-even units = $4,000/$3.00 = 1,333 (rounded)
7-19
E 7-41 (Concluded)
Fortinbras
Sales = 125 × $130.00 = $16,250
Total contribution margin = $16,250 – $9,750 = $6,500
Total fixed cost = $6,500 – $364 = $6,136
Variable cost per unit = $9,750/125 = $78.00
Contribution margin ratio = $6,500/125 = $52.00
Break-even units = $6,136/$52.00 = 118
Claudius
Total contribution margin = $4,452 + $848 = $5,300
Total variable cost = $10,600 – $5,300 = $5,300
Price per unit = $10,600/1,000 = $10.60
Variable cost per unit = $5,300/1,000 = $5.30
Contribution margin per unit = $10.60 – $5.30 = $5.30
Contribution margin ratio = 5,300/$10,600 = $0.50, or 50%
E 7-42
1. Variable Cost Ratio = $302,950/$415,000 = 0.73, or 73%
Contribution Margin Ratio = $112,050/$415,000 = 0.27, or 27%
2. Because all fixed costs are covered at break-even, the contribution margin
portion of any revenue above break-even contributes directly to operating
income.
Sales × Contribution Margin Ratio = Increased Operating Income
$30,000 × 0.27 = $8,100
Therefore, operating income will be $8,100 higher.
3. Break-Even Sales Revenue = $64,800/0.27 = $240,000
Sales…………………………………………………………………………… $240,000
Variable cost ($240,000 × 0.73)…..……………..….……………………… 175,200
Contribution margin……………………………………………………… $ 64,800
Fixed cost……………..………………………………………………………… 64,800
4. Expected sales………………………………………………………………… $415,000
Break-even sales…………………………………….………………………… 240,000
Margin of safety………………………..…………………………………… $175,000
5. Sales revenue………………..………………………………………………… $380,000
Break-even sales……………………...……………………………………… 240,000
Margin of safety………………..…………………………………………… $140,000
7-20
E 7-43
1. Sales mix is 3:1 (three times as many DVDs are sold as equipment sets).
2. Variable Sales Total
Product Price – Cost = CM × Mix = CM
DVDs $ 8 $ 4 $ 4 3 $12
Equipment sets 25 15 10 1 10
Total $22
Break-Even Packages = $84,920/$22 = 3,860
Break-Even DVDs = 3 × 3,860 = 11,580
Break-Even Equipment Sets = 1 × 3,860 = 3,860
E 7-44
1. Sales mix is 3:1:2 (three times as many DVDs will be sold as equipment sets,
and twice as many yoga mats will be sold as equipment sets).
DVDs $ 8 $ 4 $ 4 3 $12
Equipment sets 25 15 10 1 10
Yoga mats 15 9 6 2 12
Total $34
Break-Even Packages = $113,900/$34 = 3,350

Break-Even DVDs = 3 × 3,350 = 10,050
Break-Even Equipment Sets = 1 × 3,350 = 3,350
Break-Even Yoga Mats = 2 × 3,350 = 6,700
3. Cherry Blossom Products Inc.
Income Statement
For the Coming Year
Sales…………………………………………………………………………… $355,500
Total variable cost…………………………………………………………… 202,500
Contribution margin……………………………………………………… $153,000
Total fixed cost………………………………………………………………… 113,900
Operating income………………………………………………………… $ 39,100
Contribution Margin Ratio = $153,000/$355,500 = 0.4304*, or 43.04%

Break-Even Sales Revenue = $113,900/0.4304 = $264,638*
* Rounded
4. Margin of Safety = $355,500 – $264,638 = $90,862
7-21
E 7-45
1. Sales mix is 4:10:1 (four times as many portable grills will be sold as smokers,
and 10 times as many stationary grills will be sold as smokers).

Portable $ 90 $ 45 $ 45 4 $180
Stationary 200 130 70 10 700
Smoker 250 140 110 1 110
Total $990
Break-Even Packages = $2,128,500/$990 = 2,150

Break-Even Portable Grills = 4 × 2,150 = 8,600
Break-Even Stationary Grills = 10 × 2,150 = 21,500
Break-Even Smokers = 1 × 2,150 = 2,150
3. Texas-Q Company
Income Statement
For the Coming Year
Sales………………………………………………………………………… $13,050,000
Total variable cost………………………………………………………… 8,100,000
Contribution margin…………………………………………………… $ 4,950,000
Total fixed cost……………………………………………………………… 2,128,500
Operating income……………………………………………………… $ 2,821,500
Contribution Margin Ratio = $4,950,000/$13,050,000 = 0.3793, or 37.93%*

Break-Even Revenue = $2,128,500/0.3793 = $5,611,653*
* Rounded
4. Margin of Safety = $13,050,000 – $5,611,653 = $7,438,347
7-22
E 7-46
1.
$35,000
$30,000
$25,000
$20,000
$15,000
Total Cost
$10,000
$5,000
Total Revenue
$0
0 500 1,000 1,500 2,000 2,500 3,000 3,500
Units Sold
Break-Even Point = 2,500 units; the plus-marked line is total revenue, and the
heavy solid line is total cost.
2. a. Fixed cost increases by $5,000:

$40,000
$35,000
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
$0
0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000
Units Sold
Break-Even Point = 3,750 units
7-23
E 7-46 (Continued)
2. b. Unit variable cost increases to $7:
$50,000
$40,000
$30,000
$20,000
$10,000
$0
0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000
Units Sold
2. c. Unit selling price increases to $12:
$60,000
$50,000
$40,000
$30,000
$20,000
$10,000
$0
0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000
Units Sold
7-24
E 7-46 (Concluded)
2. d. Both fixed cost and unit variable cost increase:
E 7-47
1. Unit Contribution Margin = $791,700/54,600 = $14.50
Break-Even Units = $801,850/$14.50 = 55,300
2. Operating Income = 10,000 × $14.50 = $145,000
3. Contribution Margin Ratio = $14.50/$34.00 = 0.4265, or 42.65%

Break-Even Sales Revenue = $801,850/0.4265 = $1,880,070
Profit = ($200,000 × 0.4265) – $10,150 = $75,150
7-25
E 7-48
1. Break-Even Sales Dollars = $733,320/0.42* = $1,746,000
*Contribution Margin Ratio = $756,000/$1,800,000 = 0.42, or 42%
2. Margin of Safety = $1,800,000 – $1,746,000 = $54,000
3. Degree of Operating Leverage = Contribution Margin

Operating Income
= $756,000/$22,680
= 33.33*
4. Percent Change in Operating Income = 33.33 × 0.20 = 6.67*

New Operating Income = $22,680 + (6.67 × $22,680) = $173,956
*Rounded
E 7-49
Vases $40 $30 $10 2 $20
Figurines 70 42 28 1 28
Total $48
Break-Even Packages = $30,000/$48 = 625

Break-Even Vases = 2 × 625 = 1,250
Break-Even Figurines = 1 × 625 = 625
2. The new sales mix is 3 vases to 2 figurines.

Variable Sales Total
Vases $40 $30 $10 3 $30
Figurines 70 42 28 2 56
Total $86
Break-Even Packages = $35,260/$86 = 410

Break-Even Vases = 3 × 410 = 1,230
Break-Even Figurines = 2 × 410 = 820
7-26
E 7-50
1. a. Variable Cost per Unit = $8,190,000/450,000 = $18.20
b. Contribution Margin per Unit = $3,510,000/450,000 = $7.80
c. Contribution Margin Ratio = $3,510,000/$11,700,000 = 0.30, or 30%
d. Break-Even Units = $2,254,200/$7.80 = 289,000 units
e. Break-Even Sales Dollars = $2,254,200/0.30 = $7,514,000
OR Break-Even Sales Dollars = 289,000 × $26* = $7,514,000

*Price = ($11,700,000/$450,000) = $26
2. Units for Target Income = ($2,254,200 + $296,400)/$7.80 = 327,000 units
3. Additional Operating Income = $50,000 × 0.30 = $15,000
4. Margin of Safety in Units = 450,000 – 289,000 = 161,000 units

Margin of Safety in Sales Dollars = $11,700,000 – $7,514,000 = $4,186,000
5. Degree of Operating Leverage = $3,510,000/$1,255,800 = 2.8*

*Rounded
6. New Operating Income = $1,255,800 + [(2.8 × 0.10) × $1,255,800] = $1,607,424
7-27
PROBLEMS
P 7-51
Fixed Cost
= $380,400/($24 – $18)
= $380,400/$6
= 63,400 units
2. Units for Target Profit = ($380,400 + $240,000)/($24 – $18)

= $620,400/$6
= 103,400 units
3. Contribution Margin Ratio = $6/$24 = 0.25

With additional sales of $160,000, the additional profit would be
0.25 × $160,000 = $40,000.
4. Current Units = $2,040,000/$24 = 85,000

Margin of Safety in Units = 85,000 – 63,400 = 21,600
P 7-52
Fixed Cost
Price – Variable Cost per Unit
= $197,600/($13.50 – $9.85)
= 54,137*
2. Break-Even Units = ($197,600 – $23,500)/($13.50 – $9.85)

= 47,699*
3. The reduction in fixed cost reduces the break-even point because less
contribution margin is needed to cover the new, lower fixed costs. Operating
income goes up, and the margin of safety also goes up.
*Rounded
7-28
P 7-53
1. Unit Contribution Margin = $6,090,000/203,000 = $30
Break-Even Point in Units = $4,945,500/$30 = 164,850
Contribution Margin Ratio = $30/$70 = 0.4286*
Break-Even Sales Revenue = $4,945,500/0.4286* = $11,538,731
* Rounded
2. Increased contribution margin ($1,000,000 × 0.4286*)………………. $428,600

Less: Increased advertising expense………………………….………… 250,000
Increased operating income………………………………….……...… $178,600
*$30/$70 = 0.4286 (rounded)
3. $1,500,000 × 0.4286 = $642,900

4. Margin of Safety = $14,210,000 – $11,538,731 = $2,671,269
5. Degree of Operating Leverage = $6,090,000/$1,144,500 = 5.32
0.08 × 5.32 = 42.56% (increase in operating income)
7-29
P 7-54
1. Sales mix:
Basic: $3,000,000/$30 = 100,000 units
Aero: $2,400,000/$60 = 40,000 units
Variable Contribution Sales Total
Product Price – Cost* = Margin × Mix = CM
Basic sleds $30 $10 $20 5 $100
Aerosleds 60 25 35 2 70
Package $170
* Basic Sled Variable Cost: $1,000,000/100,000 = $10

Aerosled Variable Cost: $1,000,000/40,000 = $25
Break-Even Packages = ($1,428,000 + $198,900)/$170 = 9,570
Break-Even Basic Sleds = 9,570 × 5 = 47,850
Break-Even Aerosleds = 9,570 × 2 = 19,140
2. New mix:
Product Price – Cost* = Margin × Mix = CM
Basic sleds $30 $10 $20 5 $100
Aerosleds 60 25 35 3 105
Package $205
Break-Even Packages = ($1,428,000 + $198,900)/$205 = 7,936*

Break-Even Basic Sleds = 7,936 × 5 = 39,680
Break-Even Aerosleds = 7,936 × 3 = 23,808
* Rounded to the nearest whole package.
3. Increase in contribution margin for aerosleds (12,000 × $35)……… $ 420,000

Decrease in contribution margin for basic sleds (5,000 × $20)…… (100,000)
Increase in total contribution margin………………………………… $ 320,000
Less: Additional fixed cost………………………………………………… 195,000
Increase in income………………………...…………………………… $ 125,000
Basu would gain $125,000 by increasing advertising for the aerosleds. This
is a good strategy.
7-30
P 7-55
1. Break-Even Units = $58,140/($3.40 – $2.55) = 68,400
Margin of Safety in Units = 81,600 – 68,400 = 13,200
2. Sales revenue ($3.40 × 81,600)……………………..…...…………..… $277,440
Total variable cost ($2.55 × 81,600)……………….…………….……… 208,080
Total contribution margin……………………….…………………… $ 69,360
Total fixed cost…………………………………………………………… 58,140
Operating income……………….……………………………………… $ 11,220
3. Units for Target Profit = ($58,140 + $25,500)/($3.40 – $2.55)
= 98,400
4. Operating Income = Sales – (Variable Cost Ratio × Sales) – Fixed Cost
0.10 Sales = Sales – (0.75 × Sales) – $58,140
0.10 Sales = 0.25 Sales – $58,140
$58,140 = (0.25 Sales – 0.10 Sales)
$58,140 = 0.15 Sales
Sales = $387,600
P 7-56
1. Contribution Margin Ratio = $294,592/$460,300 = 0.64, or 64%
3. $460,300 × 1.15 = $529,345

$165,708 × 1.15 = 190,564*
$338,781
* Rounded
Contribution Margin Ratio = $338,781/$529,345 = 0.64
The contribution margin ratio remains at 0.64.
4. Additional variable expense: $460,300 × 0.04 = $18,412
New Contribution Margin = $294,592 – $18,412 = $276,180
New Contribution Margin Ratio = $276,180/$460,300 = 0.60
Break-Even Sales Revenue = $150,000/0.60 = $250,000
The effect is to increase the break-even sales revenue.
5. Projected contribution margin*………………………………………… $324,180
Present contribution margin………………….………………………… 294,592
Increase in contribution margin/profit………………………………… $ 29,588
*($460,300 + $80,000) × 0.60 = $324,180
7-31
P 7-56 (Concluded)
Operating leverage will decrease because the increase in variable cost
(the sales commission) causes a decrease in the contribution margin.
Elgart should pay the commission because profit would increase by
$29,588.
P 7-57
1. Break-Even Sales Revenue = Fixed Cost/Contribution Margin Ratio
= $150,000/($200,000/$600,000)
= $450,000
2. Of total sales revenue, 60% is produced by floor lamps and 40% by desk lamps.
Floor lamps = (0.60 × $600,000)/$30 = 12,000 units
Desk lamps = (0.40 × $600,000)/$20 = 12,000 units
Thus, the sales mix is 1:1.
Product Price – Cost = Margin × Mix = CM
Floor lamps $30 $20.00 $10.00 1 $10.00
Desk lamps 20 13.33 * 6.67 1 6.67
Package $16.67
Fixed Cost
Number of Packages =
Contribution Margin
= $150,000/$16.67
= 9,000 *
Floor lamps: 1 × 9,000 = 9,000
Desk lamps: 1 × 9,000 = 9,000
*Rounded
Contribution Margin
3. Operating Leverage =
Operating Income
= $200,000/$50,000
= 4.0
Percentage Increase in Profits = 4.0 × 40% = 160%
7-32
P 7-58
1. Door Handles Trim Kits
CM $12 – $9 = $3 $8 – $5 = $3
CM ratio $3/$12 = 0.25 $3/$8 = 0.375
2. Contribution margin:
($3 × 20,000) + ($3 × 40,000)……………… $180,000
Less: Fixed cost………………….………… 146,000
Operating income………………….…… $ 34,000
3. Sales mix (from Requirement 2): 1 door handle to 2 trim kits

Door handle $12 $9 $3 1 $3.00
Trim kit 8 5 3 2 6.00
Package $9.00
Break-Even Packages = $146,000/$9 = 16,222*

Door Handles = 1 × 16,222 = 16,222
Trim Kits = 2 × 16,222 = 32,444
* Rounded
4. Revenue (70,000 × $8)…………………….………………………………… $560,000

Variable cost (70,000 × $5)…………………….…………………………… 350,000
Contribution margin……………………………………………………… $210,000
Fixed cost……………………………………………………………………… 111,000
Operating income………………………………………………………… $ 99,000
Yes, operating income is $65,000 higher than when both door handles and
trim kits are sold.
P 7-59
1. Break-Even Units = $300,000/$14* = 21,429**
* $406,000/29,000 = $14
** Rounded
Contribution Margin Ratio = $406,000/$1,218,000 = 0.3333
Break-Even in Sales Dollars = $300,000/0.3333 = 900,090
2. Margin of Safety = $1,218,000 – $900,090 = $317,910
7-33
P 7-59 (Concluded)
3. Sales………………………………………………………………………… $1,218,000
Variable cost (0.45 × $1,218,000)……………….…………..…...…… 548,100
Contribution margin…………………………...…..……………… $ 669,900
Fixed cost…………………..…………………….……………………… 550,000
Operating income…………………….……………...……………… $ 119,900
Break-Even in Sales Dollars = $550,000/0.55* = $1,000,000
* $669,900/$1,218,000 = 55%
P 7-60
Variable Costs
Sales
= $647,400/$830,000 = 0.78, or 78%
(Sales – Variable Costs)
Contribution Margin Ratio =
Sales
= ($830,000 – $647,400)/$830,000
= 0.22, or 22%
3. Margin of Safety = Sales – Break-Even Sales

= $830,000 – $500,000 = $330,000
4. Contribution Margin from Increased Sales = $12,000 × 0.22 = $2,640

Cost of Advertising = $4,500
No, the advertising campaign is not a good idea, because the company’s
operating income will decrease by $1,860 ($4,500 – $2,640).
7-34
P 7-61
1. Income = Revenue – Variable Cost – Fixed Cost
$0 = 2,400P – ($42 × 2,400) – $67,200
$0 = 2,400P – $100,800 – $67,200
$168,000 = 2,400P
P = $70
2. $314,400/($6.50 – Unit Variable Cost) = 131,000

Break-Even Sales Revenue = 131,000 × $6.50 = $851,500
Total Variable Cost = $851,500 – $314,400 = $537,100
Unit Variable Cost = $4.10
P 7-62
1. Contribution Margin per Unit = $5.60 – $4.20*
= $1.40
* Variable cost per unit:
$0.70 + $0.35 + $1.85 + $0.34 + $0.76 + $0.20 = $4.20
Contribution Margin Ratio = $1.40/$5.60 = 0.25
2. Break-Even Units = ($32,300 + $12,500)/$1.40 = 32,000 boxes

Break-Even Sales Revenue = 32,000 × $5.60 = $179,200
OR = ($32,300 + $12,500)/0.25 = $179,200
3. Sales ($5.60 × 35,000)…….…………………………..…………………… $196,000

Variable cost ($4.20 × 35,000)………………………………………..…… 147,000
Contribution margin………………….……………………………….… $ 49,000
Fixed cost…………………………………………………….……………… 44,800
Operating income………………………………………….…………… $ 4,200
4. Margin of Safety = $196,000 – $179,200 = $16,800
5. Break-Even Units = $44,800/($6.20 – $4.20) = 22,400

New Operating Income = ($6.20 × 31,500) – ($4.20 × 31,500) – $44,800
= $195,300 – $132,300 – $44,800 = $18,200
Yes, operating income will increase by $14,000 ($18,200 – $4,200).
7-35
P 7-63
1. Duncan: $75,000/$25,000 = 3
Macduff: $225,000/$25,000 = 9
2. Duncan
Contribution margin ratio = $75,000/$375,000 = 0.20
Break-even sales = $50,000/0.20
Break-even sales = $250,000
Macduff
Contribution margin ratio = $225,000/$375,000 = 0.60
Break-even sales = $200,000/0.60
Break-even sales = $333,333 (rounded)
Macduff must sell more than Duncan to break even because it must cover
$150,000 more in total fixed cost (it is more highly leveraged).
3. Duncan: 3 × 30% = 90%
Macduff: 9 × 30% = 270%
The percentage increase in profits for Macduff is much higher than Duncan's
increase because Macduff has a higher degree of operating leverage (i.e., it
has a larger amount of fixed costs in proportion to variable cost as compared
to Duncan). Once fixed cost is covered, additional revenue must cover only
variable cost, and 60% of Macduff's revenue above break-even is profit,
whereas only 20% of Duncan's revenue above break-even is profit.
7-36
P 7-64
1. Contribution margin ratios:
May of current year = $23,910/$43,560 = 0.5489, or 54.89%
May of prior year = $23,400/$41,700 = 0.5612, or 56.12%
2. Fixed costs:
May of current year = $680 + $4,300 + $5,600 + $9,750 = $20,330
May of prior year = $500 + $4,300 + $5,000 + $4,000 = $13,800
Break-even point in sales dollars:
May of current year = $20,330/0.5489 = $37,038
May of prior year = $13,800/0.5612 = $24,590
3. Margin of safety:
May of current year = $43,560 – $37,038 = $6,522
May of prior year = $41,700 – $24,590 = $17,110
4. Clearly, the sharp rise in fixed costs from the prior year to the current year has
had a strong impact on the break-even point and the margin of safety. Kicker
will need to ensure that tight cost control is exercised since the margin of
safety is much slimmer. Still, the decision to go with the OEM investment
program could pay large dividends in the future. Note that the margin of
safety and break-even point give the company important information on the
potential risk of the venture but do not tell it the upside potential.
7-37
CASES
Case 7-65
1. Let X be a package of 3 Grade I cabinets and 7 Grade II cabinets.
0.30X($3,400) + 0.70X($1,600) = $1,600,000
= 748* packages
* Rounded to the nearest package.
Grade I: 0.3 × 748 = 224* cabinets
Grade II: 0.7 × 748 = 524* cabinets
2. Variable Contribution Sales Total
I $3,400 $2,686 $714 3 $2,142
II 1,600 1,328 272 7 1,904
Package $4,046
Direct fixed cost—I $ 95,000

Direct fixed cost—II 95,000
Common fixed cost 35,000
Total fixed cost $225,000
$225,000/$4,046 = 56
Grade I: 3 × 56 = 168 cabinets
Grade II: 7 × 56 = 392 cabinets
I $3,400 $2,444* $956 3 $2,868
II 1,600 1,208* 392 7 2,744
Package $5,612
[($3,400 × 3) + ($1,600 × 7)] X = $1,600,000 – $600,000

$21,400X = $1,600,000 – $600,000
X = 47* packages remaining
Grade I: 3 × 47 = 141
Grade II: 7 × 47 = 329
Additional contribution margin:
[141 × ($956 – $714)] + [329 × ($392 – $272)] = $73,602
Increase in fixed cost = $44,000
Break-even: ($225,000 + $44,000)/$5,612 = 48
Grade I: 3 × 48 = 144
Grade II: 7 × 48 = 336
* Rounded
7-38
Case 7-65 (Continued)

If the new break-even point is interpreted as a revised break-even point for the
current year, then total fixed cost must be reduced by the contribution margin
already earned (through the first five months) to obtain the units that must be
sold for the last seven months. These units would then be added to those sold
during the first five months:
Contribution Margin Earned = $600,000 – (83* × $2,686) – (195* × $1,328)
= $118,102
*224 – 141 = 83; 524 – 329 = 195
X = ($225,000 + $44,000 – $118,102)/$5,612 = 27* packages
From the first five months, 28 packages were sold (83/3 or 195/7). Thus, the
revised break-even point is 55 packages (27 + 28)—in units 165 of Grade I and
196 of Grade II.

I $3,400 $2,686 $714 1 $714
II 1,600 1,328 272 1 272
Package $986
New sales revenue: $1,000,000 × 1.30 = $1,300,000

$5,000X = $1,300,000
X = 260 packages
Thus, 260 units of each cabinet will be sold during the rest of the year.
Effect on profits:
Change in contribution margin:
[$714 × (260 – 141)] – [$272 × (329 – 260)]……………………… $66,198
Increase in fixed costs:
$70,000 × (7/12)……………………………………………………… 40,833 *
Increase in operating income……………………………………… $25,365
The break-even point (for the current year and the remaining 7 months,
respectively) is computed as follows:
X = Fixed Cost/(Price – Variable Cost)
= $295,000/$986
= 299* packages (or 299 of each cabinet)
X = ($295,000 – $118,102)/$986
= $176,898/$986
= 179* packages (179 of each)
To this, add the units already sold, yielding the revised break-even point:
Grade I: 83 + 179 = 262
Grade II: 195 + 179 = 374
*Rounded
7-39
Case 7-66
1. Break-Even Point in Units = Fixed Cost
First process: $100,000/($30 – $10) = 5,000
Second process: $200,000/($30 – $6) = 8,333 *
*Rounded
2. Income = X(Price – Variable Cost) – Fixed Cost
X ($30 – $10) – $100,000 = X($30 – $6) – $200,000
$20X – $100,000 = 24X – $200,000
$100,000 = $4X
X = 25,000 cases
The manual process is more profitable if sales are less than 25,000 cases; the
automated process is more profitable at a level greater than 25,000 cases. It is
important for the manager to have a sales forecast to help in deciding which
process should be chosen.
3. The right to decide which process should be chosen belongs to the divisional
manager. Danna has an ethical obligation to report the correct information to her
superior. By altering the sales forecast, Danna unfairly and unethically influenced
the decision-making process. Managers certainly have a moral obligation to
assess the impact of their decisions on employees, and every effort should be
taken to be fair and honest with employees. Danna's behavior, however, is not
justified by the fact that it helped a number of employees retain their employment.
First, Danna had no right to make that decision. Danna certainly has the right to
voice her concerns about the impact of automation on the employees’ well-being.
In doing so, perhaps the divisional manager would come to the same conclusion
even though the automated system appears to be more profitable. Second, the
choice to select the manual system may not be the best for the employees anyway.
The divisional manager may possess more information, making the selection of
the automated system the best alternative for all concerned, provided the sales
volume justifies its selection. For example, if the automated system is viable, the
divisional manager may have plans to retrain and relocate the displaced workers
in better jobs within the company. Third, her motivation for altering the forecast
seems more driven by her friendship with Jerry Johnson than any legitimate
concerns for the layoff of other employees. Danna should examine her reasoning
carefully to assess the real reasons for her behavior. Perhaps in so doing, the
conflict of interest that underlies her decision will become apparent.
7-40
Another random document with
no related content on Scribd:
Longfellow says,—
“Deeds are better things than words are.”
Longfellow somewhere says that deeds are better than words.

2. When words are quoted from a foreign language, they should be printed in
italics, and the quotation marks omitted; as, “They have their good glebe lands in
manu, and care not much to rake into title deeds.”—Lamb.
3. When words are to be italicized, a straight mark should be drawn underneath
the words.
4. When a quotation is followed by a comma, semicolon, colon, or period, the
punctuation mark should be placed within the quotation marks; as, “Mr. M’Adam
writes sometimes with genuine humor, and an occasional entirely original simile
shows evidence of the possession of what phrenologists call the faculty of
‘comparison;’ but the charm of the book is its rare perspicacity.”—Harper’s
Magazine.
5. When a quotation is followed by an exclamation or an interrogation point, the
punctuation mark should be placed within the quotation marks, if it forms a part of
the quotation; as, “I feel almost like groaning, when a young mother shows me
some marvel of embroidery or machine-stitching, saying triumphantly, ‘There, I did
every stitch of that myself!’”—Scribner’s Monthly.
6. When a quotation is followed by an exclamation or an interrogation point, the
punctuation mark should be placed outside of the quotation marks, if it belongs to
the whole sentence and not to the quotation; as, “We wonder what Handel would
have said to Mozart’s scoring of ‘I know that my Redeemer liveth’!”—Atlantic
Monthly. “Why cannot we hear, for instance, the wonderful curioso, ‘He gave his
back to the smiters,’ that forms the second part of the air, ‘He was despised,’ and
the duet for contralto and tenor, ‘O death where is thy sting’?”—Atlantic Monthly.
Rule II. Titles of Books.—Titles of books are generally inclosed in

quotation marks.
examples.
Morris’s “Story of Sigurd.”—Scribner’s Monthly.
“The Mikado’s Empire.”—N. A. Review.
“Daniel Deronda.”—Contemporary Review.
The Rev. W. W. Capes’s history of “The Early Roman Empire.”—
Appleton’s Journal.
remarks.
1. The names of magazines and papers are generally printed in italics; as, The
Atlantic, N. Y. Nation, Fraser’s Magazine, Appleton’s Journal, Nature, Popular
Science Monthly.
2. In examining The Atlantic, Nation, Scribner’s Monthly, Harper’s, Appleton’s
Magazine, Lippincott’s, Popular Science Monthly, Galaxy, Eclectic, N. A. Review,
New Englander, London Quarterly, British Quarterly, Westminster Review,
Edinburgh Review, Contemporary Review, The Fortnightly Review, we find that
thirteen of these use quotation marks, and four use italics, in referring to the titles
of books; eleven use italics, and six use quotation marks, in referring to magazines
and papers.
Rule III. A Quotation within a Quotation.—When there is a

quotation within a quotation, single marks should be used in addition
to double marks.
examples.
“Who was the blundering idiot who said that ‘fine words butter no
parsnips.’ Half the parsnips of society are served and rendered
palatable with no other sauce.”—Thackeray.
“There is a small but ancient fraternity, known as the Order of
Gentlemen. It is a grand old order. A poet has said that Christ
founded it; that he was ‘the first true gentleman that ever lived.’”—
Winthrop.
remarks.
1. Sometimes the quotation within a quotation has a word or phrase that is
quoted. The word or phrase must be inclosed in double marks.
2. In quoting Scripture, it is customary to place only double marks at the
beginning and end of the quotation; as, “And Jesus, moved with compassion, put
forth his hand, and touched him, and saith unto him, I will; be thou clean.”—Mark i.
41.
Rule IV. Paragraphs.—When several paragraphs are quoted in
succession, double marks should be placed at the beginning of each
paragraph, and at the end of the entire quotation.
example.
“The children woke. The little girl was the first to open her eyes.
“The waking of children is like the unclosing of flowers, a perfume
seems to exhale from those fresh young souls. Georgette, twenty
months old, the youngest of the three, who was still a nursing baby
in the month of May, raised her little head, sat up in her cradle,
looked at her feet, and began to chatter.
“A ray of morning fell across her crib; it would have been difficult to
decide which was the rosiest, Georgette’s foot or Aurora.”—Hugo.
remarks.
1. A paragraph usually consists of several sentences. It begins on a new line,
and is distinguished by a blank space on the left, at the commencement of the
paragraph.
2. When parts of a quotation are omitted, use several stars to indicate the
omission (* * * *), or place double marks at the beginning and end of each
detached part of the quotation.
THE APOSTROPHE.
Rule I. Letters Omitted.—The apostrophe is used to indicate the

omission of a letter or letters.
examples.
“O Marcia, O my sister, still there’s hope!”—Addison.
“Thou knowest ’tis common; all, that live, must die,

Passing through nature to eternity.”—Shakespeare.
remark.
The apostrophe is made like a comma, but is placed above the line.
Rule II. Possession.—The apostrophe is used to denote

possession.
examples.
Taine’s “English Literature.” Rawlinson’s “Ancient Monarchies.”
remarks.
1. The apostrophe and s should be used with nouns in the singular, even when
the word ends in s or x; as,—
“Dickens’s Works.”—Appleton’s Journal.

“Cox’s General History of Greece.”—Harper’s Magazine.
“Evans’s observations.”—Edinburgh Review.
“Mr. Hayes’s responsibility.”—N. Y. Nation.
In addition to the periodicals given above, The Atlantic, Scribner’s Monthly,

Lippincott’s Magazine, Popular Science Monthly, Galaxy, N. A. Review, London
Quarterly, British Quarterly, Fortnightly Review, use the additional s. The
Westminster omits the additional s. In the Contemporary and Edinburgh Review,
the s is used by some writers and omitted by others.
2. In the plural of nouns, the apostrophe and s are used to denote possession,
when the word does not end in s; as, men’s deeds. If the word ends in s, the
apostrophe only is used; as, my neighbors’ house.
3. The apostrophe should not be used before s in ours, yours, hers, theirs, its.
THE HYPHEN.
Rule I. Compound Words.—The hyphen is used to connect the

parts of a compound word.
examples.
“My household-gods plant a terrible fixed foot, and are not to be
rooted up without blood.”—Lamb.
“The breezy call of incense-breathing morn.”—Gray.
remarks.
1. A compound word is formed by placing together two simple words.
2. Sometimes several words are connected together by hyphens; as, “He had a
lively touch-and-go-away with him, very pleasant and engaging I admit.”—Wilkie
Collins.
3. When a compound word comes into very general use, the hyphen is
sometimes omitted; as, railroad, steamboat, bookstore.
4. To-day, to-night, to-morrow, should always be written with a hyphen.
5. When there is any doubt whether two words should be united by a hyphen or
written as one word, some standard dictionary should be consulted. It will,
however, be found that even dictionaries differ somewhat in the use and omission
of the hyphen in compound words. In order to preserve some uniformity in spelling
and in the formation of compound words, every writer should make either Webster
or Worcester the final authority.
Rule II. Prefixes.—When a prefix ends in a vowel, and the word to

which it is joined commences with a vowel, they should be separated
by a hyphen.
examples.
Re-admit, co-ordinate, pre-existence, pre-eminent.
remarks.
1. A prefix is a letter, syllable, or word, placed before some word, thus forming a
new word.
2. If, instead of two vowels, a vowel and a consonant come together, the prefix
and the word to which it is joined should usually be written as one word; as,
rewrite, predetermine.
3. Vice-president, and most words with vice as a prefix, should be written with a
hyphen.
4. Some writers use the diæresis instead of the hyphen. With prefixes it is better
to use the hyphen, but in other words containing two vowels that do not form a
diphthong, the diæresis should be used; as, Zoölogy.
Rule III. Division of Words.—When it is necessary to write part of
a word at the end of a line and part at the beginning of the next line,
the division should be made at the end of a syllable, and the parts
should be connected by a hyphen, at the end of the line.
example.
“Knowledge is of two kinds. We know a sub-
ject ourselves, or we know where we can find in-
formation upon it.”—Dr. Johnson.
remarks.
1. It is better to divide a word as near the middle as possible.
2. When two words one at the end of a line and the other at the commencement
of the following line, are separated by a punctuation mark, it should be placed at
the end of the line, and never at the beginning.
MISCELLANEOUS MARKS.
I. Two Commas (”) indicate that the word under which they are
placed is to be repeated.
Charles Harrison, Adrian, Mich.
Clinton Hardy, ” ”
II. The Caret (^) indicates that something is written above the line
that forms a part of the sentence. It is only used in writing.
III. Marks of Ellipsis (—, ....., * * * * *) indicate the omission of

letters, words, or sentences.
1. “I was the true descendant of those old W—s.”—Lamb.
2. “I have a belief of my own, ... that by desiring what is perfectly
good, even when we don’t quite know what it is, ... we are a part of a
divine power against evil, widening the skirts of light, and making the
struggle with darkness narrower.”—George Eliot.
Four words are omitted where the first dots are, and five where the
second are.
3. “My lov’d, my honour’d, much respected friend!

* * * * * * * * *
To you I sing, in simple Scottish lays,
The lowly train in life’s sequester’d scene,
The native feeling strong, the guileless ways;
What Aiken in his cottage would have been.”—Burns.
In the above, three lines are omitted.

IV. Leaders (......) are used to indicate a connection between
words at the beginning of the line and what is at the end of the line.
Winnowed Wheat ................... Nellie R. Luck.

Dreams, a Poem ................... Octa E. Wise.
V. In writing, one line drawn under a word indicates that it is to be

printed in italics; two lines, in small capitals; three lines, in capitals.
VI. Marks of Reference are used to refer to notes at the bottom of
the page, or to remarks in the margin. They are the following:—
The Star (*), the Dagger (†), the Double Dagger (‡), the Section
(§), Parallel Lines (‖), the Paragraph (¶).
The above marks are given in the order in which they are used.
The Paragraph (¶) is also used, in written compositions, to denote
that what follows should commence a new line.
Capitals.
INTRODUCTION.
It has been the custom among some writers to commence every
important word with a capital, so that some printed productions have
fairly bristled with capitalized words; as,—
“Modern authors have with unwearied Pains made many useful
Searches into the weak Sides of the Ancients, and given us a
comprehensive Lift of them.”—Swift.
“There were a Race of Men who delighted to nibble at the
Superfluities and Excrescences of Books.”—Swift.
The custom of commencing all nouns with a capital is still
prevalent among the Germans of the present day.
It is a somewhat interesting fact that the use and value of capitals
has been subject to a rise and fall in the literary market, written
productions during some centuries abounding in them, while in other
centuries they have, in a great measure, been discarded, and have
become comparative strangers in English composition.
In the early part of this century, there was a tendency to use them
to an inconsiderate extent, owing principally to German imitators like
Carlyle and others, who adopted, in a somewhat modified form, the
German method of capitalizing words. Just at present there seems to
be a reaction setting in, and there is a tendency among some of our
leading publishing houses to dispense with their use as much as
possible. In democratic America, there has always been a somewhat
unreasonable fear of official titles, and when they are used, they are
frequently belittled with small letters. This has had a tendency to
encourage the use of small letters in many words that should
properly commence with capitals.
There is no doubt that a judicious use of capitals assists the eye
very much in reading what another has written, and in understanding
a writer’s meaning. While, on the other hand, an injudicious use
lessens their value, and disfigures a printed page.
Although the taste and judgment of each writer may be consulted
in the capitalization of some words to which he may assign a special
meaning, there are a number of well established principles,
sanctioned by long usage, that should govern all writers in the use of
capital letters.
CAPITALS.
Rule I. Sentences.—The first word of every sentence should

commence with a capital.
examples.
“The price we challenge for ourselves is given us.”—Schiller.

“The elder brother of Franklin ventured to start a newspaper,
though warned that America could never support two
newspapers.”—William Russel.
“Trust in yourself, and you have learnt to live.”—Goethe.
remarks.
1. A sentence is an assemblage of words making complete sense, and followed
by a period. Sometimes a sentence has an interrogation or an exclamation point at
its close; as,—
“For of the wholly common is man made,

And custom is his nurse!”—Schiller.
2. Any expression that is equivalent to a sentence should commence with a

capital; as, Very affectionately. Price $5.00.
3. As a period indicates the close of a sentence, the word following the period
should commence with a capital; as, “The little soul is like a vapor that hovers
around a marshy lake. It never rises on the green hill, lest the winds meet it
there.”—Ossian.
If, however, a period is used to indicate an abbreviation, it should not be
followed by a capital, unless it is at the close of a sentence, or the word that
follows it requires a capital; as, In Germany, the degrees of M. D., LL. D., and Ph.
D. are only gained after passing a severe examination.
4. Although a capital is generally used after an interrogation or an exclamation
point, as they usually indicate the close of a sentence, this is not always the case;
as,—
“How poor! how rich! how abject! how august!

How complicate! how wonderful is man!
How passing wonder He who made him such!
Who centered in our make such strange extremes!”—Young.
Rule II. Poetry.—The first word of every line of poetry should

examples.
“There is a day of sunny rest

For every dark and troubled night;
And grief may bide an evening guest,
But joy shall come with early light.”—Bryant.
“But far more numerous was the herd of such,

Who think too little and who talk too much.”—Dryden.
Rule III. Persons and Places.—Names of persons, countries,

cities, islands, rivers, mountains, &c., should commence with
capitals.
examples.
“The finest thief of old history is the pirate who made that famous
answer to Alexander, in which he said that the conqueror was only
the mightier thief of the two.”—Leigh Hunt.
America, France, London, New York, West Indies, Hudson, Rhine,
Rocky Mountains, Mount Vernon, Pacific.
remarks.
1. When North, South, East, &c., refer to political or geographical divisions, they
should commence with capitals; as, “But sectional bitterness has in a great
measure passed away; the fatal cause of discord between North and South has
been removed.”
When these words refer merely to the points of the compass, they should be
written with small letters.
2. Words derived from the names of persons should commence with capitals;
as, Socratic, Platonic, Elizabethan.
When words derived from the names of persons or places lose their individual
character, and are used as common words, they should commence with small
letters; as, god-like, hector, turkey, china-ware, laconic.
3. Heaven and hell are written with small letters in the Bible. Satan is always
printed with a capital, but devil commences with a small letter, unless it stands for
Satan; as, “Then was Jesus led up of the Spirit into the wilderness to be tempted
of the devil.”—Mat. iv. 1.
Rule IV. Nations.—The names of nations, or words derived from
the names of nations, should commence with capitals.
examples.
“‘Simply to be poor,’ says my favorite Greek historian, ‘was not
held scandalous by the wise Athenians; but highly so, to owe that
poverty to our own indiscretion.’”—Fielding.
American, German, French, Latins, Americanize, Latinize,
Hellenize.
remark.
Italics and Italicize are frequently written with small letters.
Rule V. Sects and Parties.—The names of religious sects and

political parties should commence with capitals.
examples.
Christian, Mohammedan, Lutheran, Catholic, Protestant,
Episcopal, Presbyterian, Baptist, Unitarian.
Republican, Federalist, Democrat, Whig, Tory, Radical.
remarks.
1. When republican, radical, &c., are used as common words, and not as the
names of political parties, they should commence with small letters; as, republican
institutions, radical measures.
2. Some writers use small letters, when referring to political parties. If, however,
it is incorrect to write Congregational, Methodist, with small letters, why is it not
incorrect to commence Republican, Whig, with small letters?
3. Church should be written with a capital, when it refers to a religious sect; as,
the Episcopal Church, meaning the whole body of Christians belonging to that
denomination. When the word refers to a place of worship, it should commence
with a small letter.
Rule VI. Months and Days.—The names of months and days
should commence with capitals.
examples.
“No one ever regarded the first of January with indifference. It is
that from which all date their time, and count upon what is left. It is
the nativity of our common Adam.”—Lamb.
February, March, April, May; Monday, Tuesday, Wednesday,
Sunday, Good Friday, Easter.
remark.
Spring, summer, autumn, winter, should be written with small letters.
Rule VII. Titles of Books.—All the words, with the exception of

articles, conjunctions, and prepositions, in the titles of books, should
examples.
Forsyth’s “Life of Cicero.” “The Fall of the Roman Republic,” Rev.
C. Merivale.
remarks.
1. It is just as necessary to capitalize the title of a book, as it is the name of a
person.
2. The title of an oration, essay, article for a newspaper, or of any written
production, follows the same rule as the title of a book.
3. Names of sacred writings should always be capitalized; as, Bible, Old and
New Testament, the Scriptures, Acts, Revelation, Gospel of John, Koran, Vedas.
Rule VIII. Title-Pages.—The title-pages of books are generally

printed entirely with capitals. The title-page of any book will illustrate
this rule.
remarks.
1. This rule concerns more especially the printer.
2. The first word of a chapter is generally printed in small capitals, the first letter
of the word being a large capital.
3. In handbills and advertisements, all important words are capitalized, so as to
attract special attention.
Rule IX. Titles of Persons.—All titles of respect or honor should

be capitalized.
There are three classes of titles:—
1. Common Titles.
Mr., Mrs., Miss, Master.
2. Professional Titles.
Prof, Dr., D. D., LL. D., &c.
3. Official Titles.
Hon., His Excellency, His Honor, President,
Secretary, Senator, Mr. Chairman, &c.
examples.
President Hayes, Senator Morton, Hon. Thomas W. Ferry, Dr.
Chas. Rynd, Mr. Fred. J. Todd.
remarks.
1. A distinction should always be made between words used as titles, and words
used in a general sense. For example, senator should commence with a small
letter, if it is not placed before the name of a person as a title, or does not refer to a
particular individual. This is the same with president, secretary, doctor, &c.; as, “A
patient owes some thanks to a doctor who restores him with nectar smooth and
fragrant, instead of rasping his throat and flaying his interior with the bitters sucked
by sour-tempered roots from vixenish soils.”—Winthrop.
2. Father, brother, sister, aunt, uncle, cousin, &c., should commence with a
capital, when they are used like titles with the names of persons; as, Father
Pierce, Cousin Blackmar.
3. Sir, father, brother, friend, &c., when used as introductory words to a letter,
should commence with capitals, as a mark of respect; as, My dear Sir, My dear
Friend.
4. In writing such titles as the President of the United States, Secretary of State,
Alexander the Great, all the words in the title should commence with a capital,
except of and the.
Rule X. The Deity.—All names of the Supreme Being or his Son

should commence with a capital.
examples.
“But it is now time to depart,—I to die, but you to live. But which of
us is going to the better state is unknown to every one but God.”—
Socrates.
“For God so loved the world that he gave his only begotten Son,
that whosoever believeth in him should not perish but have
everlasting life.”—John iii. 16.
remarks.
1. Writers differ somewhat in the use of capitals in words referring to the Deity.
Some capitalize all words in any way referring to the Supreme Being, while others
simply capitalize the words that to them seem important. There should be some
uniformity in the use of capitals in words of this character. As a general rule, it is
better to follow the usage of an authorized version of the Scriptures.
2. Such words as First Cause, First Principle, Almighty God, Supreme Being,
Lord God Almighty, Infinite One, should always be written with capitals.
3. King of kings, Lord of lords, Son of man, Father of lights, Father of spirits,
God of hosts, Father of mercies, Prince of life, Prince of kings, and expressions of
a similar character, should only commence with a capital. This is the almost
invariable usage of the Scriptures. These expressions are not commonly used in
the Bible as titles, in the strict sense of the word. For example, King of kings really
means that the Deity is the supreme King of all human kings. For illustration see 1
Tim. vi. 15; Dan. vii. 13; Jas. i. 17; Heb. xii. 9; Psa. lxxx. 7; 2 Cor. i. 3; Acts iii. 15;
Mat. xii. 32. When these forms are used as titles, they may be capitalized like
titles.
4. The adjectives eternal, divine, heavenly, are not printed with capitals in the
Scriptures, when referring to the Deity; as, the eternal God, heavenly Father. See
Deut. xxxiii. 27; Heb. ix. 14; Mat. vi. 32; 2 Pet. i. 3. When, however, these
adjectives are used in an emphatic or special sense, they may commence with
capitals.
5. The pronouns referring to the Deity should not be capitalized, when they are
used with some name of the Supreme Being; as, “At that time Jesus answered
and said, I thank thee, O Father, Lord of heaven and earth, because thou hast hid
these things from the wise and prudent, and hast revealed them to babes.”—Mat.
xi. 25. Any chapter of the New Testament will give similar illustrations.
When, however, a pronoun referring to the Deity stands alone, it should
commence with a capital; as,—
“O Thou! with whom the night is day,

And one the near and far away.”—Whittier.
6. The capitalization of pronouns is sometimes carried to a ridiculous excess by

some writers, especially in poetry; as,
“We praise Thee, O God! for the Son of Thy love.”
7. God, goddess, deity, applied to heathen divinities, should not commence with
a capital.
Rule XI. Quotations.—When the exact words of another are

given, the first word of the quotation should commence with a
capital, if it forms a complete sentence.
examples.
“When the celebrated Chesterfield was asked by a Parisian lady,
‘Why, my Lord, does England still retain Christianity?’ ‘Madame,’ he
replied, with that mixture of repartee and philosophy which met the
case he was dealing with, ‘Madame, because, as yet, we have been
able to find nothing better.’”
Fielding somewhere says, “A good face is a letter of
recommendation.”
remarks.
1. When a quotation is introduced by that, it should not commence with a capital;
as, Napoleon banished Madame de Stael because he said that “she carried a
quiver of arrows that could hit a man if he were seated on a rainbow.”
2. When only a part of a sentence is quoted, a small letter should be used; as,
“For what satisfaction hath a man, that he shall ‘lie down with kings and emperors
in death,’ who in his lifetime never greatly coveted the society of such
bedfellows?”—Lamb.
3. Sometimes a single word comprises the entire saying of another. When this is
so, it should commence with a capital; as, “He shouted, ‘Victory.’”
4. When examples are given as illustrations of some general principle, they
naturally follow the same rule as quotations. If an entire sentence is given as an
example, it should commence with a capital. When disconnected words are given,
small letters may be used, unless the words themselves require capitals.
Rule XII. Resolutions.—In writing resolutions, the word

immediately following Resolved, should commence with a capital.
example.
“Resolved, That the Declaration, passed on the fourth, be fairly
engrossed on parchment, with the title and style of ‘The Unanimous
Declaration of the Thirteen United States of America;’ and that the
same, when engrossed, be signed by every member of Congress.”
remark.
Resolved commences with a capital in resolutions, and a comma immediately
precedes That.
Rule XIII. Special Words.—Words used in a special sense, or of

special importance, commence with capitals.
examples.
“As nowadays we build monuments to great men, so in the Middle
Ages they built shrines or chapels on the spots which saints had
made holy.”—Froude.
“The Reformation broke the theological shackles in which men’s
minds were fettered.”—Froude.
“That Popularity is alone valuable and enduring which follows you,
not that which you run after.”—Lord Mansfield.
remark.
Although it is the universal custom to capitalize a word when used in a special
sense to mark an important period or event in history, there is another class of
words to which writers assign a special importance, the capitalization of which
must necessarily be left to the judgment and taste of each writer. It should,
however, be remembered that an injudicious or too frequent use of capitals
lessens their value and force, and disfigures a written or printed page.
Rule XIV. Words Personified.—When things without life are

represented as persons, they may commence with capitals.
example.
“Father Time is not always a hard parent, and though he tarries for
none of his children, he often lays his hand lightly upon those who
have used him well; making them old men and women inexorably
enough, but leaving their hearts and spirits young and in full vigor.
With such people the gray head is but the impression of the old
fellow’s hand in giving them a blessing, and every wrinkle but a
notch in the quiet calendar of a well-spent life.”—Dickens.
remark.
Care should be taken not to carry this rule to an excess. Unless the
personification is vivid and emphatic, use small letters; as,—
“Many a daylight dawned and darkened,

Many a night shook off the daylight
As the pine shakes off the snow-flakes
From the midnight of its branches.”—Longfellow.
Rule XV. I and O.—The pronoun I and the interjection O should

always be written with capitals.
examples.
“True faith, I tell thee,
Must ever be the dearest friend to man:
His nature prompts him to assert its rights.”—Schiller.
“As wise as when I went to school.”—Goethe.
“O day! O day! O day! O hateful day!

Never was seen so black a day as this.”—Shakespeare.
Rule XVI. References.—In referring to passages in books,

numbers are sometimes represented by capital letters.
examples.
Irving’s “Life of Washington,” vol. III. p. 77.
Mommsen’s “History of Rome,” vol. IV. p. 18.
remarks.
1. Some commence volume and chapter with a capital, but this is not the usual
custom.
2. The volume, chapter, and page may be given, but the volume and page are
sufficient.
3. In referring to passages in the Bible, the chapter and verse are given; as
Luke, chap. ix. 15. It is the usual custom to omit the word chapter, the letters
representing the chapter; and the number, the verse; as, “It may be fit to remember
that Moses, Lev. xi. 9, Deut. xiv. 9, appointed fish to be the chief diet of the best
commonwealth that ever yet was.”—Izaak Walton.
Rule XVII. Divisions of a Statement.—When a general statement

is divided into separate and distinct parts, it is better to commence
each division with a capital, even when they do not form complete
sentences, and are not separated from each other by a period. This
is especially the case when the divisions are numbered.
example.
“The history of the normal development of the individual has its
counterpart in the history of humanity. There is, 1. The age of
popular and unconscious morality; 2. The transitional, skeptical, or
sophistical age; and 3. The philosophic or conscious age of morality.”
remarks.
1. When each division commences with a capital and is also numbered, they will
be more readily recognized and understood.
2. Some writers number the divisions, but do not commence them with capitals;
as, “The teaching of composition requires, (1) a cultivation of thought; and (2) a
cultivation of the faculty of expression.” It is better to commence each division with
a capital.
3. When a sentence is broken off to commence a new line, in order to give
special prominence to a statement, or to attract attention, a capital should be used;
as,—
I am, dear Mother,
Your dutiful son,
Sam. Johnson.

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Managerial Accounting The

Cornerstone of Business Decision

7-9. d Break-Even Units = $7,200/($12 – $3) = 800

7-10. c Variable Cost Ratio = $3/$12 = 0.25, or 25%

7-12. c Units to Be Sold = ($15,000 + $3,600)/($8 – $6) = 9,300

BRIEF EXERCISES: SET A

2. Contribution Margin Price – Variable Cost per Unit

Total Fixed Cost

2. Margin of Safety in Sales Revenue = Budgeted Sales – Break-Even Sales

2. Expected Operating Income = Original Income + (Percent Change ×

BRIEF EXERCISES: SET B

Total Fixed Cost

Break-Even Pairs of Shoes = Number of Packages × Sales Mix Amount

Total Fixed Cost

4. Break-Even Units = Total Fixed Cost/(Price – Variable Cost per Unit)

2. Variable Cost Ratio = $23,760/$88,000 = 0.27, or 27%

Total Fixed Cost

4. To increase operating income without increasing sales revenue, Ashton

2. Break-Even Units = $68,000/($18.00 – $14.60) = 20,000

3. Units to earn $13,530 = ($111,425 + $48,350 + $13,530)/($2.75 – $1.65)

4. Sales revenue to earn $13,530 = 157,550 × $2.75 = $433,263

2. Expected sales in units……………………………………………..… 225,000

3. Expected sales revenue ($8.12 × 225,000)………………………… $1,827,000

Break-Even Packages = $113,900/$34 = 3,350

Contribution Margin Ratio = $153,000/$355,500 = 0.4304*, or 43.04%

2. Variable Sales Total

Break-Even Packages = $2,128,500/$990 = 2,150

Contribution Margin Ratio = $4,950,000/$13,050,000 = 0.3793, or 37.93%*

4. Margin of Safety = $13,050,000 – $5,611,653 = $7,438,347

2. a. Fixed cost increases by $5,000:

Break-Even Point = 3,750 units

Break-Even Point = 3,333 units

2. c. Unit selling price increases to $12:

Break-Even Point = 1,667 units

Break-Even Point = 5,000 units

2. Operating Income = 10,000 × $14.50 = $145,000

3. Contribution Margin Ratio = $14.50/$34.00 = 0.4265, or 42.65%

2. Margin of Safety = $1,800,000 – $1,746,000 = $54,000

3. Degree of Operating Leverage = Contribution Margin

4. Percent Change in Operating Income = 33.33 × 0.20 = 6.67*

Break-Even Packages = $30,000/$48 = 625

2. The new sales mix is 3 vases to 2 figurines.

Break-Even Packages = $35,260/$86 = 410

OR Break-Even Sales Dollars = 289,000 × $26* = $7,514,000

2. Units for Target Income = ($2,254,200 + $296,400)/$7.80 = 327,000 units

3. Additional Operating Income = $50,000 × 0.30 = $15,000

4. Margin of Safety in Units = 450,000 – 289,000 = 161,000 units

5. Degree of Operating Leverage = $3,510,000/$1,255,800 = 2.8*

6. New Operating Income = $1,255,800 + [(2.8 × 0.10) × $1,255,800] = $1,607,424

2. Units for Target Profit = ($380,400 + $240,000)/($24 – $18)

3. Contribution Margin Ratio = $6/$24 = 0.25

4. Current Units = $2,040,000/$24 = 85,000

2. Break-Even Units = ($197,600 – $23,500)/($13.50 – $9.85)

2. Increased contribution margin ($1,000,000 × 0.4286*)………………. $428,600

3. $1,500,000 × 0.4286 = $642,900

* Basic Sled Variable Cost: $1,000,000/100,000 = $10

Break-Even Packages = ($1,428,000 + $198,900)/$205 = 7,936*

3. Increase in contribution margin for aerosleds (12,000 × $35)……… $ 420,000

2. Break-Even Sales Revenue = $150,000/0.64 = $234,375

3. $460,300 × 1.15 = $529,345

3. Sales mix (from Requirement 2): 1 door handle to 2 trim kits

Break-Even Packages = $146,000/$9 = 16,222*

4. Revenue (70,000 × $8)…………………….………………………………… $560,000