CHAPTER 18

Cost-Volume-Profit
ASSIGNMENT CLASSIFICATION TABLE
Brief Exercises 1 A Problems 1A, 6A B Problems 1B, 6B

Study Objectives 1. Distinguish between variable and fixed costs. Explain the significance of the relevant range. Explain the concept of mixed costs. List the five components of cost-volume-profit analysis. Indicate what contribution margin is and how it can be expressed. Identify the three ways to determine the break-even point. Give the formulas for determining sales required to earn target net income. Define margin of safety, and give the formulas for computing it.

Questions 1, 2, 3, 6

Do It! 1

Exercises 1, 2, 3, 4, 5, 6 2

2.

4, 5

2

3.

6, 7, 8

1, 3, 4, 5

1, 2

1, 3, 4, 5, 6 7

1A

1B

4.

9

5.

10, 11, 17

6, 7

8, 9, 10, 11, 12, 13, 17

1A, 2A, 3A, 4A, 5A, 6A

1B, 2B, 3B, 4B, 5B, 6B

6.

12, 13, 14

8, 9

3, 4

8, 9, 10, 11, 12, 13, 14, 16, 17 14, 15, 17

1A, 2A, 3A, 4A, 5A

1B, 2B, 3B, 4B, 5B

7.

16

10, 12

4

2A, 5A, 6A

2B, 5B, 6B

8.

15

11

4

16, 17

2A, 4A, 5A, 6A

2B, 4B, 5B, 6B

Copyright © 2011 John Wiley & Sons, Inc.

Kimmel, Accounting, 4/e, Solutions Manual

(For Instructor Use Only)

18-1

ASSIGNMENT CHARACTERISTICS TABLE
Problem Number 1A Difficulty Level Simple Time Allotted (min.) 20–30

Description Determine variable and fixed costs, compute break-even point, prepare a CVP graph, and determine net income. Prepare a CVP income statement, compute break-even point, contribution margin ratio, margin of safety ratio, and sales for target net income. Compute break-even point under alternative courses of action. Compute break-even point and margin of safety ratio, and prepare a CVP income statement before and after changes in business environment. Compute contribution margin, fixed costs, break-even point, sales for target net income, and margin of safety ratio. Determine contribution margin ratio, break-even point, and margin of safety. Determine variable and fixed costs, compute break-even point, prepare a CVP graph, and determine net income. Prepare a CVP income statement, compute break-even point, contribution margin ratio, margin of safety ratio, and sales for target net income. Compute break-even point under alternative courses of action. Compute break-even point and margin of safety ratio, and prepare a CVP income statement before and after changes in business environment. Compute break-even point and margin of safety ratio, and prepare a CVP income statement before and after changes in business environment. Determine contribution margin ratio, break-even point, and margin of safety.

2A

Moderate

30–40

3A

Simple

20–30

4A

Moderate

20–30

5A

Moderate

20–30

6A

Moderate

20–30

1B

Simple

20–30

2B

Moderate

30–40

3B

Simple

20–30

4B

Moderate

20–30

5B

Moderate

20–30

6B

Moderate

20–30

18-2

Copyright © 2011 John Wiley & Sons, Inc.

Kimmel, Accounting, 4/e, Solutions Manual

(For Instructor Use Only)

Correlation Chart between Bloom’s Taxonomy, Study Objectives and End-of-Chapter Exercises and Problems
Knowledge Q18-1 Q18-2 Q18-3 Q18-6 Q18-4 Q18-5 E18-4 E18-5 E18-7 Q18-10 Q18-11 Q18-17 BE18-6 BE18-7 E18-8 E18-9 Q18-13 BE18-8 BE18-9 DI18-3 DI18-4 E18-8 E18-9 Q18-16 BE18-10 BE18-12 DI18-4 Q18-15 BE18-11 DI18-4 Communication E18-10 E18-11 E18-12 E18-13 E18-14 E18-17 E18-10 E18-11 E18-12 E18-13 E18-17 BE18-6 P18-1A P18-2A P18-1B P18-2B E18-16 P18-1A P18-2A P18-1B P18-2B Q18-9 P18-3A P18-3B P18-4A P18-5A P18-6A P18-4B P18-3A P18-4A P18-3B P18-4B P18-5A P18-5B E18-12 P18-2A E18-14 P18-2B E18-15 E18-17 E18-17 E18-16 P18-2A P18-2B P18-5A P18-5B Real-World Focus Decision Making Exploring the Web Across the Organization P18-5A P18-6A P18-5B P18-6B P18-4A P18-6A P18-4B P18-6B P18-5B P18-6B Q18-6 Q18-7 BE18-1 DI18-1 E18-1 Q18-8 BE18-4 BE18-5 DI18-2 BE18-3 E18-5 E18-3 E18-6 P18-1A P18-1B E18-2 BE18-2 BE18-1 E18-5 E18-1 E18-2 DI18-1 E18-3 E18-6 P18-1A P18-1B P18-6A P18-6B Comprehension Application Analysis Synthesis Evaluation

Study Objective

* 1.

Distinguish between variable and E18-4 fixed costs.

* 2.

Explain the significance of the relevant range.

BLOOM’S TAXONOMY TABLE

Copyright © 2011 John Wiley & Sons, Inc.

* 3.

Explain the concept of mixed costs.

* 4.

List the five components of cost-volume-profit analysis.

* 5.

Indicate what contribution margin is and how it can be expressed.

Kimmel, Accounting, 4/e, Solutions Manual

* 6.

Identify the three ways to determine the break-even point.

Q18-12 Q18-14

(For Instructor Use Only)

* 7.

Give the formulas for determining sales required to earn target net income.

* 8.

Define margin of safety, and give the formulas for computing it.

Broadening Your Perspective

Managerial Analysis Ethics Case All About You

18-3

ANSWERS TO QUESTIONS
1. (a) Cost behavior analysis is the study of how specific costs respond to changes in the level of activity within a company. (b) Cost behavior analysis is important to management in planning business operations and in deciding between alternative courses of action. (a) The activity index identifies the activity that causes changes in the behavior of costs. Once the index is determined, it is possible to classify the behavior of costs in response to changes in activity levels into three categories: variable, fixed, or mixed. (b) Variable costs may be defined in total or on a per-unit basis. Variable costs in total vary directly and proportionately with changes in the activity level. Variable costs per unit remain the same at every level of activity. Fixed costs remain the same in total regardless of changes in the activity level. In contrast, fixed costs per unit vary inversely with activity. As volume increases, fixed costs per unit decline and vice versa. (a) The relevant range is the range of activity over which a company expects to operate during the year. (b) Disagree. The behavior of both fixed and variable costs are linear only over a certain range of activity. CVP analysis is based on the assumption that both fixed and variable costs remain linear within the relevant range.

2.

3.

4.

5.

This is true. Most companies operate within the relevant range. Within this range, it is possible to establish a linear (straight-line) relationship for both variable and fixed costs. If a relevant range cannot be established, segregation of costs into fixed and variable becomes extremely difficult. Apartment rent is fixed because the cost per month remains the same regardless of how much Todd uses the apartment. Rent on a Hertz rental truck is a mixed cost because the cost usually includes a per day charge (a fixed cost) plus an activity charge based on miles driven (a variable cost). For CVP analysis, mixed costs must be classified into their fixed and variable elements. One approach to the classification of mixed costs is the high-low method. Variable cost per unit is $1.20, or [($160,000 – $100,000) ÷ (90,000 – 40,000)]. At any level of activity, fixed costs are $52,000 per month [$160,000 – (90,000 X $1.20)]. No. Only two of the basic components of cost-volume-profit (CVP) analysis, unit selling prices and variable cost per unit, relate to unit data. The other components, volume, total fixed costs, and sales mix, are not based on per-unit amounts. There is no truth in Sara’s statement. Contribution margin is sales less variable costs. It is the revenue that remains to cover fixed costs and to produce income (profit) for the company. Contribution margin is $12 ($40 – $28). The contribution margin ratio is 30% ($12 ÷ $40).

6.

7.

8.

9.

10.

11.

18-4

Copyright © 2011 John Wiley & Sons, Inc.

Kimmel, Accounting, 4/e, Solutions Manual

(For Instructor Use Only)

...........000 is as follows: $180. 1......................... and enter new market areas... Operating expenses ($200....000 X .....000 = 20%...... Variable expenses Cost of goods sold ($500.... 16..... $15.... The break-even point in sales dollars is obtained by drawing a horizontal line from the break-even point to the vertical axis......... Knowledge of the break-even point is useful to management in deciding whether to introduce new product lines...000 = $3........ Disagree.. 4/e............ Solutions Manual (For Instructor Use Only) 18-5 ....000 (a) The break-even point involves the plotting of three lines over the full range of activity: the total revenue line.......000 $410...... $900........000 = 30% The sales volume to achieve net income of $60.........000 ÷ 25% = $100............... 14.....................Questions Chapter 18 (Continued) 12........................... Total variable expenses.250 X $12 = $15.. Inc...... Margin of safety is the difference between actual or expected sales and sales at the break-even point.....000 ÷ $15........... $3........ and the total cost line..... Accounting................ Kimmel..... At break-even sales. = $800.000 RENFRO COMPANY CVP Income Statement Sales.... the contribution margin is equal to the fixed costs.. 15................ Contribution margin ......30 17.000 Copyright © 2011 John Wiley & Sons......... (b) The break-even point in units is obtained by drawing a vertical line from the break-even point to the horizontal axis............000. the total fixed cost line..000 $600............000 140....... The contribution margin ratio is: 13..............70)..........70) .000 + $60........ The break-even point is determined at the intersection of the total revenue and total cost lines...000 – $12.....000 .....000....000 490.......................000 X .....000 $350. change sales prices on established products.... $180.. $25..

000 8.000 4.000 0 20 40 60 80 100 FIXED COST Relevant Range Activity Level Activity Level 18-6 Copyright © 2011 John Wiley & Sons. 4/e.000 2.000 0 20 40 60 80 100 $10. Supervisory salaries is a fixed cost because it remains the same in total regardless of changes in the activity level.000 4.000 6.000 8. Kimmel. Maintenance is a mixed cost because it increases in total but not proportionately with changes in the activity level. Inc. Solutions Manual (For Instructor Use Only) .000 2. Accounting. BRIEF EXERCISE 18-2 VARIABLE COST Relevant Range $10.SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 18-1 Indirect labor is a variable cost because it increases in total directly and proportionately with the change in the activity level.000 6.

Solutions Manual (For Instructor Use Only) 18-7 . 4/e.000 – $13.600 = 8.000 $15.000 1.400 ÷ 1.40—Variable cost per mile. Inc.BRIEF EXERCISE 18-3 $80. Copyright © 2011 John Wiley & Sons.400 1.500 Direct Labor Hours BRIEF EXERCISE 18-4 High Low Difference $1.000 COST 40.500 $ 3.000 11.40 Total fixed costs $15.900 $ 3.500 = $1.100 10.000 Fixed Cost Element 0 500 1. High Total cost Less: Variable costs 8.500 X $1.000 2.000 Total Cost Line 60.600 The mixed cost is $3.000 = $1.40 per mile. Kimmel.500 X $1.100 Low $13. Accounting.500 – 7.40 7.500 2.000 Variable Cost Element 20.100 plus $1.

..............000 $ 5.......076...........000 = $33.........000)....000 + $45. Kimmel.....000 + $98.124...... Inc....000 1.000 = $1..50 Total fixed costs $65.....................000 $ 541.. Solutions Manual (For Instructor Use Only) .. Accounting.....280 – $320) 2...... CVP Income Statement For the Quarter Ended March 31...000 $32...000 $65.......000 18-8 Copyright © 2011 John Wiley & Sons.......000 – 18.000 $ 5.... 3........000)..........000 60.........50 18.........000 22.. BRIEF EXERCISE 18-7 RADIAL MANUFACTURING INC............000 + $70........... Contribution margin ....BRIEF EXERCISE 18-5 High Low Difference $33............. $2....000 27............ Fixed costs ($440.000 X $1......000 = 40.........000 BRIEF EXERCISE 18-6 1..............50 per unit... 4/e.....000 583..000 + $86........000 000......... Variable costs ($920. (a) (b) (c) (d) (e) (f) $256 = ($640 – $384) 40% ($256 ÷ $640) $210 = ($300 – $90) 30% ($90 ÷ $300) $1........000 – $32..... Net income.200............ Activity Level High Low Total cost Less: Variable costs 40.....000 X $1.....000 ÷ 22. 2012 Sales .................000 1.....280 = ($320 ÷ 25%) $960 ($1..

000 BRIEF EXERCISE 18-11 Margin of safety = $1. 4/e. or ($520 – $286) X = $187.40.000 – $840. Copyright © 2011 John Wiley & Sons.50 = 1. Kimmel.000. Solutions Manual (For Instructor Use Only) 18-9 .00 – $4. Required sales in dollars = ($195.000 Margin of safety ratio = $360.000 = 30% BRIEF EXERCISE 18-12 Contribution margin per unit $1.200.60) ÷ $1 = .BRIEF EXERCISE 18-8 (a) $520Q = $286Q + $187. the contribution margin ratio is ($1 – $0.000 – $180.000] = 40% Required sales in dollars = $160.200 + $0 $234Q = $187.320.000) ÷ $1.000 ÷ 40% = $400.200 Q = 800 units (b) Contribution margin per unit $234.200 ÷ $234 X = 800 units BRIEF EXERCISE 18-9 Contribution margin ratio = [($300.50) Required sales in units = ($480.000 + $1.50 is ($6.40 = $675.000) ÷ .000 ÷ $1.000 = $360.200.500.000 BRIEF EXERCISE 18-10 If variable costs are 60% of sales.000) ÷ $300. Inc. Accounting.000 + $75.

(b) DO IT! 18-4 (a) CM per unit = Unit selling price – Unit variable costs $10 = $30 – $20 CM ratio = CM per unit/Unit selling price 33 1/3% = $10/$30 Break-even point in dollars = Fixed costs ÷ Contribution margin ratio = $200. and the breakeven point in units is 1.000.750 – $16. 90Q = $135. The formula therefore is $135.50 X 8.50 X 10.200 – ($1.000 + ($1.000 ÷ $90).000 or $16.50 per unit Fixed cost: $18. DO IT! 18-2 (a) Variable cost: ($18. and the breakeven point in units is 1.500 – 8.750 – ($1.000 ÷ 33 1/3% = $600. Accounting.000 ÷ $90.800) = $1.500.800) = $3.50 X 8.200) ÷ (10. and direct materials. Inc. Therefore. Solutions Manual (For Instructor Use Only) .500 units) = $3.SOLUTIONS FOR DO IT! REVIEW EXERCISES DO IT! 18-1 Variable costs: Indirect labor.500) = $15.000. Kimmel. direct labor.500 units: $3. The contribution margin per unit is $90 ($250 – $160).500 ($135. 4/e.750 DO IT! 18-3 (a) The formula is $250Q = $160Q + $135.000 (b) Total cost to produce 8.000 18-10 Copyright © 2011 John Wiley & Sons. Fixed costs: Property taxes and depreciation. Mixed costs: Utilities and maintenance.

000 required sales Copyright © 2011 John Wiley & Sons. Inc.000 + $120. Accounting.000 = $750.000 – $600. 4/e.000 = = (c) 20% Sales = Variable costs + Fixed costs + Net income $30Q = $20Q + $200.000 units X $30 = $960.000 units 32. Solutions Manual (For Instructor Use Only) 18-11 .DO IT! 18-4 (Continued) (b) Margin of safety Actual sales – Breakeven sales Actual sales $750. Kimmel.000 $10Q = $320.000 Q = 32.

Remain constant in total but vary on a per-unit basis. Kimmel. or mixed can be made by comparing the cost in total and on a per-unit basis at two different levels of production. (b) Using these criteria as a guideline. Accounting. fixed. Variable Costs Fixed Costs Mixed Costs Vary in total but remain constant on a per-unit basis.SOLUTIONS TO EXERCISES EXERCISE 18-1 (a) The determination as to whether a cost is variable. the classification is as follows: Direct materials Direct labor Utilities EXERCISE 18-2 (a) Variable Variable Mixed Rent Maintenance Supervisory salaries Fixed Mixed Fixed 18-12 Copyright © 2011 John Wiley & Sons. Inc. Vary both in total and on a per-unit basis. Solutions Manual (For Instructor Use Only) . Contain both a fixed element and a variable element. 4/e.

Inc.900 4.000 units) = = Cost Units $10. (d) Fixed cost within the relevant range (4. Solutions Manual (For Instructor Use Only) 18-13 . Copyright © 2011 John Wiley & Sons.000 units) = $7. maintenance costs are $900 per month plus $5 per machine hour.000 – 9.900 – $2.400 $2.000 units of output since a straight-line relationship exists for both direct materials and rent within this range.000 EXERCISE 18-3 (a) Maintenance Costs: $4.000 – 9.500 $ 900 300 Machine Hours $2.400 Thus.000 $ 900 1. Variable cost per unit Within the relevant range (4. Kimmel. 4/e.500 = = $5 variable cost per machine hour 800 – 300 500 800 Machine Hours Total costs Less: Variable costs 800 X $5 300 X $5 Total fixed costs $4.EXERCISE 18-2 (Continued) (b) The relevant range is 4.000* (c) = $2 per unit *Any costs and units within the relevant range could have been used to calculate the same unit cost of $2. Accounting.000 – 9.000* 5.

Fuel used in delivery trucks. 3.000 Variable Cost Element COSTS $3. Fixed. 10.900 $2.000 $ 900 Fixed Cost Element 0 200 400 600 800 Machine Hours EXERCISE 18-4 1. Screws used in the production of furniture.EXERCISE 18-3 (Continued) (b) $5. Utilities expense. 2. 7. Hourly wages of furniture craftsmen. 4. Fixed. 12. Property taxes. Salaries of factory supervisors. Straight-line depreciation on factory building. Variable. Inc. Fixed. Sales commissions. Accounting.000 $4. Mixed. Fixed. 6. Sales staff salaries. 11.000 $1. 18-14 Copyright © 2011 John Wiley & Sons. Variable. Fixed. Telephone bill. 4/e. Variable. Solutions Manual (For Instructor Use Only) . Mixed. Variable.000 Total Cost Line $4. Wood used in the production of furniture. Insurance on buildings. 5. 9. 8. Variable. Kimmel.

Kimmel.000 3. Accounting.000 $1.800 $2.44 variable cost per machine hour 8.000 Total Cost Line $4. maintenance costs are $1.000 Variable Cost Element COSTS $3.800 1. (b) $5.44 per machine hour.000 – $2. 4/e.480 per month plus $.000 Machine Hours Copyright © 2011 John Wiley & Sons.000 Fixed Cost Element 0 2.000 4.EXERCISE 18-5 (a) Maintenance Costs: $5. Solutions Manual (For Instructor Use Only) 18-15 .000 Activity Level High Total cost Less: Variable costs 8.000 8.000 – 3.000 $2. Inc.000 X $.000 6.44 Total fixed costs $5.000 5.320 $1.480 Thus.000 $1.44 3.000 X $.200 = = $.520 00.480 Low $2.480 $1.

100 – $200 = $900 Variable cost per unit = $900/3.000 + $5. Accounting.000 units = $1.000 units) = (($9 + $. Solutions Manual (For Instructor Use Only) .000 units = $.30) X 5.800 – $300 = $1.000 Variable cost per unit Variable cost portion of mixed cost = $27.700 18-16 Copyright © 2011 John Wiley & Sons.800 + $2.50 per unit Maintenance: Variable cost to produce 3.000 units = $7.30 per unit Cost to produce 5.000 + $1. 4/e. Inc.700 = $49.000 units = (Variable costs per + Fixed cost unit X 5.000 + $4.EXERCISE 18-6 (a) Cost Direct materials Direct labor Utilities Property taxes Indirect labor Supervisory salaries Maintenance Depreciation Fixed costs Fixed Variable X X Mixed X X X X X X = $1.50 + $.400 + $300 + $200 = $5.500/3.000 units = $1.000) + $5.500 = $27.500 + $15. Kimmel.700 = $54.000/3.500 Variable cost per unit = $1.000 units = $.700 (b) Variable costs to produce 3.000 units = $9 per unit = Total cost – Fixed portion Utilities: Variable cost to produce 3.

When these assumptions are not valid. there are some assumptions which underline CVP analysis. Kimmel. All costs can be classified with reasonable accuracy as either fixed or variable.000 = $3. Inc. 4/e.720 per month OR Fixed costs ÷ Contribution margin ratio = $3.700 ÷ . Solutions Manual (For Instructor Use Only) 18-17 . EXERCISE 18-8 (a) Contribution margin per lawn Contribution margin per lawn Contribution margin ratio = = = $60 – ($13 + $12 + $2) $33 $33 ÷ $60 = 55% Fixed costs = $1. 3. 5.727* per month *$7 difference is due to rounding. Copyright © 2011 John Wiley & Sons. The five assumptions are: 1. 4. When more than one type of product is sold. If you want further explanation of any of these assumptions. please contact me.700 Break-even point in lawns = $3. 2. the results of CVP analysis may be inaccurate. the sales mix will remain constant.EXERCISE 18-7 MEMO To: From: Re: Kenny Deines Student Assumptions underlying CVP analysis CVP analysis is a useful tool in analyzing the effects of changes in costs and volume on a company’s profits.500 + $200 + $2. However. Accounting.700 ÷ $33 = 112(rounded) (b) Break-even point in dollars = 112 lawns X $60 per lawn = $6. Changes in activity are the only factors that affect costs. All units produced are sold.55 = 6. The behavior of both costs and revenues is linear throughout the relevant range of the activity index.

460 Contribution margin $23. Break-even point in dollars = 425 rooms X $60 per room = $25.200 ÷ . Contribution margin per room Contribution margin per room Contribution margin ratio = = = $60 – ($8 + $28) $24 $24 ÷ $60 = 40% Fixed costs = $7. Inc. 35% $21.000 = $60. $42 18-18 Copyright © 2011 John Wiley & Sons. Accounting.000.400 X .200 Break-even point in rooms = $10.200 ÷ $24 = 425 2.940 Contribution margin per unit: Contribution margin ratio: $120 – $78 ($120 X 65%) = $42.40 = $25.000 = 500. $42 ÷ $120 = 35%.500 per month EXERCISE 18-10 (a) Contribution margin in dollars: Sales = 570 X $120 = $68. (b) Break-even sales in dollars: Break-even sales in units: $21.500 + $1.200 + $1.EXERCISE 18-9 1. 4/e.400 Variable costs = $68.500 per month OR Fixed costs ÷ Contribution margin ratio = $10. Solutions Manual (For Instructor Use Only) .65 = 44.200 + $300 = $10. Kimmel.

90 Contribution margin ratio = $2.000X + $105. Therefore.00 = 30% OR Copyright © 2011 John Wiley & Sons.90 = 50.000 X $7.00 – $2. Inc.EXERCISE 18-11 (a) 1.000 ($350.300 = 812 fares $25 (b) At the break-even point fixed costs and contribution margin are equal.10 ÷ $7. Contribution margin ratio is: $27. 4/e.000 Break-even point in dollars = 2.428.10 Variable cost per unit = Unit selling price – Unit contribution margin = $7.428 = $20. Accounting. EXERCISE 18-12 (a) Unit contribution margin = Fixed costs Break-even sales in units = $105. the contribution margin at the break-even point would be $15.000 = $25 1.000 = where X = Variable cost per unit = Variable cost per unit = $4. Round-trip fare = $15. Kimmel. Solutions Manual (For Instructor Use Only) 18-19 .360 = 76% $36.440 fares Break-even point in fares = $20.10 = $4.300 76% $36.000 ÷ $7) = $2.00 = 50.

......................400 80.................. 4/e.........000 X = 400 units (c) NAYLOR COMPANY CVP Income Statement For the Month Ended September 30................................................ 18-20 Copyright © 2011 John Wiley & Sons........................000 ($420................. Variable costs........ 2012 Sales (620 video game consoles) ....................................000 ($126...........000 52...... Solutions Manual (For Instructor Use Only) .......000). Kimmel................000 = $126..................................................000 $130X = 52... Fixed costs .........600 Per Unit $400 270 $130 (b) Sales = Variable costs + Fixed costs $400X = $270X + $52.............. Fixed costs ........................................ Total $248................... EXERCISE 18-13 (a) NAYLOR COMPANY CVP Income Statement For the Month Ended September 30..000 108...........000 in 2012.. Inc.. 2012 Total $160.....30 = $420.................................000 52...........EXERCISE 18-12 (Continued) (b) Fixed costs ÷ Contribution margin ratio = Break-even sales in dollars Fixed costs ÷ .......000 167.......... Variable costs .........000 – $105..... Net income..000 X...000 $ 28..............30) Since fixed costs were $105....... Accounting........... Contribution margin ..... the increase in 2013 is $21...... Contribution margin ...600 52...000 $ –0– Per Unit $400 270 $130 Sales (400 video game consoles).............................. Net income......

Alternative 1.000 = 12.000 = $67.500. Solutions Manual (For Instructor Use Only) 18-21 .000 $60X = $720.000 = $210.000X – $1.000 + $210.000 + $150.000 – $90.500 – $90.000 * = 13.000 + $60.000 = 12.000 = 12.000 + $210.860. or ($70 X 110%).EXERCISE 18-14 (a) Sales = Variable cost + Fixed cost + Target net income $150X = $90X + $570.000 = $85.000 units = $70 Increase selling price to $77. where X = new selling price X – $90 $780. Reduce variable costs to 55% of sales. 4/e. Accounting. Inc.000 units. 2. increasing selling price. Copyright © 2011 John Wiley & Sons. Net income = $385.000 units OR Units sold in 2012 = $570. Unit sales price = $350.000 + $150.000 $1.000 X = 12.000 = 12. will produce the highest net income.000 units $150 – $90 (b) Units needed in 2013 = $570.000 – $210. Kimmel.080.000 (c) $570.000.000X X = $155 EXERCISE 18-15 1. Net income = $350.000 – $192.000 ÷ 5.000 units $150 – $90 *$150.

000 ÷ $2.000 units 2.000. 2.500.000 ÷ 40% (c) 1. Inc.000 or $800.60X = $800.40X + $800.000.800 2.000 1.EXERCISE 18-16 (a) $3.000 Margin of safety ratio: $500. Kimmel. Break-even sales in dollars: X = .000 = $500.500. Accounting.000 – $2.000 X = $2.000 $1. 4/e.000 X = 500. Break-even sales in units: $4X = $2.400 DOLLARS (000) 2. Margin of safety in dollars: $2.200 800 400 100 200 300 400 500 600 700 800 Number of Units (in thousands) Fixed Cost Line Break-even Point Total Cost Line Sales Line (b) 1.200 2.60X + $800.000 . Solutions Manual (For Instructor Use Only) .600 1.000 = 20% 18-22 Copyright © 2011 John Wiley & Sons.40X = $800.

960 ÷ 65% = $38.EXERCISE 18-17 (a) Contribution ratio = Contribution margin ÷ Sales ($40 – $14) ÷ $40 = 65% (b) Break-even in dollars: $19.000 ÷ $96.000 = 68.400 40% increase in contribution margin in $62.000 = $66. 4/e.960 Total increase in sales required: $24.000 $66.400 X 40% = $24.400 Copyright © 2011 John Wiley & Sons. Solutions Manual (For Instructor Use Only) 18-23 . Kimmel.000 (c) Margin of safety = $96.000* – $30.400 = $62.500 ÷ 65% = $30.400 X $40) (d) Current contribution margin $40 – $14 = $26 Total contribution margin is $26 X 2. Accounting. Inc.75% *(2.

30 .20 $6. Accounting.00 X 1.50 .800] = $800 18-24 Copyright © 2011 John Wiley & Sons.900) + $6. Inc. Solutions Manual (For Instructor Use Only) . Kimmel. 4/e.000 – [($6.200 1.000 $5.000) (b) $10.00X = $6.800 18 15 DOLLARS (000) 12 9 6 3 Break-even Point Sales Line Total Cost Line Fixed Cost Line 300 600 900 1.800 Number of Haircuts (d) Net income = $19.800 $ 4.700 haircuts X $10 = $17.700 haircuts (c) 1.000* 500 200 900 175 25 $6.00 $5.00X + $6.SOLUTIONS TO PROBLEMS PROBLEM 18-1A (a) Variable costs (per haircut) Barbers’ commission Barber supplies Utilities Total variable cost per haircut Fixed costs (per month) Barbers’ salaries Manager’s extra salary Advertising Rent Utilities Magazines Total fixed *(5 X $1.800 X = 1.500 1.00X = $6.

Net income.......................33X + $408..........000) or $............. 2012 Net sales......200.........50 X 66%)...000 .50 = $1.800...................... Administrative expenses .200.. Total fixed expenses ... Fixed expenses Cost of goods sold ................000 60.000 ÷ $1..800....000 = $1.000) ÷ $1..........33 per bottle ($. Inc..000 1..000 $.....000....000 408. Contribution margin . 4/e..... Administrative expenses ....900.......PROBLEM 18-2A (a) LYMAN COMPANY CVP Income Statement (Estimated) For the Year Ending December 31....... Selling expenses ............000 + $238....... Solutions Manual (For Instructor Use Only) 18-25 ...33) ÷ $....000 – $1......000 + variable manufacturing overhead $316. (c) Contribution margin ratio = ($..000 2....000 units 2.......50 – $............50 = 34% (or 1 – ........ (b) Variable costs = 66% of sales ($1...000 20.....800. Selling expenses ..098...............34 Copyright © 2011 John Wiley & Sons..................... 1. $......000 612.......17X = $408. Kimmel........000 X $.66) Margin of safety ratio (d) Required sales X= = ($1.000...........................000* 70........... $1..........000 65.......800.............000 *Direct materials $430..000 $ 204......................400......50X = $. Total variable expenses ... Accounting.......000 283...............400.000 + direct labor $352.....000 = 33% (rounded) $408............................000 X = 2.. Variable expenses Cost of goods sold .........188....000 $1. Total fixed costs = $408...188................

and fixed expenses were $980.000*) ÷ $2.435 (rounded) .880.400.000 = $2.000 = $2.560. the contribution margin ratio changes to 46% [($2. Total sales become $2.880.400. 4/e. 18-26 Copyright © 2011 John Wiley & Sons.000 – $1.000 (600. Inc. Accounting. The new break-even point is: $890. variable expenses were $1.880. Therefore.05) Alternative 1 is the recommended course of action because it has a lower break-even point.667 (rounded) .000. The new break-even point is: $980.80).400. the break-even point in dollars is: $980.000 = $2.46 *($2.400.400.000 – $90.000 ($980.000]. Thus.560. Kimmel.000 X $4.000 (65% of sales).30 *($2.000) ÷ $2.000.000) 2.000 X .966.80 ($4* X 120%).000 – $120.800.PROBLEM 18-3A (a) Sales were $2.35 (b) 1.000 .130.000]. The effects of this alternative are to change total fixed costs to $890.000) and to change the contribution margin to 30% [($2. Solutions Manual (For Instructor Use Only) . The effect of this alternative is to increase the selling price per unit to $4.000 – $1.560.000/600.

000 X $38) (24.000 + $34. The recommendation is to not accept the proposed changes.000 pairs of shoes New break-even point: $38X = $22X + ($270.000 X $22) The proposed changes will raise the break-even point 4.000 X $40) 0 = 25% New margin of safety percentage = (24. Solutions Manual (For Instructor Use Only) 18-27 . This is a significant increase. Inc. Accounting.000 X = 19. 4/e.000 384.000 X $40) (20.000 304.000 X $22) Contribution margin Fixed expenses Net income $800.000 $ 90.000 New $912.000 440.000 $ 80.000 X $40) – (15.000 X = 15.000 lower. Kimmel. Margin of safety is 4% lower and net income is $10.000 528.000 X $38) (24.000 X $38) 3 = 21% (rounded) (c) VALUE SHOE STORE CVP Income Statement Current Sales (20.000 X $40) Variable expenses (20.000 (where X = pairs of shoes) $18X = $270.000 pairs of shoes (b) Current margin of safety percentage = (20.000 270. Copyright © 2011 John Wiley & Sons.000 X $38) – (19.000) $16X = $304.000 units.000 360.PROBLEM 18-4A (a) Current break-even point: $40X = $22X + $270.000 (24.

1 X 1.100 313.000 X .30) $108.1 X 1. 4/e.000 (2) Fixed Costs Current Year Manufacturing overhead ($360.000 56.20) Total variable costs Contribution margin Sales Variable costs Direct materials Direct labor Manufacturing overhead Selling expenses Administrative expenses Total variable costs Contribution margin Current Year $1.000 285.600 61.000 144.000 $476.000 96.000 1.000 X .1 X 1. Accounting.PROBLEM 18-5A (a) (1) Net sales Variable costs Direct materials Direct labor Manufacturing overhead ($360.000 224.760.600 1.000 252.000 X 1.80) 224.320.40) Administrative expenses ($280.200.1 562.600. Solutions Manual (For Instructor Use Only) .000 $476.1 X 1.70) Selling expenses ($240.000 Projected Year $1.000 $ 400.200 105.000 1.000 Current Year $1.1 X 1.000 Selling expenses ($240.1 511.000 18-28 Copyright © 2011 John Wiley & Sons.000 X 1.60) 144.000 Total fixed costs Projected year $108.000 X .000 Administrative expenses ($280.000 X .000 511.000 $ 400.600.000 X . Inc.500 277.000 $ 440.000 X .200. Kimmel.000 56.000 285.000 252.1 X 1.000 96.

000 ÷ .000) ÷ $3.25 Break-even point in units = Fixed costs ÷ Unit contribution margin 119.4% = ($3.144.000 ÷ 100.000) ÷ .904.25 (c) Sales dollars required for = (Fixed costs + Target net income) ÷ Contribution margin ratio target net income $3.000 = $476.000 Copyright © 2011 John Wiley & Sons. Inc.600. Accounting.000 = $16 Unit variable cost = $1.25 (d) Margin of safety = (Expected sales – Break-even sales) ÷ Expected sales ratio 39.000 ÷ 100.904.000 – $1. Kimmel.000 = $12 Unit contribution margin = $16 – $12 = $4 Contribution margin ratio = $4 ÷ $16 = . 4/e.000 ÷ $4 Break-even point in dollars = Fixed costs ÷ Contribution margin ratio $1.200.000 units = $476.144.PROBLEM 18-5A (Continued) (b) Unit selling price = $1.000 = ($476.144.000 + $310. Solutions Manual (For Instructor Use Only) 18-29 .

000 – ($400. because they would be incurred whether or not the advertising expenditure is increased.000 X 8.992. Kimmel.000 Let fixed manufacturing overhead = FMO Sales – Variable cost of goods sold – FMO = Gross profit $1. Contribution margin = Fixed costs (FSA + FMO) $112.000 Incremental contribution margin = $240.000 FMO = $100.000 + $100. 4/e. Accounting. Let variable selling and administrative expenses = VSA Sales – Variable cost of goods sold – VSA = Contribution Margin $1.000 + FMO) = $100.200. The other fixed costs are irrelevant to this decision. (b) Incremental sales = $1. Inc.200. which is $19.33% = $112.000 X 8.455 2.000 VSA = $100.000 – ($400. 18-30 Copyright © 2011 John Wiley & Sons.200.000 FSA = $12.33% Contribution margin at break-even = $1. 3.000 ÷ $1.455 At break-even.000 = 8.000 Let fixed selling and administrative expenses = FSA Contribution margin ratio = $100. Solutions Manual (For Instructor Use Only) .000 + $500.000 + VSA) = $100.PROBLEM 18-6A (a) 1.200.350.000 + $100.992 The maximum increased advertising expenditure would be equal to the incremental contribution margin earned on the increased sales.000 X 20% = $240.000 + $500.33% = $19.455 = FSA + $100.

600 haircuts X $10 = $16.800 Number of Haircuts (d) Net income = $17.00 Fixed costs (per month) Barbers’ salaries Rent Depreciation Utilities Advertising Total fixed *($1.200 $7X = $11.60 .900 $ 9.000* – [($3.500 1.900 X 3) + $3.000 (c) 18 15 DOLLARS (000) 12 Break-even Point Sales Line Total Cost Line Fixed Cost Line 9 6 3 300 600 900 1.600 haircuts 1.600* 700 500 300 100 $11.00 .700) Copyright © 2011 John Wiley & Sons.200 1. Inc.00 X 1.700) + $11. Solutions Manual (For Instructor Use Only) 18-31 . Kimmel.200] = $700 *($10 X 1.200 (b) $10X = $3X + $11.PROBLEM 18-1B (a) Variable costs (per haircut) Barbers’ commission Rent Barber supplies Total variable $2.40 $3.200 X = 1. Accounting. 4/e.

.000 $1....... 2012 Net sales ........000 (1) Direct materials $360........40 18-32 Copyright © 2011 John Wiley & Sons. (c) Contribution margin ratio = ($..250....000 + direct labor $450...... Selling expenses.....000 ÷ $2............. Accounting........... (b) Variable costs = 60% of sales ($1..000) ÷ $2.......000 280.... Total fixed expenses................000 X = 2.000 (1) 80..50 X 60%).........000 150.....000 40..000 – $1......20X = $500....000 2... 4/e................. Net income...50 = $1.000 = 37..200........30 per bottle ($..............000 1.50 = 40% Margin of safety ratio (d) Required sales X= = ($2. Selling expenses.000) or $..000 $.30X + $500............ Total variable expenses.000 + variable manufacturing overhead $270.......... $..........250..50X = $...500............ Contribution margin .........200...........000 X $........000 $ 300.............5% $500.000 units (breakeven) 2.. Variable expenses Cost of goods sold...50 – $......PROBLEM 18-2B (a) COLAW COMPANY CVP Income Statement (Estimated) For the Year Ending December 31.000 = $2.. 1... Total fixed costs = $500.. Kimmel......000 500....000 800............080.. Fixed expenses Cost of goods sold.. Administrative expenses........000..000. $2.225........ Administrative expenses.000................ Solutions Manual (For Instructor Use Only) ..000.500....000 .000 70.........000.....30) ÷ $...... Inc.000..........000 + $390................

the contribution margin ratio changes to 50% ($1.000 ÷ $2. The effects of this alternative are to change total fixed costs to $670.100.000 X $35).000 each. Thus.50 2.000 X .000 .000 = $1. and (3) total fixed costs are $1.000).100. Inc.000.000*) ÷ $1. 4/e.000].000 ($675.000 ($840.500.000 – $1.680.095.26 [($1.923 . (2) total variable costs become $795. The new breakeven point is: $670.787 (rounded) Alternative 1 is the recommended course of action using breakeven analysis because it has the lowest breakeven point.000).000).576.000 and variable expenses were $1. Accounting.000 + $355. Solutions Manual (For Instructor Use Only) 18-33 .000 .47X = $1.000 . Fixed expenses were $840.800.500. The effects of this alternative are: (1) variable and fixed cost of goods sold become $675.26 *($1.000 – $170.000 = $2.050.000 ($675.000 + $55.500.050.000 (60.000.000 + $65.000)X + $1.050.095.000) and to change the contribution margin to .000 X = . The effect of this alternative is to increase the selling price per unit to $35 ($25 X 140%).095. Total sales become $2.000 and CM ratio was 30%.000 X = $2.500.000 = $2.53X + $1.000 + $65.30 (b) 1.500. which means contribution margin was $450.000 ÷ $1. the breakeven point in dollars is: $840. Therefore. Copyright © 2011 John Wiley & Sons.095. The new breakeven point is: $840. Kimmel. The new breakeven point is: X = ($795.04) 3.000 – $60.329.PROBLEM 18-3B (a) Sales were $1.

PROBLEM 18-4B (a) Current breakeven point: $30X = $15X + $210.000 210. 4/e. the changes should not be made because net income will be lower than the net income currently earned.000 X = 14.000 units and the margin of safety percentage would decrease from 12.000 pairs of shoes (b) Current margin of safety percentage = (16.000 X $30) 3 = 12.000 X $28) (20.000 X $30) (16.5% New margin of safety percentage = (20.000 X = 18.000 X $28) 2 = 10% (c) PAYLESS SHOE STORE CVP Income Statement Current Sales (16. Solutions Manual (For Instructor Use Only) .5% to 10%.000 240. the breakeven point would be higher by 4.000 X $28) – (18.000 X $15) Contribution margin Fixed expenses Net income $480.000 240.000 234.000 pairs of shoes New breakeven point: $28X = $15X + ($210. 18-34 Copyright © 2011 John Wiley & Sons. Kimmel.000 (where X = pairs of shoes) $15X = $210. In addition. Accounting.000 260.000 $ 26.000 X $30) – (14.000 X $15) No.000 300.000) $13X = $234.000 X $28) (20. Inc.000 + $24.000 X $30) Variable expenses (16.000 New $560.000 $ 30.000 (20.

000 X 1.000 (2) Current Fixed Costs Year Manufacturing overhead ($480.70) 350.000 Selling expenses ($400.000 408. Inc.80) $ 384. Kimmel. Accounting.000 1.000.000 X .000 Total fixed costs Copyright © 2011 John Wiley & Sons.306.70) 280.200 $ 832.306.000 $1.014.000 600.PROBLEM 18-5B (a) (1) Net sales Variable costs Direct materials Direct labor Manufacturing overhead ($480.000 180.2 X 1.2 Current Year $2.20) Selling expenses ($400.2 720.000 $ 694.000 150.000 280.000 Projected Year $2. Solutions Manual (For Instructor Use Only) 18-35 .000 150.2 X 1.014.000 115.2 X 1.000 120.2 X 1.000 X .000 X .2 X 1.400.800 Projected Year $ 384.000 $1.000 120.30) Administrative expenses ($500.000 340.000 X .000 1.000 $ 694.567.000 1.000 X 1.000 340.000 96.000 X .000 600.30) Total variable costs Contribution margin Sales Variable costs Direct materials Direct labor Manufacturing overhead Selling expenses Administrative expenses Total variable costs Contribution margin Current Year $2.000 X .000 350. 4/e.000.2 X 1.200 144.000 96.000 Administrative expenses ($500.

000 48.190* = $1.000 + $374.00 – $13.000 600.000 200.190) ÷ 4.000 ÷ $6.000 X .922.014.000 = $20.347 *Rounded (c) Sales dollars required for = (Fixed costs + Target net income) ÷ Contribution margin ratio target net income $4.94 ÷ $20.014.000) Manufacturing overhead ($480.000 150.000 X .000 = $13.110* units = $1.922. Solutions Manual (For Instructor Use Only) .80) Administrative expenses ($500.000 (d) (e) (1) Net sales Variable costs Direct materials Direct labor ($340.000 X .000 1.000 ÷ 100.06 = $6.00 Unit variable cost = $1.318. Kimmel.94 *Rounded Break-even point in dollars = Fixed costs ÷ Contribution margin ratio $2.000 – $140.PROBLEM 18-5B (Continued) (b) Unit selling price = $2.347 Margin of safety = (Expected sales – Break-even sales) ÷ Expected sales ratio 27% = ($4.347 Break-even point in units = Fixed costs ÷ Unit contribution margin 146.000.000 $ 682.000 ÷ 100.014. 4/e.000 320.000 – $2.000.000 ÷ .000) ÷ .06 Unit contribution margin = $20.000.306.10) Selling expenses ($400.00 = . Inc.000 = ($1.30) Total variable costs Contribution margin $2.000.94 Contribution margin ratio = $6.000. Accounting.000 18-36 Copyright © 2011 John Wiley & Sons.

922.000 X . both of which would increase the break-even point. the purchase of the new equipment increased the company’s fixed costs (by increasing its equipment depreciation) and reduced its variable direct labor cost.527.000 ÷ $2. Copyright © 2011 John Wiley & Sons.70) Total fixed costs $432.20) Administrative expenses ($500. In contrast.000 = .859 (rounded) Fixed costs Manufacturing overhead ($480.000 The break-even point in dollars declined from $2.000 350. and therefore reduced its break-even point. 4/e.000 X . Accounting.527.000 X . By changing to a more commission based approach to compensate its sales staff the company reduced its fixed costs.000. Kimmel.341 (3) Break-even point in dollars = $862.341 = $2. Inc.000 $862.190 to $2.859. This means that overall the company’s risk has declined because it doesn’t have to generate as much in sales.PROBLEM 18-5B (Continued) (2) Contribution margin ratio = $682.000 ÷ .000 80. The two changes actually had opposing effects on the break-even point. Solutions Manual (For Instructor Use Only) 18-37 .90) Selling expenses ($400.

000 + FMO) = $300. Contribution margin = Fixed costs (FSA + FMO) $173.800 2.200.PROBLEM 18-6B (a) 1. because they would be incurred whether or not the advertising expenditure is increased.000 ÷ $1. Let variable selling and administrative expenses = VSA Sales – Variable cost of goods sold – VSA = Contribution Margin $1.000 + $200.900.000 + $700.800 At break-even. Inc.000 FSA = $73.020 The maximum increased advertising expenditure would be equal to the incremental contribution margin earned on the increased sales.900.000 + $200.900. 4/e.000 + VSA) = $150.000 Incremental contribution margin = $380.000 VSA = $250.020.000 Let fixed manufacturing overhead = FMO Sales – Variable cost of goods sold – FMO = Gross profit $1.000 – ($600.800 = FSA + $100.900. Kimmel.000 FMO = $100. (b) Incremental sales = $1. Solutions Manual (For Instructor Use Only) .000 = 7.000 + $700. 3.000 X 7. which is $30. 18-38 Copyright © 2011 John Wiley & Sons.000 – ($600. The other fixed costs are irrelevant to this decision. Accounting.000 X 20% = $380.90% = $173.90% = $30.90% Contribution margin at break-even = $2.000 Let fixed selling and administrative expenses = FSA Contribution margin ratio = $150.000 X 7.

000 $10.00 4.BYP 18-1 DECISION MAKING ACROSS THE ORGANIZATION (a) (1) Capital-Intensive $2. Accounting.000 $30.00 Fixed manufacturing costs Incremental selling expenses Total fixed costs Selling price Variable costs Direct materials Direct labor Variable overhead Selling expenses Contribution margin Total fixed costs (1) Fixed manufacturing costs Incremental selling expenses Total fixed costs Selling price Variable costs Direct materials Direct labor Variable overhead Selling expenses Contribution margin Total fixed costs (1) Contribution margin per unit (2) Break-even in units (1) ÷ (2) 16.040.040.000 = $20X + $2.00 $2.508.000 Contribution margin per unit (2) Break-even in units (1) ÷ (2) (b) Martinez Company would be indifferent between the two manufacturing methods at the volume (X) where total costs are equal.00 (2) Labor-Intensive $1.500 units because the fixed costs are lower.50 2.000 502.000 X = 242.00 6.500 units and the labor-intensive manufacturing method if annual sales are not expected to exceed 242.010. The capital-intensive method is more profitable for sales above 242.00 $5.00 $14.040. $16X + $3.000 20.000 502. Inc.00 204.00 $10.010. 4/e.000 $2.00 3.000 $3.538.50 8.00 215. Copyright © 2011 John Wiley & Sons. Solutions Manual (For Instructor Use Only) 18-39 .010.000 $30.000 $4X = $970.00 2.500 units. Kimmel.000 $14.00 $3.500 units (c) Martinez should employ the capital-intensive manufacturing method if annual sales are expected to exceed 242.00 $5. The labor-intensive method is more profitable for sales up to 242.500 units because its contribution margin is higher.

.............. Kimmel..... Administrative expenses ($160.................000 ÷ 200.BYP 18-2 MANAGERIAL ANALYSIS (a) The variable costs per unit are: Cost of goods sold ($600.....000 1..............200...048 units (rounded) *($1......00.....000 .....000 X $..25)..........000 $2..........000).25) Sales volume = 260........000 546..........000 52................ Selling expenses ($280...... $3.90 $200. Variable expenses Cost of goods sold (260...000 X $3.90 ÷ $6..000 $845........625.....25).......000 X . Selling expenses (260...........314..000) (b) Variable unit cost of goods sold = $3.000 Net income computation: Sales.........000)......75).....00*) X + $460...625........... Total variable expenses........000 X 130%) Total sales = 260......35X = $460.........000 X ...........000 X $6...000 X .000 = $3.... 18-40 $1. Accounting.... Administrative expenses ($40.25 ($600......00 + $...000b ÷ 200.000 X = 219.000 X ....00X = $3. Fixed Costs are: Cost of goods sold ($800.....000 $460.90X + $460.. Inc.......000 X = .000 X ............000 ($800..........................000 Copyright © 2011 John Wiley & Sons.....................286 (rounded) $6.............000c ÷ 200...... 4/e.. Selling expenses ($140... a $3.000 units (200......70 .079.................000 140. Solutions Manual (For Instructor Use Only) ..70) ..20 $3.............50)......25) The break-even points are: X = ($3....000 X .25 = $1.........75) b ($280.... Administrative expenses (260............000a ÷ 200.....20) ...000/200.000 182.000 X $.10X = $460............. Total.00 ..65X + $460....000) ......... Contribution margin.50) c ($160.......000 X = $1.....000 120.....................

.............000 $960.........000 X = ($1..................352......000)....00 – $..........000 $200.............. (d) Sally’s plan should be accepted.........00) .. Total fixed expenses ... Selling expenses (320...000 252...... Inc................79) ...000 ..000 X = .... Selling expenses ($140......... Total fixed expenses ...........000 X 160% = 320....800 547..34X = $460.20) ....000 175.......BYP 18-2 (Continued) Fixed expenses Cost of goods sold ..................800 ÷ $1...200 Copyright © 2011 John Wiley & Sons....... $1..................650..625.000 X = $1...079................................000 120..000 460.......000 ÷ $1.. (c) Sales [320....824............ Fixed expenses Cost of goods sold ........ Contribution margin .....000 Profits and the break-even point would both increase...... Kimmel.000)X + $495.......... Administrative expenses (320.............000 ..............70X + $495.......30)] ....000 + $35.....276..000 X $.......000 $ 52...........000 140. Total variable expenses .. Variable expenses Cost of goods sold (320. 4/e................000 X $... It produces a higher net income and a lower break-even point than Terry’s plan.000 (1) X ($6.... Net income...66X + $460.. X = ($1.000)X + $460...30X = $495....... Accounting..........824....276.000 $ 86... (1) Sales volume = 200.800 64.................000 120......000 X = ..... Selling expenses ... Solutions Manual (For Instructor Use Only) 18-41 ......941 (rounded) Profits and the break-even point would both increase...........000 X $3....200 $200...............000 495............ Net income........... Administrative expenses .......000 1...........000 X = $1... Administrative expenses ................................

or reduce other costs. it might best be handled as a mixed cost. For CVP purposes. is the activity index. (b) This description makes the marketing expenditures sound like they are a variable cost. If the unit cost of a variable cost item increases. the bottlers. Coke also keeps track of this since it provides information about what is happening at the retail level. in that there usually is a relationship between marketing expenditures and sales. its primary line of business. indicates the amount of activity by Coke’s primary customers. since other factors also influence units sold. This will lead to a decline in net income unless the company can increase its selling price. Accounting. unlike variable costs. 18-42 Copyright © 2011 John Wiley & Sons. having both a fixed and variable component. Inc. However. (c) The first measure. it is also not a fixed cost. the contribution margin will decline. Solutions Manual (For Instructor Use Only) . Kimmel. since it best reflects the company’s production and sales activity at the wholesale level. since it suggests that they vary with the amount of units sold. However. The second measure. the relationship of marketing costs is not directly proportional to sales. gallon shipments of concentrates and syrups. Thus.BYP 18-3 REAL-WORLD FOCUS (a) Sweeteners and packaging are a variable cost to Coca-Cola because their use is directly proportional to the amount of product produced. increase the number of units it sells. 4/e. unit cases of finished product. it is not a pure variable cost.

Kimmel. coloring. Workers add flavoring and coloring when the candy is kneaded. Workers then roll each end of the product over the middle to form a pillow shape. indirect labor. Inc. and kneading of ingredients. Copyright © 2011 John Wiley & Sons. The roll is stretched by hand at the chicken bone machine so that the width of the roll is the width of the average chicken bone. Accounting. Solutions Manual (For Instructor Use Only) 18-43 . (b) The following costs might be identified as variable: labor (stretching chicken bones. The end result is a candy which tastes of sweet cinnamon and has a luscious surprise of chocolate in the middle. the elongated roll is fed into the cutting machine. 4/e. a difficult procedure. cooking. The following costs might be identified as fixed: depreciation of machinery. and utilities. feeding into cutting machine).BYP 18-4 MANAGERIAL ACCOUNTING ON THE WEB (a) The description of the production process is as follows: The production of hard candy begins with the blending. Next. The candy is then pressed out and a roll of thick chocolate is placed in the middle of the candy. materials (flavoring. chocolate).

Inc. if the selling price is $300 and variable costs are $210. total fixed costs are divided by either the contribution margin ratio or contribution margin per unit. Break-even sales in units is found by using unit selling price and unit variable costs in the formula. The answer will be in sales units. the break-even formula becomes X = . Solutions Manual (For Instructor Use Only) . Using CM per unit results in determining the break-even point in units.BYP 18-5 COMMUNICATION ACTIVITY To: From: Subject: My Roommate Your Roommate Cost-Volume-Profit Questions In response to your request for help. (c) When contribution margin is used to determine break-even sales. For example. Accounting. (b) The formulas for contribution margin per unit and contribution margin ratio differ as shown below: Unit Selling Price – Unit Variable Costs = Contribution Margin per Unit Contribution Margin per Unit ÷ Unit Selling Price = Contribution Margin Ratio You can see that CM per Unit is used in computing the CM ratio. 4/e. 18-44 Copyright © 2011 John Wiley & Sons. Using the CM ratio results in determining the break-even point in dollars. if the percentage is 70%. the break-even formula becomes $300X = $210X + Fixed Costs.70X + Fixed Costs. Kimmel. The answer will be in sales dollars. I provide you the following: (a) The mathematical formula for break-even sales is: Break-even Sales = Variable Costs + Fixed Costs Break-even sales in dollars is found by expressing variable costs as a percentage of unit selling price. For example.

Solutions Manual (For Instructor Use Only) 18-45 . Accounting.BYP 18-5 (Continued) The formula for determining break-even sales in dollars is: Fixed Costs ÷ Contribution Margin Ratio = Break-even Sales in Dollars The formula for determining break-even sales in units is: Fixed Costs ÷ Contribution Margin per Unit = Break-even Sales in Units I hope this memo answers your questions. Kimmel. Inc. Copyright © 2011 John Wiley & Sons. 4/e.

Accounting. Confess his mistake to management. The students’ recommendations should recognize the practical aspects of the situation but they should be idealistic and ethical. If the students can’t be totally ethical when really nothing is at stake. accountant of Advanced Company. Solutions Manual (For Instructor Use Only) . 4/e. The senior management who made the decision. Kimmel. Inc. (c) Jimmy’s alternatives are: Keep quiet. The dislocated personnel of Advanced. (b) Jimmy is hiding an error and is knowingly deceiving the company’s management with inaccurate data. how can they expect to be ethical under real-world pressures? 18-46 Copyright © 2011 John Wiley & Sons.BYP 18-6 ETHICS CASE (a) The stakeholders in this situation are: Jimmy Hester.

The savings per mile of driving the hybrid vehicle would be $0.075). In order to break even on your investment you would need to drive 120. In addition.025. your decision might be influenced by nonfinancial factors. This is determined by dividing the additional fixed cost of $3. Solutions Manual (For Instructor Use Only) 18-47 .BYP 18-7 ALL ABOUT YOU ACTIVITY (a) The variable gasoline cost of going one mile in the hybrid car would be $0.000 miles.00/30).075 ($3. some states and some employers offer rebates for the purchase of hybrid vehicles.000 by the contribution margin per mile of $0. insurance costs. The variable gasoline cost of going one mile in the traditional car would be $0.10 – $0. (b) (c) (d) Copyright © 2011 John Wiley & Sons. 4/e. Kimmel.025 ($0. licensing fees. do the vehicles differ in their expected repair bills.00/40). For example.10 ($3. There are many other factors that you would want to consider in your analysis. or ultimate resale value? Also. Accounting. such as a desire to reduce emissions. Inc.

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