Accounting 3 chapter 21

. Sales (dollars)

(fixed costs + target profit) / contribution margin ratio

. Margin of safety (percent of current sales)

(Sales - Sales at break-even point)/sales

During 20Y5, Jackson Computer Supply produced income from operations of $95,000 from sales of 80,000 units at $2.50 each. The company's fixed costs totaled $22,000. If the company has a 4,000 increase in sales units in the upcoming year, what will income from operations be for 20Y6? Assume that fixed costs and the selling price and variable cost per unit will remain the same.

20Y6 20Y5 Sales $210,000 $200,000 Variable costs 87,150 83,000 CM $122,850 $117,000 Fixed costs 22,000 22,000 Y(operations) $100,850 $ 95,000 20Y5 Contribution margin = $95,000 + $22,000 20Y5 Variable costs = $200,000 - $117,000 Change in income from operations = $5,850 = ($117,000/$200,000) × $10,000

Given the information below, calculate the operating leverage for 20Y5 and 20Y6, rounding to two decimal places. Determine in which year a 5% increase in sales would have a larger impact on income from operations. 20Y6 20Y5 Sales $425,000 $300,000 Variable costs 145,000 105,000 CM $280,000 $195,000 Fixed costs 105,000 75,000 Income(operation) $175,000 $120,000

20Y6 20Y5 Sales $425,000 $300,000 Variable cost 145,000 105,000 CM $280,000 $195,000 Fixed costs 105,000 75,000 Y(operations) $175,000 $120,000 Operating leverage 1.60 1.63 $280,000/$175,000 $195,000/$120,000 20Y5 Percent change in income from operations = 8.15% = 5% × 1.63 20Y6 Percent change in income from operations = 8.00% = 5% × 1.60 A 5% change in sales would cause a larger change in income from operations in 20Y5 (8.15%) than in 20Y6 (8.00%).

A manufacturing company produces three products, as shown below. For 20Y5, the company incurred costs of $102,500, but expects this number to remain the same in the upcoming year. Determine the break-even point in unit sales per product and total sales for 20Y6. Round percentages to the one decimal place and all others to three decimal places. Use the sales mix to determine the mixed product. A B C Unit selling price $105 $120 $110 Unit variable cost 65 105 88 Units sold 8,000 4,000 20,000

A B C Mixed selling price 105 120 $110 $110 variable cost 65 105 88 84.375 CM 40 15 22 25.625 Units sold 8,000 4,000 20,000 X Sales mix 25.0% 12.5% 62.5% X Mixed product unit selling price = ($105 × 25.0%) + ($120 × 12.5%) + ($110 × 62.5%) Mixed product unit variable cost = ($65 × 25.0%) + ($105 × 12.5%) + ($88 × 62.5%) Break-even point (units) for mixed product = 4,000 units = ($102,500)/$25.625 Unit sales of Product A = 1,000 units = 4,000 × 25.0% Unit sales of Product B = 500 units = 4,000 × 12.5% Unit sales of Product C = 2,500 units = 4,000 × 62.5% Break-even point (sales) = $440,000 = (1,000 units × $105 per unit) + (500 units × $120 per unit) + (2,500 units × $110 per unit), or 4,000 units × $110 per unit

Use the information in Exercise 26 to prepare a profit-volume chart for the company if the maximum units of sales is 5,000 units. What is the company's maximum profit and loss?

Maximum profit = $546,000 = ($150 - $30) × 5,000 units - $54,000 Maximum loss = $54,000

Determine if each situation below describes a variable cost, fixed cost, or mixed cost. a. As the number of units produced increases, the cost per unit remains the same. b. Each month, the company pays $1,200 for interest. c. The bank charges $50 per month to maintain a checking account and an additional $1.50 for each check if the company writes more than 60 checks.

A. Variable Cost B. Fixed Cost C. Mixed cost

Determine if each of the following would be considered a fixed cost, variable cost, or mixed cost. A. The company's lawyer charges a base fee of $400 per month plus $20 for each hour of legal service provided. B. The property taxes for the year are 5% of the value of the building. C. The direct materials used for packaging finished goods cost $2 per finished good

A. mixed cost B.Fixed Cost C. Variable cost

Determine if each of the lines plotted in the graph below, which represent total cost, is an example of a fixed cost, variable cost, or mixed cost. A. y= 15/8x B. y=10/8x +500 C. y=1500

A.Variable cost B.Mixed cost C. Fixed Cost

Use the information shown below to calculate the operating leverage for the two companies. Round answers to two decimal places. Also, determine which company would have a higher income from operations if sales decreased by 2%. ABC Corp. XYZ Corp. Sales $490,000 $975,300 Variable costs 105,350 315,000 CM $384,650 $660,300 Fixed costs 99,750 207,500 Y(operation) $284,900 $452,800

ABCCorp. XYZCorp. Sales $490,000 $975,300 Variable costs 105,350 315,000 CM $384,650 $660,300 Fixed costs 99,750 207,500 Y(operations) $284,900 $452,800 Operating leverage 1.35 1.46 $384,650/$284,900 $660,300/$452,800 Percent change in income from operations 2.70% 2.92% 2% × 1.35 2% × 1.46

Use the information below to calculate the margin of safety in dollars, units, and as a percentage of sales for the upcoming year if the company expects for sales to increase by 5%. Each finished good sells for $100. Round percentages to one decimal place and units to the nearest whole unit. Sales $250,700 Variable costs 105,294 Contribution margin $145,406 Fixed costs 85,840 Income from operations $ 59,566

Break-even point (sales) = $148,000 = $85,840/58% Break-even point (units) = 1,480 units = $148,000/$100 Sales in upcoming year = $263,235 = $250,700 × 1.05 Margin of safety (dollars) = $115,235 = $263,235 - $148,000 Margin of safety (units) = 1,152 units = $263,235/$100 per unit - 1,480 units Margin of safety (percent of current sales) = 43.8% = ($263,235 - $148,000)/$263,235

Determine the margin of safety in dollars, units, and percent of current sales for a manufacturer that incurs $20,000 of fixed cost to produce 5,000 finished goods that have a 25% contribution margin. The finished goods sell for $40 each.

Break-even point (sales) = $80,000 = $20,000/25% Break-even point (units) = 2,000 units = $80,000/$40 per unit Margin of safety (dollars) = $120,000 = $200,000 - $80,000 Margin of safety (units) = 3,000 units = 5,000 - 2,000 Margin of safety (percent of current sales) = 60% = ($200,000 - $80,000)/$200,000

Shooz manufactures finished goods for a variable cost of $30 each and fixed costs of $15,000. The company sells the goods for $80 each. Prepare a cost-volume-profit chart for the company.

Break-even point (units) = 300 units = $15,000/$50 Break-even point (sales) = $24,000 = $15,000/62.5%, or 300 units × $80 per unit

Prepare a cost-volume-profit chart for a company that has an 80% contribution margin for goods that it sells for $150 each. The company's fixed costs total $54,000. Also, determine the break-even point in units and sales.

Break-even point (units) = 450 units = $54,000/$120 per unit Break-even point (sales) = $67,500 = $54,000/80%, or 450 units × $150 per unit

Contribution Margin Ratio

Contribution Margin / Sales

. Operating leverage

Contribution margin/income from operation

variable costs

Difference in total cost/difference in units produced (under high-low method)

A paper manufacturer would like to earn an income from operations of $55,006 in 20Y6. In 20Y5, the company had fixed costs of $7,500, but expects this number to increase by 10%. Finished goods sell for $10 each and have variable costs of $2. Determine the sales in units and dollars in order to earn the target profit. Round answers to the nearest whole number.

Fixed costs in 20Y6 = $8,250 = $7,500 × 1.10 Sales (units) = 7,907 units = ($8,250 + $55,006)/$8 Sales (dollars) = $79,070 = ($8,250 + $55,006)/80%, or 7,907 units × $10 per unit

break even sales (units)

Fixed costs/Unit contribution margin

Assuming that the maximum units of sales is 2,000 for the company in Exercise 24, prepare a profit-volume chart. Also, determine the maximum profit and loss the company can earn.

Maximum profit = $18,000 = 2,000 units × $10 contribution margin per unit - $2,000 Maximum loss = $2,000 chart: profit line: y=9x-2000 horizontal zero: y=0

Cold Weather Gear manufactures two products, Jackets and Hats. During the past year, the company incurred $124,800 of fixed costs. Use the information shown below to calculate the break-even point in units of each product and total sales for the company. Use the sales mix to determine the mixed product. Jackets Hats Unit selling price $55 $15 Unit variable cost 15 3 Units sold 95,000 30,000

Jackets Hats Mixed selling price $55 $15 $45.40 variable cost 15 3 12.12 cm $40 $12 $33.28 sold 95,000 30,000 Sales mix 76% 24% Mixed product unit selling price = ($55 × 76%) + ($15 × 24%) Mixed product unit variable cost = ($15 × 76%) + ($3 × 24%) Break-even point (units) for mixed product = 3,750 units = $124,800/$33.28 Unit sales of Jackets = 2,850 units = 3,750 × 76% Unit sales of Hats = 900 units = 3,750 × 24% Break-even point (sales) = $170,250 = (2,850 units × $55 per unit) + (900 units × $15 per unit), or 3,750 units × $45.40 per unit

ABC Corporation has a break-even point of 2,000 units, which sell for $5 each. The company made total sales of $75,000 each. Calculate the company's margin of safety in dollars, units, and percent of current sales.

Margin of safety (dollars) = $65,000 = $75,000 - $10,000 Margin of safety (units) = 13,000 units = 15,000 - 2,000 Margin of safety (percent of current sales) = 86.7% = ($75,000 - $10,000)/$75,000

With the information shown below, calculate the operating leverage for the company, rounding to two decimal places. Also, determine the income from operations if there was a 10% increase in sales. Sales $300,000 Variable costs 112,000 Contribution margin $188,000 Fixed costs 79,000 Income from operations $109,000

Operating leverage 1.72 $188,000/$109,000 Percent change in income from operations = 17.2% = 10% × 1.72 Income from operations = $127,748 = $109,000 × (1 + 17.2%)

percent change in income from operations

Percent change in sales × Operating leverage

After earning a loss of $6,000 from operations in 20Y5, the production manager would like to know the break-even point in sales dollars and units for the company. During 20Y5, the company sold 6,000 at $3 each. Variable costs for the year totaled $10,800 Determine the break-even point in dollars and units.

Sales $18,000 Variable costs 10,800 Contribution margin $ 7,200 Fixed costs 13,200 Income from operations$(6,000) Unit contribution margin = $1.20 = $7,200/6,000 units Break-even point (units) = 11,000 = $13,200/$1.20 Contribution margin ratio = 40% = $7,200/$18,000 Break-even point (dollars) = $33,000 = $13,200/40%, or 11,000 × $3 per unit

The production manager at Athletix would like to know the break-even point for the company's goods in sales dollars and units. During the past year, the company earned an income from operations of $69,600. The contribution margin for the year was $120,000 after selling 50,000 units at $4 each. Determine the break-even point in dollars and units.

Sales $200,000 Variable costs 80,000 Contribution margin $120,000 Fixed costs 50,400 Income from operations $69,600 Unit contribution margin = $2.40 = $120,000/50,000 units Break-even point (units) = 21,000 units = $50,400/$2.40 Contribution margin ratio = 60% = $120,000/$200,000 Break-even point (dollars) = $84,000 = $50,400/60%, or 21,000 × $4 per unit

During 20Y5, Cards by Shannon sold 50,000 finished products with a contribution margin of 55%. The variable costs totaled $40,500 for the year. Calculate the sales, contribution margin, and unit contribution margin.

Sales $90,000 [$40,500/(100% - 55%)] Sales price per unit $1.80 Variable cost/unit 0.81 Contribution margin/unit $0.99 Contribution margin $49,500

If a manufacturing company had a contribution margin of $65,700 for 20Y5 from selling 25,000 products at $6 each, determine the variable cost per unit, contribution margin ratio, and unit contribution margin. Round unit answers to two decimal places and percentages to the nearest percent.

Sales (dollars) $150,000 Contribution margin 65,700 Total variable cost 84,300 Variable cost per unit $3.37 Unit contribution margin $2.63 Contribution margin ratio 44%

. Margin of safety (dollars)

Sales (dollars) - break even sales (dollars)

Assume the manufacturer in Exercise 18 would like to earn a target profit of $36,000. Determine the sales in dollars and units needed to achieve the goal.

Sales (units) = 11,500 units = ($19,200 + $36,000)/$4.80 Sales (dollars) = $92,000 = ($19,200 + $36,000)/60%, or 11,500 units × $8 per unit

unit contribution margin

Sales price per unit - Variable cost per unit

A tire manufacturer sells its finished goods for $80 each. The variable cost to manufacture each product is $20, while fixed costs equal $20,700. In 20Y5, the company earned income from operations of $32,100. In 20Y6, the CEO would like to increase income from operations by 5%. Determine the sales in dollars and units needed to achieve the CEO's goal. Round answers to the nearest whole number.

Target profit = $33,705 = $32,100 × 1.05 Sales (units) = 907 units = ($20,700 + $33,705)/$60 Sales (dollars) = $72,540 = ($20,700 + $33,705)/75%, or 907 units × $80 per unit *Due to rounding, the two methods will differ by $20 in sales.

Fixed cost

Total cost-(variable cost*Units produced)

A new manufacturing company would like to know the sales needed to break even for the first year of operations. The expected total fixed costs will be $27,000 for 15,000 units. The company expects to sell the units for $10 each and incur a variable cost of $4 per unit. Determine the break-even sales point in dollars and units.

Unit contribution margin = $6 = $10 - $4 Break-even point (units) = 4,500 units = $27,000/$6 Contribution margin ratio = 60% = $90,000/$150,000, or $6/$10 Break-even point (dollars) = $45,000 = $27,000/60%, or 4,500 units × $10 per unit

For 20Y5, Moore's Mowers had total sales of $42,000, with each product selling for $15 each. Each product had variable costs of $8. Calculate the (a) contribution margin, (b) contribution margin ratio, and (c) unit contribution margin. Round contribution margin ratio to the nearest percent.

Units sold = 2,800; $42,000/$15 per unit a. $19,600; $42,000 - ($8 per unit × 2,800 units) b. 47%; $19,600/$42,000 c. $7 per unit; $15 - $8

With the information for the first four months of production, determine the variable cost per unit and the fixed cost using the high-low method. Total Cost Units Produced January $155,100 9,000 February 166,350 9,750 March 158,100 9,200 April 157,350 9,150

Variable cost = $15 per unit; ($166,350 - $155,100)/(9,750 - 9,000) Fixed cost = $20,100; $155,100 - ($15 × 9,000)

The total cost of production for the last four quarters for Moore's Mowers is shown below. Use the high-low method to determine the variable cost per unit and the fixed cost. Total Cost Units Produced Quarter 1 $51,000 2,000 Quarter 2 56,400 2,300 Quarter 3 49,200 1,900 Quarter 4 53,700 2,150

Variable cost = $18 per unit; ($56,400 - $49,200)/(2,300 - 1,900) Fixed cost = $15,000; $56,400 - ($18 × 2,300)

Calculate the variable cost per unit and the fixed cost using the high-low method for the production information given. Total Cost Units Produced August $46,800 5,600 September 58,200 7,500 October 42,600 4,900 November 53,880 6,780

Variable cost = $6 per unit; ($58,200 - $42,600)/(7,500 - 4,900) Fixed cost = $13,200; $58,200 - ($6 × 7,500)

. A manufacturing company produces Widgets and Gadgets. For 20Y5, the company's fixed costs totaled $70,260, and it expects this number to increase by 10% in the upcoming year. Determine the break-even point in unit sales per product and total sales for the upcoming year with the information below. Round unit sales to one decimal place. Use the sales mix to determine the mixed product. Widgets Gadgets Unit selling price $30 $28 Contribution ratio 50% 25% Units sold 36,500 13,500

Wid Gad Mixed selling price $30 $28 $29.46 variable cost 15 21 16.62 CM $15 $ 7 $12.84 CM ratio 50% 25% Units sold 36,500 13,500 Sales mix 73% 27% Mixed product unit selling price = ($30 × 73%) + ($28 × 27%) Mixed product unit variable cost = ($15 × 73%) + ($21 × 27%) Break-even point (units) of mixed product = 6,050 units = ($70,620 × 1.1)/$12.84 Unit sales of Widgets = 4,416.5 units = 6,050 units × 73% Unit sales of Gadgets = 1,633.5 units = 6,050 units × 27% Break-even point (sales) = $178,233 = (4,416.5 units × $30 per unit) + (1,633.5 units × $28 per unit), or 6,050 units × $29.46 per unit

Use the chart below to determine the following: a. Break-even point (units and sales) b. Selling price per unit c. Variable cost per unit d. Income from operations for 600 units Chart: y=20x for total sales y=40/3x+2000 for total cost

a. Break-even point (units and sales) 200 units for $4,000 b. Selling price per unit $20 = $4,000/200 units c. Variable cost per unit $10 = ($4,000 - $2,000)/200 units d. Income from operations for 600 units $4,000 = $12,000 - $8,000 or ($10 per unit × 600 units) - $2,000

Use the following information to determine the change in income from operations for each situation if the company sells its products for $4 each. a. Contribution margin ratio of 35% and a 10,000 increase in sales units. b. Unit contribution margin of $2.10 and an increase of $20,000 in sales. c. Contribution margin ratio of 30% and an increase in sales of $30,000

a. Contribution margin ratio of 35% and a 10,000 increase in sales units. $14,000 = 35% × (10,000 units × $4 per unit) b. Unit contribution margin of $2.10 and an increase of $20,000 in sales. $10,500 = $2.10 × ($20,000/$4 per unit) c. Contribution margin ratio of 30% and an increase in sales of $30,000. $9,000 = 30% × $30,000

Would each of the following cause the break-even point to increase or decrease? a. Decrease in selling price of $5 per unit b. Decrease in variable costs of $1 per unit c. Increase in fixed costs by $12,000

a. Decrease in selling price of $5 per unit Increase b. Decrease in variable costs of $1 per unit Decrease c. Increase in fixed costs by $12,000 Increase

In 20Y5, a paper manufacturer has the income from operations shown below for sales of 7,500 units. Determine the new break-even sales in each situation. Round answers to the nearest whole sales dollar. Sales $60,000 Variable costs 24,000 Contribution margin $36,000 Fixed costs 19,200 Income from operations $16,800 a. Decrease in selling price per unit by 20% b. Increase in fixed costs by $2,000 c. Decrease in variable costs by $1.20

a. Decrease in selling price per unit by 20% Sales price per unit = $6.40 Contribution margin ratio = $3.20/$6.40 Increase in break-even sales to $38,400 = $19,200/50% b. Increase in fixed costs by $2,000 Increase in break-even sales to $35,333 = $21,200/60% c. Decrease in variable costs by $1.20 Variable cost per unit = $2.00 Contribution margin ratio = 25% Increase in break-even sales to $76,800 = $19,200/25%

A clothing manufacturer has a current break-even point of 3,200 units, which sell for $8 each. The company's fixed costs total $12,800. Determine the new units needed to break even in each situation. a. Increase in selling price to $9 per unit b. Decrease fixed costs by 5% c. Increase variable costs by $2 per unit

a. Increase in selling price to $9 per unit Decrease to 2,560 units = $12,800/$5 per unit b. Decrease fixed costs by 5% Decrease to 3,040 units = ($12,800 × 95%)/$4 per unit c. Increase variable costs by $2 per unit Increase to 6,400 units = $12,800/$2 per unit

Determine the change in income from operations for each situation for a company that has an increase in total sales of $52,000. a. Unit contribution margin of $4.50 and each product selling for $8. b. Contribution margin ratio of 24% and each product selling for $10. c. Unit contribution margin of $6, with total variable costs of $25,000 at $5 per unit.

a. Unit contribution margin of $4.50 and each product selling for $8. $29,250 = $4.50 × ($52,000/$8 per unit) b. Contribution margin ratio of 24% and each product selling for $10. $12,480 = 24% × $52,000 c. Unit contribution margin of $6, with total variable costs of $25,000 at $5 per unit. $30,000 = $6 × 5,000 units

Change in income from operations

change in sales dollars × Contribution margin ratio

Change in income from operations

change in sales units × Unit contribution margin

Break-even sales (dollars)

fixed costs / contribution margin ratio

. Sales (units)

fixed costs+ Target profit)/Unit contribution margin

Use the information in Exercise 22 to prepare a profit-volume chart for Shooz, assuming that the maximum units of sales is 1,000 units.

profit line= y= 35x-15,000 horizontal line= y=0

Margin of safety (units)

sales (units)- Break-even sales (units)

contribution margin

sales - variable cost