Chapter 6 Solutions

# Chapter 6 Solutions - Exercise61(20minutes 1...

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Exercise   6-1  (20 minutes) 1. The new income statement would be: Total Per Unit Sales (10,100 units) ......... \$353,500 \$35.00 Variable expenses ...........   202,000       20.00     Contribution margin ......... 151,500 \$15.00 Fixed expenses ................   135,000     Net operating income ....... \$      16,500     You can get the same net operating income using the following  approach: Original net operating income ..... \$15,000 Change in contribution margin  (100 units  ×  \$15.00 per unit) .....       1,500     New net operating income ........... \$16,500 2. The new income statement would be: Total Per Unit Sales (9,900 units) ............. \$346,500 \$35.00 Variable expenses ..............   198,000       20.00     Contribution margin ............ 148,500 \$15.00 Fixed expenses ..................   135,000     Net operating income ......... \$      13,500     You can get the same net operating income using the following  approach: Original net operating income .............. \$15,000  Change in contribution margin  (-100 units  ×  \$15.00 per unit) ............     (1,500     ) New net operating income ................... \$13,500

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Exercise 6-1  (continued) 3. The new income statement would be: Total Per Unit Sales (9,000 units) ........ \$315,000 \$35.00 Variable expenses ........   180,000       20.00     Contribution margin ...... 135,000 \$15.00 Fixed expenses .............   135,000     Net operating income .... \$                      0    Note: This is the company’s break-even point.
Exercise 6-2  (30 minutes) 1. The CVP graph can be plotted using the three steps outlined in the  text. The graph appears on the next page. Step 1. Draw a line parallel to the volume axis to represent the  total fixed expense. For this company, the total fixed expense is  \$24,000. Step 2. Choose some volume of sales and plot the point  representing total expenses (fixed and variable) at the activity level  you have selected. We’ll use the sales level of 8,000 units. Fixed expenses ....................................................... \$ 24,000 Variable expenses (8,000 units  ×  \$18 per unit) ......   144,000     Total expense ......................................................... \$168,000 Step 3. Choose some volume of sales and plot the point  representing total sales dollars at the activity level you have  selected. We’ll use the sales level of 8,000 units again. Total sales revenue (8,000 units  ×  \$24 per unit) ..... \$192,000 2. The break-even point is the point where the total sales revenue  and the total expense lines intersect. This occurs at sales of 4,000  units. This can be verified as follows: Profit = Unit CM  ×  Q   Fixed expenses = (\$24   \$18)  ×  4,000   \$24,000 = \$6  ×  4,000   \$24,000 = \$24,000  \$24,000 = \$0

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Exercise 6-4  (10 minutes) 1. The company’s contribution margin (CM) ratio is: Total sales .............................. \$200,000 Total variable expenses ..........   120,000     = Total contribution margin ..... 80,000 ÷  Total sales ........................... \$200,000 = CM ratio ............................... 40 % 2. The change in net operating income from an increase in total sales  of \$1,000 can be estimated by using the CM ratio as follows: Change in total sales .......................................... \$1,000 ×  CM ratio ...........................................................             40     % = Estimated change in net operating income ..... \$        400     This computation can be verified as follows: Total sales ....................... \$200,000
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