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# Solutions to Cha - 7-3All other things equal Company B with its higher fixed costs and lower variable costs will have a higher contribution margin

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Unformatted text preview: 7-3All other things equal, Company B, with its higher fixed costs and lower variable costs, will have a higher contribution margin ratio than Company A. Therefore, it will tend to realize a larger increase in contribution margin and in profits when sales increase. Exercise 7-6 (10 minutes)1. The equation method yields the required unit sales, Q, as follows:Sales = Variable expenses + Fixed expenses + Profits\$140Q = \$60Q + \$40,000+ \$6,000\$80Q = \$46,000Q = \$46,000 ÷ \$80 per unitQ = 575 units2. The contribution margin yields the required unit sales as follows:Fixed expenses + Target profitUnits sold to attain = the target profitUnit contribution margin\$40,000 + \$8,000= \$80 per unit\$48,000= \$80 per unit= 600 units or 600 × \$140 = \$84,000\$40,000 + \$8,000\$40,000 + \$8,000Also\$84,000 rounded60.57141 –140==æö÷ç÷ç÷çèø3. Units sold to attain = Fixed expenses + After tax profit/(1- tax rate) After tax profitUnit Contribution Margin= \$40,000 + \$7,700/(1-.3) = 638 units\$80 per unitExercise 7-7 (10 minutes)1. To compute the margin of safety, we must first compute the break-even unit sales.Sales = Variable expenses + Fixed expenses + Profits\$25Q = \$15Q + \$8,500 + \$0\$10Q = \$8,500Q = \$8,500 ÷ \$10 per unitQ = 850 unitsSales (at the budgeted volume of 1,000 units)...\$25,000Break-even sales (at 850 units).......................... 21,250 Margin of safety (in dollars)................................\$ 3,750 2. The margin of safety as a percentage of sales is as follows:Margin of safety (in dollars).........................\$3,750÷ Sales........................................................\$25,000Margin of safety as a percentage of sales...15.0%Exercise 7-8 (20 minutes)1. The company’s degree of operating leverage would be computed as follows:Contribution margin................\$36,000÷ Operating income...............\$12,000Degree of operating leverage3.02. A 10% increase in sales should result in a 30% increase in operating income, computed as follows:Degree of operating leverage.....................................3.0× Percent increase in sales......................................... 10 %Estimated percent increase in operating income........ 30 %3. The new income statement reflecting the change in sales would be:AmountPercent of SalesSales.............................\$132,000100%Variable expenses........ 92,400 70 %Contribution margin......39,600 30 %Fixed expenses............. 24,000 Operating income.........\$ 15,600 Operating income reflecting change in sales............\$15,600Original operating income.........................................\$12,000Change – income.....................................................3,600Percent change in operating income (3,600/12,000)30%Problem 7-19...
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## This note was uploaded on 06/14/2011 for the course BUS 254 taught by Professor Favere-marchesi during the Fall '10 term at Simon Fraser.

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Solutions to Cha - 7-3All other things equal Company B with its higher fixed costs and lower variable costs will have a higher contribution margin

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