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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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