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Unformatted text preview: MANAGEMENT ACCOUNTING - Solutions Manual CHAPTER 13 COST-VOLUME-PROFIT RELATIONSHIPS I. Questions 1. The total “contribution margin” is the excess of total revenue over total variable costs. The unit contribution margin is the excess of the unit price over the unit variable costs. 2. Total contribution margin: Selling price - manufacturing variable costs expensed - nonmanufacturing variable costs expensed = Total contribution margin. Gross margin: Selling price - variable manufacturing costs expensed - fixed manufacturing costs expensed = Gross margin. 3. A company operating at “break-even” is probably not covering costs which are not recorded in the accounting records. An example of such a cost is the opportunity cost of owner-invested capital. In some small businesses, owner-managers may not take a salary as large as the opportunity cost of forgone alternative employment. Hence, the opportunity cost of owner labor may be excluded. 4. In the short-run, without considering asset replacement, net operating cash flows would be expected to exceed net income, because the latter includes depreciation expense, while the former does not. Thus, the cash basis break-even would be lower than the accrual break-even if asset replacement is ignored. However, if asset replacement costs are taken into account, (i.e., on a “cradle to grave” basis), the long-run net cash flows equal long-run accrual net income, and the long-run break-even points are the same. 5. Both unit price and unit variable costs are expressed on a per product basis, as: π = (P 1- V 1 ) X 1 + (P 2- V 2 ) X 2 + … + (P n- V n ) X n- F, for all products 1 to n where: π = operating profit, P = average unit selling price, 13-1 Chapter 13 Cost-Volume-Profit Relationships V = average unit variable cost, X = quantity of units, F = total fixed costs for the period. 6. If the relative proportions of products (i.e., the product “mix”) is not held constant, products may be substituted for each other. Thus, there may be almost an infinite number of ways to achieve a target operating profit. As shown from the multiple product profit equation, there are several unknowns for one equation: π = (P 1- V 1 ) X 1 + (P 2- V 2 ) X 2 + … + (P n- V n ) X n- F, for all products 1 to n. 7. A constant product mix is assumed to simplify the analysis. Otherwise, there may be no unique solution. 8. Operating leverage measures the impact on net operating income of a given percentage change in sales. The degree of operating leverage at a given level of sales is computed by dividing the contribution margin at that level of sales by the net operating income. 9. Three approaches to break-even analysis are (a) the equation method, (b) the contribution margin method, and (c) the graphical method. In the equation method, the equation is: Sales = Variable expenses + Fixed expenses + Profits, where profits are zero at the break-even point. The equation is solved to determine the break-even point in units or peso...
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This note was uploaded on 07/18/2011 for the course ECON 102 taught by Professor Sadassad during the Spring '11 term at Abant İzzet Baysal University.
- Spring '11