Hilton_MAcc_Ch8_Solution

Hilton_MAcc_Ch8_Solution - 1 CHAPTER 8 Cost-Volume-Profit...

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Unformatted text preview: 1 CHAPTER 8 Cost-Volume-Profit Analysis Answers to Review Questions 8-1 a. In the contribution-margin approach, the break-even point in units is calculated using the following formula: margin on contributi unit expenses fixed point even- Break b. In the equation approach, the following profit equation is used: units in volume sales expense ble unit varia units in volume sales price sales unit fixed expenses This equation is solved for the sales volume in units. c. In the graphical approach, sales revenue and total expenses are graphed. The break-even point occurs at the intersection of the total revenue and total expense lines. 8-4 The safety margin is the amount by which budgeted sales revenue exceeds break-even sales revenue. 8-11 The most important assumptions of a cost-volume-profit analysis are as follows: (a) The behavior of total revenue is linear (straight line) over the relevant range. This behavior implies that the price of the product or service will not change as sales volume varies within the relevant range. (b) The behavior of total expenses is linear (straight line) over the relevant range. This behavior implies the following more specific assumptions: (1) Expenses can be categorized as fixed, variable, or semivariable. (2) Efficiency and productivity are constant. (c) In multiproduct organizations, the sales mix remains constant over the relevant range. (d) In manufacturing firms, the inventory levels at the beginning and end of the period are the same. 2 EXERCISE 8-28 (25 MINUTES) 1. (a) Traditional income statement: PACIFIC RIM PUBLICATIONS, INC. INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 20XX Sales ......................................................................... $1,000,000 Less: Cost of goods sold......................................... 750,000 Gross margin ............................................................... $ 250,000 Less: Operating expenses: Selling expenses............................................ $75,000 Administrative expenses............................... 75,000 150,000 Net income ................................................................... $ 100,000 (b) Contribution income statement: PACIFIC RIM PUBLICATIONS, INC. INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 20XX Sales ......................................................................... $1,000,000 Less: Variable expenses: Variable manufacturing ................................. $500,000 Variable selling............................................... 50,000 Variable administrative.................................. 15,000 565,000 Contribution margin .................................................... $ 435,000 Less: Fixed expenses: Fixed manufacturing...................................... $ 250,000 Fixed selling ................................................... 25,000 Fixed administrative ...................................... 60,000 335,000...
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Hilton_MAcc_Ch8_Solution - 1 CHAPTER 8 Cost-Volume-Profit...

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