Exercise 5-1 Preparing a Contribution Format Income Statement Wheeler Corporation's most recent income statement follows: Total Per Unit Sales (8,000 units) 211,200 26.40 Variable expenses 140,000 17.50 Contribution margin 71,200 8.90 Fixed expenses 54,800 Net operating income 16,400 Required: Prepare a new contribution format income statement under each of the following conditions (consider each case independently): 1. The sales volume increases by 30 units. The new income statement would be: Total Per unit Sales (8030 units) ### 26.40 Variable expenses ### 17.50 Contribution margin 71,467.00 8.90 Fixed expenses 54,800.00 Net Operating Income 16,667.00 As an alternative, you could have found the net income using the following method: Original net operating income $8,000 Change in contribution margin (50 units * $8.00 per unit) 400 New net operating income $8,400 2. The sales volume declines by 50 units. Sales (7950 units) $206,700 $26.00 Variable expenses 143,100 18.00 Contribution margin $63,600 $8.00 Fixed expenses 56,000 Net Operating Income $7,600 As an alternative, you could have found the net income using the following method: Original net operating income $8,000 Change in contribution margin (-50 units * $8.00 per unit) -400 New net operating income $7,600 3. The sales volume is 7,0000. Sales (7000 units) $182,000 $26.00 Variable expenses 126,000 18.00 Contribution margin $56,000 $8.00 Fixed expenses 56,000 Net Operating Income $0 This is the company's break even point because it it the point where the contribution margin covers the fixed expenses and there is no net income/net loss (it is zero).
Exercise 5-2 Prepare a Cost-Volume-Profit (CVP) Graph Katara Enterprises distributes a single product whose selling price is $36 and whose variable cost is $24 per unit. The company's monthly fixed expense is $12,000. Required: 1. Prepare a cost-volume-profit graph for the company up to a sales level of 2,000 units. Note: The CVP graph is plotted using the three steps in the text. Step 1: Draw a line parallel to the volume axis to represent the total fixed expense (See purple line). For this company, the total fixed expense is $12,000. Step 2: Choose some volume of sales and plot the point representing total expenses (fixed and variable) at the activity level you have selected. (Part (a) of this problem wants us to find the sales level at 2,000 units) so: Fixed expense $12,000 Variable expense ($2,000 units * $24/ unit) 48,000 Total expense $60,000 2. Estimate the company's break-even point in unit sales using your cost-volume profit graph. The break-even point where the total sales revenue and the total expense lines intersect. This occurs at sales of 1,000 units. This can be verified by solving for the break-even point in unit sales, Q, using the equation method as follows: Sales = Variable expenses + Fixed expenses + Profits $36Q = $24Q + $12,000 + $0 $12Q = $12,000 Q = $12,000/ $12 per unit Q = 1,000 units 0 $20,000 500 1,000 0 1,500 2,000 $40,000 $60,000 $80,000 Fixed costs $12,000 Total costs: Variable ($24 * 2000) + $12,000 = $60,000 Total sales revenue: 2,000 units * $36 = $72,000. Break-even point: 1,000 units
Exercise 5-3 Computing and Using the CM Ratio Last month when Harrison Creations, Inc., sold 40,000 units, total sales were $300,000, total variable expenses were $240,000, and total fized expenses were $45,000.