Chapter 19

# Total cost 15 units of production fixed cost 61500

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Total cost = (\$15 × Units of Production) + Fixed Cost \$61,500 2,100 units) Production Total (Units) Cost June 1,000 \$45,550 July 1,500 52,000 August 2,100 61,500 September 1,800 57,500 October 750 41,250 Total Cost = (Variable Cost per Unit × Units of Production) + Fixed Cost 1

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11-17 19-17 \$61,500 = (\$15 × 2,100 units) + Fixed cost \$61,500 = \$31,500 + Fixed cost \$61,500 – \$31,500 = Fixed cost \$30,000 = Fixed cost If the lowest level had been chosen, the results of the formula would provide the same fixed cost of \$30,000. 1
11-18 19-18 With fixed costs and variable costs estimated at \$30,000 and \$15 per unit, a formula is in place to estimate production at any level. If the company is expected to produce 950 units in November, the estimated total overhead would be calculated as follows: Total Cost = (Variable Cost per Unit × Units of Production) + Fixed cost Total Cost = \$15 (950) + \$30,000 Total Cost = \$44,250 1

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11-19 19-19 2 Compute the contribution margin, the contribution margin ratio, and the unit contribution margin.
11-20 19-20 Cost-Volume-Profit Relationships Cost-volume-profit analysis is the examination of the relationships among selling prices, sales and production volume, costs, expenses, and profits. 2

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11-21 19-21 The contribution margin is the excess of sales revenues over variable costs. It is especially useful because it provides insight into the profit potential of a company. Contribution Margin 2
11-22 19-22 Contribution Margin Ratio (in dollars) The contribution margin ratio is most useful when the increase or decrease in sales volume is measured in sales dollars . In this case, the following formula is used to determine change in income from operations. Change in Income from Operations Change in Sales Dollars × Contribution Margin Ratio = 2

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11-23 19-23 Contribution Margin Ratio 100% 60 % Contribution Margin Ratio = 40% Contribution Margin Ratio = Sales – Variable Costs Sales \$1,000,000 – \$600,000 \$1,000,000 Contribution Margin Ratio = 40% 30 % 10% 2
11-24 19-24 Using Contribution Margin per Unit as a Shortcut Lambert Inc.’s sales could be increased by 15,000 units from 50,000 to 65,000 units. Lambert’s income from operations would increase by \$120,000 (15,000 × \$8) as shown below. Change in Income from Operations Changes in Sales Units × Unit Contribution Margin = Change in Income from Operations 15,000 × \$8 = Change in Income from Operations \$120,000 = 2

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11-25 19-25 3 Determine the break- even point and sales necessary to achieve a target profit.
11-26 19-26 Baker Corporation’s fixed costs are estimated to be \$90,000. The unit contribution margin is calculated as follows: Unit selling price \$25 Unit variable cost 15 Unit contribution margin \$10 3

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11-27 19-27 The break-even point (in units) is calculated using the following equation: Break-Even Sales (units) = Fixed Costs Unit Contribution Margin Break-Even Sales (units) = \$90,000 \$10 Break-Even Sales (units) = 9,000 units 3
11-28 19-28 The break-even point (in dollars) is calculated using the following equation: Break-Even Sales (dollars) = Fixed Costs Contribution Margin Ratio Break-Even Sales (dollars) = \$225,000 \$90,000 .40 Break-Even Sales (dollars) = Unit Contribution Margin Unit Selling Price \$10 \$25 3

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11-29 19-29 Park Co. is evaluating a proposal to pay an additional 2% commission on sales to its salespeople (a variable cost) as an incentive to increase sales. Fixed costs are estimated at
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