25 60 contribution margin per unit of dryer 120 x 75

Contribution margin per unit of Washer: $240 x .25 =$ 60
Contribution margin per unit of Dryer: $120 x .75 = 90
Weighted-average contribution margin $150
c. Break-even point
= Fixed cost ÷ Weighted-average contribution margin
Break-even point = $78,000 / $150 = 520 units
d. Required sales for Washer = 520 units x .25 = 130 units
Required sales for Dryer = 520 units x .75 = 390 units
Total 520 units
Washer Dryer Total
Sales price (a) $540 $300
Variable costs (b) $300 $180
Break-even units (c) 130 units 390 units 520 units
Sales (a x c) $ 70,200 $117,000 $187,200
Variable costs (b x c) (39,000) (70,200) (109,200)
Contribution margin 31,200 46,800 78,000
Fixed cost (34,000) (44,000) (78,000)
Net income $ (2,800) $ 2,800 $ -0-
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Chapter 03 - Analysis of Cost, Volume, and Pricing to Increase Profitability
f. Total budgeted sales – Total break-even sales
Margin of safety =
––––––––––––––––––––––––––––––––––––––––––––
––
Total budgeted sales
$576,000 – $187,200
Margin of safety = –––––––––––––––––––––––
$576,000
Margin of safety = 67.5%
ATC 3-1
a. Operating leverage is the concept that explains how the percentage change in
net earnings can increase at a faster rate than the percentage increase in
revenues.
b. Operating leverage exists because of fixed costs. If all of a company’s costs are
variable in nature, its percentage change in earnings will be exactly the same as
its percentage change in revenue, and it will not experience operating leverage.
c. Other things being equal, as a company’s revenues rise, its variable costs rise
proportionately, but their fixed costs stay constant, within a relevant range. Thus,
its variable costs become a larger proportion of its total costs and its fixed costs
become a smaller proportion of total costs, which reduces its operating leverage.
Obviously, when a company’s revenue grows from $5.41 billion to $8.34 billion
the company’s fixed costs probably increase as well, but probably not as rapidly
as the rise in its variable costs.
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Chapter 03 - Analysis of Cost, Volume, and Pricing to Increase Profitability
ATC 3-2
a. and b.
Alternatives Original 1 2 3
Revenue $8,000 $12,800 $7,600 $7,200
Variable costs (4,800) (7,680) (3,040) (4,320)
Contribution margin 3,200 5,120 4,560 2,880
Fixed cost (2,400) (4,000) (2,400) (1,600)
Net income $ 800 $1,120 $2,160 $1,280
Answers can be determined rapidly by multiplying the contribution margin per unit by
the number of units sold and subtracting fixed cost.
c. The discussion will take many forms. However, it is likely that leadership will be
decided by action. The people who aggressively step forward are usually given
authority. In general, power is taken, not given. Also, division of labor should be
discussed. In all likelihood the section that won divided the three tasks among
different groups. Each group only did part of the total task. It is highly inefficient
to have each group do all of the tasks.
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Chapter 03 - Analysis of Cost, Volume, and Pricing to Increase Profitability
ATC 3-3
a. Possible activity measures, shown under “Operating Data,” are:
Revenue passengers carried Enplaned passengers
Revenue passenger miles Trips flown
b. Of the four activities listed in Item 6, Revenue passenger miles would probably
be best activity measure because it considers the miles flown, and not just the
number of trip or number of passengers flown. It cost more to fly a passenger
1,000 miles than it does 500 miles.