FINANCIAL & MANAGERIAL ACCOUNTING
FINANCIAL & MANAGERIAL ACCOUNTING
7th Edition
ISBN: 9781260368192
Author: Wild
Publisher: MCG CUSTOM
Question
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Chapter 18, Problem 6PSB

1.

To determine

To identify: Break- even point of sales in dollars (a) existing business strategy and (b) new business strategy.

1.

Expert Solution
Check Mark

Explanation of Solution

(a)

Existing business strategy

Given,
Fixed cost is $950,000.

Calculated values,
Contribution margin ratio is 55% or 0.55 (from working note).

Formula to calculate break-even point of sales in dollars,

    Breakeven point= Fixedcost Contribution margin ratio

Substitute $950,000 for fixed cost and 0.55 for contribution margin ratio.

    Breakeven point= $950,000 0.55 =$1,727,272.72

Working note:

Given,
Total variable unit cost is $800,000.
Total variable packaging cost is $100,000.
Units sold are 100,000.
Selling price per unit is $20.

Calculation of total variable cost,

    Totalvariablecost=Total variable unit cost+Total variable packaging cost =$800,000+$100,000 =$900,000

Calculation of variable cost per unit,

    Variablecostperunit= TotalVariablecost Unitssold = $900,000 100,000 =$9

Calculation of contribution margin,

    Contributionmargin=SellingpriceVariablecost =$20$9 =$11

Compute contribution margin ratio.

Given,
Per unit selling price is $20.

Calculated values,
Unit contribution is $11.

Formula to calculate contribution margin ratio,

    Contribution margin ratio= Unitcontributionmargin Unitsellingprice = $11 $20 =0.55or55%

Hence, contribution margin ratio is 55%.

New business strategy

Given,
Fixed cost is $950,000.

Calculated values,
Contribution margin ratio is 55% or 0.55 (from working note).

Formula to calculate break-even point of sales in dollars,

    Breakeven point= Fixedcost Contribution margin ratio

Substitute $950,000 for fixed cost and 0.55 for contribution margin ratio.

    Breakeven point= $950,000 0.55 =$1,727,273

Working note:

Given,
Selling price is $20.
Selling price decreased by 20%.
Volume of sales is 100,000.
Volume of sales increase by 80%.
Variable cost of packaging increases by 20%.
Variable cost of packaging is $100,000.

Calculation of decreased selling price,

    Sellingprice=Previousyearsellingprice×( 1Decreaseinsellingprice ) =$20×( 10.2 ) =$20×0.8 =$16

Calculation of increased sales volume,

    Salesvolume=Previousyearsalesvolume×( 1+Increaseinsalesvolume ) =100,000×( 1+0.8 ) =100,000×1.8 =180,000

Calculation of variable cost per unit,

    Variablepackagingcostperunit= Totalvariablepackagingcost Unitssold = $100,000 100,000 =$1

Calculation of increased variable packaging cost per unit,

    Newvariablepackaging cost=( Previousyearvariablecost ×( 1+Increaseinvariablecost ) ) =$1×( 1+0.2 ) =$1×1.2 =$1.2

Calculation of increased total variable packaging cost,

    Totalvariablepackaging cost=Incresedvariablecostperunit×Unitssold =$1.2×180,000 =$216,000

Calculation of variable cost per unit,

    Variableunitcost= Totalvariableunitcost Unitssold = $800,000 100,000 =$8

Calculation of decreased variable unit cost per unit,

    Newvariableunit cost=( Previousyearvariablecost ×( 1Decreaseinvariableunitcost ) ) =$8×( 10.25 ) =$8×0.75 =$6

Calculation of total variable unit cost,

    Totalvariablepackaging cost=Variableunitcostperunit×Unitssold =$6×180,000 =$1,080,000

Calculation of total variable cost,

    Totalvariablecost=( Totalvariableunitcost +Totalvariablepackaging cost ) =$1,080,000+$216,000 =$1,296,000

Total variable cost per unit is $7.20 ( $1.2+$6 ) .

Calculation of contribution margin,

    Contributionmargin=SellingpriceVariablecost =$16$7.20 =$8.80

Compute contribution margin ratio.

Given,
Per unit selling price is $16.

Calculated values,
Unit contribution is $8.80.

Formula to calculate contribution margin ratio,

    Contribution margin ratio= Unitcontributionmargin Unitsellingprice = $8.80 $16 =0.55or55%

Hence, contribution margin ratio is 55%.

Hence, break-even point of sale of existing business strategy and new business strategy is $1,727,273 and $ 1,727,273.

2.

To determine

To prepare: A contribution margin income statement for the company.

2.

Expert Solution
Check Mark

Explanation of Solution

Statement to show the contribution margin income statement

Company B

Income Statement

For the Year Ended December….

Particulars

Existing business strategy

($)

New business strategy

($)

Sales

2,000,000

2,880,000

Less: Variable Cost

900,000

1,296,000

Contribution Margin

1,100,000

1,584,000

Less: Fixed Cost

950,000

950,000

Pre Tax Income

150,000

634,000

Tax

37,500

158,500

Net Income

112,500

475,500

Table(1)

Working note:

Existing business strategy

Given,
The numbers of units sold is 100,000.
The selling price is $20.
Variable cost per unit is $9.

Calculation of total sales,

    Totalsales=Numbersofunits×Salesprice =100,000units×$20 =$2,000,000

The total sales are $2,000,000.

Calculation of total variable cost,

    Totalvariable cost=Numbersofunits×Variablecost per unit =100,000units×$9 =$900,000

The total variable cost is $900,000.

Calculation of tax,

    Tax=Pretaxincome×Taxrate =$150,000×25% =$37,500

New business strategy

Given,
The numbers of units sold is 180,000.
The selling price is $16.
Variable cost per unit is $7.20.

Calculation of total sales,

    Totalsales=Numbersofunits×Salesprice =180,000units×$16 =$2,880,000

The total sales are $2,880,000.

Calculation of total variable cost,

    Totalvariable cost=Numbersofunits×Variablecost per unit =180,000units×$7.20 =$1,296,000

The total variable cost is $1,296,000.

Calculation of tax,

    Tax=Pretaxincome×Taxrate =$634,000×25% =$158,500

Hence, the net income of Company B through existing business strategy and new business strategy is $112,500 and $475,500.

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Chapter 18 Solutions

FINANCIAL & MANAGERIAL ACCOUNTING

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