Break-even Point: It refers to a point in the level of operations at which a company experiences its revenues generated is equal to its costs incurred. Thus, when a company reaches at its break-even point, it reports neither an income nor a loss from operations. The formula to calculate the break-even point in sales units is as follows:
Margin of Safety: It is a measure that shows the probability of decrease in the sales level before a company faces an operating loss or reaches its break-even point. It is expressed in terms of dollars of sales, unit of sales, and percent of current sales. The formula to calculate the margin of safety as a percent of current sales is as follows:
To explain: the reason to question the validity of the given data.
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Chapter 19 Solutions
Financial & Managerial Accounting
- Top managers of Video Avenue are alarmed by their operating losses. They are considering dropping the DVD product line. Company accountants have prepared the following analysis to helo make this decision: Total fixed costs will not change if the company stops selling DVDs. Video Avenue Income Statment For the Year Ended December 31, 2018 Total Blue-ray DVE Discs Net Sale Revenue $ 437,000 $ 308,000 $ 129,000 Variable Costs 250,000 154,000 96,000 Contribution Margin 187,000 154,000 33,000 Fixed Cost Manufacturing 132,000 76,000 56,000 Selling and Administrative 65,000 51,000 14,000 Total Fixed Expenses 197,000 127,000 70,000 Operating Income(Loss)…arrow_forwardTop managers of Video Avenue are alarmed by their operating losses. They are considering dropping the DVD product line. Company accountants have prepared the following analysis to helo make this decision: Total fixed costs will not change if the company stops selling DVDs. Video Avenue Income Statment For the Year Ended December 31, 2018 Total Blue-ray DVE Discs Net Sale Revenue $ 437,000 $ 308,000 $ 129,000 Variable Costs 250,000 154,000 96,000 Contribution Margin 187,000 154,000 33,000 Fixed Cost Manufacturing 132,000 76,000 56,000 Selling and Administrative 65,000 51,000 14,000 Total Fixed Expenses 197,000 127,000 70,000 Operating Income(Loss)…arrow_forwardThe manager of an automobile dealership is considering a new bonus plan designed to increase sales volume. Currently, the mean sales volume is 14 automobiles per month. The manager wants to conduct a research study to see whether the new bonus plan increases sales volume. To collect data on the plan, a sample of sales personnel will be allowed to sell under the new bonus plan for a one-month period. a. Develop the null and alternative hypotheses most appropriate for this situation. b. Comment on the conclusion when H0 cannot be rejected. c. Comment on the conclusion when H0 can be rejected.arrow_forward
- Carpetland salespersons average 8,000 per week in sales. Steve Contois, the firms vice president, proposes a compensation plan with new selling incentives. Steve hopes that the results of a trial selling period will enable him to conclude that the compensation plan increases the average sales per salesperson. a. Develop the appropriate null and alternative hypotheses. b. What is the Type I error in this situation? What are the consequences of making this error? c. What is the Type II error in this situation? What are the consequences of making this error?arrow_forward- On the basis of the following data, the general manager of Hawkeye Shoes Inc. decided to discontinue Children's Shoes because it reduced operating income by $30,000. What is the flaw in this decision, if it is assumed fixed costs would not be materially affected by the discontinuance? Hawkeye Shoes Inc. Product-Line Income Statement For the Year Ended November 30, 20Y8 Children's Shoes Men's Shoes Women's Shoes $ 300,000 Total Sales $ 280,000 $ 500,000 $1,080,000 Costs of goods sold: $ (505,000) $(220,000) (120,000) $(340,000) $ 160,000 Variable costs $(135,000) $(150,000) Fixed costs Total cost of goods sold Gross profit Selling and adminstrative expenses: (45,000) $(180,000) $ 100,000 (60,000) $(210,000) $ 90,000 (225,000) $ (730,000) $ 350,000 $ (240,000) (75,000) $ (315,000) $ 35,000 $ (45,000) (20,000) $ (95,000) Variable selling and admin. expenses Fixed selling and admin. expenses Total selling and admin. expenses Operating income (loss) $(100,000) (30,000) (25,000) $(130,000)…arrow_forwardDue to erratic sales of its sole product, a high capacity battery for laptop computers, elo Company has been experiencing difficulty for some time. The company's income statement for the most recent month is given below: Sales (19,500 units @ P500) P9,750,000 Less variable expenses (7.995.000) Contribution margin 1,755,000 Less fixed expenses 1,800,000 Net loss P (45,000) The sales manager is convinced that a 5% reduction in the selling price, combined with an increase of P600,000 in the monthly advertising budget, will cause unit sales to double. What will be the new profit or loss if these changes are adopted?arrow_forward
- Making decisions about dropping a product Members of the board of directors or Security Check have received the following operating income data for the year ended May 31, 2018: Members of my board are surprised that the industrial systems product line is not profitable. They commission a study to determine whether the company should drop the line. Company accountants estimate that dropping industrial systems will decrease the fixed cost of goods sold by $580,000 and decrease fixed selling and administrative expenses by $12,000. Requirements Prepare a differential analysis to show whether Security Check should drop the industrial systems product line. Prepare contribution margin income statements to show Security Check’s total operating income under the two alternatives: (a) with the industrial systems line and (b) without the line. Compare the difference between the two alternatives’ income numbers to your answer to Requirement 1. What have you learned from the comparison in…arrow_forwardMembers of the board of directors of Security Team have received the following operating income data for the year ended May 31, 2018: E (Click the icon to view the operating income data.) Members of the board are surprised that the industrial systems product line is not profitable. They commission a study to determine whether the company should drop the line. Company accountants estimate that dropping industrial systems will decrease fixed cost of goods sold by $84,000 and decrease fixed selling and administrative expenses by $10,000. Read the requirements. Requirement 1. Prepare a differential analysis to show whether Security Team should drop the industrial systems product line. (Use parentheses or a minus sign to enter decreases to profits.) in operating income - X Requirements 1. Prepare a differential analysis to show whether Security Team should drop the industrial systems product line. 2. Prepare contribution margin income statements to show Security Team's total operating…arrow_forwardMaking decisions about dropping a product Top managers of Video Avenue are alarmed by their operating losses. They are considering dropping the DVD product line. Company accountants have prepared the following analysis to help make this decision: Total fixed costs will not change if the company stops selling DVDs. Requirements Prepare a differential analysis to show Whether Video Avenue should drop the DVD Product fins. Will dropping DVDs add $37,000 to operating income? Explain.arrow_forward
- Due to erratic sales of its sole product, a high capacity battery for laptop computers, Salcedo Company has been experiencing difficulty for some time. The company's income statement for the most recent month is given below: Sales (19,500 units @ P500) P9,750,000 Less variable expenses (7,995,000) Contribution margin 1,755,000 Less fixed expenses 1,800,000 Net loss P (45,000) The president believes that a P160,000 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an P800,000 increase in monthly sales. If the president is right, what will be the effect on the company's monthly net income or loss? (Indicate whether the effect would be increase or decrease, e.g. 1000 decrease, 1000 increase)arrow_forwardTop managers of Movie Street are alarmed by their operating losses. They are considering dropping the DVD product line. Company accountants have prepared the following analysis to help make this decision: Assume that Movie Street can avoid $39,000 of fixed costs by dropping the DVD product line (these costs are direct fixed costs of the DVD product line). E (Click the icon to view the analysis.) Prepare a differential analysis to show whether Movie Street should stop selling DVDS. (Enter decreases to revenues with a parentheses or minus sign.) Expected decrease in revenues Data Table Expected decrease in costs: Variable costs Movie Street Fixed costs Income Statement Expected decrease in total costs For the Year Ended December 31, 2018 Expected | in operating income Total Blu-ray Discs DVD Discs Decision: Net Sales Revenue $ 424,000 $ 300,000 $ 124,000 248,000 153,000 95,000 Variable Costs Contribution Margin 176,000 147,000 29,000 Fixed Costs: Manufacturing 130,000 74,000 56,000…arrow_forwardMaking decisions about dropping a product Members of the board of directors of Security Team have received the following operating income data for the year ended March 31, 2018: Members of the board are surprised that the industrial systems product line is losing money. They commission a study to determine whether the company should drop the line. Company accountants estimate that dropping industrial systems will decrease fixed cost of goods sold by $81,000 and decrease fixed selling and administrative expenses by $15,000. Requirements Prepare a differential analysis to show whether Security Team should drop the industrial systems product line. Prepare contribution margin income statements to show Security Team’s total operating income under the two alternatives: (a) with the industrial systems line and without the line. Compare the difference between the two alternatives’ income numbers to your answer to Requirement l. What have you learned from this comparison in Requirement 2?arrow_forward
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