Chapter 21, Problem 5APSA

To determine

Concept Introduction:

Breakeven point-

Breakeven point is the point where total revenues are equal to total costs. Total cost includes fixed costs as well as variable costs. It is calculated as follows-

  $Breakevenpointinsalesdollars=Fixedcosts/Contributionmarginratio$

Requirement 1-:

To compute:

Break even points in sales dollars.

Answer to Problem 5APSA

Product T

  $\begin{array}{l}Breakevenpointinsalesdollars=\frac{Fixedcosts}{Contributionmarginratio}\hfill \\ Breakevenpointinsalesdollars=\frac{\$125,000}{20\%}\hfill \\ Breakevenpointinsalesdollars=\$625,000\hfill \end{array}$

Product O

  $\begin{array}{l}Breakevenpointinsalesdollars=\frac{Fixedcosts}{Contributionmarginratio}\hfill \\ Breakevenpointinsalesdollars=\frac{\$1,475,000}{87.5\%}\hfill \\ Breakevenpointinsalesdollars=\$1,685,715\hfill \end{array}$

Explanation of Solution

Product T

Given,

• Fixed costs = $125,000
• Sales = $2,000,000
• Contribution margin = $400,000
First we need to find contribution margin ratio-

  $\begin{array}{l}Contributionmarginratio=Contributionmargin/Sales\hfill \\ Contributionmarginratio=\$400,000/\$2,000,000\hfill \\ Contributionmarginratio=\text{ 2}0\%\hfill \end{array}$

Breakeven point is calculated as follows-

  $\begin{array}{l}Breakevenpointinsalesdollars=\frac{Fixedcosts}{Contributionmarginratio}\hfill \\ Breakevenpointinsalesdollars=\frac{\$125,000}{20\%}\hfill \\ Breakevenpointinsalesdollars=\$625,000\hfill \end{array}$

Product TT

Given,

• Fixed costs = $1,475,000
• Sales = $2,000,000
• Contribution margin = $1,750,000
First we need to find contribution margin ratio-

  $\begin{array}{l}Contributionmarginratio=Contributionmargin/Sales\hfill \\ Contributionmarginratio=\$1,750,000/\$2,000,000\hfill \\ Contributionmarginratio=\text{ 87}\text{.5\%}\hfill \end{array}$

Breakeven point is calculated as follows-

  $\begin{array}{l}Breakevenpointinsalesdollars=\frac{Fixedcosts}{Contributionmarginratio}\hfill \\ Breakevenpointinsalesdollars=\frac{\$1,475,000}{87.5\%}\hfill \\ Breakevenpointinsalesdollars=\$1,685,715\hfill \end{array}$

Conclusion:

Thus, breakeven point in sales dollars is calculated.

To determine

Concept Introduction:

Contribution margin income statement-

It is a statement wherein all the variable costs are deducted from the sales to get the contribution margin and after getting contribution margin, fixed expenses are deducted from contribution margin to get net income or loss.

Requirement 2-:

To prepare:

Forecasted contribution margin income statement.

Answer to Problem 5APSA

Henna Company
Forecasted contribution margin income statement
Particulars	Product T	Product O
Sales	1,200,000	1,200,000
Variable costs	960,000	150,000
Contribution margin	240,000	1,050,000
Fixed costs	125,000	1,475,000
Income before tax	115,000	(425,000)
Tax on income (32%)	36,800	136,000
Net income / (Loss)	78,200	(289,000)

Explanation of Solution

Product T

Given, Fixed costs = $125,000

  $\begin{array}{l}Sellingpriceperunit=Sales/No.ofunits\hfill \\ Sellingpriceperunit=2,000,000/50,000\hfill \\ Sellingpriceperunit=\$40\hfill \end{array}$

  $\begin{array}{l}Sales=No.ofunits*Sellingperunit\hfill \\ Sales=30,000*\$40\hfill \\ Sales=\$1,200,000\hfill \end{array}$

  $\begin{array}{l}Variablecostperunit=1,600,000/50,000\hfill \\ Variablecostperunit=\$32\hfill \\ \hfill \end{array}$

  $\begin{array}{l}Variablecosts=No.ofunits*Variablecostperunit\hfill \\ Variablecosts=30,000*\$32\hfill \\ Variablecosts=960,000\hfill \end{array}$

  $\begin{array}{l}Contributionmargin=Sales–Variablecosts\hfill \\ Contributionmargin=\$1,200,000-\$960,000\hfill \\ Contributionmargin=\$240,000\hfill \end{array}$

  $\begin{array}{l}Incomebeforetax=Contributionmargin–Fixedcosts\hfill \\ Incomebeforetax=\$240,000-\$125,000\hfill \\ Incomebeforetax=\$115,000\hfill \end{array}$

  $\begin{array}{l}Taxonincome=Incomebeforetax*Taxrate\hfill \\ Taxonincome=\$115,000*32\%\hfill \\ Taxonincome=\$36,800\hfill \end{array}$

Net income is calculated as follows-

  $\begin{array}{l}Netincome=Incomebeforetax-Taxonincome\hfill \\ Netincome=\$115,000-\$36,800\hfill \\ Netincome=\$78,200\hfill \end{array}$

Product O

Given, Fixed costs = $1,475,000

  $\begin{array}{l}Sellingpriceperunit=Sales/No.ofunits\hfill \\ Sellingpriceperunit=2,000,000/50,000\hfill \\ Sellingpriceperunit=\$40\hfill \end{array}$

  $\begin{array}{l}Sales=No.ofunits*Sellingperunit\hfill \\ Sales=30,000*\$40\hfill \\ Sales=\$1,200,000\hfill \end{array}$

  $\begin{array}{l}Variablecostperunit=250,000/50,000\hfill \\ Variablecostperunit=\$5.00\hfill \\ \hfill \end{array}$

  $\begin{array}{l}Variablecosts=No.ofunits*Variablecostperunit\hfill \\ Variablecosts=30,000*\$5.00\hfill \\ Variablecosts=\text{ \$150,000}\hfill \end{array}$

  $\begin{array}{l}Contributionmargin=Sales–Variablecosts\hfill \\ Contributionmargin=\$1,200,000-\$150,000\hfill \\ Contributionmargin=\$1,050,000\hfill \end{array}$

  $\begin{array}{l}Incomebeforetax=Contributionmargin–Fixedcosts\hfill \\ Incomebeforetax=\$1,050,000-\$1,475,000\hfill \\ Incomebeforetax=\text{ (}\$425,000)\hfill \end{array}$

  $\begin{array}{l}Taxonincome=Incomebeforetax*Taxrate\hfill \\ Taxonincome=\$425,000*32\%\hfill \\ Taxonincome=\$136,000\hfill \end{array}$

Net income is calculated as follows-

  $\begin{array}{l}Netincome=Incomebeforetax-Taxonincome\hfill \\ Netincome=(\$425,000)-\$136,000\hfill \\ Netincome=\text{ (}\$289,000)\hfill \end{array}$

Conclusion:

Thus, contribution margin income statement is prepared.

To determine

Concept Introduction:

Contribution margin income statement-

It is a statement wherein all the variable costs are deducted from the sales to get the contribution margin and after getting contribution margin, fixed expenses are deducted from contribution margin to get net income or loss.

Requirement 3-:

To prepare:

Forecasted contribution margin income statement.

Answer to Problem 5APSA

Henna Company
Forecasted contribution margin income statement
Particulars	Product T	Product O
Sales	2,400,000	2,400,000
Variable costs	1,920,000	300,000
Contribution margin	480,000	2,100,000
Fixed costs	125,000	1,475,000
Income before tax	355,000	625,000
Tax on income (32%)	113,600	200,000
Net income / (Loss)	241,400	425,000

Explanation of Solution

Product T

Given, Fixed costs = $125,000

  $\begin{array}{l}Sellingpriceperunit=Sales/No.ofunits\hfill \\ Sellingpriceperunit=2,000,000/50,000\hfill \\ Sellingpriceperunit=\$40\hfill \end{array}$

  $\begin{array}{l}Sales=No.ofunits*Sellingperunit\hfill \\ Sales=\text{ 60},000*\$40\hfill \\ Sales=\$2,400,000\hfill \end{array}$

  $\begin{array}{l}Variablecostperunit=1,600,000/50,000\hfill \\ Variablecostperunit=\$32\hfill \\ \hfill \end{array}$

  $\begin{array}{l}Variablecosts=No.ofunits*Variablecostperunit\hfill \\ Variablecosts=60,000*\$32\hfill \\ Variablecosts=1,920,000\hfill \end{array}$

  $\begin{array}{l}Contributionmargin=Sales–Variablecosts\hfill \\ Contributionmargin=\$2,400,000-\$1,920,000\hfill \\ Contributionmargin=\$480,000\hfill \end{array}$

  $\begin{array}{l}Incomebeforetax=Contributionmargin–Fixedcosts\hfill \\ Incomebeforetax=\$480,000-\$125,000\hfill \\ Incomebeforetax=\$355,000\hfill \end{array}$

  $\begin{array}{l}Taxonincome=Incomebeforetax*Taxrate\hfill \\ Taxonincome=\$355,000*32\%\hfill \\ Taxonincome=\$113,600\hfill \end{array}$

Net income is calculated as follows-

  $\begin{array}{l}Netincome=Incomebeforetax-Taxonincome\hfill \\ Netincome=\$355,000-\$113,600\hfill \\ Netincome=\$241,400\hfill \end{array}$

Product O

Given, Fixed costs = $1,475,000

  $\begin{array}{l}Sellingpriceperunit=Sales/No.ofunits\hfill \\ Sellingpriceperunit=2,000,000/50,000\hfill \\ Sellingpriceperunit=\$40\hfill \end{array}$

  $\begin{array}{l}Sales=No.ofunits*Sellingperunit\hfill \\ Sales=\text{ 60,}000*\$40\hfill \\ Sales=\$2,400,000\hfill \end{array}$

  $\begin{array}{l}Variablecostperunit=250,000/50,000\hfill \\ Variablecostperunit=\$5.00\hfill \\ \hfill \end{array}$

  $\begin{array}{l}Variablecosts=No.ofunits*Variablecostperunit\hfill \\ Variablecosts=60,000*\$5.00\hfill \\ Variablecosts=\text{ \$300,000}\hfill \end{array}$

  $\begin{array}{l}Contributionmargin=Sales–Variablecosts\hfill \\ Contributionmargin=\$2,400,000-\$300,000\hfill \\ Contributionmargin=\$2,100,000\hfill \end{array}$

  $\begin{array}{l}Incomebeforetax=Contributionmargin–Fixedcosts\hfill \\ Incomebeforetax=\$2,100,000-\$1,475,000\hfill \\ Incomebeforetax=\$625,000\hfill \end{array}$

  $\begin{array}{l}Taxonincome=Incomebeforetax*Taxrate\hfill \\ Taxonincome=\$625,000*32\%\hfill \\ Taxonincome=\$200,000\hfill \end{array}$

Net income is calculated as follows-

  $\begin{array}{l}Netincome=Incomebeforetax-Taxonincome\hfill \\ Netincome=\$625,000-\$200,000\hfill \\ Netincome=\$425,000\hfill \end{array}$

Conclusion:

Thus, contribution margin income statement is prepared.

To determine

Concept Introduction:

Contribution margin income statement-

It is a statement wherein all the variable costs are deducted from the sales to get the contribution margin and after getting contribution margin, fixed expenses are deducted from contribution margin to get net income or loss.

Requirement 4-:

To Explain:

To explain which product would experience greater decrease in profit.

Answer to Problem 5APSA

When sales are increased, there will be improvement in income in case of product T as it will earn more contribution margin per unit as compared to product O. The operating leverage of given items will yield same result.

Explanation of Solution

The requirement is explained in the answer.

Conclusion:

Thus, Product T will experience greater decrease in profit.