Chapter 9, Problem 39P

1.

To determine

Determine the annual breakeven point in units and dollars.

Explanation of Solution

Compute the breakeven point in units:

$\begin{array}{c}\begin{array}{l}\text{Break-even}\\ \text{ point in units}\end{array}\}\text{ = }\frac{\text{Total fixed expenses}}{\left(\begin{array}{l}\text{Sales price}\\ -\text{Totalper unit variable cost}\end{array}\right)}\\ \text{= }\frac{\$296,100}{\$84-\$63}\\ \text{=}\frac{\$296,100}{\$21}\\ =14,100\text{ unit}\end{array}$

Compute the breakeven point in dollars:

$\begin{array}{c}\begin{array}{l}\text{Break-even}\\ \text{ point in dollars}\end{array}\}\text{ = }\left(\begin{array}{l}\text{Break even sales in dollars}\\ \times \text{Sales price}\end{array}\right)\\ \text{= 14,100×\$84}\\ \text{=\$1,184,000 }\end{array}$

Compute the contribution margin ratio:

$\begin{array}{c}\text{Contribution margin ratio}\}\text{ = }\frac{\text{Sales price}-\text{Variable cost}}{\text{Sales price}}\\ \text{= }\frac{\text{\$84}-\$63}{\text{\$84}}\\ \text{=}\frac{\text{\$21}}{\$84}\\ =25\%\end{array}$

2.

To determine

Determine the amount of sales in units and dollars.

Explanation of Solution

Compute the amount of sales in units:

$\begin{array}{c}\text{Sales in units}\}\text{ = }\frac{\text{Total fixed expenses+Profit}}{\left(\begin{array}{l}\text{Sales price}\\ -\text{Totalper unit variable cost}\end{array}\right)}\\ \text{= }\frac{\$296,100+\$30,000}{\$84-\$63}\\ \text{=}\frac{\$326,100}{\$21}\\ =15,529\text{ units}\end{array}$

Compute the amount of sales in dollars:

$\begin{array}{c}\text{Sales in dollars}\}\text{ = }\left(\begin{array}{l}\text{Required sales in units}\\ \text{ × Selling price per unit}\end{array}\right)\\ \text{= 15,529 units ×\$84}\\ \text{= \$1,304,436}\end{array}$

3.

To determine

Determine the amount of sales in units and dollars, when income tax rate is 40%.

Explanation of Solution

Compute the required sales in unit:

$\begin{array}{c}\text{Sales in units}\}\text{ = }\frac{\text{Total fixed expenses+Targeted Profit}}{\left(\begin{array}{l}\text{Sales price}\\ -\text{Totalper unit variable cost}\end{array}\right)}\\ \text{= }\frac{\$296,100+\$50,000}{\$84-\$63}\\ \text{=}\frac{\$346,100}{\$21}\\ =16,481\text{ units}\end{array}$

Working notes:

Determine the targeted profit:

$\begin{array}{c}\text{Targeted profit}\}\text{ = }\frac{\text{After tax profit}}{(1-\text{t)}}\\ \text{= }\frac{\$30,000}{(1-0.4)}\\ \text{= }\$50,000\end{array}$

Compute the required sales in dollars:

$\begin{array}{c}\text{Required sales}\}\text{ = }\left(\begin{array}{l}\text{Required sales volume, in units }\\ \text{× selling price per unit}\end{array}\right)\\ \text{= }16,481\times \$84\\ \text{= }\$1,384,404\end{array}$

4.

To determine

Prepare a contribution income statement.

Explanation of Solution

Prepare the contribution income statement:

Contribution Income Statement
Particulars	Amount
Sales	$1,384,404
Less: Variable costs ($63 per unit)	$1,038,303
Contribution margin ($21 per unit)	$346,101
Less: Fixed costs	$296,100
Pre-tax  income	$50,001
Less: Income tax (40%)	$20,000
Profit after tax	$30,001

5.

To determine

Indicate the effect of manager’s decision in operating profit of the company.

Explanation of Solution

Particulars	Original  (A)	Incremental (A-B)	After Change (B)
Sales	$1,050,000	$200,000	$1,250,000
Less: Variable costs	$787,500	$150,000	$937,500
Contribution margin	$262,500	$50,000	$312,500
Less: Fixed costs	$296,100	$60,000	$356,100
Operating profit	-$33,600	-$10,000	-$43,600

Therefore, the operating profit is decreased by $10,000.

6.

To determine

Indicate the effect of strategy in operating profit of the company.

Explanation of Solution

Particulars	Original  (A)	Change               (A-B)	New (B)
Sales	$1,050,000	$131,250	$1,181,250
Less: Variable costs	$787,500	$196,875	$984,375
Contribution margin	$262,500	-$65,625	$196,875
Less: Fixed costs	$296,100	$40,000	$336,100
Operating income (loss)	-$33,600	-$105,625	-$139,225

Therefore, the operating profit is decreased by $105,525.

7.

To determine

Indicate whether the change is desirable or not.

Explanation of Solution

The proposed change is considered to be desirable. The total amount of deduction in variable cost is $62,500 and the increase in fixed cost is $50,000. Hence, the total amount of net savings is $12,500.