Managerial Accounting

Answers for Select Problems

Chapter 8

Exercise 8-23
Sales
Revenue
$160,000a
80,000
120,000
110,000

1
2
3
4

Variable
Expenses
$40,000
65,000
40,000
22,000

Total
Contribution
Margin
$120,000
15,000
80,000
88,000

Fixed
Expenses
$30,000
15,000b
30,000
50,000

Net
Income
$90,000
-050,000
38,000

Break-Even
Sales
Revenue
$40,000
80,000
45,000c
62,500d

Exercise 8-24
1

Break-even point (in units) = 8,000 pizzas

Contribution-margin ratio = .5

Break-even point (in sales dollars) = $80,000

4 21,000 pizzas
Exercise 8-25
p denotes Argentinas peso
1 Break-even point (in units)= 4,000 components
2 New break-even point (in units) = 4,400 components
3 Net income
= 1,000,000p
4 New break-even point (in units) = 8,000 components
5 Analysis of price change decision
Net income (loss)= 3,000p= 1,000,000p; 2,500p = 900,000p
Exercise 8-26
2

The team must play 4 games to break even.

Exercise 8-27
2
3

Safety margin: $160,000

break-even ticket price, assuming a 12-game season and 50 percent attendance: $4 per
ticket

Exercise 8-28
1 (a) Traditional income statement:

Sales .........................................................................
Less: Cost of goods sold...........................................
Gross margin.................................................................
Less: Operating expenses:
Selling expenses..............................................
Administrative expenses..................................
Net income....................................................................
Contribution income statement:
Sales.........................................................................
Less: Variable expenses:
Variable manufacturing...................................
Variable selling................................................
Variable administrative....................................
Contribution margin......................................................
Less: Fixed expenses:
Fixed manufacturing........................................
Fixed selling....................................................
Fixed administrative........................................
Net income....................................................................

Operating leverage factor = 4.35

Percentage increase in net income = 43.5%

Exercise 8-29
1

High-quality
= $200 (unit contribution margin)
Medium-quality = 150 (unit contribution margin)
Sales mix:
High-quality bicycles=25%
Medium-quality
= 75%

3 Weighted-average unit contribution margin

4 Break even point in (units) = 400 bicycles
5 net income: 700 bicycles

= = $162.50

Exercise 8-31
1 Net income $ 50,000

10 %
2

$2,000,000
1,500,000
$ 500,000
$150,000
150,000

300,000
$ 200,000
$2,000,000

$1,000,000
100,000
30,000

1,130,000
$ 870,000

$ 500,000
50,000
120,000
$

670,000
200,000

2 Decrease in Net Income= $30,000

3 Operating leverage factor=4
4 Percentage change in net income =80%
Exercise 8-32
Net Income (loss) = Requirement (1)
$
30,000

Requirement (2)
$ 225,000

Exercise 8-33
1 Break even volume in sales revenue = $ 600,000
2 Target before tax income = $ 80,000
3 Service revenue required to earn target after-tax income of $48,000 =$ 1,000,000.
solutions to Problems
Problem 8-34
1 Break-even point in units=: 150,000 units
2 Target net income = = $280,000
3 Volume of sales dollars required: 12,800,000
4
selling price =$ 20
Problem 8-35
1
2
3
4

Break-even point in sales dollars= $ 630,000

Sales units required to earn income of $180,000= 54,000 units
Break-even point in sales dollars:= $ 700,000
selling price that will yield the same contribution-margin ratio: p= $21.33 (rounded)

Problem 8-36
1
2
3
4

Break-even point: = 22,000 units

Model no. 4399 is more profitable when sales and production average 46,000 units.
Required sales = 45,000 units
volume level at which annual total costs are equal =40,000 units

Problem 8-37
1 Current income: $ 240,000; required sales =$3,680,000
2 Break-even point: 32,000 units
3 a Fixed cost =$1,920,000
b X = $71.25
4.
(a)
Increase
(b)

No effect

(c)

Increase
3

(d)

No effect

Problem 8-38
2 a

Yes. Plan A sales are expected to total 65,000 units which compares favorably against
current sales of 60,000 units
b This is not surprising in light of the fact that Deluxe has a higher selling price than
Basic ($86 vs. $74 ).
c Yes Commissions will total $535,600
d No. The company would be less profitable under the new plan.

3a

The total units sold under both plans are the same; however, the sales mix has shifted
under Plan B in favor of the more profitable product as judged by the contribution margin.
b Plan B is more attractive both to the sales force and to the company.
Net income : Current =$1,112,000 , Plan B = $1,283,100

Problem 8-39
1 Plan A break-even point = 1,000 units
Plan B break-even point = 2,200 units
3 Operating leverage factor:
Plan A= 1.2
Plan B: 1.58 (rounded
4 Plan A profitability decrease =20%
Plan B profitability decrease: 26.3% (rounded)
5 This situation arises because Plan B has a higher degree of operating leverage.
Problem 8-41
1
2
3
4

Break even points (in units )=90,000 units

Break even points( in dollars)=2,250,000
Number of sales units required to earn target net profit= 140,000 units
Margin of safety =$750,000

5 Break-even point if direct-labor costs increase by 8 percent

Break-even point=97,5000 units
6 sales price= $ 25.51( rounded)

Problem 8-42
2 Break-even point = $4,000,000
3 Margin of safety = $4,000,000
4 Operating leverage factor (at budgeted sales)= 2
4

5 Dollar sales required to earn target net profit = $ 10,000,000

6 Variable expenses= 25.0%; Fixed expenses= 37.5%
Problem 8-43
1

Break even points (in units) =70,000 units

Sales in dollar =$700,000
2 Number of units of sales=120,000 units
3 Break even sales (in units) = 80,500 units
5 Number of units of sales = 130,000 units
Problem 8-44
1 10,220 clients must visit
2 Safety margin = $1,167,000
Problem 8-45
1

Computer-assisted manufacturing system: = 210,000 units

Labor-intensive production system:
=
175,000 units
2 The indifferent between the two manufacturing methods =311,111 units (rounded)
Problem 8-46
1 Break-even sales volume :
a Economy model: 25,000 tubs
b Regular model: : 27,500 tubs
c Super model:
40,816 tubs
3 Volume = 37,500 tubs
(the total cost is the same with either model if 37,500 tubs are sold)
Problem 8-47
1
2
3
4
5

Break even points (in units) = 15,000 units

Number of sales units = 29,000 units
New Break even points (in units) = 19,125 units
Number of sales units required to earn target net profit = 31,625 units
$ 28.33(rounded)

Problem 8-48
2
3
4

New break even point = 17,000 units

Sales (in units) required to show a profit of $140,000 = 27,000 units
If management adopts the new manufacturing technology
A Its break-even point will be higher (17,000 units instead of 15,000 units).
B The number of sales units required to show a profit of $140,000 will be lower (27,000 units
instead of 29,000 units).
5

Problem 8-49
1
2
3

Total decrease in operating income =$ 10,800

Decrease in operating income
$1,400
Decrease in operating income
$ 1,200

Problem 8-50
1 Budgeted net income $ 360,000
2 Total unit sales to break even = 162,500 units
3 Total unit sales to break even = 200,000 units
Problem 8-51
1
2
3
4
5

Break even volume in tons = 1,100 tons

Projected net income for sales of 2,100 tons: =$225,000
Net income
$352,500
New sales territory: = 307.5 tons
New break even point in tons = 1224 tons
New break even point in sales dollar= 612,000
6 Dollar sales required to earn the net profit = $1,140,000
Problem 8-52
1 Contribution margin ration= .34
2 Number of units of sales= 34,000 units
3 Break-even point (in units) for the mountaineering model= 10,500 units
4 New break even point =10,729 units
5 Break-even point = 11,000 units
Problem 8-53
1 Break even sales dollar = $ 12,000,000
If the company has it own sales unit =$ 16,000,000
2
3 The volume in sales dollars= $ 19,200,000
Problem 8-54
1
Division A
Division B
Contribution from
10,50,000
1,50,000
profit
Contribution from

+ 1,400,000

Company
12,00,000

-1,00,000
6

13,00,000

 [ Rs. 110 as per working above less cost of two extra hours of machine @ Rs.25/hour]
Since the transfer price is Rs.50 less than the case ( ii ) above, Division A's profit will reduce by
RS. 50 x 5,000 or Rs 2, 50,000 to Rs 11, 50,000 and Divisions B's profit will be Rs.1, 50,000making company's profit of Rs. 13,00,000

Problem 8-55
Annual revenue = Rs. 22,000
Break even sales = 9,76,800
Problem 8-56
Extra weekly contribution = Rs.192
Problem 8-57
Problem 8-58
BE Sales = Rs.18,18,181
Problem 8-59
Selling price = Rs. 35
Problem 8-60
A

Final product Mix (on the basis of Ranking)

Downstream Limit

Total (Kg.)

1-- to work at 70% capacity

2-- to product at full capacity
3-- at 70% capacity 14,000 Kg
+ addition
5,714 Kg

42,000
40,000
19,714

B Loss on account of not meeting full capacity = 160,002

C

Downstream unit
1
2

Revised price
22.2
16
7

17.4

Problem 8-61
1 Decline in contribution = 44Lakh caused by the change in strategy
2 Growth aspect : Net 40 A
Price aspect = 84 A
Productivity ( or usage) aspect = Nil
Reduction in contribution = 44lakh
Case 8-62
1 16,900 patients per day
2 Net earnings would decrease by $606,660

Case 8-63
1
a Oakley must sell 500 units
b In order to achieve its after-tax profit objective, Oakley must sell 2,500 units
2 To achieve its annual after-tax profit objective, Oakley should select the first alternative, where
the sales price is reduced by $40 and 2,700 units are sold during the remainder of the year.
Case 8-64
1
2
3
4

Break-even point for 20x2 = $ 500,000

Estimated break even point = $ 1,000,000
Sales volume in dollars required to earn after-tax net income=13,333,333
The company will have the same before-tax income under the two alternatives if the sales
volume is $1,250,000.