Assignment On

Management Accounting Topic: Break-even and profit analysis

Prepared for
Shahana Kabir Lecturer Management Accounting Daffodil International University

Prepared by
Md. Al-Amin ID : 101-11-1415 Section : C Program : BBA Daffodil International University

Submission date: 31th March , 2012

Exercise 6-12: Miller Companys most recent contribution format income statement is shown below: Total Sales (20000 units) Variable expenses $300,000 180,000 Per Unit $15.00 9.00

Contribution margin Fixed expenses Net operating income Required:

120,000 70,000 $ 50,000

$6.00

Prepare a new contribution format income statement under each of the following conditions: 1. The sales volume increases by 15%. 2. The selling price decreases by $1.50 per unit, and the sales volume increases by 25%. 3. The selling price increases by $1.50 per unit, fixed expenses increases by $20,000 and the sales volume decreases by 5%. 4. The selling price increases by 12%, variable expenses increases by 60 cents per unit, and the sales volume decreases by 10%.

Solution: 1. Income Statement (Contribution Approach) Amount

Sales { 20000+(2000015%)} (-) Variable Expenses (23000$9) Contribution Margin (-) Fixed Expenses Net operating income

$345000 207000 138000 70000 58000

2.

Income Statement (Contribution Approach) Amount

Sales { 20000+(2000025%)} ($15-1.50) (-) Variable Expenses (25000$9) Contribution Margin (-) Fixed Expenses Net operating income

$337500 225000 112500 70000 42500

3.

Income Statement (Contribution Approach) Amount

Sales { 20000-(200005%)} ($15+1.50) (-) Variable Expenses (19000$9) Contribution Margin

$313500 171000 142500

(-) Fixed Expenses ($70000+$20000) Net operating income

90000 52500

4.

Income Statement (Contribution Approach) Amount

Sales { 20000-(2000010%)} ($15+1512%) (-) Variable Expenses {18000($9+0.6) Contribution Margin (-) Fixed Expenses Net operating income

$302400 172800 129600 70000 59600

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Exercise 6-14: Lindon Company is the exclusive distributor for an automotive product that sells for $40 per unit and has a CM ratio of 30%. The companys fixed expenses are $180,000 per year. Required: 1. What are the variable expenses per unit?

2. Using the equation method: a. What is the break-even paint in units and sales dollars? b. What sales level in units and sales dollars is required to earn an annual profit of $60000? c. Assume that by using a more efficient shipper the company is able to reduce its variable expenses by $4 per unit. What is the companys new break-even paint in units and sales dollars? 3. Repeat (2) above using the contribution margin method.

Solution: 1. Sales (-)Variable expenses* Contribution margin ($4030%) Per unit $40 28 $12

2. Equation Method:

(a). Break-even point in units, Sales= variable expenses + fixed expenses + profit 40x = 28x + 180000 + 0 12x = 180000 x Break-even point, in dollars = Number of units break-even point selling price per unit = 15000 $40 = $600000. = 15000 units.

(b).

To earn profit $60000, we have to sell units, Sales= variable expenses + fixed expenses + profit 40x = 28x + 180000 + 60000 12x = 240000 x = 20000 units.

To earn profit $60000, we have to get, sales in dollar= Number of units break-even point selling price per unit = 20000 $40 = $800000.

(c).

If we reduce the variable expenses $4 per unit, then our new variable expenses will be ($28-4)=$24. So, New Break-even point in units, Sales= variable expenses + fixed expenses + profit 40x = 24x + 180000 + 0 16x = 180000 x = 11250 units.

Break-even point, in dollars = Number of units break-even point selling price per unit = 11250 $40 = $450000.

3. Contribution Method:

(a).

Fixed Expenses Break-even point in units= CM per unit

$180000 = $12

15000 units.

Fixed Expenses Break-even point in dollars= CM Ratio

$180000 = 0.30

$600000.

(b).

To earn profit $60000, we have to sell units,

Fixed Expenses + Target Profit In units= CM per unit

$180000 + $60000 = $12

20000 units.

To earn profit $60000, we have to sell units,

Fixed Expenses + Target Profit in dollars= CM Ratio

$180000 + $60000 = 0.30

$800000.

(c). If we reduce the variable expenses $4 per unit, then our new variable expenses will be ($28-4)=$24. So, the Contribution margin per unit will be ($40-24)=$16. And C M ratio (1640)100=40%. So, Fixed Expenses New Break-even point in units= CM per unit

$180000 = $16

11250 units.

Fixed Expenses New Break-even point in dollars= CM Ratio

$180000

= 0.40

$450000.

-------- o ------Exercise 6-21: The fashion show Company operates a chain of womens shoe shops around the country. The shops carry many styles of shoes that are all sold at the same price. Sales personnel in the shops are paid a substantial commission on each pair of shoes sold in order to encourage them to be aggressive in their sales efforts. The following worksheet cost and contains revenue data for shop 48 and is typical of the companys many outlets:

Per pair of shoes Selling price Variable expenses: Invoice cost Sales commission Total variable expenses $ 13.50 4.50 $ 18.00 Annual Fixed expenses: Advertising Rent Salaries Total fixed expenses $ 30,000 20,000 100,000 $ 150,000 $ 30.00

Required:

1. Calculate the annual break-even point in dollar sales and in units sales for shop 48. 2. Prepare a CVP graph showing cost and revenue data for shop 48 from a zero level of activity up to 17,000 pairs of shoes are sold in a year. Clearly indicate the break-even point on the graph. 3. If 12,000 pairs of shoes are sold in a year, what would be shop 48s net operating income or loss? 4. The company is considering paying the store manager of shop 48 an incentive commission of 75 cents per pair of shoes. If this change is made, what will be the new break-even point in dollar sales and in unit sales? 5. Refer to the original data. As an alternative to (4) above, the company is considering paying the store manager 50 cents commission on each pair of shoes sold in excess of the break-even point. If this change is made, what will be the shops net operating income or loss if 15,000 pairs of shoes are sold? 6. Refer to the original data. The company is considering eliminating sales commissions entirely in its shops and increasing fixed salaries by $31,500 annually. If this change is made, what will be the new break- even point in dollar sales and in unit sales for shop 48? Would you recommend that the change be made? Explain.

Solution: 1. Contribution Method:

Fixed Expenses Break-even point in units= CM per unit

$150000 = $12 [CM per unit, ($30-18)=$12]

12500 units.

Fixed Expenses Break-even point in dollars= CM Ratio

$150000 = 0.40 [CM ratio, (1230)100=40%]

$375000.

2.

$600000 $500000 Revenue $400000 Break-even point

$300000 $200000 $100000 Fixed Expenses

3000

6000

9000 12000 15000 18000

Pair of shoes sold

CVP Graph

3.

Income Statement (Contribution Approach) Amount

Sales (12000$30) (-) Variable Expenses (12000$18) Contribution Margin (-) Fixed Expenses Net operating income

$360000 216000 144000 150000 (6000)

4. If sales commission increases by 75 cents, then variable per unit will be ($18+.75)=$18.75. So, CM per unit ($30-18.75)=$11.25. And CM ratio, (11.2530)100=37.5%.

Fixed Expenses New Break-even point in units= CM per unit

$150000 = $11.25

13333.33 units.

Fixed Expenses New Break-even point in dollars= CM Ratio

$150000 = 0.375

$400000.

5.

Income Statement (Contribution Approach) Amount

Sales (15000$30) (-) Variable Expenses (12500$18) + (2500$18.50) Contribution Margin (-) Fixed Expenses Net operating income

$450000 271250 178750 150000 28750

6. If the company eliminates sales commission entirely, then variable expenses per unit will be $13.50. So, CM per unit ($30-13.50)=$16.50. And CM ratio, (16.5030)100=55%. And fixed expenses increases to ($150000 + 31500)=$181500.

Fixed Expenses New Break-even point in units= CM per unit

$181500 = $16.50

11000 units.

Fixed Expenses New Break-even point in dollars= CM Ratio

$181500 = 0.55

$330000.

I recommended that change can be made. Because if the break-even point in unit and in dollars are decreases then it should be more profitable for the company. They can earn more by using this change in their operations.

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