Ex 8-24

1 Break Even point (in units) = Fixed Expenses

unit contribution margin

= $40,000 = 8,000 pizzas affan.mughal@yahoo.c

$10-$5

2 Contribution Margin ratio = unit contributuion margin

unit sales price

= $10-$5 = 0.5
$10

3 Break Even Point = Fixed Expenses

(in sales dollar) Contribution margin ratio

= $40,000
0.5

= $80,000

4 Let X denote the sales volume of pizzas required to earn a target net profit of $65,000

$10X - 5X - $40,000 = 65,000.

= $5X = $105,000

X = 21,000 Pizzas
affan.mughal@yahoo.com
1 Traditional Income Statement
EUROPA PUBLICATIONS, INC.
INCOME STATEMENT
FOR THE YEAR ENDED DEC 31, 2009
$
Sales 2,000,000
Less: Cost of Goods Sold 1,500,000
Gross Margin 500,000
Less: Operating expenses:
Selling expenses 150,000
administrative expenses 150,000 300,000
Net Income 200,000

Contribution Income Statement

EUROPA PUBLICATIONS, INC.

INCOME STATEMENT
FOR THE YEAR ENDED DEC 31, 2009

$
Sales 2,000,000
Less: Variable expenses
variable manufacturing 1,000,000
variable selling 100,000
variable administrative 30,000 1,130,000
Contribution margin 870,000
Less: Fixed expenses
Fixed manufacturing 500,000
Fixed selling 50,000
Fixed administrative 120,000 670,000
Net Income 200,000

2 Operating leverage factor (at 2,000,000 sales level = contribution margin

net Income
1 Break Even point (in units) = Fixed Costs
Units contribution margin

= $468,000 = $2,250,000
$25 - $19.80

= 90,000 units

2 Break Even Point = Fixed Cost

(in sales dollar) Contribution margin ratio = $25 - $19.80
$25
= $468,000
0.208

= $2,250,000

3 Number of Sales units required = Fixed cost + target net profit

to earn target net profit Units contribution margin

= $468,000 + $260,000
$25 - $19.80

= 140,000 units.

4 Margin of safety = Budgeted sales revenue - break even sales revenue

= (120,000)($25) - $2,250,000 = $750,000.

5 Break Even point if direct labor

cost increase by 8 percent

New unit contribution margin = $25.00 - 10.50 - ($5.00)(1.08) - $3.00 - $1.3

= $4.80

Break Even point = fixed costs

new unit contribution margin

= $468,000
$4.80

= 97,500 units
6 Contribtution margin ratio = unit contribtution margin
sales price

old Contribtution margin ratio = 25-19.8

25

= 0.208

Let P denote sales price required to maintain a contribution margin ratio of .208.
Then P is determined as follows:

P-410.5 - ($5.00)(1.08) - #3.00 - $1.30 = 0.208

P
P-$20.20=.208p

.792P = $20.20

P = $25.51

Cross check

New Contribtution margin ratio = $25.51 - $10.50 -($5.00)(1.08) - $3.00 - $1.30

$25.51

= 0.208
= 0.208
Ex 8-23
Total Fixed Net Break-Even
Sales Variable Contribution Expenses Income Sales
Revenue Expenses Margin Revenue

1 160,000 40,000 120,000 30,000 90,000 40,000

2 80,000 65,000 15,000 15,000 0 80,000
3 120,000 40,000 80,000 30,000 50,000 45,000
4 110,000 22,000 88,000 50,000 38,000 62,500

Break Even sales revenue 40,000

Fixed Expenses 30,000
Variable Expenses 10,000

Therefore variable expenses are 25 percent of sales revenue.

When variable expenses amount to $40,000, sales revenue is $160,000

$80,000 is the break even sales revenue, so fixed expenses must be equal to the
contribution margin of $15,000 and profit must be zero.

$45,000=$30,000 / (2/3) is the contribution-margin ratio

$62,500 = $50,000/.80, where .80 is the contribution-margin ratio.

3,213,067,117
1 Sales Unit Unit
Bicycle Type Price Variable Cost Contribution Margin

High quality 500 $300($275 + $25) 200

Medium quality 500 150 ($135 + $15) 150

2 Sales Mix

High quality bicycles 25%

Medium quality bicycles 75%

3 Weighted average unit = ( $200 x 25%) + ($150 x 75%)

Contribution margin
= $ 162.50

4 Break Even point = fixed expenses

in units weighted average unit contribution margin

= $65,000 = 400 bicycles

$ 162.50

Break Even Sales Sales Sales

Bicycle Type Volume Price Revenue

High quality bicycles 100 (400 x 0.25) $500 $ 50,000

Medium quality bicycles 300 (400 x 0.75) 300 90,000
140,000

5 Target Net Income

Sales volume required to earn target net income of $48,750 = $65,000 + 48,750
$ 162.50

= 700 bicycles

This means that the shop will need to sell the following volume of each type of
bicycles to earn the net income

High quality 175 (700 x 0.25)

Meduim quality 525 (700 x 0.75)
1 Unit Contribution Margin
Sales Price $ 64.00
Less variable costs:
Sales commissions ($64 x 5%) $ 3.20
system variable costs 16.00 19.20
Unit Contribution Margin 44.80

Break even point = fixed costs / unit contribution margin

= 985,600 / 44.80

= 22,000 units

2 Which model is more profitable to acquire?

Model Model
No. 6754 No. 4399

Sales Revenue (46,000 x $64) 2,944,000 2,944,000

Less: Variable Costs:
Sales commissions ($2,944,000 x 5%) 147,200 147,200
System variable costs:
46,000 units x $16.00 736,000
46,000 units x $12.80 588,800
Total Variable costs 883,200 736,000
Contribution margin 2,060,800 2,208,000
Less : Annual Fixed Costs 985,600 1,113,600
Net Income 1,075,200 1,094,400

Model # 4399 is more profiable when sales and production average 46,000 units

3 Annual fixed costs will increase by $90,000 ($450,000 / 5 years) because of

straight line depreciation associated with the new equipment to $1,203,600
($1,113,600 + 90,000). The unit contribution margin is $48 ($2,208,000 / 46,000 units)
Thus

Required sales = (fixed costs + target net profit) / unit contribtution margin

= ($1,203,600 + 956,400)
48

= 45,000 units.

4 Let X = volume level at which annual total costs are equal

$16.00X + $985,600 = 12.80X + $1,113,600
$3.20X = 128,000.
X = 40,000 units.
1 Break Even point (in units) = Fixed Costs
Units contribution margin

= 4,000,000p = 4,000 components

3,000p - 2,000p

2 New break even point

in units = (4,000,000p) (1.10) = 4,400 components
1,000p

3 Sales revenue (5,000 x 3,000p) 15,000,000p

Variable cost (5,000 x 2,000p) 10,000,000p
Contribution margin 5,000,000p
Fixed Costs 4,000,000p
Net Income 1,000,000p

4 New break even point

in units = 4,000,000p
2,500p-2,000p

= 8,000 components

5 Analysis of price change decision:

Price
3,000p 2,000p
Sales revenue: (5,000 x 3,000p) 15,000,000p
(6,200 x 2,500p) 15,500,000p
Variable costs: (5,000 x 2,000p) 10,000,000p
(6,200 x 2,000p) 12,400,000p
Contribution margin 5,000,000 3,100,000p
Fixed expenses 4,000,000p 4,000,000p
Net Income (loss) 1,000,000p (9,000,000p)

The price cut should not be made, since pojected net income will decline.
 Problem 8-34

1 Break even point in units, using the equation approach:

$16X - (10 + $2) X - $600,000 = 0

$4X = $600,000

X = $600,000
$4

X = 150,000 units

2 New projected sales volume = 200,000 x 110%

= 220,000 units

Net Income = (220,000) ($16 - $12) - $600,000

= (220,000) ($4) - $600,000

= $880,000 - $600,000

Net Income = $280,000

3 Target net income = $200,000 (from original problem data)

New disk purcase price = $10 x 130% = $13

Volume of sales dollars required:

volume of sales dollars required = fixed expenses + target net profit

contribution margin ratio

= $600,000 + $200,000 $800,000

$16 - $13 - $2 0.625

= $12,800,000

4 Let P denote the selling price that will yield the same contribution - margin
ratio:

$16 - $10 - 2 = P - $13 -$2

$16 P

0.25 = P - $15
P
0.25P = P - $15
 $15 = 0.75P

P = $15/0.75

P = $20

Check: New contribution - margin ratio is:

$20 - $15 = 0.25

$20
1 Closing of downtown store:
Loss of contribution margin at Downtown Store (36,000)
Savings of fixed cost at Downtown Store (75%) 30,000
Loss of contribution margin at Mall Store (4,800)
Total decrease in operating income (10,800)

2 Promotional Campaing
Increase in contribution margin (10%) 3,600
Increase in monthly promotional expenses ($60,000/12) (5,000)
(1,400)

3 Elimination of items sold at their variable cost:

We can restate the November 20 x 1 data for the Downtown Store as follows:

Downtown Store
Items sold at Other items
their variable
cost
Sales 60,000 60,000
Less: variable expenses (60,000) (24,000)
Contribution margin - 36,000

If the items sold at their variable cost are eliminated, we have:

Decrease in contribution margin on other items (20%) (7,200)
Decrease in fixed expenses (15%) 6,000
Decrease in operating income (1,200)