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Chapter 20: Q26E (page 1126)

Complete the table below for the missing amounts:

A B C

Number of units 2,064 units (d) 2,570 units

Sales price per unit \( 250 \) 125 $ (g)

Variable costs per unit (a) 50 4,528

Contribution margin per unit 125 (e) (h)

Total contribution margin (b) 1,567,500 (i)

Contribution margin ratio (c) (f) 20%

Short Answer

Expert verified

Answer

1. (a) $125

2. (b) $258,000

3. (c) 50%

4. (d) 20,900

5. (e) $75

6. (f) 60%

7. (g) $5,660

8. (h) $1,132

9. (i) $2,909,240

Step by step solution

01

Calculation of sub-part (a),(b), and (c)

A

Number of units 2,064

Sales price per unit $250

Variable cost per unit (Sales price per unit-Contribution margin per unit) (a) $125 ($250-$125)

Contribution margin per unit $125

Total contribution margin (b) (2,064 x $125) (b) $258,000

Contribution margin ratio (c) ($125/250) (c) 50%

02

Calculation of sub-part (d),(e), and (f)

Number of units ($1,567,500/$75) (d) 20,900

Sales price per unit $125

Variable cost per unit $50

Contribution margin per unit (Sales price per unit- Variable cost) (e) $75

Total contribution margin 1,567,500

Contribution margin ratio ($75/$125) (f) 60%

03

Calculation of sub-part (g), (h), and (i)

Number of units 2,570

Sales price per unit ($4,528/(1-20%)) (g) $5,660

Variable cost per unit (a) $4,528

Contribution margin per unit (Sales price per unit- Variable

cost) ($5,660-$4,528) (h) $1,132

Total contribution margin (b) ($1,132 x 2,570) (i) $2,909240

Contribution margin ratio (c) ($1,132 / $5,660) 20%

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Most popular questions from this chapter

You have just begun your summer internship at Omni Instruments. The company supplies sterilized surgical instruments for physicians. To expand sales, Omni is considering paying a commission to its sales force. The controller, Matthew Barnhill, asks you to compute: (1) the new breakeven sales figure, and (2) the operating profit if sales increase 15% under the new sales commission plan. He thinks you can handle this task because you learned CVP analysis in your accounting class.

You spend the next day collecting information from the accounting records, performing the analysis, and writing a memo to explain the results. The company president is pleased with your memo. You report that the new sales commission plan will lead to a significant increase in operating income and only a small increase in breakeven sales.

The following week, you realize that you made an error in the CVP analysis. You overlooked the sales personnel’s $2,800 monthly salaries, and you did not include this fixed selling cost in your computations. You are not sure what to do. If you tell Matthew Barnhill of your mistake, he will have to tell the president. In this case, you are afraid Omni might not offer you permanent employment after your internship.

Requirements

1. How would your error affect breakeven sales and operating income under the proposed sales commission plan? Could this cause the president to reject the sales commission proposal?

2. Consider your ethical responsibilities. Is there a difference between (a) initially making an error and (b) subsequently failing to inform the controller?

3. Suppose you tell Matthew Barnhill of the error in your analysis. Why might the consequences not be as bad as you fear? Should Barnhill take any responsibility for your error? What could Barnhill have done differently?

4. After considering all the factors, should you inform Barnhill or simply keep quiet?

Diversified Investor Group is opening an office in Boise, Idaho. Fixed monthly costs are office rent (\(8,000), depreciation on office furniture (\)1,700), utilities (\(2,400), special telephone lines (\)1,500), a connection with an online brokerage service (\(2,500), and the salary of a financial planner (\)11,900). Variable costs include payments to the financial planner (9% of revenue), advertising (11% of revenue), supplies and postage (4% of revenue), and usage fees for the telephone lines and computerized brokerage service (6% of revenue).

Requirements

  1. Use the contribution margin ratio approach to compute Diversified’s breakeven revenue in dollars. If the average trade leads to \(800 in revenue for Diversified, how many trades must be made to break even?
  2. Use the equation approach to compute the dollar revenues needed to earn a monthly target profit of \)11,200.
  3. Graph Diversified’s CVP relationships. Assume that an average trade leads to \(800 in revenue for Diversified. Show the breakeven point, the sales revenue line, the fixed cost line, the total cost line, the operating loss area, the operating income area, and the sales in units (trades) and dollars when monthly operating income of \)11,200 is earned.
  4. Suppose that the average revenue Diversified earns increases to $2,000 per trade. Compute the new breakeven point in trades. How does this affect the breakeven point?

Question: What is target profit?

Question: Use the following information to complete Short Exercises S20-10 through S20-15.

Funday Park competes with Cool World by providing a variety of rides. Funday Park sells tickets at \(70 per person as a one-day entrance fee. Variable costs are \)42 per person, and fixed costs are $170,800 per month.

Compute Funday Park’s contribution margin ratio. Carry your computation to two decimal places. Use the contribution margin ratio approach to determine the sales revenue Funday Park needs to break even

Question: Why is the calculation to determine the target profit considered a variation of the breakeven calculation?
See all solutions

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