Chapter 5 Essay

4447 words - 18 pages

Chapter 5
Exercise 5-1 (20 minutes)

1. The new income statement would be:

| | |Total |Per Unit |
| |Sales (8,050 units) |\$209,300 |\$26.00 |
| |Variable expenses | 144,900 | 18.00 |
| |Contribution margin |64,400 |\$ 8.00 |
| |Fixed expenses |  56,000 | |
| |Net operating income |\$  8,400 | |

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00 per unit) | |
| |New net operating income |\$7,600 |
| | | |
Exercise 5-1 (continued)

3. The new income statement would be:

| | |Total |Per Unit |
| |Sales (7,000 units) |\$182,000 |\$26.00 |
| |Variable expenses | 126,000 | 18.00 |
| |Contribution margin |56,000 |\$ 8.00 |
| |Fixed expenses |  56,000 | |
| |Net operating income |\$        0 | |
| | | | |

Note: This is the company's break-even point.
Exercise 5-4 (10 minutes)

1. The company’s contribution margin (CM) ratio is:

| |Total sales |\$300,000 |
| |Total variable expenses | 240,000 |
| |= Total contribution margin |\$ 60,000 |
| |÷ Total sales |\$300,000 |
| |= CM ratio |20% |

2. The change in net operating income from an increase in total sales of \$1,500 can be estimated by using the CM ratio as follows:

| |Change in total sales |\$1,500 |
| |× CM ratio |     20% |
| |= Estimated change in net operating income |\$  300 |

This computation can be verified as follows:

| |Total sales |\$300,000 | |
| |÷ Total units sold |   40,000 |units |
| |= Selling price per unit |\$7.50 |per unit |
| | | | |
| |Increase in total sales |\$1,500 | |
| |÷ Selling price per unit |\$7.50 |per unit |
| |= Increase in unit sales |200 |units |
| |Original total unit sales |40,000 |units |
| |New total unit sales |40,200 |units |

| | ...

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