Problem 6-19
Required:
1. What is the present yearly net operating income or loss?
Sales (15,000 units x $70) $ 1,050,000
Less: Variable expenses (15,000 units x $40) $ 600,000
Contribution Margin $ 450,000
Less: Fixed expenses $ 540,000
Net operating loss $ (90,000)
2. What is the present break-even point in unit sales and in peso sales?
Break even units = Fixed Costs/Contribution per unit
= $ 540,000 / $30
= 18,000 units
Break even sales = Break even units x Sales price
= 18,000 units x $70
= $1,260,000 to break even
3. Assuming that the marketing studies are correct, what is the maximum annual profit that the company can earn? At how many
units and at what selling price per unit would the company generate this profit?
Unit Unit Unit Total Net
Selling Variable Contribution Volume Contribution Fixed Operating
Price Expense Margin (Units) Margin Expenses Income(Loss)
$ $ $ $ $ $ $
70 40 30 15,000 450,000 540,000.00 (90,000)
$ $ $ $ $ $ $
68 40 28 20,000 560,000 540,000.00 20,000
$ $ $ $ $ $ $
66 40 26 25,000 650,000 540,000.00 110,000
$ $ $ $ $ $ $
64 40 24 30,000 720,000 540,000.00 180,000
$ $ $ $ $ $ $
62 40 22 35,000 770,000 540,000.00 230,000
$ $ $ $ $ $ $
60 40 20 40,000 800,000 540,000.00 260,000
$ $ $ $ $ $ $
58 40 18 45,000 810,000 540,000.00 270,000
$ $ $ $ $ $ $
56 40 16 50,000 800,000 540,000.00 260,000
$ $ $ $ $ $
54 40 14 55,000 770,000 540,000.00 230,000
Maximum annual profit is $270,000
Selling price per unit is $58
4. What would be the break-even point in unit sales and in peso sales using the selling price you determined in (3) above (e.g., the
selling price at the level of maximum profits)? Why is this breakeven point different from the break-even point you computed in (2)
above?
Break even units = Fixed Costs/Contribution per unit
= 540,000 units / $18
= $30,000 units
Break even sales = Break even units x Sales price
= 30,000 units x $58
= $1,740,000 to break even
Problem 6-20
Required: 1. Compute (a) last year’s CM ratio and the break-even point in balls, and (b) the degree of operating leverage at last
year’s sales level.
a. CM ratio: CM / Sales
=$300,000 / $750,000
= 0.4 or 40%
BEP in balls: TFC / CMU
=210,000 / 10
= 21,000 balls
b. Degree of Operating Leverage: CM / Net Operating Income
= $300,000 / $90,000
= 3.33
2. Due to an increase in labor rates, the company estimates that next year’s variable expenses will increase by $3 per ball. If this
change takes place and the selling price per ball remains constant at $25, what will be next year’s CM ratio and the break-even point
in balls?
CM ratio: CM / Sales
= $210,000 / $750,000
= .28 or 28%
BEP in balls: TFC / CMU
= $210,000 / 10
= 30,000 balls
3. Refer to the data in (2) above. If the expected change in variable expenses takes place, how many balls will have to be sold next
year to earn the same net operating income, $90,000, as last year?
Sales volume in units= (TFC + PBT) / CMU
= ($210,000 + $90,000) / $7
= $300,000 / $7
= 42,857 balls
4. Refer again to the data in (2) above. The president feels that the company must raise the selling price of its basketballs. If
Northwood Company wants to maintain the same CM ratio as last year (as computed in requirement 1a), what selling price per ball
must it charge next year to cover the increased labor costs?
Selling price per unit:
Let selling price be X
Contribution = Selling price - Variable cost
.40X = X - ($15 + $3)
.60X = $18
X = $28/.60
X = $30 per unit to be charged
5. Refer to the original data. The company is discussing the construction of a new, automated manufacturing plant. The new plant
would slash variable expenses per ball by 40%, but it would cause fixed expenses per year to double. If the new plant is built, what
would be the company’s new CM ratio and new break-even point in balls?
CM ratio: CM / Sales
= $480,000 / $750,000
= .64 or 64%
BEP in balls: TFC / CMU
= $420,000 / $16
= 26,250 balls
6. Refer to the data in (5) above.
a. If the new plant is built, how many balls will have to be sold next year to earn the same net operating income, $90,000, as
last year?
Sales volume in units= (TFC + PBT) / CMU
= ($420,000 + $90,000) / 416
= 510,000 / $16
= 31,875 balls
b. Assume the new plant is built and that next year the company manufactures and sells 30,000 balls (the same number as
sold last year). Prepare a contribution format income statement and compute the degree of operating leverage.
Total Per Unit Percent of sales
Sales (30,000 balls) $750,000 $25 100%
Variable expenses 270,000 9 36%
Contribution Margin $480,000 $16 64%
Fixed Expenses 420,000
Net Operating $60,000
Income
Degree of Operating Leverage: CM / Net Operating Income
= $480,000 / $60,000
=8
c. If you were a member of top management, would you have been in favor of constructing the new plant? Explain.
No, because the net operating income will decrease by $30,000.
Problem 6-21
Required:
1. Prepare a contribution format income statement for the month based on the actual sales data. Present the income
statement in the format shown above.
White Fragrant Loonzain Total
Percentageof total sales 40% 24% 36%
$ $
Sales $ 300,000 100% 180,000 100% 270,000 100% $ 750,000 100%
Less: Variale Expenses 216,000 72% 36,000 20% 108,000 40% 360,000 48%
Contribution Margin 84,000 28% 144,000 80% 162,000 60% 390,000 52%
Fixed Expenses 449,280
$
Net Operating Loss (59,280)
2. Compute the break-even point in dollar sales for the month based on your actual data.
Break-even= Fixed expenses / Contribution Margin Ratio
= $449,280 / .52
= $864,000
3. Considering the fact that the company met its $750,000 sales budget for the month, the president is shocked at the results
shown on your income statement in (1) above. Prepare a brief memo for the president explaining why the net operating
income (loss) and the break-even point in dollar sales are different from what was budgeted.
The actual net income (loss) and the break-even point in dollar sales are different from what was budgeted due to
actual sales and variable expenses change. Variable expenses vary depending on the total units sold, so the actual
percentage of contribution margin is different from the budgeted one, affecting the break-even in dollars for the month.
