Braun Ma4 SM 10

Chapter 7
Cost-Volume-Profit Analysis
Chapter 7
Quick Check
Answers:
QC-1. d
QC-2. c
QC-3. b
QC-4. c
QC-5. a
QC-6. c
QC-7. b
QC-8. b
QC-9. c
QC-10. d
Short Exercises
(5-10 min.) S7-1
a.
Sales price per passenger.

Less: Variable cost per passenger..
Contribution margin per passenger
$ 50
20
$ 30
b.
Contribution margin per passenger

Divided by sales price per passenger.
Contribution margin ratio..
$30
50
60%
c.
Total contribution margin (11,000 $30)...

Less: Fixed expenses..
Operating income.
$330,000
210,000
$120,000
d.
Total contribution margin

($490,000 60%) ..
Operating income.
$294,000
210,000
$84,000
(5 min.) S7-2
The unit contribution margin tells managers how much income is earned on each unit of sales
before considering fixed costs. Each sale contributes its unit contribution margin towards
covering fixed costs and generating a profit. Therefore, if the number of dinner cruises sold
increases by 600 and each sale generates $30 of contribution margin, operating income will
increase (or operating loss will decrease) by $18,000 (= 600 passengers $30 per passenger).
Copyright 2015 Pearson Education, Inc.
7-1
Managerial Accounting 4e Solutions Manual
(5-10 min.) S7-3

Units sold
(to break even)
Fixed expenses + Operating income

Contribution margin per unit (passenger)
$210,000 + 0
$30*
=
=
7,000 passengers
*Contribution margin
per passenger
$50 sales
price
$20 variable expense

per passenger
Number of passengers to break even*.

Sales price per passenger...
Sales revenue to break even..
7,000
$50
$350,000
* from earlier calculation
(5 min.) S7-4
Sales in units
=
=
=

Contribution margin per unit
$210,000 + $45,000
$30
8,500 dinner cruise tickets
Or, using the equation approach:

Sales revenue
Variable expenses
Fixed
expenses
Operating
income
Sale price Units

per unit sold
Variable cost
Units
per unit
sold
Fixed
expenses
Operating
income
[($50 Units sold)
($20 Units sold)]

[($50 $20) Units sold]
$210,000
$210,000
Units sold
= $45,000
= $45,000
= 8,500 tickets
To earn target income of $45,000, the cruiseline must sell 8,500 dinner cruise tickets.
7-2
Chapter 7
(5-10 min.) S7-5
(5 min.) S7-6
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
Fixed expense line

Total expense line
Sales revenue line
Dollars (vertical axis)
Units (horizontal axis)
Operating loss area
Operating income area
Breakeven point
150
$300
7-3
(10 min.) S7-7
Req. 1
If the sales price declines to $40, then the new unit contribution margin is $20 ($40 $20). The
new breakeven point in units is:
=
Sales in units
$210,000 + $0
$20
=
=
10,500 dinner cruise passengers
To achieve breakeven, sales revenue needs to be $420,000 (10,500 passengers $40 sales
price per passenger). Also can be calculated as:
=
Sales in $
Contribution margin ratio
$210,000 + $0
0.50*
=
=
$420,000 dinner cruise revenue

*CM ratio = $20/$40 = 0.50

Sales revenue
Sale price Units

per unit sold
Variable expenses
Variable cost
per unit
($40 Units sold)
Units
sold
($20 Units sold)
Fixed
expenses
Operating
income
Fixed
expenses
Operating
income
$210,000
$210,000
Units sold
10,500 passengers $40 = $420,000

Alternatively,
Contribution
margin ratio
=
Sales
in dollars

Sale price per unit
=
=
$40 $20
$20
0.50
=
=
=
= $0
= $0
= 10,500
passengers
$210,000 + $0
0.50
$420,000
All else being constant, a decrease in sales price will decrease the contribution margin per unit
and the contribution margin ratio. The breakeven point will therefore increase. Increases in sales
price will have the opposite effect.
7-4
Chapter 7
(continued) S7-7
Req. 2
If the variable cost decreases to $10, then the new unit contribution margin is $40 ($50 $10).
The new breakeven point in units is:
=
Sales in units
$210,000 + $0
$40
=
=
To achieve breakeven, sales revenue needs to be $262,500 (5,250 passengers $50 sales price
per ticket).
Sales revenue
Variable expenses
Fixed
expenses
Operating
income
Sale price Units

per unit sold
Variable cost
Units
per unit
sold
Fixed
expenses
Operating
income
($50 Units sold)
($10 Units sold)
$210,000
$210,000
Units sold
= $0
= $0
= 5,250
passengers
5,250 passengers $50 = $262,500

Alternatively,
Contribution
margin ratio
=
=
Sales
in dollars

Sale price per unit
$50 10
$50
0.80
=
=
=
$210,000 + $0
0.80
$262,500
All else being equal, a decrease in variable costs will increase the contribution margin per unit
and the contribution margin ratio. The breakeven point will therefore decrease. An increase in
variable costs will have the opposite effect.
7-5
(5-10 min.) S7-8

Req. 1
The decline in fixed costs does not affect the $30 unit contribution margin calculated in S7-1.
The new breakeven point in units is:
=
Sales in units
$180,000 + $0
$30
=
=

Sales revenue
Sale price Units

per unit sold
Variable expenses
Variable cost
per unit
($50 Units sold)
Units
sold
($20 Units sold)
Fixed
expenses
Operating
income
Fixed
expenses
Operating
income
$180,000
$180,000
$30 Units sold
Units sold
6,000 passengers $50 = $300,000

Alternatively,
Contribution
margin ratio
=
=
Sales
in dollars
$50 20
$50
0.60
=
=
=
7-6

Sale price per unit
$180,000 + $0
0.60
$300,000
=
=
=
=
$0
$0
$180,000
6,000
passengers
Chapter 7
(continued) S7-8
Req. 2
The breakeven point is lower than in S7-3. By cutting fixed costs, the cruiseline was able to
decrease its breakeven point by 1,000 passengers (7,000 - 6,000).
All else being equal, a decrease in fixed costs will decrease the breakeven point, while an
increase in fixed costs will increase the breakeven point.
(5-10 min.) S7-9

Weighted-Average Contribution Margin per Unit
Regular
Executive
Cruise
Cruise
Sale price per ticket
$ 50
$130
Less: Variable expense per ticket
20
40
Contribution margin per ticket
$ 30
$ 90
Sales mix in units
4
1
Contribution margin
$120
$ 90
Weighted-average contribution
margin per unit ($210 / 5)
Total
5
$210
$ 42.00
A simple average contribution margin would be $60 [(30 + 90) / 2]. The weighted-average is
less than the simple average because the cruiseline sells more regular cruises (with the lower
contribution margin) than executive cruises.
The weighted average contribution margin ($42.00) is higher than the contribution margin of
regular cruises ($30) because the cruiseline sells some executive cruises, and executive cruises
have a higher contribution margin ($90) than regular cruises.
Because the new sales mix creates a higher weighted average contribution margin, the
cruiseline will need to sell fewer cruises, in total, to breakeven than when it just sold regular
cruises.
(5-10 min.) S7-10

a.
Sales
in total tickets
=
=

Weighted-average contribution margin per unit
$210,000 + $0
$42.00*
= 5,000 passengers
*Weighted-average contribution margin per unit from S7-9.
b.
Breakeven sales of regular cruises (5,000 4/5)
Breakeven sales of executive cruises (5,000 1/5)......
Total cruise passengers...................................
4,000
1,000
5,000
7-7
(5-10 min.) S7-11

a.
Margin of safety
in units
Expected sales
in units
=
=
8,750 7,000*
1,750 passengers
Breakeven sales
in units
*(from S7-3)
b.
Margin of safety
in dollars
Target level
sales dollars
=
=
$437,500a - $350,000b
$87,500
a
Breakeven
sales dollars
8,750 x $50 = $437,500

7,000 x $50 = $350,000
c.
Margin of safety
as a percentage
of expected sales
Margin of safety in dollars

Expected sales in dollars
$87,500
$437,500
=
=
20%
(5-10 min.) S7-12

a.
Contribution margin (8,750 $30 / cruise

passenger)......
Less: Fixed expenses.
Operating income..
Operating Leverage Factor
$262,500
210,000
$52,500
=
Contribution margin
Operating income
$262,500
$52,500
5.0
b.
If volume increases 10%, operating income will increase 50% (operating leverage factor
of 5.0 multiplied by 10%).
c.
If volume decreases by 5%, operating income will decrease by 25% (operating leverage
factor of 5.0 multiplied by 5%).
(5-10 min.) S7-13

a.
7-8
Margin of safety
Expected sales
Breakeven sales
Chapter 7
in units
in units
=
1,500 750*
750 posters
in units
*Breakeven in units = $15,000/($45-$25) = 750 units

b.
Margin of safety
in dollars
Target level
sales dollars
=
=
$67,500** - $33,750***
$33,750
Breakeven
sales dollars
** Expected sales in dollars = 1,500 x $45 = $67,500

*** Breakeven in dollars = 750 x $45 = $33,750
c.
Margin of safety
as a percentage
of expected sales

Expected sales in dollars
=
=
33,750
67,500
50%
7-9
(5-10 min.) S7-14

Contribution margin (1,500 $20 / poster).
Operating income..
$30,000
15,000
$15,000
Contribution margin
Operating income
$30,000
$15,000
=
2.0
If volume increases 20%, operating income will increase 40% (operating leverage factor of 2.0
multiplied by 20%).
Proof:
Original volume (posters)
..
Add: Increase in volume (20% 1,500)
New volume (posters)

....
Multiplied by: Unit contribution
margin.
New total contribution
margin..
Less: Fixed
expenses...
New operating
income
Less: Operating income before change in
1,500
300
1,800
$20
$36,000
(15,000
)
$21,000
volume (from above).....
(15,000
)
Increase in operating
income...
$6,000
Percentage change ($6,000 / $15,000)

..
7-10
40%
Chapter 7
(5-10 min.) S7-15
Req. 1
Product: Cupcakes
Selling price per unit
Less: Variable cost per unit
CM
$
$
$
6.00
4.00
2.00
To find the indifference point, you need to set the

costs of Option 1 equal to the costs of Option 2:
$2,600 = $1,700 + [($6 x .05) x CUPCAKES]
Then solve for CUPCAKES:
CUPCAKES = 3,000
Proof:
Lease costs under Option 1:
Fixed costs
Variable costs (none)
Total costs under Option 1
$ 2,600
0
$ 2,600
Lease costs under Option 2:

Fixed costs
Variable costs per unit ($6 x .05)
Times # of units at pt of indifference (3,000)
0.30
$ 1,700
3,000
Total variable costs

Total costs under Option 2
900
$2,600
Since the number of units is 2,200 and is less than the 3,000 point of indifference, option 2
would be the lowest cost option.
Option 1 costs = $2,600
Option 2 costs = $1,700 + ($6 x 0.05) x 2,200) = $2,360
Req. 2
Option 1 is the better option for 4,500 units
Option 1 costs = $2,600
Option 2 costs = $1,700 + (($6 x 0.05) x 4,500) = $3,050
(5-10 min.) S7-16

1. Integrity - Mitigate actual conflicts of interest, regularly communicate with business
associates to avoid apparent conflicts of interest. Advise all parties of any potential conflicts.
2. Competence - Maintain an appropriate level of professional expertise by continually
developing knowledge and skills.
3. Competence - Perform professional duties in accordance with relevant laws, regulations, and
technical standards.
4. Confidentiality - Keep information confidential except when disclosure is authorized or legally
required.
5. Credibility - Disclose all relevant information that could reasonably be expected to influence
an intended user's understanding of the reports, analyses, or recommendations.
7-11
Exercises (Group A)
(15 min.) E7-17A
Req. 1
Global Travel
Contribution Margin Income Statements
Sales revenue
Less: Variable expenses (30% of sales revenue*)
Contribution margin (70% of sales revenue**)
Fixed expenses
Operating income (loss)
__________
*$120,000 / $400,000 = 0.30
**$280,000 / $400,000 = 0.70 (CM ratio)
$270,000
81,000
189,000
170,800
$ 18,200
$410,000
123,000
287,000
170,800
$ 116,200
Req. 2
Breakeven sales
$170,800 + $0
1 0.30
$170,800 + $0
0.70
= $244,000
(10-15 min.) E7-18A

This problem involves working backwards through the shortcut contribution margin formula and
then working backwards through the contribution margin income statement to find the missing
data.
First, fill in the given data in the short cut contribution margin formula, and solve for the
contribution margin ratio:
Sales needed to breakeven
$48,000
Fixed expenses
$24,000
$24,000
$48,000
= .50
Next, fill in the given data in the contribution margin income statement:
Sales.
Less: Variable expenses.
Contribution margin.
Operating income..
7-12
$
?
42,000
?
24,000
$
?
Chapter 7
(continued) E7-18A
Because the contribution margin ratio
50% of sales revenue. Therefore:
Variable expenses
$ 42,000
$ 84,000
Or alternatively:
Sales $42,000
Sales 50% Sales
50% Sales
Sales
Sales
is 50% of sales revenue, the variable expenses must be

=
=
=
50% Sales revenue

50% Sales revenue
Sales revenue
=
=
=
=
50% Sales
$42,000
$42,000
$42,000
50%
$84,000
Once sales revenue is found, the rest of the income statement follows:
Sales.
$ 84,000
42,000
$ 42,000
24,000
Operating income.
$ 18,000
Therefore, at the current level of operations, the companys sales revenue is $84,000 and its
operating income is $18,000.
(15 min.) E7-19A

Req. 1
Contribution margin per unit:
Sale price......................................
Less: Variable expenses..................................
Contribution margin per unit....................
Contribution margin ratio:
Sale price per unit
$1.80
0.90
$0.90
$0.90
$1.80
0.50
Req. 2
Breakeven sales in units
=
=

$90,000 + $0
$0.90
= 100,000 packages
Breakeven sales in dollars
=
=

$90,000 + $0
0.50
= $180,000
7-13
(continued) E7-19A
Req. 3
Sales in units
=
=

$90,000 + $18,000
$0.90
= 120,000 packages
(5-10 min.) E7-20A

New contribution margin per unit:
Sales price......................................
Sales in units
=
=
$1.80
0.80
$1.00

$105,000 + $18,000
$1.00
= 123,000 packages
The company would have to sell 3,000 more packages of socks (123,000 120,000 from E719A) to earn $18,000 of operating income. The increase in fixed costs was not completely offset
by the decrease in variable costs at the prior target profit volume of sales. Therefore, the
company will need to sell more units in order to achieve its target profit level.
7-14
Chapter 7
Req. 1
Contribution
margin ratio
(10-15 min.) E7-21A

Sales price per unit
=
=
=
Breakeven sales
in dollars
$5.25 $2.10
$5.25
0.60
=
=
=
$7,500 + $0
0.60
$12,500
Req. 2
If franchisees require a monthly operating income of $7,500
Target sales
=
in dollars
=
=
$7,500 + $7,050
0.60
$24,250
Yes, the franchising concept is a good idea. Most locations are expected to sell more ($25,000)
than the sales required to earn the target profit ($24,250).
(10- 15 min.) E7-22A

Req. 1
Prior to changes, the average restaurant location had the following operating income:
Contribution margin per unit ($5.25 - $2.10)
$ 3.15
Average sales volume units
6,500
Contribution margin..
$20,475
(7,500)
Operating income...
$12,975
Req. 2
After the price cut and advertising fees, the average restaurant location will have the following
operating income:
New contribution margin per unit ($4.75 sales price
$2.10 variable cost.
$ 2.65
New sales volume (units).
7,000
Contribution margin...
$18,550
Less: New fixed expenses
($7,500 + $600 advertising fee)
(8,100)
New operating income..
$ 10,450
Assuming volume increases according to plan, cutting the sales price and advertising will allow
the franchise owners to continue to reach their target profits of $7,050 per month. However,
their operating income will not be as high as before the changes.
7-15
(10-15 min.) E7-23A

Req. 1

=
=
=
$630,000 + $0
0.70
$900,000
Req. 2
Grovers Steel Parts
Operating Income Projections
at Different Sales Levels
Sales revenue
$ 520,000
0.70
Contribution margin
364,000
Less: Fixed expenses
630,000
$(266,000)
$1,010,000
0.70
707,000
630,000
$ 77,000
Req. 3
Yes, the income projections at the two different sales levels make sense given the breakeven
sales level ($900,000) computed in Req. 1. Req. 2 shows that if the companys revenue is only
$520,000 (short of the revenue required to breakeven) the company incurs a loss. On the other
hand, if revenue is $1,010,000 (higher than the revenue required to breakeven), the company
earns a profit.
(15 min.) E7-24A

Req. 1
Target sales in dollars
=
=
=

$630,000 + $77,000
0.40
$1,767,500
Req. 2
Sales in dollars
$1,010,000
$404,000
Fixed expenses + $77,000
$327,000
Fixed expenses

0.40
Fixed expenses can only be $327,000 to maintain the prior profit level of $77,000 per month.
Therefore, Grover will have to save at least $303,000 per month in fixed costs ($630,000
$327,000) by moving operations overseas if he plans to maintain his prior profit level.
7-16
Chapter 7
(15-20 min.) E7-25A
Req. 1
(Fixed expenses + Operating income) / CM per unit = Breakeven in units
($240,000 + $0) / ($2,400 - $1,000 - $200) = 200 units
(Fixed expenses + Operating income) / CM ratio = Breakeven in sales dollars

CM ratio = ($2,400 - $1,000 - $200) / $2,400 = .50
($240,000 + $0) / .50 = $480,000
Req. 2
Total CM ($2,400 - $1,000 - $200) x 410 = $492,000
Projected operating income = $492,000 - $240,000 = $252,000
Req. 3
New fixed expenses = $240,000 + $120,000 = $360,000
New CM = $2,400 ($1,000 - $240) - $200 = $1,440
($360,000 + $0) / ($2,400 ($1,000 - $240) - $200) = 250 units
CM ratio = ($2,400 ($1,000 - $240) - $200) / $2,400 = .60
($360,000 + $0) / .60 = $600,000
Req. 4
Total CM ($2,400 ($1,000 - $240) - $200) x 410 = $590,400
Req. 5
Based purely on the financial analysis presented above (operating income for Req. 1 is more
than the operating income for Req. 4), the company should not implement the software control
system. However, the new control system would reduce waste and contribute to the companys
sustainability objectives. The company should take into account not only the financial measures
such as operating income, breakeven point, and operating leverage, but also the sustainability
impact of the decision.
Student answers may vary for Req. 5.
7-17
(5-10 min.) E7-26A

Use the short cut contribution margin formula to determine the companys current level of fixed
expenses:
Fixed expenses
=
Fixed expenses
.20
$350,000
$350,000 .20
Fixed expenses
$70,000
Fixed expenses
After buying the equipment, the companys fixed expenses will be $125,000 ($70,000 +
$55,000 increase). Calculate breakeven (in sales) at the new level of fixed expenses:
Fixed expenses
=
=
=
$125,000
.20
$625,000
The company will now have to generate $625,000 of sales revenue to breakeven.
(5-10 min.) E7-27A

Sales price per unit..
Contribution margin ratio...
Contribution margin per unit.
$24.00
.625
$15.00
Find the number of scarves needed to breakeven on (or pay for) the extra entrance fee cost of $120 (= $1,200 10%
increase):
Fixed expenses
Breakeven in units
=
Alternatively:
Breakeven in sales revenue
$120
$15.00
8 scarves
Fixed expenses
=
=
$120
.625
= $192 in sales revenue

Dividing $192 in sales revenue by the price per scarf ($24) yields 8 scarves. The owner will have
to sell an additional 8 scarves next year to cover the increase in entrance fees.
(15-20 min.) E7-28A

7-18
Chapter 7

Twig
Sale price per unit
$15.00
2.50
$12.50
Multiply by: Sales mix in units
4
Contribution margin
$50.00
Oak
$35.00
10.00
$25.00
1
$25.00
Weighted-average contribution margin per unit ($75 / 5

units)
Sales in total units:
=
=
Total
5
$75.00
$15.00

$300 + $0
$15
= 20 units
Breakeven sales of twig stands (20 4/5)
Breakeven sales of oak stands (20 1/5).
16 units
4 units
By charging her husband part of the craft fair entrance fees, the wifes fixed costs will decrease.
Therefore, the wife will need to sell fewer scarves to breakeven than before her husband
decided to share her craft booths.
(15-20 min.) E7-29A

Standard
Chrome
$60
$75
45
55
$15
$20
3
2
Contribution margin
$45
$40
units)
Total
5
$ 85
$ 17

=
=
$18,700 + $0
$17
= 1,100 units
Breakeven sales of standard scooters (1,100 3/5)
Breakeven sales of chrome scooters (1,100 2/5)...
660 units
440 units
7-19
(continued) E7-29A

$18,700 + $13,600
$17
= 1,900 units
Target sales of standard scooters (1,900 3/5)........
Target sales of chrome scooters (1,900 2/5)............................
1,140 units
760 units
(20-30 min.) E7-30A

This is a challenging exercise that requires students to work backwards. Use the weightedaverage contribution margin per unit chart, in conjunction with the shortcut formula, to work
backwards to find the contribution margin of the Classic.
Sales price per unit..................
Less: Variable expense per unit. ($125 + $35)
Contribution margin per unit....
Multiply by: Sales mix in units............
Contribution margin...........
margin per unit............
a
Classic
215
3
645
Sales in
total units

2,100
$195,000 + $36,000
Weighted-average
contribution
margin per unit
=
=
7-20
Digital
$225
160
65
x7
$455
$231,000
2,100
$110 / unit
Total
10
1,100
$ 110
Chapter 7
(continued) E7-30A
b
Weighted-average
contribution
margin per unit
Contribution
margin per
Classic watch
Total sales mix contribution margin

Total sales mix units
$455 + X
10
$110
$1,100
$455 + X
$645
$645
$215
Contribution margin
per Classic watch
(15 min.) E7-31A

Req. 1
The companys operating income can be computed as follows:
Sales revenue.
Less: Variable expenses
Less: Fixed expenses($2,600,000 - $1,088,000)
Operating income..
Req. 2
5,712,000
6,800,000
=
=
$6,800,000
1,088,000
5,712,000
1,512,000
$4,200,000
84%
Req. 3
Breakeven in sales dollars
1,512,000
84%
=
=
$1,800,000
Req. 4
If the company embarks on this advertising campaign, sales revenue and variable costs will rise
by 14%, which will cause the contribution margin to increase by 14%. Fixed costs will rise by
only $250,000 due to the advertising campaign. Overall operating income will increase by
$549,680 See the computations to follow.
The change in operating income can be computed as follows:
Current contribution margin
Percentage increase
Increase in contribution margin
Less: Increase in fixed costs of advertising campaign
Increase in operating income
$5,712,000
14%
799,680
250,000
$549,680
(15 min.) E7-32A

7-21

Req. 1
1.00 0.60
0.40
=
=
Margin of safety
Req. 2
Margin of safety as
a percentage of target sales

$12,000 + $0
0.40
$30,000
=
=
$12,000 + $20,000
0.40
$32,000
0.40
$80,000
$80,000 $30,000
$50,000
$50,000
$80,000
= 0.625 or 62.5% of target sales

Req. 3
Target sales...
Contribution margin
Operating income.
$80,000
.40
$32,000
12,000
$20,000
=
Contribution margin
Operating income
$32,000
$20,000
1.60
Req. 4
If volume decreases 12%, operating income will decrease 19.20% (operating leverage factor of
1.60 multiplied by 12%).
7-22
Chapter 7
(10 min.) E7-33A

First, find the companys contribution margin:
Sales
Contribution margin
$60,000
.35
$21,000
Then, work backwards to find the companys operating income:

Contribution margin
Operating leverage factor
=
Operating income
=
$21,000
Operating income
Operating income
$21,000
1.40
Operating income
= $15,000
1.40
Finally, finish the income statement to find the fixed expenses:

$21,000
Unknown
Operating income..
$15,000
Therefore, fixed expenses must be $6,000.
7-23
(10-15 min.) E7-34A

Req. 1
Selling price
$30
Less: Variable costs ($6 + $3 + $3)
12
CM per unit
$18
Lease costs under Option A:
Fixed costs
Total costs under Option A
$ 3,000
0
$ 3,000
Lease costs under Option B:

Fixed costs
Total variable costs (10% x $30 x 250)
Total costs under Option B
$ 1,650
750
$ 2,400
The more attractive lease option is Option B because it results in the lowest total lease costs.
Req. 2
To solve the question, you need to set the costs of Option A equal to the costs of Option B:
$3,000 = $1,650 + (10% x $30 x CANDLES)
Then solve for CANDLES:
CANDLES = 450
Req. 3
The lease option that is more attractive for the company if the company plans to sell 600
candles a month is option A, the fixed lease payment because the sales volume is more than
the indifference point.
7-24
Chapter 7
(20-25 min.) E7-35A
Req. 1
Breakeven in units
Fixed expenses
=
=
=
Req. 2
2a.
2b.
Selling price
Less: variable cost
per unit
CM per unit
Sales in units to reach desired

profit
Sales in dollars to reach desired

profit
$600
$30*
20 grooming kits
$62
$32
$30
Fixed expenses + Operating Income

=
=
$600 + $900
$30
$1,500
$30
50 grooming kits
breakeven units x selling price per unit
50 units x $62/each
$3,100
2c.
Condensed Income Statement
Sales
Less: variable expenses (50 x
$32)
$3,100
Contribution margin
$1,500
Less: fixed expenses
$600
Operating income
$900
$1,600
7-25
(continued) E7-35A
Req. 3
Margin of safety in dollars:
Sales at target level:
Sales at B/E level:
Margin of safety in units:
Sales at B/E level:
Margin of safety in units
Margin of safety in %:
$1,860/$3,100 =
$3,100
$1,240*
$1,860
50
20
30
$1,860
$3,100
60.00%
*Sales at B/E level: 20 kits x $62 = $1,240
7-26
Chapter 7
(20-25 min.) E7-36A

Req. 1
Total
Sales
Per Unit
$81,250
$25
100%
48,750
15
60%
Contribution Margin
$32,500
$10
40%
13,000
Operating income
$19,500
1a) Total contribution margin is $32,500.

1b) Per unit contribution margin is $10.
1c) Operating income is $19,500.
1d) Units sold = Total sales / sales price = $81,250 / $25 = 3,250 units
Req. 2
2a.
Breakeven in units
=
=
$13,000
$10
1,300 units
2b.
Fixed expenses
=
=
=

$13,000 + 0
0.40 (from req. 1)
$32,500
Req. 3
3a.
profit

$13,000 + $53,000
$10
$66,000
$10
6,600 units
7-27
(continued) E7-36A
3b.
Budgeted Sales Units
3,250
Less: Breakeven Sales Units
1,300
Margin of Safety in Units
1,950
3c.
Budgeted Sales
$81,250
Less: Breakeven Sales Volume
$32,500
Margin of Safety in Dollars

3d.
$48,750
$48,750
Divided by: Budgeted Sales Dollars
$81,250
Margin of Safety %
60.0%
(20-25 min.) E7-37A

1.
Sales price per unit.............................................

(7.30+6+2.60+2.10).........................................
Contribution margin per unit .............................
$25.00
$18.00
$ 7.00
$7.00
$25.00
Sales revenue (140,000 $25.00)

Less: Variable expenses (140,000 $18.00)
.28
28%
$ 3,500,000
(2,520,000)
$ 980,000
2.
Sales volume (units)

Unit contribution margin
Contribution margin
Less: Fixed expenses($292,000 + $447,200)
Operating income.
170,000
x $7.00
$1,190,000
(739,200)
$450,800
3.
Sales revenue
Contribution margin
Less: fixed expenses.
Operating income.
$4,500,000
x
28%
$1,260,000
(739,200)
$ 520,800
4.
7-28
B/E sales in units
$739,200
$7.00
B/E sales in dollars
$739,200
28%
105,600
units
$2,640,000
Chapter 7
7-29
(continued) E7-37A
5.
6.
$739,200 + $269,500
$7.00
Original contribution margin per unit..................

Less: Increase in direct labor cost per unit ($6.00 x
10%)..........................................................
New contribution margin per unit...
$0.60
$6.40
$739,200
24,000
New fixed expenses
$763,200
$763,200
$6.40
8.
Increase in volume..
Operating leverage factor..
New fixed expenses
9.
Margin of safety
$ 240,800
Sales Sales at breakeven

$3,500,000 $2,640,000
(from part 1) (from part 4)
$860,000
=
Margin of safety as a percentage
=
$860,000
$3,500,000
16 GB
$25
18
$ 7
6
$42
.25
(rounded
)
32 GB
Total
$50
22
$28
1
$28
7
$70
Weighted-average contribution margin per

unit
Sales in units
4.07
= (rounde
d)
$980,000
8%
4.07
32.6%
(rounded)
Sales price..
Less: Variable cost..
Sales mix.
Multiply by: Contribution margin.
119,250
Units
$980,000
(739,200)
$ 240,800
=
$739,200 + $269,500
$10
Smaller 16 GB: 100,870 6/7..

Larger 32 GB: 100,870 1/7..
7-30
Contribution margin (from part 1)...

Less: Fixed expenses...
Operating income
Operating Leverage factor
10.
$7.00
Original fixed expenses.

Plus: Increase in fixed expenses..
New breakeven in units

7.
144,100 units
25%
= (rounded
)
$10.00
100,870
units
86,460 units
(rounded)
14,410 units
(rounded)
Chapter 7
The target profit volume is lower than before (Req. 5) because now the company is selling a
product with a much higher unit contribution margin.
Exercises (Group B)
(15 min.) E7-38B
Req. 1
Contribution Margin Income Statements
Sales revenue
Less: Variable expenses (35% of sales revenue*)
Contribution margin (65% of sales
revenue**)
Fixed expenses
__________
*$192,500 / $550,000 = 0.35
**$357,500 / $550,000 = 0.65 (CM ratio)
$190,000
66,500
123,500
176,800
$ (53,300)
$420,000
147,000
273,000
176,800
$ 96,200
Req. 2
Breakeven sales
$176,800 + $0
1 0.35
$176,800 + $0
0.65
= $272,000
7-31
(10-15 min.) E7-39B

This problem involves working backwards through the shortcut contribution margin formula and
then working backwards through the contribution margin income statement to find the missing
data.
First, fill in the given data in the short cut contribution margin formula, and solve for the
contribution margin ratio:
$40,000
Fixed expenses
$30,000
$30,000
$40,000
= .75
Next, fill in the given data in the contribution margin income statement:
Sales.
Operating income..
$
?
45,000
?
30,000
$
?
Because the contribution margin ratio is 75% of sales revenue, the variable expenses must be
25% of sales revenue. Therefore:
Variable expenses
$ 45,000
$180,000
=
=
=
25% Sales revenue

25% Sales revenue
Sales revenue
Sales $45,000
Sales 75% Sales
25% Sales
Sales
=
=
=
=
Sales
75% Sales
$45,000
$45,000
$45,000
25%
$180,000
Or alternatively:
Once sales revenue is found, the rest of the income statement follows:
Sales.
Operating income.
$180,000
45,000
$135,000
30,000
$ 105,000
Therefore, at the current level of operations, the companys sales revenue is $180,000, and its
operating income is $105,000.
7-32
Chapter 7
(15 min.) E7-40B
Req. 1
Contribution margin per unit:
Sale price......................................
Contribution margin ratio:
Sale price per unit
$1.60
0.80
$0.80
$0.80
$1.60
0.50
Req. 2
=
=

$80,000 + $0
$0.80
= 100,000 packages
=
=

$80,000 + $0
0.50
= $160,000
Req. 3
Sales in units
=
=

$80,000 + $25,000
$0.80
= 131,250 packages
(5-10 min.) E7-41B

New contribution margin per unit:
Sale price......................................
Sales in units
=
=
$1.60
0.60
$1.00

$95,000 + $25,000
$1.00
= 120,000 packages
(continued) E7-41B
7-33

The company would have to sell 11,250 fewer packages of socks (120,000 131,250 from E740B) to earn $25,000 of operating income.
(10-15 min.) E7-42B

Req. 1
Contribution
margin ratio
=
=
Breakeven sales
in dollars

$6.25 $2.50
$6.25
0.60
=
=
=
$8,250 + $0
0.60
$13,750
Req. 2
If franchisees require a monthly operating income of $6,600
Target sales
=
in dollars
=
=
$8,250 + $6,600
0.60
$24,750
No, the franchising concept is not a good idea. The sales required to earn the target profit
($24,750) are more than the expected sales generated ($24,000).
7-34
Chapter 7
(10- 15 min.) E7-43B
Req. 1
Prior to changes, the average restaurant location had the following operating income:
Contribution margin per unit (from E7-42B)
$ 3.75
Average sales volume units
5,500
$20,625
(8,250)
Operating income...
$12,375
Req. 2
After the price cut and advertising fees, the average restaurant location will have the following
operating income:
New contribution margin per unit ($5.75 sales price
$2.50 variable cost.
New sales volume (units).
Less: New fixed expenses
($8,250 + $500 advertising fee)
New operating income..
$ 3.25
6,000
$19,500
(8,750)
$ 10,750
Assuming volume increases according to plan, cutting the sales price and advertising will allow
the franchise owners to reach their target profits of $6,600 per month.
(10-15 min.) E7-44B

Req. 1
=
=
=

$620,000 + $0
0.80
$775,000
Req. 2
Sales revenue
Contribution margin
Operating Income Projections

at Different Sales Levels
$ 520,000
0.80
416,000
620,000
$(204,000)
$1,020,000
0.80
816,000
620,000
$ 196,000
Req. 3
Yes, the income projections at the two different sales levels make sense given the breakeven
sales level ($775,000) computed in Req. 1. Req. 2 shows that if the companys revenue is only
$520,000 (short of the revenue required to breakeven) the company incurs a loss. On the other
hand, if revenue is $1,020,000 (higher than the revenue required to breakeven), the company
earns a profit.
7-35
(15 min.) E7-45B

Req. 1
Sales in dollars
=
=
=
Req. 2

$620,000 + $196,000
0.50
$1,632,000

Sales in dollars
$1,020,000
$510,000
$314,000
Fixed expenses

0.50
Fixed expenses can only be $314,000 to maintain the prior profit level of $196,000 per month.
Therefore, the company will have to save at least $306,000 per month in fixed costs ($620,000
$314,000) by moving operations overseas if it plans to maintain its prior profit level.
(15-20 min.) E7-46B

Req. 1
($294,000 + $0) / ($2,100 - $520 - $110) = 200 units
CM ratio = ($2,100 - $520 - $110) / $2,100 = .700
($294,000 + $0) / .700 = $420,000
Req. 2
Total CM = ($2,100 - $520 - $110 ) x 290 = $426,300
Req. 3
New fixed expenses = $294,000 + $126,000 = $420,000
New CM = ($2,100 ( $520 - $210) - $110) = $1,680
($420,000 + $0) / $1,680) = 250 units
CM ratio = $1,680 / $2,100 = .800
($420,000 + $0) / .800 = $525,000
Req. 4
Total CM ($2,100 ($520- $210) - $110) x 290 = $487,200
(continued) E7-46B
7-36
Chapter 7
Req. 5
However, the new control system would reduce waste and contribute to the companys
sustainability objective. The company should take into account not only the financial measures
such as operating income, breakeven point, and operating leverage, but also the sustainability
impact of the decision.
Student answers may vary.
(5-10 min.) E7-47B

Use the short cut contribution margin formula to determine the companys current level of fixed
expenses:
Fixed expenses
$500,000
$500,000 .50
Fixed expenses
$250,000
Fixed expenses
Fixed expenses
.50
After buying the equipment, the companys fixed expenses will be $300,000 ($250,000 +
$50,000 increase). Calculate breakeven (in sales) at the new level of fixed expenses:
Fixed expenses
=
=
=
$300,000
.50
$600,000
The company will now have to generate $600,000 of sales revenue to breakeven.
(5-10 min.) E7-48B

Sales price per unit..
Contribution margin ratio...
Contribution margin per unit.
$14.00
.625
$8.75
Find the number of scarves needed to breakeven on (or pay for) the extra entrance fee cost of
$350 (= $1,400 25% increase):
Fixed expenses
Breakeven in units
=
=
=
$350
$8.75
40 scarves
7-37

Alternatively:
Breakeven in sales revenue
(continued) E7-48B
Fixed expenses
=
=
$350
.625
= $560 in sales revenue

Dividing $560 in sales revenue by the price per scarf ($14) yields 40 scarves. The owner will
have to sell an additional 40 scarves next year to cover the increase in entrance fees.
(15-20 min.) E7-49B

Twig
$18.00
Less Variable cost per unit
3.00
$15.00
4
Contribution margin
$60.00
units)
Oak
$38.00
8.00
$30.00
1
$30.00
Total
5
$90.00
$18.00

=
=
$360 + $0
$18
= 20 units
Breakeven sales of twig stands (20 4/5)
Breakeven sales of oak stands (20 1/5).
16 units
4 units
By charging her husband part of the craft fair entrance fees, the wifes fixed costs will decrease.
Therefore, the wife will need to sell fewer scarves to breakeven than before her husband
decided to share her craft booths.
7-38
Chapter 7
(15-20 min.) E7-50B

Standard
Chrome
$65
$85
55
65
$10
$20
3
2
Contribution margin
$30
$40
Weighted-average contribution margin
Total
5
$70
$ 14
Sales in total units to breakeven:

=
=
$9,800 + $0
$14
= 700 units
Breakeven sales of standard scooters (700 3/5)
Breakeven sales of chrome scooters (700 2/5)...
420 units
280 units
Sales in total units to achieve target operating income:

=
=
$9,800 + 8,400
$14
= 1,300 units
Target sales of standard scooters (1,300 3/5)........
Target sales of chrome scooters (1,300 2/5).........................
780 units
520 units
7-39
(20-30 min.) E7-51B

This is a challenging exercise that requires students to work backwards. Use the weightedaverage contribution margin per unit chart, in conjunction with the shortcut formula, to work
backwards to find the contribution margin of the Classic.
Digital
$250
170
80
8
$640
Sales price per unit..................

Less: Variable expense per unit. ($120 + $50)
Contribution margin per unit....
Multiply by: Sales mix in units............
Contribution margin...........
margin per unit............
a
2,200
$200,000 + $75,000
$275,000
2,200
Weighted-average
contribution
margin per unit
Contribution margin
per Classic watch
$125 / unit
Total sales mix contribution margin
Total sales mix units
$640 + X
10
$125
$1,250
$640 + X
$610
$610
$305
10
1,250
$ 125

Contribution
margin per
Classic watch
7-40
305
2
610
Total
Sales in
total units
Weighted-average
contribution
margin per unit
Classic
Chapter 7
(15 min.) E7-52B

Req. 1
The companys operating income can be computed as follows:
Sales revenue.
Less: Fixed expenses($2,590,000 - $1,342,000)
Operating income..
$6,100,000
1,342,000
4,758,000
1,248,000
$3,510,000
Req. 2
=
Req. 3
Breakeven in sales dollars
$4,758,000
$6,100,000
78%
$1,248,000
78%
= $1,600,000
The company will have to generate $1,600,000 in sales in order to break even.
Req. 4
If the company embarks on this advertising campaign, sales revenue and variable costs will rise
by 16%, which will cause the contribution margin to increase by 16%. However, fixed costs will
rise by $260,000 dollars due to the advertising campaign.
The change in operating income can be computed as follows:
Current contribution margin
Percentage increase
Less: Increase in fixed costs of advertising campaign
$4,758,000
16%
761,280
260,000
$501,280
7-41

Req. 1
(15 min.) E7-53B

=
1.00 0.40
0.60
=
=
Req. 2
Margin of safety as
a percentage of target sales
$7,500 + $0
0.60
$12,500

$7,500 + $30,000
0.60
Margin of safety

$37,500
0.60
$62,500
$62,500 $12,500
$50,000
$50,000
$62,500
= 0.80 or 80% of target sales

Req. 3
Target sales...
Contribution margin
Operating income.
$62,500
.60
$37,500
7,500
$30,000
=
Contribution margin
Operating income
$37,500
$30,000
1.25
Req. 4
If volume decreases 12%, operating income will decrease 15.0% (operating leverage factor of
1.25 multiplied by 12%).
(10 min.) E7-54B

First, find the contribution margin:
7-42
Chapter 7
Sales
Contribution margin
$45,000
.20
$ 9,000
Then, work backwards to find operating income:

Contribution margin
=
Operating income
=
$9,000
Operating income
Operating income
$9,000
1.60
Operating income
= $5,625
1.60
Finally, finish the income statement to find the fixed expenses:

$9,000
Unknown
Operating income..
$ 5,625
Therefore, fixed expenses must be $3,375.
(10-15 min.) E7-55B

Req. 1
Selling price
$45
Less: Variable costs ($10 + $4 + $2)
CM per unit
$29
16
Lease costs under Option A:

Fixed costs
Total costs under Option A
$ 3,600
0
$ 3,600
Lease costs under Option B:

Fixed costs
Total variable costs (20% x $45 x 190)
Total costs under Option B
$ 990
1,710
$2,700
The more attractive lease option is Option B because it results in the lowest total lease costs.
Req. 2
To solve the question, you need to set the costs of Option A equal to the costs of Option B:
$3,600 = $990 + (20% x $45 x CANDLES)
Then solve for CANDLES:
CANDLES = 290
Req. 3
The lease option that is more attractive for the company if the company plans to sell 490
candles a month is option A, the fixed lease payment because the sales volume is more than
the indifference point.
Lease costs under option A: #3,600
Lease costs under option B: $990 + (20% x $45 x 490) = $5,400
(20-25 min.) E7-56B

Req. 1
Breakeven in units
Fixed expenses
7-43

=
=
*
Req. 2
2a.
2b.
Selling price
Less: variable cost
per unit
CM per unit

profit
Sales in dollars to reach desired

profit
$720
$40*
18 grooming kits
$73
$33
$40
=
=
$720 + $1,080
$40
$1,386
$40
45 grooming kits
target units x selling price per unit
45 units x $73/each
$3,285
2c.
Condensed Income Statement
Sales (45 x $73)
Less: variable expenses (45 x
$33)
$3,285
Contribution margin
$1,800

Operating income
7-44
$1,485
$720
$1,080
Chapter 7
(continued) E7-56B
Req. 3
Sales at target level
Sales at B/E level:
($720 / 40) x $73
$3,285
$1,314
$1,971
Margin of safety in units:

Sales at B/E level:
($720 / 40)
Margin of safety in units
45
18
27
Margin of safety in %:
$1,971/ $3,285
$1,971
$3,285
60.0%
(20-25 min.) E7-57B

Req. 1
Total
Sales
Per Unit
$115,000
$50
100%
57,500
25
50%
Contribution Margin
$57,500
$25
50%
11,500
Operating income
$46,000
1a) Total contribution margin is $57,500.

1b) Per unit contribution margin is $25.
1c) Operating income is $46,000.
1d) Units sold = Total sales / sales price = $115,000 / $50 = 2,300 units
7-45
(continued) E7-57B
Req. 2
2a.
Breakeven in units
Fixed expenses
$11,500
$25
460 units
2b.
=
=
=
Req. 3
3a.

profit

$11,500 + 0
0.50 (from req. 1)
$23,000

=
=
$11,500 + $58,000
$25
$69,500
$25
2,780 units
3b.
Budgeted Sales Units
2,300
Less: Breakeven Sales Units

Margin of Safety in Units
460
1,840
3c.
Budgeted Sales
$115,000
Less: Breakeven Sales
$23,000
$92,000
3d.
Divided by Budgeted Sales Dollars
Margin of Safety %
7-46
$92,000
$115,000
80.0%
Chapter 7
(20-25 min.) E7-58B

1.
Sales price per unit.......................................

Less: Variable cost per unit ($8.40+$8+$3.70+
$1.90)...................................
Contribution margin per unit.............................
$25.00
$22.00
$ 3.00
$3.00
$25.00
.12
12%
Sales Revenue (100,000 $25.00)

Less: Variable exp. (100,000 $22.00)
$ 2,500,000
(2,200,000)
$ 300,000
2.
Sales volume (units)

Unit contribution margin
Contribution margin
Less: Fixed expenses ($121,800+$167,100)
Operating income
130,000
x $25.00
$390,000
(288,900)
$101,100
3.
Sales revenue
Contribution margin
Less: Fixed expenses ($121,800+$167,100)
Operating income
$4,000,000
x
12%
$480,000
(288,900)
$ 191,100
4.
5.
B/E sales in units
$288,900
$3.00
B/E sales in dollars
$288,900
12%
$288,900 + $260,100
$3.00
=
=
96,300
units
$2,407,500
183,000 units
7-47
(continued) E7-58B
6.
Original contribution margin per unit..................

Less: Increase in Direct labor cost per unit ($8.00 x
10%)..........................................................
New contribution margin per unit...
$3.00
$0.80
$2.20
Original fixed expenses.

Plus: Increase in fixed expenses.
New fixed expenses
New breakeven in units
7.
$288,900
23,500
$312,400
$312,400
$2.20
Contribution margin (from part 1)...

Operating income
8.
Increase in volume..
Operating leverage factor..
New fixed expenses
9.
Margin of safety
$300,000
$11,100

$2,500,000 $2,407,500
(from part 1) (from part 4)
$92,500
Margin of safety as a percentage

=
16 GB
$25
22
$ 3
9
$27
92,500
2,500,000
.037
32 GB
$50
27
$23
1
$23
$121,800 + $167,100 +
$260,100
$5.00
Smaller 16 GB: 109,800 9/10

Larger 32 GB: 109,800 1/10.
3.7%
Total
10
$50
Weighted-average contribution margin per

unit
Sales in units
27.03
(rounded)
3%
27.03
81.1%
(rounded)
Sales price..
Less: Variable cost..
Multiply by: Sales mix.
$300,000
(288,900)
$11,100
=
10.
142,000
Units
$5.00
109,800 units
=
98,820 units
10,980 units
The target profit volume is lower than before (Req. 5) because now the company is selling a
product with a much higher unit contribution margin.
7-48
Chapter 7
Problems (Group A)
(30-45 min.) P7-59A
Req. 1
Companies Q, R, S, T
Target sales
Operating income
Units sold
Contribution
per unit
margin
Q
$625,000
125,000
370,000
$130,000
80,000
$
COMPANY
R
$445,000
178,000
159,000
$ 108,000
106,800
6.25
Contribution margin
0.80
ratio
Computations (top to bottom for each company)
Q:
2.50
S
$236,000
118,000
94,000
$ 24,000
12,500
$
0.60
9.44
0.50
T
$780,000
156,000
493,000
$131,000
16,000
$
39.00
0.80
Sales Variable expenses Operating income = Fixed expenses

$625,000 $125,000 $370,000 = $130,000
Sales Variable expenses = Contribution margin;
Contribution margin / Unit contribution margin = Units sold
$625,000 $125,000 = $500,000; $500,000 / $6.25 = 2,048 units
Contribution margin / Sales = Contribution margin ratio
$500,000 / $625,000 = 0.80
R:
Sales Contribution margin ratio = Contribution margin;

Sales Contribution margin = Variable expenses
($445,000 0.60) = $267,000; $445,000 $267,000 = $178,000
Sales Variable expenses Fixed expenses = Operating income
$445,000 $178,000 $159,000 = $108,000
Contribution margin / Units sold = Contribution margin per unit
$267,000 / 106,800 = $2.50
S:
Units sold Unit contribution margin = Contribution margin;

12,500 $9.44 = $118,000; $236,000 $118,000 = $118,000
$236,000 $118,000 $94,000 = $24,000
$118,000 / $236,000 = 0.50
7-49
(continued) P7-59A
T:

Contribution margin + Variable expenses = Sales
16,000 $39 = $624,000; $624,000 + $156,000 = $780,000
$780,000 $156,000 $131,000 = $493,000
$624,000 / $780,000 = 0.80
Req. 2
Breakeven Sales:
Q
B/E
$370,000
0.80
$462,500
R:
B/E
$159,000
0.60
$265,000
S:
B/E
$94,000
0.50
$188,000
Lowest breakeven point
T:
B/E
$493,000
0.80
$616,250
Company Ss low breakeven point is primarily due to its low fixed expenses.
(30-45 min.) P7-60A

Req. 1
Revenue per show:
1,200 tickets $55 / ticket........................
$66,000
Variable expenses per show:

Programs: 1,200 guests $9 / guest....................
Cast: 60 cast members $320 / cast member.........
Total variable expenses per show.........................
$ 10,800
19,200
$30,000
7-50
Chapter 7
(continued) P7-60
Sales revenue
Variable expenses
Fixed expenses
Operating income
Operating income
$0
Revenue
per
show
Number
of
shows
Variable
Number
exp. per
of
Fixed expenses
show
shows
$66,000
Number
of
shows
$30,000
Number
of
$969,000
shows
($66,000 $30,000) Number of shows

$36,000 Number of shows
Number of shows
Breakeven number of shows
Req. 3
Contribution margin
= $1,224,000
=
=
=
$1,224,000
$1,224,000
$36,000
34 shows
= $66,000 $30,000
= $36,000
Fixed expenses + Target operating income
Target number of shows
$1,224,000 + $3,888,000
$36,000
$5,112,000
$36,000
= 142 shows
This profit goal is unrealistic since the show currently performs 115 times a year.
Req. 4
Fiddler on the Roof
Contribution Margin Income Statement
For the Year Ended December 31
Sales revenue (115 $66,000)
Less: Variable expenses (115 $30,000)
Contribution margin
Operating income
$7,590,000
3,450,000
4,140,000
1,224,000
$2,916,000
7-51

Req. 1
Sales Revenue
Sale
price Units sold
per
unit
(30-45 min.) P7-61A
Variable expenses
Variable
cost
per unit
Units sold
Fixed expenses
= Operating income
Fixed expenses
= Operating income
($16.50 Units sold) ($6.50 Units sold)

$1,095,000
($13.50 $3.50) Units sold
$10.00 Units sold
Units sold
Req. 2
= $0
= $1,095,000
= $1,095,000
=
$1,095,000
$10.00
= 109,500 cartons
Contribution margin = $16.50 $6.50

= $10.00
Contribution margin ratio = $10.00 / $16.50
= 0.61 (rounded)
Target sales in dollars =
=

$1,095,000 + $308,000
0.61
$1,403,000
0.61
= $2,300,000
Req. 3
Team Spirit Calendars
Month Ended June 30
Less Variable expenses:
Cost of goods sold (450,000 $6.50 0.68)
$1,989,250
Operating expenses (450,000 $3.50 0.32)
936,000
Contribution margin
Operating income
7-52
$7,425,000
2,925,000
4,500,000
1,095,000
$3,405,000
Chapter 7
Req. 4
Margin of
Margin of
Margin of
Margin of
(continued) P7-61A
safety
safety
safety
safety

=
=
=
=

$7,425,000 (109,500 cartons $16.50 per carton)
$7,425,000 $1,806,750
$5,618,250
Contribution margin
Operating income
$4,500,000
=
$3,405,000
= 1.322 (rounded)
=
Req. 5
If volume increases 16%, then operating income will increase 21.15% (operating leverage factor
Proof:
Original volume (cartons).....
450,000
72,000
New volume (cartons)...
522,000
Multiplied by: Unit contribution margin
$10.00
New total contribution margin
$5,220,000
(1,095,000)
New operating income.
$4,125,000
vs. Operating income before change in
volume..
3,405,000
Increase in operating income.
$ 720,000
Percentage change ($720,000 / $3,405,000)
21.15% (rounded)
(30-45 min.) P7-62A

Req. 1
= 0.75 (computed as 1.00 0.12 0.04

0.06)
0.03
Monthly fixed expenses = $9,000 (computed as $2,700 + $280 + $250 + $600

+ $650 + $4,520)
Breakeven sales in dollars =

=
$9,000 + $0
0.75
= $12,000
Breakeven sales in units =
(trades)
$12,000
$500
= 24 trades
(continued) P7-62A
Req. 2
7-53

Sales revenue Variable expenses Fixed expenses
Target operating
income
Sales revenue 0.25 Sales revenue $9,000 = $5,250

0.75 Sales revenue = $14,250
Sales revenue =
$14,250
0.75
Sales revenue = $19,000

Req. 3
Req. 4
Breakeven sales in dollars (from Req. 1)
$12,000
Breakeven sales in units (trades)
$12,000
$300
40 trades
The decrease in the average trade revenue increases the breakeven point from 24 to 40 trades.
(25-35 min.) P7-63A

Req. 1
Westlake Coffee
Small
Large
7-54
Total
Chapter 7
Less: Variable expense per unit
$3.00
1.50
$1.50
3
$4.50
$5.00
2.50
$2.50
1
$2.50
Weighted-average contribution margin per unit ($7.00 / 4

units)
Breakeven sales in total units:
margin per unit
4
$7.00
$1.75
$28,000 + $0
$1.75
Breakeven sales of small coffees (16,000 )........

Breakeven sales of large coffees (16,000 )........
16,000 units
12,000 units
4,000 units
Proof:
Westlake Coffee
Month Ended February 29
Sales revenue [(12,000 $3) + (4,000 $5)]
Less: Variable expenses [(12,000 $1.50) + (4,000 $2.50)]
$56,000
28,000
28,000
28,000
$
0
Contribution margin
Operating income
Req. 2
Margin of safety
Actual sales Breakeven sales
Margin of safety
$126,000 $56,000*
=
$70,000
*Breakeven sales from proof in Req. 1.
7-55

Req. 3
(continued) P7-63A
= Contribution Margin
Operating income
= $63,000
$35,000
= 1.80
A 15% increase in volume will lead to 27% increase in operating income (15% multiplied by the
operating leverage factor of 1.80). Therefore, the new operating income will be $44,450
($35,000 old operating income 1.27).
Proof:
Westlake Coffee
Effect on Operating Income of 15% Increase in Sales Volume
Increase in sales revenue ($126,000 0.15)
$18,900
Increase in variable expenses ($63,000 0.15)

Change in fixed expenses
Operating income before sales increase
Operating income after sales increase
9,450
9,450
0
35,000
$44,450
Alternatively,
Westlake Coffee
Sales revenue ($126,000 1.15)
$144,900
Variable expenses ($63,000 1.15)
72,450
Contribution margin
72,450
Fixed expenses
28,000
Operating income
7-56
$ 44,450
Chapter 7
Problems (Group B)
(30-45 min.) P7-64B
Req. 1
Companies Q, R, S, T
Q
$757,500
242,400
340,000
$ 175,100
85,000
Target sales
Operating income
Units sold
Contribution
per unit
margin
Contribution
ratio
margin
COMPANY
R
$445,000
178,000
159,000
$ 108,000
106,800
6.06
0.68
2.50
S
$162,500
32,500
81,000
$ 49,000
15,625
$
0.60
8.32
0.80
T
$1,000,000
360,000
488,000
$152,000
20,000
$
32.00
0.64
Computations (top to bottom for each company)

Q:

$757,500 $242,400 $175,100 = $340,000
Sales Variable expenses = Contribution margin;
Contribution margin / Unit contribution margin = Units sold
$757,500 $242,400 = $515,100; $515,100 / $6.06 =85,000 units
$515,500 / $757,500 = 0.68
R:
Sales Contribution margin ratio = Contribution margin;

($445,000 0.60) = $267,000; $445,000 $267,000 = $178,000
$445,000 $178,000 $159,000 = $108,000
Contribution margin / Units sold = Contribution margin per unit
$267,000 / 106,800 = $2.50
S:

15,625 $8.32 = $130,000; $162,500 $130,000 = $32,500
$162,500 $32,500 $81,000 = $49,000
$130,000 / $162,500 = 0.80
7-57
(continued) P7-64B
T:

Contribution margin + Variable expenses = Sales
20,000 $32.00 = $640,000; $640,000 + $360,000 = $1,000,000
$1,000,000 $640,000 $152,000 = $208,000
$640,000 / $1,000,000 = 0.64
Req. 2
Breakeven Sales:
Q:
B/E
$340,000
0.72
$500,000
R:
B/E
$159,000
0.60
$265,000
S:
B/E
$81,000
0.80
$101,250
$488,000
0.64
T:
B/E
Lowest breakeven point
$762,500
Company Ss low breakeven point is primarily due to its low fixed expenses.
(30-45 min.) P7-65B

Req. 1
Revenue per show:
1,400 tickets $65 / ticket........................
$91,000
Variable expenses per show:

Programs: 1,400 guests $6 / guest....................
Cast: 65 cast members $320 / cast member.........
Total variable expenses per show.........................
$ 8,400
20,800
$29,200
7-58
Chapter 7
(continued) P7-65B
Req. 2
Sales revenue
Variable expenses
Fixed expenses
Operating income
Operating income
$0
Revenue
Number
per
of
show
shows
Variable
Number
exp. per
of
Fixed expenses
show
shows
Number
of
shows
$29,200
$91,000
Number
of
$2,163,000
shows
($91,000 $29,200) Number of shows

$61,800 Number of shows
Number of shows
Breakeven number of shows
Req. 3
Contribution margin
$2,163,000
$2,163,500
=
=
$2,163,500
$61,800
35 shows
= $91,000 $29,200
= $61,800
$2,163,000 + $3,708,000
$61,800
$5,871,000
$61,800
= 95 shows
This profit goal is realistic. The show already performs 100 times a year.
Req. 4
Wicked
For the Year Ended December 31
Sales (100 x $91,000)
Less: Variable expenses (100 $29,200)
Contribution margin
Operating income
$9,100,000
2,920,000
6,180,000
2,163,000
$4,017,000
7-59
(30-45 min.) P7-66B

Req. 1
Sales Revenue
Sale
price Units sold
per
unit
Variable expenses
Variable
cost
per unit
Units sold
Fixed expenses
= Operating income
Fixed expenses
= Operating income
($19.50 Units sold) ($4.50 Units sold)

$1,125,000
($19.50 $4.50) Units sold
$15.00 Units sold
Units sold
= $0
= $1,125,000
= $1,115,000
=
$1,125,000
$15.00
= 75,000 cartons
Req. 2
Contribution margin = $19.50 $4.50
= $15.00
Contribution margin ratio = $15.00 / $19.50
= 0.77 (rounded)
=

$1,125,000 + $338,000
0.77
$1,463,000
0.77
= $1,900,000
Req. 3
Dudley Calendars
Month Ended June 30
Less variable expenses:
Cost of goods sold (475,000 $4.50 0.74)
$1,581,750
Operating expenses (475,000 $4.50 0.26)
555,750
Contribution margin
Operating income
7-60
$9,262,500
2,137,500
7,125,000
1,125,000
$6,000,000
Chapter 7
Req. 4
Margin of
Margin of
Margin of
Margin of
(continued) P7-66B
safety
safety
safety
safety

=
=
=
=

$9,262,500 (75,000 cartons $19.50 per carton)
$9,262,500 $1,462,500
$7,800,000
Contribution margin
Operating income
= $7,125,000 / $6,000,000
= 1.188 (rounded)
=
Req. 5
If volume increases 13%, then operating income will increase 15.44% (operating leverage factor
Proof:
Original volume (cartons)..
New volume (cartons)
Multiplied by: Unit contribution margin
New total contribution margin
New operating income
vs. Operating income before change in
volume.
Percentage change ($926,250 / $6,000,000)
475,000
61,750
536,750
$15.00
$8,051,250
(1,125,000)
$6,926,250
6,000,000
$ 926,250
15.43% (rounded)
7-61
(30-45 min.) P7-67B

Req. 1
= 0.60 (computed as 1.00 0.10 0.05

0.23)
0.02
Monthly fixed expenses = $6,000 (computed as $2,500 + $260 + $250 + $600

+ $640 + $1,750)
Breakeven sales in dollars =

=
$6,000 + $0
0.60
= $10,000
Breakeven sales in units =
(trades)
$10,000
$500
= 20 trades
Req. 2
Sales revenue Variable expenses Fixed expenses
Target operating
income
Sales revenue 0.40 Sales revenue $6,000 = $5,400

0.60 Sales revenue = $11,400
Sales revenue =
$11,400
0.60
Sales revenue = $19,000
7-62
Chapter 7
(continued) P7-67B
Req. 3
Req. 4
Breakeven sales in dollars (from Req. 1)
$10,000
Breakeven sales in units (trades)
$10,000
$400
25 trades
The decrease in the average trade revenue increases the breakeven point from 20 to 25 trades.
7-63
(25-35 min.) P7-68B
Req. 1
Margot Coffee
Small
Large
Sale price per unit
$3.00
$5.00
Less: Variable expense per unit
1.50
2.50
$1.00
$2.50
3
1
$4.50
$2.50
Weighted-average contribution margin per unit ($5.00 / 4
units)
Breakeven sales in total units:
margin per unit
Total
4
$7.00
$1.75
$42,000 + $0
$1.75
Breakeven sales of small coffees (24,000 )........

Breakeven sales of large coffees (24,000 )........
24,000 units
18,000 units
6,000 units
Proof:
Margot Coffee
Month Ended February 29
Sales revenue [(18,000 $3) + (6,000 $5)]
Less: Variable expenses [(18,000 $1.50) + (6,000 $2.50)]
Contribution margin
Operating income
Req. 2
Margin of safety
Actual sales Breakeven sales
Margin of safety
$154,000 $84,000*
$84,000
42,000
42,000
42,000
$
0
=
$70,000
*Breakeven sales from proof in Req. 1.
Req. 3
Operating leverage factor:
= Contribution margin
Operating income
= $77,000
$35,000
= 2.2
A 15% increase in volume will lead to 33% increase in operating income (15% multiplied by the
operating leverage factor of 2.2). Therefore, the new operating income will be $46,550
($35,000 old operating income 1.33).
7-64
Chapter 7
(continued) P7-68B
Proof:
Margot Coffee
Increase in sales revenue ($154,000 0.15)
$23,100
Increase in variable expenses ($77,000 0.15)

Change in fixed expenses
Operating income before sales increase
Operating income after sales increase
11,550
11,550
0
35,000
$46,550
Alternatively,
Hemingway Coffee
Sales revenue ($154,000 1.15)
$177,100
Variable expenses ($77,000 1.15)
88,550
Contribution margin
88,550
Fixed expenses
42,000
Operating income
$ 46,550
7-65
Discussion & Analysis Questions

A7-69
1. Define breakeven point. Why is the breakeven point important to managers?
The breakeven point is the sales level at which operating income is zero; total revenues
equal total expenses. The breakeven point is important to managers because they know the
volume that needs to be sold in order to cover costs. Anything below that point results in a
loss; anything above the point results in a profit.
2. Describe four different ways cost-volume-profit analysis could be useful to
management.
C-V-P is useful to managers because it helps them determine:
1.
2.
3.
4.
the breakeven point

the volume needed to reach target profit
how changes in costs, sales price, and volume affect the companys profit and
the firms risk level.
3. The purchasing manager for Rockwell Fashion Bags has been able to purchase the
material for its signature handbags for $2 less per bag. Keeping everything else
the same, what effect would this reduction in material cost have on the breakeven
point for Rockwell Fashion Bags? Now assume that the sales manager decides to
reduce the selling price of each handbag by $2. What would the net effect of both
of these changes be on the breakeven point in units for Rockwell Fashion Bags?
A decrease in the material costs, and keeping everything else the same, would lower the
variable expenses for each handbag, which would increase the contribution margin per bag.
This would, in turn, lower the breakeven point. If the manager reduces the selling price by
$2 along with the $2 decrease in variable costs, the contribution margin would stay the
same and so would the breakeven point.
4. Describe three ways that cost-volume-profit concepts could be used by a service
organization.
C-V-P can be used by a service organization to help them determine:
1. the breakeven point
2. the volume needed to reach target profit and
3. how changes in costs, sales price, and volume affect the companys profit.
5. Breakeven analysis isnt very useful to a company because companies need to
do more than break even to survive in the long run. Explain why you agree or
disagree with this statement.
Its true that companies need to do more than break even to survive in the long run, but
breakeven analysis allows the manager to see the level that must be reached to cover costs.
This becomes the starting point for determining target profits and analyzing how changes in
selling prices, costs, and volume will affect profits.
6. What conditions must be met for cost-volume-profit analysis to be accurate?
The following conditions must be met for C-V-P analysis to be accurate:
7-66
A change in volume is the only factor that affects costs.

Managers can classify each cost (or the components of mixed costs) as either variable or
fixed. These costs are linear throughout the relevant range of volume.
Revenues are linear throughout the relevant range of volume.
Inventory levels will not change.
Chapter 7
The sales mix of products will not change. Sales mix is the combination of products that
make up total sales. If profits differ across products, changes in sales mix will affect CVP
analysis.
7. Why is it necessary to calculate a weighted-average contribution margin ratio for

a multiproduct company when calculating the breakeven point for that company?
Why cant all of the products contribution margin ratios just be added together
and averaged?
A company that sells more than one product must calculate each products contribution
margin. It then uses the weighted average of all products, which is each units contribution
margin times the relative number of units sold. Since the sales volume for each unit is
different and its contribution margin is different, the ratio must be weighted to reflect its
volume in conjunction with the other units sold.
8. Is the contribution margin ratio of a grocery store likely to be higher or lower than
that of a plastics manufacturer? Explain the difference in cost structure between a
grocery store and a plastics manufacturer. How does the cost structure difference
impact operating risk?
The contribution margin ratio of a grocery store is more likely to be lower than that of a
manufacturer because a grocery store would most likely have higher variable costs where
the manufacturer would have higher fixed costs due to the plant and equipment needed to
make a product. Operating risk is less for a company with fewer fixed costs to cover
because they are at less risk of incurring a loss should sales decline.
9. Alston Jewelry had sales revenues last year of $2.4 million, while its breakeven
point (in dollars) was $2.2 million. What was Alston Jewelrys margin of safety in
dollars? What does the term margin of safety mean? What can you discern about
Alston Jewelry from its margin of safety?
Alstons margin of safety is the difference between sales and breakeven point, so it would be
$200,000 ($2.4 million - $2.2 million). This means that Alston could suffer a drop in sales of
$200,000 without incurring a loss.
10. Rondell Pharmacy is considering switching to the use of robots to fill
prescriptions that consist of oral solids or medications in pill form. The robots will
assist the human pharmacists and will reduce the number of human pharmacy
workers needed. This change is expected to reduce the number of prescription
filling errors, to reduce the customers wait time, and to reduce the total overall
costs. How does the use of the robots affect Rondell Pharmacys cost structure?
Explain the impact of this switch to robotics on Rondell Pharmacys operating
risk.
Using robotics would likely decrease the pharmacys variable costs (fewer human labor
hours, fewer errors, etc.) and increase the fixed costs (depreciation and maintenance of the
robots). This would result in a higher contribution margin (less labor cost) for the pharmacy
and a higher breakeven point due to the higher fixed costs (robots). The pharmacys risk will
be higher than before due to the higher level of fixed costs.
11.Suppose a company can replace the packing material it currently uses with a
biodegradable packing material. The company believes this move to
biodegradable packing materials will be well received by the general public.
However, the biodegradable packing materials are more expensive than the
current packing materials, and the contribution margin ratios of the related
products will drop. What are the arguments for the company to use the
biodegradable packing materials? What are the arguments for the company to not
use the biodegradable materials? What do you think the company should do?
Student answers will vary.
7-67

12.
How can CVP techniques be used in supporting a companys sustainability

efforts? Conversely, how might CVP be a barrier to sustainability efforts?
CVP analysis is often used by managers to determine how sustainability initiatives will
impact the companys operating income. Sustainability initiatives often result in both cost
savings and additional costs. These costs and cost savings may be fixed or variable in
nature. Managers use CVP analysis to determine how these initiatives will impact the
volume needed to achieve the companys operating income goals. CVP techniques can be
used to quantify the environmental savings of a sustainable initiative. However, as
mentioned above, CVP analysis will also uncover the costs associated with sustainable
initiatives. These added costs may overshadow the environmental savings.
7-68
Chapter 7
Application & Analysis

A7-70
Select one product that you could make yourself. Examples of possible products could be
cookies, birdhouses, jewelry, or custom t-shirts. Assume that you have decided to start a small
business producing and selling this product. You will be applying the concepts of cost-volumeprofit analysis to this potential venture.
Note: This is a sample solution. Student answers will vary.
CVP for a Product
Basic Discussion Questions
1.
Describe your product. What market are you targeting this product for? What
price will you sell your product for? Make projections of your sales in units over
each of the upcoming five years.
I make beaded necklaces for women who are interested in unique, yet affordable
accessories to their wardrobes. The necklaces will sell for an average of $100 each.
Sales Projections
2012
150
2.
2013
175
2014
200
1
25
10
30 inches
1
$15
$6
$3
$2
$1
$27
Make a list of all of the equipment you will need to make your product.
Estimate the cost of each piece of equipment that you will need.
Equipment
Tools
Storage boxes for materials
Beading boards
Miscellaneous supplies
TOTAL
4.
2016
250
Make a detailed list of all of the materials needed to make your product.
Include quantities needed of each material. Also include the cost of the material
on a per-unit basis.
Materials per Necklace
Pendants
Beads
Silver findings
Wire
Clasp
TOTAL
3.
2015
225
$100
$75
$50
$50
$275
Make a list of all other expenses that would be needed to create your product.
Examples of other expenses would be rent, utilities, and insurance. Estimate the
cost of each of these expenses per year.
Rent
Utilities
Insurance
TOTAL
$1,800
$120
$50
$1,970
7-69

5. Now classify all of the expenses you have listed as being either fixed or variable.
For mixed expenses, separate the expense into the fixed component and the
variable component.
Rent
Utilities
Insurance
Fixed
Fixed
Fixed
6. Calculate how many units of your product you will need to sell to breakeven in
each of the five years you have projected.
Fixed expenses / Unit contribution margin = Unit breakeven point
$1,850 / ($100 - $27) = 26 necklaces
7.
Calculate the margin of safety in units for each of the five years in your
projection.
Margin of Safety = Projected Sales Breakeven Sales
2012
2013
2014
150-26=124
175-26=149
200-26=174
$15,000$17,500
$20,000
$2,600
$2,600
$2,600
$12,400
$14,900
$17,400
8.
2015
225-26=199
$22,500
$2,600
$19,900
2016
250-26=224
$25,000
$2,600
$22,400
Now decide how much you would like to make in before-tax operating income
(target profit) in each of the upcoming five years. Calculate how many units you
would need to sell in each of the upcoming years to meet these target profit
levels.
Fixed expenses + Target profit / Unit CM = Yearly sales volume
$1,850 + $12,000 / ($100 - $27) = 190 necklaces
9.
How realistic is your potential venture? Do you think you would be able to
break even in each of the projected five years? How risky is your venture (use the
margin of safety to help answer this question). Do you think your target profits
are achievable?
The venture looks realistic. The breakeven point is only 26 necklaces, which means I would
need to sell on average less than three necklaces a month. The margin of safety is
promising as long as the projected sales can be made. The target profits appear achievable,
but will require implementing a solid marketing plan.
Student answers will vary.
7-70
Chapter 7
(30 min.) A7-71

Ethics Mini-Case
1.
a. The ethical issues in this situation are:

Competence: Provide decision support information and recommendations that are
accurate, clear, concise, and timely. In his initial report, Greg Michaels had an
inaccuracy. It was a mistake, but ignoring the mistake is a breach of this principle.
Confidentiality: Keep information confidential except when disclosure is authorized or
legally required. Greg Michaels disclosure of the internal report to Beth Sparrow, an
employee of a competing company, is neither authorized nor legally required. As a
result, this is a clear ethical violation.
Integrity: Abstain from engaging in or supporting any activity that might discredit the
profession. Ignoring errors in reports which affect real business decisions could discredit
the profession.
Credibility: Disclose all relevant information that could reasonably be expected to
influence an intended users understanding of the reports, analyses, or
recommendations. It is reasonable to expect that the undisclosed error, if disclosed,
would affect the understanding of the report. Thus, by not reporting this inaccuracy,
Greg Michaels is violating this ethical principle.
b. Greg Michaels responsibilities as a management accountant are to be honest, fair,
objective, and responsible. He should seek to correct the mistake he had made by
reporting it to his immediate supervisor. He is also responsible for maintaining
confidential information, so he should not disclose confidential information to his friend,
however much he may trust her.
c. John Hammond is responsible for reviewing the reports which are given to him before
signing off on them, especially in the case of interns or junior employees. It is not
sufficient that a report looks professional, but he has a duty to also verify that it is
accurate.
d. Beth Sparrows is responsible for making ethical decisions. Since she is employed by a
competing company, she should not look at Greg Michaels report, as it could result in
unethical behavior. She should encourage Greg to take his concerns to his supervisor.
She may give him general advice but should not examine anything which is confidential.
2. By omitting the fixed monthly sales staff salaries from the report, breakeven sales are
reported as lower than they actually are. This error would certainly influence the decision
about proceeding with the new proposal, since it would make the proposal look favorable
and more profitable than it actually is.
3. First, Greg should report the mistake with his immediate supervisor. If he has concerns about
his employment with the firm after this mistake, he should take these concerns to the HR
department to get an objective third party which is not involved in this incident.
(20-25 min.) A7-72

Real-life Mini Case
1. Is the cost of down a fixed cost or a variable cost for a jacket manufacturer such
as Lands End?
Down is a variable cost to jacket manufacturers because more down is required for each
additional unit (jacket) produced.
2. If the cost of down increases, what happens to the breakeven point for a downfilled jacket product line at Lands End?
If the cost of down increases, the breakeven point will also increase because the contribution
margin will decrease.
7-71

3. What is the percentage increase in the cost of down per pound from 2010 to 2012
at Lands End? Would you expect the breakeven units to change by this same
percentage? Why or why not?
The price of down increased by about 77% [($23 - $13)/$13]. The breakeven units will not
change by this same percentage because down is only one material that goes into the cost
of the jacket. If we assume that the other costs are assumed to have stayed the same, the
actual total cost of making the jacket will increase by a smaller total percentage. Therefore,
the breakeven in units will increase by a smaller amount than 77%.
4. If down increases by a certain percentage, will the selling price of a down-filled
jacket need to change by that same percentage to maintain the same profit
margin? Explain.
No. Again, down is only one component of the jacket. The other materials in the jacket will
help to lessen the impact of the percentage increase in the cost of down (assuming those
other materials remain at a constant cost.) Therefore, the selling price will not have to be
increased by 77 percent to cope with the 77 percent increase in the cost of down.
5. Assume that a Lands End down jacket selling for $100 uses 12 ounces of down.
Further assume that Lands End has $250,000 of fixed costs related to the down
jacket line and its other variable manufacturing costs total $60 per jacket. As
stated in the story, the cost per pound of down was $13 and $23 in October 2010
and October 2012, respectively. Calculate the breakeven number of jackets both
in (a) October 2010; and (b) October 2012. Do these breakeven numbers agree
with your answers to the prior questions?
October 2010 breakeven: $250,000 / ($100 ($60 + ($13 x 12/16))) = 8,264 jackets
(rounded)
October 2012 breakeven: $250,000 / ($100 ($60 + ($23 x 12/16))) = 10,989 jackets
(rounded)
Yes, these numbers agree to answers to the prior questions.
6. Assume now the same set of facts as in Question 5 but that Lands End raises the
selling price of each jacket by $10 in October 2013. Does the contribution margin
percentage remain the same?
No, the contribution margin would increase, this is because Lands End only uses 12 ounces
of down in each jacket and the price per pound of down went up $10. Therefore, the $10
increase in price will overcompensate for the variable cost per unit increase of the jacket.
October 2010 contribution margin: $100 ($60 + ($13 x 12/16)) = $69.75
October 2010 contribution margin ratio: $69.75 / $100 = 69.75%
October 2012 contribution margin: $110 ($60 + ($23 x 12/16)) = $87.25
October 2012 contribution margin ratio: $87.25 / $110 = 79.32%
7-72

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Chapter 7

Sales price per passenger.

Contribution margin per passenger

Total contribution margin (11,000 $30)...

Total contribution margin

Copyright 2015 Pearson Education, Inc.

Managerial Accounting 4e Solutions Manual

(5-10 min.) S7-3

Fixed expenses + Operating income

$20 variable expense

Number of passengers to break even*.

* from earlier calculation

Fixed expenses + Operating income

Or, using the equation approach:

Sale price Units

[($50 Units sold)

($20 Units sold)]

Copyright 2015 Pearson Education, Inc.

(5-10 min.) S7-5

Fixed expense line

Copyright 2015 Pearson Education, Inc.

Managerial Accounting 4e Solutions Manual

(10 min.) S7-7

10,500 dinner cruise passengers

$420,000 dinner cruise revenue

Or, using the equation approach:

Sale price Units

($40 Units sold)

[($40 $20) Units sold]

($20 Units sold)

10,500 passengers $40 = $420,000

Contribution margin per unit

Copyright 2015 Pearson Education, Inc.

5,250 dinner cruise passengers

Sale price Units

($50 Units sold)

[($50 $10) Units sold]

($10 Units sold)

5,250 passengers $50 = $262,500

Contribution margin per unit

Copyright 2015 Pearson Education, Inc.

Managerial Accounting 4e Solutions Manual

(5-10 min.) S7-8

6,000 dinner cruise passengers

Or, using the equation approach:

Sale price Units

($50 Units sold)

[($50 $20) Units sold]

($20 Units sold)

6,000 passengers $50 = $300,000

Contribution margin per unit

Copyright 2015 Pearson Education, Inc.

(5-10 min.) S7-9

(5-10 min.) S7-10

Fixed expenses + Operating income

Copyright 2015 Pearson Education, Inc.

Managerial Accounting 4e Solutions Manual

(5-10 min.) S7-11

8,750 x $50 = $437,500

Margin of safety in dollars

(5-10 min.) S7-12

Contribution margin (8,750 $30 / cruise

(5-10 min.) S7-13