CHAPTER 7

Solutions Manual to Cost Accounting, 4e, by Hansen & Mowen. ... Cornerstone
Exercise 14.1 (Concluded). 2. ..... this meant that the product's conformance was
within an acceptable range of some ideal target value for the quality
characteristic.

Part of the document


CHAPTER 7
Cost-Volume-Profit Analysis


Solutions to exercises


Exercise 7-23 (20 minutes)

1. Break-even point (in units) = [pic]

= [pic]= 13,500 pizzas


2. Contribution-margin ratio = [pic]

= [pic]= .4


3. Break-even point (in sales dollars) = [pic]


= [pic]= $135,000


4. Let X denote the sales volume of pizzas required to earn a target net
profit of $60,000.


$10X - $6X - $54,000 = $60,000


$4X = $114,000


X = 28,500 pizzas



Exercise 7-27 (25 minutes)


1. Break-even point (in units) = [pic]


= [pic]= 4,000 components


p denotes Argentina's peso.


2. New break-even point (in units) = [pic]


=[pic]= 4,200 components


3. Sales revenue (7,000 ( 1,500p) 10,500,000p
Variable costs (7,000 ( 1,000p) 7,000,000p
Contribution margin 3,500,000p
Fixed costs 2,000,000p
Net income 1,500,000p

4. New break-even point (in units) = [pic]


= 5,000 components


5. Analysis of price change decision:

| |Price |
| |1,500p |1,400p |
|Sales revenue: (7,000 ( 1,500p) | 10,500,000p| |
|(8,000 ( 1,400p) | |11,200,000p |
|Variable costs: (7,000 ( 1,000p) | | |
|(8,000 ( 1,000p) |7,000,000p |8,000,000p |
|Contribution margin | |3,200,000p |
|Fixed expenses |3,500,000p |2,000,000p |
|Net income (loss) |2,000,000p |1,200,000p |
| |1,500,000p | |



The price cut should not be made, since projected net income will
decline by 300,000p.


Exercise 7-28 (25 minutes)

1. (a) Traditional income statement:

Pacific Rim Publications, Inc.
Income Statement
For the Year Ended December 31, 20xx

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

(b) Contribution income statement:

Pacific Rim Publications, Inc.
Income Statement
For the Year Ended December 31, 20xx

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. |[pic] | |
| | | |
|3. |[pic] |
| | | |
| | |= 15% ( 4.35 |
| | |= 65.25% |

|4. |Most operating managers prefer the contribution income statement for |
| |answering this type of question. The contribution format highlights |
| |the contribution margin and separates fixed and variable expenses. |


Exercise 7-33 (20 minutes)


|1. |[pic] |
| | |
|2. |[pic] |


|3. |Service revenue required to |[pic] |
| |earn target after-tax income| |
| |of $120,000 | |
| | |
|4. |A change in the tax rate will have no effect on the firm's break-even |
| |point. At the break-even point, the firm has no profit and does not |
| |have to pay any income taxes. |


Solutions to Problems


Problem 7-34 (30 minutes)

|1. |Break-even point in sales dollars, using the contribution-margin |
| |ratio: |
| |[pic] |
| | |
|2. |Target net income, using contribution-margin approach: |
| |[pic] |
| | | |
|3. |New unit variable manufacturing|= $15 ( 120% |
| |cost | |
| | |= $18.00 |
| |Break-even point in sales | |
| |dollars: | |
| |[pic] |
|4. |Let P denote the selling price that will yield the same |
| |contribution-margin ratio: |
| |[pic] |
| | |
| |Check: New contribution-margin ratio is: |
| |[pic] |


Problem 7-35 (30 minutes)


|1. |[pic] |
| | |
|2. |[pic] |
| | | |
|3. |Number of sales units |[pic] |
| |required to earn target net | |
| |profit | |
| | | |
|4. |Margin of |= budgeted sales revenue - break-even sales revenue |
| |safety | |
| | |= (140,000)($25) - $3,375,000 = $125,000 |
| | |
|5. |Break-even point if direct-labor costs increase by 10 percent: |
| | | |
| |New unit contribution | = $25.00 - $8.20 - ($4.00)(1.10) - $6.00 - |
| |margin |$1.60 |
| | | = $4.80 |
| |Break-even point |[pic] |
|6. |Contribution-margin |[pic] |
| |ratio | |
| |Old contribution-margin |[pic] |
| |ratio | |
| | |
| |Let P denote sales price required to maintain a contribution-margin |
| |ratio of .208. Then P is determined as follows: |
| |[pic] |
| |Check: |New |[pic] |
| | |contribution- | |
| | |margin ratio | |

PROBLEM 7-37 (30 MINUTES)

1. Unit contribution margin:
|Sales | |$32.00|
|price..........................| | |
|............. | | |
|Less variable costs: | | |
|Sales commissions ($32 x |$ 1.60| |
|5%)...... | | |
|System variable | | |
|costs.................. |8.00 |9.60 |
|Unit contribution | |$22.40|
|margin.................... | | |


Break-even point = fixed costs ÷ unit contribution margin
= $1,971,200 ÷ $22.40
= 88,000 units


2. Model B is more profitable when sales and production average 184,000
units.

| |Model A |Model B |
| | | |
|Sales revenue (184,000 units x |$5,888,000|$5,888,000|
|$32.00)......... | | |
|Less variable costs: | | |
|Sales commissions ($5,888,000 x |$ |$ |
|5%)... |294,400 |294,400 |
|System variable | | |
|costs:........................ |