Managerial Accounting
Managerial Accounting
16th Edition
ISBN: 9781259995484
Author: Ray Garrison
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Question
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Chapter 1, Problem 2AE
To determine

Variable cost, fixed cost, contribution margin, net operating income:

Variable costs are directly related with production process, so it has the changes according to the sales revenue.

Fixed costs are indirectly related with production process, so it hasn’t change according to the sales revenue.

Contribution income is derived after deducting variable costs from sales revenue.

Net operating income is the real income for the company because it has derived after deduction all costs such as variable and fixed costs from sales revenue.

Whether increase of sales by 10% would change the variable costs and fixed costs.

Whether contribution margin increased or not by the new sales revenue (10%).

Whether net operating income increased or not by new sales revenue (10%).

Expert Solution & Answer
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Answer to Problem 2AE

Solution:

    Traditional format income statement

    Particulars Amount Amount
    Sales revenue $13,200
    Less
    Cost of goods sold $6,600
    Gross margin $6,600
    Less: Selling and administration expenses
    Selling expenses $3160
    Administration expenses $1940 $5100
    Net operating income $1,500
    Contribution Format income statement
    Particulars Amount Amount
    Sales revenue $13,200
    Less: Variable expenses
    Cost of goods sold $6600
    Variable selling $660
    Variable administration $440 $7,700
    Contribution margin $5,500
    Less: Fixed expenses
    Selling expenses $2,500
    Administration Expenses $1,500 $4,000
    Net operating income $1,500

Formula:

  New sales revenue increase= Existing sales revenue  percentage of increase Contribution Margin = Sales revenue  cost of goods sold  variable selling variable administrative Net operating income = Contribution margin  fixed selling  fixed administrative. 

Explanation of Solution

Yes, new sales revenue increased the variable cost by 10%.

Old variable cost:

  Cost of goods sold =$6000 Variable selling=$600 Variable administration=$400

Increase variable cost:

  Cost of goods sold =$6000 *10/100=$600 Variable selling=$600*10/100=$60 Variable administration=$400*10/100=$40 After sales increased by 10% 

New variable cost:

  Cost of goods sold =$6000 *10/100=$600+$6000=$6600 Variable selling=$600*10/100=$60+$600=$660 Variable administration=$400*10/100=$40+$400=440 But fixed cost remain unchanged due to sales revenue increased by 10% because it is not directly related with production process. 

Yes, contribution margin increased by 10% due to new sales revenue, new variable costs, if variable

cost has change it reflect the contribution margin.

  Old contribution margin=$12,000 $6000$600$400=$5000 Old Variable cost=$6000+$600+$400=$7000 New contribution margin=$$13,200$6600$660$440=$5,500 New variable cost =$6600+$660+$440=$7700 Increased by 10%= $7000*10/100=$700 New variable cost old variable cost =$7700 $7000=$700 So, new contribution margin increased by 10% 

No, net operating income not increased by 10%, because fixed cost remain unchanged made the net

income increased up to 50%.

Old net operating income:

  $12,000 $6000$600$400$2500$1500 =$1000 

New net operating income:

  $13,200$6600$660$440$2500$1500=$1500 If 10% increase in the new net operating income: $1,000 *10/100=$100+$1,000=$1100 Actually net operating income is $1500 $1000 *50/100=$500+$1000=$1,500 

Conclusion

Above explanation and calculation stated new sales revenue increased variable cost not the fixed cost and contribution margin also increased by 10% but net operating income not increased by 10%.

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Chapter 1 Solutions

Managerial Accounting

Ch. 1 - What is meant by an activity base when dealing...Ch. 1 - Managers often assume a strictly linear...Ch. 1 - Distinguish between discretionary fixed costs and...Ch. 1 - Does the concept of the relevant range apply to...Ch. 1 - What is the difference between a traditional...Ch. 1 - Prob. 12QCh. 1 - Prob. 13QCh. 1 - Prob. 14QCh. 1 - Prob. 1AECh. 1 - Prob. 2AECh. 1 - L01-2, L01-3, L01-4, L01-5, L01-6 Martinez...Ch. 1 - L012, L013, L014, L015, L016 Martinez Company’s...Ch. 1 - L01–1, L01–2, L01–3, L01–4, L01–5, L01–6 Martinez...Ch. 1 - L01–1, L01–2, L01–3, L01–4, L01–5, L01–6 Martinez...Ch. 1 - L01-1, L01-2, L01-3, L01-4, L01-5, L01-6 Martinez...Ch. 1 - L01-1, L01-2, L01-3, L01-4, L01-5, L01-6 Martinez...Ch. 1 - L01-1, L01-2, L01-3, L01-4, L01-5, L01-6 Martinez...Ch. 1 - L01-2, L01-3, L01-4, L01-5, L01-6 Martinez...Ch. 1 - L01-1, L01-2, L01-3, L01-4, L01-5, L01-6 Martinez...Ch. 1 - L01-1, L01-2, L01-3, L01-4, L01-5, L01-6 Martinez...Ch. 1 - L01-1, L01-2, L01-3, L01-4, L01-5, L01-6 Martinez...Ch. 1 - L01-1, L01-2, L01-3, L01-4, L01-5, L01-6 Martinez...Ch. 1 - L01-1, L01-2, L01-3, L01-4, L01-5, L01-6 Martinez...Ch. 1 - L01-1, L01-2, L01-3, L01-4, L01-5, L01-6 Martinez...Ch. 1 - L01-2, L01-3, L01-4, L01-5, L01-6 Martinez...Ch. 1 - EXERCISE 1—1 Identifying Direct and Indirect Costs...Ch. 1 - EXERCISE 1-2 Classifying Manufacturing Costs LO1-2...Ch. 1 - EXERCISE 1-3 Classifying Costs as Product or...Ch. 1 - EXERCISE 14 Fixed and Variable Cost Behavior LO14...Ch. 1 - Prob. 5ECh. 1 - EXERCISE 1—6 Traditional and Contribution Format...Ch. 1 - Prob. 7ECh. 1 - EXERCISE 18 Product Costs and Period Costs;...Ch. 1 - Prob. 9ECh. 1 - Prob. 10ECh. 1 - EXERCISE 1—11 Cost Behavior; Contribution Format...Ch. 1 - EXERCISE 1-12 Product and Period Cost Flows LO1–3...Ch. 1 - Prob. 13ECh. 1 - EXERCISE 1-14 Cost Classification 1O1–2, LO1–3,...Ch. 1 - Prob. 15ECh. 1 - EXERCISE 1–16 Cost Classifications for Decision...Ch. 1 - EXERCISE 1-17 Classifying Variable and Fixed Costs...Ch. 1 - PROBLEM 1-18 Direct and Indirect Costs; variable...Ch. 1 - PROBLEM 1-19 Traditional and Contribution Format...Ch. 1 - PROBLEM 120 Variable and Fixed Costs; Subtleties...Ch. 1 - Prob. 21PCh. 1 - Prob. 22PCh. 1 - PROBLEM 123 Cost Classification LO11, LO13, LO14...Ch. 1 - PROBLEM 1-24 Different Cost Classifications for...Ch. 1 - Prob. 25PCh. 1 - CASE 1-26 Cost Classification and Cost Behavior...Ch. 1 - Prob. 27C
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