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Katayama Company produces a variety of products. One division makes neoprene wetsuits. The division’s projected income statement for the coming year is as follows: Required: 1. Compute the contribution margin per unit, and calculate the break-even point in units. Repeat, using the contribution margin ratio. 2. The divisional manager has decided to increase the advertising budget by $140,000 and cut the average selling price to $200. These actions will increase sales revenues by $1 million. Will this improve the division’s financial situation? Prepare a new income statement to support your answer. 3. Suppose sales revenues exceed the estimated amount on the income statement by $612,000. Without preparing a new income statement, determine by how much profits are underestimated. 4. How many units must be sold to earn an after-tax profit of $1.254 million? Assume a tax rate of 34 percent. (Round your answer up to the next whole unit.) 5. Compute the margin of safety in dollars based on the given income statement. 6. Compute the operating leverage based on the given income statement. (Round to three significant digits.) If sales revenues are 20 percent greater than expected, what is the percentage increase in profits?

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Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663

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Chapter
Section
BuyFindarrow_forward

Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663
Chapter 16, Problem 37P
Textbook Problem
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Katayama Company produces a variety of products. One division makes neoprene wetsuits. The division’s projected income statement for the coming year is as follows:

Chapter 16, Problem 37P, Katayama Company produces a variety of products. One division makes neoprene wetsuits. The divisions

Required:

  1. 1. Compute the contribution margin per unit, and calculate the break-even point in units. Repeat, using the contribution margin ratio.
  2. 2. The divisional manager has decided to increase the advertising budget by $140,000 and cut the average selling price to $200. These actions will increase sales revenues by $1 million. Will this improve the division’s financial situation? Prepare a new income statement to support your answer.
  3. 3. Suppose sales revenues exceed the estimated amount on the income statement by $612,000. Without preparing a new income statement, determine by how much profits are underestimated.
  4. 4. How many units must be sold to earn an after-tax profit of $1.254 million? Assume a tax rate of 34 percent. (Round your answer up to the next whole unit.)
  5. 5. Compute the margin of safety in dollars based on the given income statement.
  6. 6. Compute the operating leverage based on the given income statement. (Round to three significant digits.) If sales revenues are 20 percent greater than expected, what is the percentage increase in profits?

1.

To determine

Compute the break-even point in units and sales revenue along with the margin of safety.

Explanation of Solution

Contribution Margin Ratio: The contribution margin ratio shows the amount of difference in the actual sales value and the variable expenses in percentage. This margin indicates that percentage which is available for sale above the fixed costs and the profit. The formula for variable cost ratio is shown below:

Contribution Margin ratio = Contribution MarginSales

Break-Even Point: The break-even point refers to the point of sales at which the firm neither earns a profit nor suffers a loss. It is also known as the point of sales or sales value at which the firm recovers the entire cost of fixed and variable nature.

Compute the contribution margin per unit:

Contribution Margin per unit =Contribution MarginNumber of units=$6,864,00065,000=$105.60

The contribution margin per unit is $105.60.

Compute the break-even units:

Break-even in Units =Fixed costContribution Margin=$4,012,000$105

2.

To determine

Compute the income statement showing the financial situation of the firm after the proposed changes.

3.

To determine

Compute the amount by which the profits are underestimated, if the sales exceed the amount shown in the income statement.

4.

To determine

Compute the number of units to be sold to generate an after-tax profit of $1.254 million with a tax rate of 34%.

5.

To determine

Compute the margin of safety in sales revenue.

6.

To determine

Compute the operating leverage and the increase in profit percentage if the profit increases.

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Chapter 16 Solutions

Cornerstones of Cost Management (Cornerstones Series)
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