Financial and Managerial Accounting
Financial and Managerial Accounting
7th Edition
ISBN: 9781259726705
Author: John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher: McGraw-Hill Education
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Chapter 18, Problem 5PSA

1.

To determine

To identify: Break- even point of sales in dollars for each product.

1.

Expert Solution
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Explanation of Solution

Product T

Given,
Fixed cost is $125,000.

Calculated values,
Contribution margin ratio is 20% or 0.2 (from working note).

Formula to calculate break-even point of sales in dollars,

    Breakeven point= Fixedcost Contribution margin ratio

Substitute $125,000 for fixed cost and 0.2 for contribution margin ratio.

    Breakeven point= $125,000 0.2 =$625,000

Working note:

Calculation of selling price per unit,

    Sellingpriceperunit= Sales Unitssold = $2,000,000 50,000 =$40

Calculation of variable cost per unit,

    Variablecostperunit= Variablecost Unitssold = $1,600,000 50,000 =$32

Calculation of contribution margin ratio,

    Contribution margin ratio= Contributionmargin Sales ×100 = $400,000 $2,000,000 ×100 =20%

Hence, contribution margin ratio is 20%.

Product O

Given,
Fixed cost is $1,475,000.

Calculated values,
Contribution margin ratio is 87.5% or 0.875 (from working note).

Formula to calculate break-even point of sales in dollars,

    Breakeven point= Fixedcost Contribution margin ratio

Substitute $1,475,000 for fixed cost and 0.875 for contribution margin ratio.

    Breakeven point= $1,475,000 0.875 =$1,685,714.28

Working note:

Calculation of selling price per unit,

    Sellingpriceperunit= Sales Unitssold = $2,000,000 50,000 =$40

Calculation of variable cost per unit,

    Variablecostperunit= Variablecost Unitssold = $250,000 50,000 =$5

Formula to calculate contribution margin ratio,

    Contribution margin ratio= Contributionmargin Sales ×100 = $1,750,000 $2,000,000 ×100 =87.5%

Hence, contribution margin ratio is 87.5%.

Hence, break-even point of sale of product T is $625,000 and product O is $1,685,714.28.

2.

To determine

To prepare: A forecasted contribution margin income statement for the company.

2.

Expert Solution
Check Mark

Explanation of Solution

Statement to show the contribution margin income statement

Company H

Income Statement

For the Year Ended December 31, 20XX

Particulars

Product T Amount

($)

Product O Amount

($)

Sales

1,200,000

1,200,000

Less: Variable Cost

960,000

150,000

Contribution Margin

240,000

1,050,000

Less: Fixed Cost

125,000

1,475,000

Pre Tax Income

115,000

(425,000)

Tax

36,800

(136,000)

Net Income

78,200

289,000

Table(1)

Working note:

Given,
The numbers of units sold is 30,000.
The selling price is $40 of both products.
Variable cost per unit of product T is $32.
Variable cost per unit of product O is $5.

Calculation of total sales,

    Totalsales=Numbersofunits×Salesprice =30,000units×$40 =$1,200,000

The total sales are $1,200,000.

Product T

Calculation of total variable cost,

    Totalvariable cost=Numbersofunits×Variablecost per unit =30,000units×$32 =$960,000

The total variable cost is $960,000.

Product O

Calculation of total variable cost,

    Totalvariable cost=Numbersofunits×Variablecost per unit =30,000units×$5 =$150,000

The total variable cost is $150,000.

Product T

Calculation of tax,

` Tax=Pretaxincome×Taxrate =$115,000×32% =$36,800

Product O

Calculation of tax,

` Tax=Pretaxincome×Taxrate =( $425,000 )×32% =( $136,000 )

Hence, the net income of Company H is $78,200 from product T and net loss $136,000 from product O.

3.

To determine

To prepare: A forecasted contribution margin income statement for the company.

3.

Expert Solution
Check Mark

Explanation of Solution

Statement to show the contribution margin income statement,

Company H

Income Statement

For the Year Ended December 31, 20XX

Particulars

Product T Amount

($)

Product O Amount

($)

Sales

2,400,000

2,400,000

Less: Variable Cost

1,920,000

300,000

Contribution Margin

480,000

2,100,000

Less: Fixed Cost

125,000

1,475,000

Pre Tax Income

355,000

625,000

Tax

113,600

200,000

Net Income

241,400

425,000

Table(2)

Working note:

Given,
The numbers of units sold is 60,000.
The selling price is $40 of both products.
Variable cost per unit of product T is $32.
Variable cost per unit of product O is $5.

Calculation of total sales,

    Totalsales=Numbersofunits×Salesprice =60,000units×$40 =$2,400,000

The total sales are $2,400,000.

Product T

Calculation of total variable cost,

    Totalvariable cost=Numbersofunits×Variablecost per unit =60,000units×$32 =$1,920,000

The total variable cost is $1,920,000.

Product O

Calculation of total variable cost,

    Totalvariable cost=Numbersofunits×Variablecost per unit =60,000units×$5 =$300,000

The total variable cost is $300,000.

Product T

Calculation of tax,

` Tax=Pretaxincome×Taxrate =$355,000×32% =$113,600

Product O

Calculation of tax,

` Tax=Pretaxincome×Taxrate =$625,000×32% =$200,000

Hence, the net income of Company H is $241,400 from product T and $425,000 from product O.

4.

To determine

To identify: The product that would greatly experience loss when sales decreases.

4.

Expert Solution
Check Mark

Explanation of Solution

  • The product O will experience greater loss when sales decreases.
  • Per unit variable cost is low of product O therefore, contribution is highly affected due to decrease in sales.
  • Fixed cost is high of product O therefore, when sales highly decrease the product O have to suffer huge losses.

Hence, product that would greatly experience loss when sales decreases is product O as its fixed expenses are higher.

5.

To determine

To identify: The factors that might have created the different cost structure for the two products.

5.

Expert Solution
Check Mark

Explanation of Solution

The factors that might have created the different cost structure for the two products:

  • Labor cost: It may affect the cost structure as it is one of the important parts of total cost it includes the wages paid to the workers.
  • Machinery cost: It may affect the cost structure as it is one of the important parts of total cost it includes the cost incurred to install machinery.
  • Salary of staff: It may affect the cost structure as it is one of the important parts of total cost it depends on the number of staff working in the organization.
  • Raw material cost: It may affect the cost structure as it is one of the important parts of total cost, raw material required may be more or less costly therefore, it also affect a product’s cost.

Hence, raw material cost, salary structure, machinery required etc are the factors that might have created the different cost structure for the two products.

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Chapter 18 Solutions

Financial and Managerial Accounting

Ch. 18 - Prob. 6DQCh. 18 - Prob. 7DQCh. 18 - Prob. 8DQCh. 18 - Prob. 9DQCh. 18 - Prob. 10DQCh. 18 - Prob. 11DQCh. 18 - Prob. 12DQCh. 18 - Prob. 13DQCh. 18 - Prob. 14DQCh. 18 - Prob. 15DQCh. 18 - Prob. 16DQCh. 18 - Prob. 17DQCh. 18 - Prob. 18DQCh. 18 - Prob. 19DQCh. 18 - APPLE Should Apple use single product or...Ch. 18 - Prob. 21DQCh. 18 - Prob. 22DQCh. 18 - Prob. 1QSCh. 18 - Prob. 2QSCh. 18 - Cost behavior estimation---high-low method P1 The...Ch. 18 - Prob. 4QSCh. 18 - Prob. 5QSCh. 18 - Prob. 6QSCh. 18 - Prob. 7QSCh. 18 - Prob. 8QSCh. 18 - Prob. 9QSCh. 18 - Prob. 10QSCh. 18 - Prob. 11QSCh. 18 - Prob. 12QSCh. 18 - Prob. 13QSCh. 18 - Prob. 14QSCh. 18 - Prob. 15QSCh. 18 - Prob. 16QSCh. 18 - Prob. 17QSCh. 18 - Prob. 18QSCh. 18 - Prob. 19QSCh. 18 - Prob. 20QSCh. 18 - Prob. 21QSCh. 18 - Following are five graphs representing various...Ch. 18 - Prob. 2ECh. 18 - Prob. 3ECh. 18 - Prob. 4ECh. 18 - Prob. 5ECh. 18 - Prob. 6ECh. 18 - Prob. 7ECh. 18 - Prob. 8ECh. 18 - Prob. 9ECh. 18 - Prob. 10ECh. 18 - Prob. 11ECh. 18 - Prob. 12ECh. 18 - Prob. 13ECh. 18 - Prob. 14ECh. 18 - Prob. 15ECh. 18 - Prob. 16ECh. 18 - Prob. 17ECh. 18 - Prob. 18ECh. 18 - Prob. 19ECh. 18 - Prob. 20ECh. 18 - Prob. 21ECh. 18 - Prob. 22ECh. 18 - Prob. 23ECh. 18 - Prob. 24ECh. 18 - Prob. 25ECh. 18 - Prob. 26ECh. 18 - Prob. 27ECh. 18 - Prob. 1PSACh. 18 - Prob. 2PSACh. 18 - Prob. 3PSACh. 18 - Prob. 4PSACh. 18 - Prob. 5PSACh. 18 - Prob. 6PSACh. 18 - Prob. 7PSACh. 18 - Prob. 1PSBCh. 18 - Prob. 2PSBCh. 18 - Prob. 3PSBCh. 18 - Prob. 4PSBCh. 18 - Prob. 5PSBCh. 18 - Prob. 6PSBCh. 18 - Prob. 7PSBCh. 18 - Prob. 18SPCh. 18 - Apple offers extended service contracts that...Ch. 18 - Prob. 2BTNCh. 18 - Prob. 3BTNCh. 18 - Prob. 4BTNCh. 18 - Prob. 5BTNCh. 18 - Prob. 6BTNCh. 18 - Prob. 7BTNCh. 18 - Prob. 8BTNCh. 18 - Prob. 9BTN
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