Fundamental Accounting Principles
Fundamental Accounting Principles
24th Edition
ISBN: 9781259916960
Author: Wild, John J., Shaw, Ken W.
Publisher: Mcgraw-hill Education,
Question
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Chapter 21, Problem 5APSA
To determine

Concept Introduction:

Breakeven point-

Breakeven point is the point where total revenues are equal to total costs. Total cost includes fixed costs as well as variable costs. It is calculated as follows-

  Breakeven point in sales dollars = Fixed costs / Contribution margin ratio

Requirement 1-:

To compute:

Break even points in sales dollars.

Expert Solution
Check Mark

Answer to Problem 5APSA

Product T

  Breakeven point in sales dollars =  Fixed costs Contribution margin ratio  Breakeven point in sales dollars = $125,000 20%  Breakeven point in sales dollars =$625,000

Product O

  Breakeven point in sales dollars =  Fixed costs Contribution margin ratio  Breakeven point in sales dollars = $1,475,000 87.5%  Breakeven point in sales dollars =$1,685,715

Explanation of Solution

Product T

Given,

  • Fixed costs = $125,000
  • Sales = $2,000,000
  • Contribution margin = $400,000
  • First we need to find contribution margin ratio-

      Contribution margin ratio = Contribution margin / SalesContribution margin ratio = $400,000 / $2,000,000Contribution margin ratio = 20%

Breakeven point is calculated as follows-

  Breakeven point in sales dollars =  Fixed costs Contribution margin ratio  Breakeven point in sales dollars = $125,000 20%  Breakeven point in sales dollars =$625,000

Product TT

Given,

  • Fixed costs = $1,475,000
  • Sales = $2,000,000
  • Contribution margin = $1,750,000
  • First we need to find contribution margin ratio-

      Contribution margin ratio = Contribution margin / SalesContribution margin ratio = $1,750,000 / $2,000,000Contribution margin ratio = 87.5%

Breakeven point is calculated as follows-

  Breakeven point in sales dollars =  Fixed costs Contribution margin ratio  Breakeven point in sales dollars = $1,475,000 87.5%  Breakeven point in sales dollars =$1,685,715

Conclusion:

Thus, breakeven point in sales dollars is calculated.

To determine

Concept Introduction:

Contribution margin income statement-

It is a statement wherein all the variable costs are deducted from the sales to get the contribution margin and after getting contribution margin, fixed expenses are deducted from contribution margin to get net income or loss.

Requirement 2-:

To prepare:

Forecasted contribution margin income statement.

Expert Solution
Check Mark

Answer to Problem 5APSA

    Henna Company
    Forecasted contribution margin income statement
    ParticularsProduct TProduct O
    Sales1,200,0001,200,000
    Variable costs960,000150,000
    Contribution margin240,0001,050,000
    Fixed costs125,0001,475,000
    Income before tax115,000(425,000)
    Tax on income (32%)36,800136,000
    Net income / (Loss)78,200(289,000)

Explanation of Solution

Product T

Given, Fixed costs = $125,000

  Selling price per unit = Sales / No. of unitsSelling price per unit = 2,000,000 / 50,000Selling price per unit = $40

  Sales = No. of units * Selling per unitSales = 30,000 * $40Sales = $1,200,000

  Variable cost per unit = 1,600,000 / 50,000Variable cost per unit = $32 

  Variable costs = No. of units * Variable cost per unitVariable costs = 30,000 * $32Variable costs = 960,000

  Contribution margin = Sales  Variable costsContribution margin = $1,200,000  $960,000Contribution margin = $240,000

  Income before tax = Contribution margin  Fixed costsIncome before tax = $240,000  $125,000Income before tax = $115,000

  Tax on income = Income before tax * Tax rateTax on income = $115,000 * 32%Tax on income = $36,800

Net income is calculated as follows-

  Net income = Income before tax  Tax on incomeNet income = $115,000  $36,800Net income = $78,200

Product O

Given, Fixed costs = $1,475,000

  Selling price per unit = Sales / No. of unitsSelling price per unit = 2,000,000 / 50,000Selling price per unit = $40

  Sales = No. of units * Selling per unitSales = 30,000 * $40Sales = $1,200,000

  Variable cost per unit = 250,000 / 50,000Variable cost per unit = $5.00 

  Variable costs = No. of units * Variable cost per unitVariable costs = 30,000 * $5.00Variable costs = $150,000

  Contribution margin = Sales  Variable costsContribution margin = $1,200,000  $150,000Contribution margin = $1,050,000

  Income before tax = Contribution margin  Fixed costsIncome before tax = $1,050,000  $1,475,000Income before tax = ($425,000)

  Tax on income = Income before tax * Tax rateTax on income = $425,000 * 32%Tax on income = $136,000

Net income is calculated as follows-

  Net income = Income before tax  Tax on incomeNet income = ($425,000)  $136,000Net income = ($289,000)

Conclusion:

Thus, contribution margin income statement is prepared.

To determine

Concept Introduction:

Contribution margin income statement-

It is a statement wherein all the variable costs are deducted from the sales to get the contribution margin and after getting contribution margin, fixed expenses are deducted from contribution margin to get net income or loss.

Requirement 3-:

To prepare:

Forecasted contribution margin income statement.

Expert Solution
Check Mark

Answer to Problem 5APSA

    Henna Company
    Forecasted contribution margin income statement
    ParticularsProduct TProduct O
    Sales2,400,0002,400,000
    Variable costs1,920,000300,000
    Contribution margin480,0002,100,000
    Fixed costs125,0001,475,000
    Income before tax355,000625,000
    Tax on income (32%)113,600200,000
    Net income / (Loss)241,400425,000

Explanation of Solution

Product T

Given, Fixed costs = $125,000

  Selling price per unit = Sales / No. of unitsSelling price per unit = 2,000,000 / 50,000Selling price per unit = $40

  Sales = No. of units * Selling per unitSales = 60,000 * $40Sales = $2,400,000

  Variable cost per unit = 1,600,000 / 50,000Variable cost per unit = $32 

  Variable costs = No. of units * Variable cost per unitVariable costs = 60,000 * $32Variable costs = 1,920,000

  Contribution margin = Sales  Variable costsContribution margin = $2,400,000  $1,920,000Contribution margin = $480,000

  Income before tax = Contribution margin  Fixed costsIncome before tax = $480,000  $125,000Income before tax = $355,000

  Tax on income = Income before tax * Tax rateTax on income = $355,000 * 32%Tax on income = $113,600

Net income is calculated as follows-

  Net income = Income before tax  Tax on incomeNet income = $355,000  $113,600Net income = $241,400

Product O

Given, Fixed costs = $1,475,000

  Selling price per unit = Sales / No. of unitsSelling price per unit = 2,000,000 / 50,000Selling price per unit = $40

  Sales = No. of units * Selling per unitSales = 60,000 * $40Sales = $2,400,000

  Variable cost per unit = 250,000 / 50,000Variable cost per unit = $5.00 

  Variable costs = No. of units * Variable cost per unitVariable costs = 60,000 * $5.00Variable costs = $300,000

  Contribution margin = Sales  Variable costsContribution margin = $2,400,000  $300,000Contribution margin = $2,100,000

  Income before tax = Contribution margin  Fixed costsIncome before tax = $2,100,000  $1,475,000Income before tax = $625,000

  Tax on income = Income before tax * Tax rateTax on income = $625,000 * 32%Tax on income = $200,000

Net income is calculated as follows-

  Net income = Income before tax  Tax on incomeNet income = $625,000  $200,000Net income = $425,000

Conclusion:

Thus, contribution margin income statement is prepared.

To determine

Concept Introduction:

Contribution margin income statement-

It is a statement wherein all the variable costs are deducted from the sales to get the contribution margin and after getting contribution margin, fixed expenses are deducted from contribution margin to get net income or loss.

Requirement 4-:

To Explain:

To explain which product would experience greater decrease in profit.

Expert Solution
Check Mark

Answer to Problem 5APSA

When sales are increased, there will be improvement in income in case of product T as it will earn more contribution margin per unit as compared to product O. The operating leverage of given items will yield same result.

Explanation of Solution

The requirement is explained in the answer.

Conclusion:

Thus, Product T will experience greater decrease in profit.

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Chapter 21 Solutions

Fundamental Accounting Principles

Ch. 21 - Prob. 11DQCh. 21 - List three methods to measure cost behavior.Ch. 21 - Prob. 13DQCh. 21 - Prob. 14DQCh. 21 - Prob. 15DQCh. 21 - Prob. 16DQCh. 21 - Prob. 17DQCh. 21 - Prob. 18DQCh. 21 - Prob. 19DQCh. 21 - Prob. 20DQCh. 21 - Prob. 21DQCh. 21 - Prob. 22DQCh. 21 - Cost behavior identification C1 Listed here are...Ch. 21 - QS 21-2 Cost behavior identification c1 ...Ch. 21 - QS 21-3 Cost behavior estimation—high-low method...Ch. 21 - Prob. 4QSCh. 21 - Prob. 5QSCh. 21 - Prob. 6QSCh. 21 - Prob. 7QSCh. 21 - Prob. 8QSCh. 21 - Prob. 9QSCh. 21 - Prob. 10QSCh. 21 - Prob. 11QSCh. 21 - Prob. 12QSCh. 21 - Prob. 13QSCh. 21 - Prob. 14QSCh. 21 - Prob. 15QSCh. 21 - Prob. 16QSCh. 21 - Prob. 17QSCh. 21 - Prob. 18QSCh. 21 - Prob. 19QSCh. 21 - Prob. 20QSCh. 21 - Prob. 21QSCh. 21 - Prob. 1ECh. 21 - Prob. 2ECh. 21 - Prob. 3ECh. 21 - Prob. 4ECh. 21 - Prob. 5ECh. 21 - Prob. 6ECh. 21 - Prob. 7ECh. 21 - Prob. 8ECh. 21 - Prob. 9ECh. 21 - Prob. 10ECh. 21 - Prob. 11ECh. 21 - Prob. 12ECh. 21 - Prob. 13ECh. 21 - Prob. 14ECh. 21 - Prob. 15ECh. 21 - Prob. 16ECh. 21 - Prob. 17ECh. 21 - Prob. 18ECh. 21 - Prob. 19ECh. 21 - Prob. 20ECh. 21 - Prob. 21ECh. 21 - Prob. 22ECh. 21 - Prob. 23ECh. 21 - Prob. 24ECh. 21 - Prob. 25ECh. 21 - Prob. 26ECh. 21 - Prob. 27ECh. 21 - Prob. 1APSACh. 21 - Prob. 2APSACh. 21 - Prob. 3APSACh. 21 - Prob. 4APSACh. 21 - Prob. 5APSACh. 21 - Prob. 6APSACh. 21 - Prob. 7APSACh. 21 - Prob. 1BPSBCh. 21 - Prob. 2BPSBCh. 21 - Prob. 3BPSBCh. 21 - Prob. 4BPSBCh. 21 - Prob. 5BPSBCh. 21 - Prob. 6BPSBCh. 21 - Prob. 7BPSBCh. 21 - Prob. 21SPCh. 21 - Prob. 2AACh. 21 - Prob. 3AACh. 21 - Labor costs of an auto repair mechanic are seldom...Ch. 21 - Prob. 2BTNCh. 21 - Prob. 4BTNCh. 21 - Prob. 6BTN
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