Chapter 21, Problem 5BPSB

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-

  $Breakevenpointinsalesdollars=Fixedcosts/Contributionmarginratio$

Requirement 1-:

To compute:

Break even points in sales dollars.

Answer to Problem 5BPSB

Product BB

  $\begin{array}{l}Breakevenpointinsalesdollars=\frac{Fixedcosts}{Contributionmarginratio}\hfill \\ Breakevenpointinsalesdollars=\frac{\$100,000}{30\%}\hfill \\ Breakevenpointinsalesdollars=\$333,334\hfill \end{array}$

Product TT

  $\begin{array}{l}Breakevenpointinsalesdollars=\frac{Fixedcosts}{Contributionmarginratio}\hfill \\ Breakevenpointinsalesdollars=\frac{\$560,000}{87.5\%}\hfill \\ Breakevenpointinsalesdollars=\$640,000\hfill \end{array}$

Explanation of Solution

Product BB

Given,

• Fixed costs = $100,000
• Sales = $800,000
• Contribution margin = $240,000

First we need to find contribution margin ratio-

  $\begin{array}{l}Contributionmarginratio=Contributionmargin/Sales\hfill \\ Contributionmarginratio=\$240,000/\$800,000\hfill \\ Contributionmarginratio=\text{ 3}0\%\hfill \end{array}$

Breakeven point is calculated as follows-

  $\begin{array}{l}Breakevenpointinsalesdollars=\frac{Fixedcosts}{Contributionmarginratio}\hfill \\ Breakevenpointinsalesdollars=\frac{\$100,000}{30\%}\hfill \\ Breakevenpointinsalesdollars=\$333,334\hfill \end{array}$

Product TT

Given,

• Fixed costs = $560,000
• Sales = $800,000
• Contribution margin = $700,000
First we need to find contribution margin ratio-

  $\begin{array}{l}Contributionmarginratio=Contributionmargin/Sales\hfill \\ Contributionmarginratio=\$700,000/\$800,000\hfill \\ Contributionmarginratio=\text{ 87}\text{.5\%}\hfill \end{array}$

Breakeven point is calculated as follows-

  $\begin{array}{l}Breakevenpointinsalesdollars=\frac{Fixedcosts}{Contributionmarginratio}\hfill \\ Breakevenpointinsalesdollars=\frac{\$560,000}{87.5\%}\hfill \\ Breakevenpointinsalesdollars=\$640,000\hfill \end{array}$

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.

Answer to Problem 5BPSB

STAM Company
Forecasted contribution margin income statement
Particulars	Product BB	Product TT
Sales	528,000	528,000
Variable costs	369,600	66,000
Contribution margin	158,400	462,000
Fixed costs	100,000	560,000
Income before tax	58,400	(98,000)
Tax on income (32%)	18,688	31,360
Net income / (Loss)	39,712	(66,640)

Explanation of Solution

Product BB

Given, Fixed costs = $100,000

  $\begin{array}{l}Sellingpriceperunit=Sales/No.ofunits\hfill \\ Sellingpriceperunit=800,000/50,000\hfill \\ Sellingpriceperunit=\$16\hfill \end{array}$

  $\begin{array}{l}Sales=No.ofunits*Sellingperunit\hfill \\ Sales=33,000*\$16\hfill \\ Sales=\$528,000\hfill \end{array}$

  $\begin{array}{l}Variablecostperunit=560,000/50,000\hfill \\ Variablecostperunit=\$11.20\hfill \\ \hfill \end{array}$

  $\begin{array}{l}Variablecosts=No.ofunits*Variablecostperunit\hfill \\ Variablecosts=33,000*\$11.20\hfill \\ Variablecosts=369,600\hfill \end{array}$

  $\begin{array}{l}Contributionmargin=Sales–Variablecosts\hfill \\ Contributionmargin=\$528,000-\$369,600\hfill \\ Contributionmargin=\$158,400\hfill \end{array}$

  $\begin{array}{l}Incomebeforetax=Contributionmargin–Fixedcosts\hfill \\ Incomebeforetax=\$158,400-\$100,000\hfill \\ Incomebeforetax=\$58,400\hfill \end{array}$

  $\begin{array}{l}Taxonincome=Incomebeforetax*Taxrate\hfill \\ Taxonincome=\$58,400*32\%\hfill \\ Taxonincome=\$18,688\hfill \end{array}$

Net income is calculated as follows-

  $\begin{array}{l}Netincome=Incomebeforetax-Taxonincome\hfill \\ Netincome=\$58,400-\$18,688\hfill \\ Netincome=\$39,712\hfill \end{array}$

Product TT

Given, Fixed costs = $560,000

  $\begin{array}{l}Sellingpriceperunit=Sales/No.ofunits\hfill \\ Sellingpriceperunit=800,000/50,000\hfill \\ Sellingpriceperunit=\$16\hfill \end{array}$

  $\begin{array}{l}Sales=No.ofunits*Sellingperunit\hfill \\ Sales=33,000*\$16\hfill \\ Sales=\$528,000\hfill \end{array}$

  $\begin{array}{l}Variablecostperunit=100,000/50,000\hfill \\ Variablecostperunit=\$2.00\hfill \\ \hfill \end{array}$

  $\begin{array}{l}Variablecosts=No.ofunits*Variablecostperunit\hfill \\ Variablecosts=33,000*\$2.00\hfill \\ Variablecosts=\text{ \$66,000}\hfill \end{array}$

  $\begin{array}{l}Contributionmargin=Sales–Variablecosts\hfill \\ Contributionmargin=\$528,000-\$66,000\hfill \\ Contributionmargin=\$462,000\hfill \end{array}$

  $\begin{array}{l}Incomebeforetax=Contributionmargin–Fixedcosts\hfill \\ Incomebeforetax=\$462,000-\$560,000\hfill \\ Incomebeforetax=\text{ (}\$98,000)\hfill \end{array}$

  $\begin{array}{l}Taxonincome=Incomebeforetax*Taxrate\hfill \\ Taxonincome=\$98,000*32\%\hfill \\ Taxonincome=\$31,360\hfill \end{array}$

Net income is calculated as follows-

  $\begin{array}{l}Netincome=Incomebeforetax-Taxonincome\hfill \\ Netincome=(\$98,000)-\$31,360\hfill \\ Netincome=\text{ (}\$66,640)\hfill \end{array}$

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.

Answer to Problem 5BPSB

STAM Company
Forecasted contribution margin income statement
Particulars	Product BB	Product TT
Sales	1,024,000	1,024,000
Variable costs	716,800	128,000
Contribution margin	307,200	896,000
Fixed costs	100,000	560,000
Income before tax	207,200	336,000
Tax on income (32%)	66,304	107,520
Net income / (Loss)	140,896	228,480

Explanation of Solution

Product BB

Given, Fixed costs = $100,000

  $\begin{array}{l}Sellingpriceperunit=Sales/No.ofunits\hfill \\ Sellingpriceperunit=800,000/50,000\hfill \\ Sellingpriceperunit=\$16\hfill \end{array}$

  $\begin{array}{l}Sales=No.ofunits*Sellingperunit\hfill \\ Sales=\text{ 64},000*\$16\hfill \\ Sales=\$1,024,000\hfill \end{array}$

  $\begin{array}{l}Variablecostperunit=560,000/50,000\hfill \\ Variablecostperunit=\$11.20\hfill \\ \hfill \end{array}$

  $\begin{array}{l}Variablecosts=No.ofunits*Variablecostperunit\hfill \\ Variablecosts=64,000*\$11.20\hfill \\ Variablecosts=716,800\hfill \end{array}$

  $\begin{array}{l}Contributionmargin=Sales–Variablecosts\hfill \\ Contributionmargin=\$1,024,000-\$716,800\hfill \\ Contributionmargin=\$307,200\hfill \end{array}$

  $\begin{array}{l}Incomebeforetax=Contributionmargin–Fixedcosts\hfill \\ Incomebeforetax=\$307,200-\$100,000\hfill \\ Incomebeforetax=\$207,200\hfill \end{array}$

  $\begin{array}{l}Taxonincome=Incomebeforetax*Taxrate\hfill \\ Taxonincome=\$207,200*32\%\hfill \\ Taxonincome=\$66,304\hfill \end{array}$

Net income is calculated as follows-

  $\begin{array}{l}Netincome=Incomebeforetax-Taxonincome\hfill \\ Netincome=\$207,200-\$66,304\hfill \\ Netincome=\$140,896\hfill \end{array}$

Product TT

Given, Fixed costs = $560,000

  $\begin{array}{l}Sellingpriceperunit=Sales/No.ofunits\hfill \\ Sellingpriceperunit=800,000/50,000\hfill \\ Sellingpriceperunit=\$16\hfill \end{array}$

  $\begin{array}{l}Sales=No.ofunits*Sellingperunit\hfill \\ Sales=\text{ 64,}000*\$16\hfill \\ Sales=\$1,024,000\hfill \end{array}$

  $\begin{array}{l}Variablecostperunit=100,000/50,000\hfill \\ Variablecostperunit=\$2.00\hfill \\ \hfill \end{array}$

  $\begin{array}{l}Variablecosts=No.ofunits*Variablecostperunit\hfill \\ Variablecosts=64,000*\$2.00\hfill \\ Variablecosts=\text{ \$128,000}\hfill \end{array}$

  $\begin{array}{l}Contributionmargin=Sales–Variablecosts\hfill \\ Contributionmargin=\$1,024,000-\$128,000\hfill \\ Contributionmargin=\$896,000\hfill \end{array}$

  $\begin{array}{l}Incomebeforetax=Contributionmargin–Fixedcosts\hfill \\ Incomebeforetax=\$896,000-\$560,000\hfill \\ Incomebeforetax=336,000\hfill \end{array}$

  $\begin{array}{l}Taxonincome=Incomebeforetax*Taxrate\hfill \\ Taxonincome=\$336,000*32\%\hfill \\ Taxonincome=\$107,520\hfill \end{array}$

Net income is calculated as follows-

  $\begin{array}{l}Netincome=Incomebeforetax-Taxonincome\hfill \\ Netincome=\$336,000-\$107,520\hfill \\ Netincome=\$228,480\hfill \end{array}$

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 increase in profit.

Answer to Problem 5BPSB

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

Explanation of Solution

The requirement is explained in the answer.

Conclusion:

Thus, Product TT will experience greater increase in profit.

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 5-:

To Explain:

To explain the factors which might create different cost structures for two products.

Answer to Problem 5BPSB

Following are the factors-

• Sales representative works only on commission.
• Labor arrangement paying workers for per unit manufactured.
• Salary structure is not dependent on sales or production.
• Assets utilized in manufacturing of BB are leased with rent dependent on the basis of assets utilized.

Explanation of Solution

The requirement is explained in the answer.

Conclusion:

Thus, factors are explained.