Concept explainers
(a)
Breakeven Point:
The level of sales where the company is neither on profit nor loss is termed as breakeven point. In other words, that level of sales at which the fixed cost of the business is recovered.
To compute:
The breakeven point if the fixed cost is
Answer to Problem 22E
The breakeven point is
Explanation of Solution
Fixed cost is
Contribution margin is
The break-even point in units is calculated as:
(b)
Concept introduction:
Breakeven Point:
The level of sales where the company is neither on profit nor loss is termed as breakeven point. In other words, that level of sales at which the fixed cost of the business is recovered.
To prove:
The breakeven point by using contribution margin statement.
Answer to Problem 22E
The breakeven point is
Explanation of Solution
Income Statement:
Particulars | Amount |
Sales Price |
|
Variable Cost per Canoe |
|
Contribution Margin |
|
Less: Fixed Cost | |
Profit |
(c)
Concept introduction:
Target Profit:
The target profit is that profit which a company decides to achieve and this analysis helps in determinig the level of sales by which this target can be achieved.
The total sales to achieve target profit of
Answer to Problem 22E
The target sale point is
Explanation of Solution
Fixed cost is
Contribution margin is
The total sales for achieving the target profit are calculated as:
(d)
Concept introduction:
Target Profit:
The target profit is that profit which a company decides to achieve and this analysis helps in determinig the level of sales by which this target can be achieved.
To prove:
The target sale by using contribution margin statement.
Answer to Problem 22E
The target sale is
Explanation of Solution
Income Statement:
Particulars | Amount |
Sales Price |
|
Variable Cost per Canoe |
|
Contribution Margin |
|
Less: Fixed Cost | |
Profit |
(e)
Concept introduction:
Margin of Safety:
The margin of safety is the margin enjoyed by the company which is achieved over and above the breakeven sales. It is a difference of actual sales and breakeven sales.
To compute:
The margin safety in units and percentage of sales.
Answer to Problem 22E
The margin safety is
Explanation of Solution
The actual sales amount to
The breakeven sales amount to
The margin of safety in terms of amount is calculated as:
The margin of safety in terms of percentage of sales is calculated as:
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Chapter 6 Solutions
Managerial Accounting - With Access
- Cost-Volume-Profit, Margin of Safety Victoria Company produces a single product. Last years income statement is as follows: Required: 1. Compute the break-even point in units and sales dollars calculated using the break-even units. 2. What was the margin of safety for Victoria last year in sales dollars? 3. Suppose that Victoria is considering an investment in new technology that will increase fixed cost by 250,000 per year but will lower variable costs to 45% of sales. Units sold will remain unchanged. Prepare a budgeted income statement assuming that Victoria makes this investment. What is the new break-even point in sales dollars, assuming that the investment is made?arrow_forwardSales Revenue Approach, Variable Cost Ratio, Contribution Margin Ratio Arberg Companys controller prepared the following budgeted income statement for the coming year: Required: 1. What is Arbergs variable cost ratio? What is its contribution margin ratio? 2. Suppose Arbergs actual revenues are 30,000 more than budgeted. By how much will operating income increase? Give the answer without preparing a new income statement 3. How much sales revenue must Arberg earn to break even? Prepare a contribution margin income statement to verify the accuracy of your answer. 4. What is Arbergs expected margin of safety? 5. What is Arbergs margin of safety if sales revenue is 380,000?arrow_forwardFaldo Company produces a single product. The projected income statement for the coming year, based on sales of 200,000 units, is as follows: Required: 1. Compute the unit contribution margin and the units that must be sold to break even. Suppose that 30,000 units are sold above the break-even point. What is the profit? 2. Compute the contribution margin ratio and the break-even point in dollars. Suppose that revenues are 200,000 greater than expected. What would the total profit be? 3. Compute the margin of safety in sales revenue. 4. Compute the operating leverage. Compute the new profit level if sales are 20 percent higher than expected. 5. How many units must be sold to earn a profit equal to 10 percent of sales? 6. Assume the income tax rate is 40 percent. How many units must be sold to earn an after-tax profit of 180,000?arrow_forward
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- Contribution margin, break-even sales, cost-volume-profit chart, margin of safety, and operating leverage Belmain Co. expects to maintain the same inventories at the end of 20Y7 as at the beginning of the year. The total of all production costs for the year is therefore assumed to be equal to the cost of goods sold. With this in mind, the various department heads were asked to submit estimates of the costs for their departments during the year. A summary report of these estimates is as follows: It is expected that 12,000 units will be sold at a price of 240 a unit. Maximum sales within the relevant range are 18,000 units. Instructions 1. Prepare an estimated income statement for 20Y7. 2. What is the expected contribution margin ratio? 3. Determine the break-even sales in units and dollars. 4. Construct a cost-volume-profit chart indicating the break-even sales. 5. What is the expected margin of safety in dollars and as a percentage of sales? (Round to one decimal place.) 6. Determine the operating leverage.arrow_forwardCompany A has current sales of $10,000,000 and a 45% contribution margin. Its fixed costs are $3,000,000. Company B is a service firm with current service revenue of $5,000,000 and a 20% contribution margin. Company Bs fixed costs are $500,000. Compute the degree of operating leverage for both companies. Which company will benefit most from a 25% increase in sales? Explain why.arrow_forwardKatayama Company produces a variety of products. One division makes neoprene wetsuits. The divisions 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 divisions 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?arrow_forward
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