Managerial Accounting: The Cornerstone of Business Decision-Making
7th Edition
ISBN: 9781337115773
Author: Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher: Cengage Learning
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Question
Chapter 7, Problem 63P
1.
To determine
Calculate the degree of operating leverage for Company D and Company M.
2.
To determine
Calculate break-even point in sales dollars for each company.
3.
To determine
Calculate the percentage increase in profit for each company if there is an increase of 30% in revenues.
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Chapter 7 Solutions
Managerial Accounting: The Cornerstone of Business Decision-Making
Ch. 7 - Prob. 1DQCh. 7 - Describe the difference between the units sold...Ch. 7 - Define the term break-even point.Ch. 7 - Prob. 4DQCh. 7 - What is the variable cost ratio? The contribution...Ch. 7 - Prob. 6DQCh. 7 - Define the term sales mix. Give an example to...Ch. 7 - Explain how CVP analysis developed for single...Ch. 7 - Prob. 9DQCh. 7 - How does targeted profit enter into the break-even...
Ch. 7 - Explain how a change in sales mix can change a...Ch. 7 - Define the term margin of safety. Explain how it...Ch. 7 - Explain what is meant by the term operating...Ch. 7 - How can sensitivity analysis be used in...Ch. 7 - Why is a declining margin of safety over a period...Ch. 7 - If the variable cost per unit goes down,Ch. 7 - The amount of revenue required to earn a targeted...Ch. 7 - Prob. 3MCQCh. 7 - Prob. 4MCQCh. 7 - An important assumption of cost-volume-profit...Ch. 7 - The use of fixed costs to extract higher...Ch. 7 - Prob. 7MCQCh. 7 - The contribution margin is the a. amount by which...Ch. 7 - Dartmouth Company produces a single product with a...Ch. 7 - Dartmouth Company produces a single product with a...Ch. 7 - If a companys total fixed cost decreases by...Ch. 7 - Prob. 12MCQCh. 7 - Variable Cost, Fixed Cost, Contribution Margin...Ch. 7 - Prob. 14BEACh. 7 - Variable Cost Ratio, Contribution Margin Ratio...Ch. 7 - Prob. 16BEACh. 7 - Units to Earn Target Income Head-First Company...Ch. 7 - Sales Needed to Earn Target Income Head-First...Ch. 7 - Break-Even Point in Units for a Multiple-Product...Ch. 7 - Prob. 20BEACh. 7 - Margin of Safety Head-First Company plans to sell...Ch. 7 - Degree of Operating Leverage Head-First Company...Ch. 7 - Impact of Increased Sales on Operating Income...Ch. 7 - Variable Cost, Fixed Cost, Contribution Margin...Ch. 7 - Prob. 25BEBCh. 7 - Variable Cost Ratio, Contribution Margin Ratio...Ch. 7 - Prob. 27BEBCh. 7 - Units to Earn Target Income Chillmax Company plans...Ch. 7 - Sales Needed to Earn Target Income Chillmax...Ch. 7 - Prob. 30BEBCh. 7 - Prob. 31BEBCh. 7 - Margin of Safety Chillmax Company plans to sell...Ch. 7 - Prob. 33BEBCh. 7 - Impact of Increased Sales on Operating Income...Ch. 7 - Basic Break-Even Calculations Suppose that Larimer...Ch. 7 - Price, Variable Cost per Unit, Contribution...Ch. 7 - Contribution Margin Ratio, Variable Cost Ratio,...Ch. 7 - Prob. 38ECh. 7 - Prob. 39ECh. 7 - Margin of Safety Comer Company produces and sells...Ch. 7 - Prob. 41ECh. 7 - Sales Revenue Approach, Variable Cost Ratio,...Ch. 7 - Prob. 43ECh. 7 - Cherry Blossom Products Inc. produces and sells...Ch. 7 - Prob. 45ECh. 7 - Lotts Company produces and sells one product. The...Ch. 7 - Klamath Company produces a single product. The...Ch. 7 - Margin of Safety and Operating Leverage Medina...Ch. 7 - Parker Pottery produces a line of vases and a line...Ch. 7 - Jellico Inc.s projected operating income (based on...Ch. 7 - Break-Even Units, Contribution Margin Ratio,...Ch. 7 - Prob. 52PCh. 7 - Aldovar Company produces a variety of chemicals....Ch. 7 - Basu Company produces two types of sleds for...Ch. 7 - Cost-Volume-Profit Equation, Basic Concepts,...Ch. 7 - Contribution Margin Ratio, Break-Even Sales,...Ch. 7 - Prob. 57PCh. 7 - Polaris Inc. manufactures two types of metal...Ch. 7 - Cost-Volume-Profit, Margin of Safety Victoria...Ch. 7 - Abraham Company had revenues of 830,000 last year...Ch. 7 - Prob. 61PCh. 7 - Prob. 62PCh. 7 - Prob. 63PCh. 7 - Suppose that Kicker had the following sales and...Ch. 7 - Danna Lumus, the marketing manager for a division...Ch. 7 - Cost-Volume-Profit Analysis, Single-Product...Ch. 7 - Cost-Volume-Profit Analysis, Single-Product...Ch. 7 - Prob. 3MTCCh. 7 - Prob. 4MTCCh. 7 - Sensitivity Cost-Volume-Profit Analysis and...Ch. 7 - Calculate the hotels margin of safety (both in...
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Income statements for two different companies in the same industry are as follows: Required: 1. Compute the degree of operating leverage for each company. 2. Compute the break-even point for each company. Explain why the break-even point for Quintex, Inc., is higher. 3. Suppose that both companies experience a 50 percent increase in revenues. Compute the percentage change in profits for each company. Explain why the percentage increase in Quintexs profits is so much greater than that of Trimax.
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Suppose you are analyzing a firm that is successfully executing a strategy that differentiates its products from those of its competitors. Because of this strategy, you project that next year the firm will generate 6.0% revenue growth from price increases and 3.0% revenue growth from sales volume increases. Assume that the firms production cost structure involves strictly variable costs. (That is, the cost to produce each unit of product remains the same.) Should you project that the firms gross profit will increase next year? If you project that the gross profit will increase, is the increase a result of volume growth, price growth, or both? Should you project that the firms gross profit margin (gross profit divided by sales) will increase next year? If you project that the gross profit margin will increase, is the increase a result of volume growth, price growth, or both?
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Beck Inc. and Bryant Inc. have the following operating data:
Â
Beck Inc.
Bryant Inc.
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Â
$408,000
Â
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68,300
Â
244,800
Contribution margin
$102,000
Â
$163,200
Â
Fixed costs
51,000
Â
27,200
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$51,000
Â
$136,000
Â
a. (pictured)
b. (pictured)
c. Â The difference in the (increase/decrease) of income from operations is due to the difference in the operating leverages. Beck Inc.'s (higher/lower) operating leverage means that its fixed costs are a (larger/smaller) percentage of contribution margin than are Bryant Inc.'s.
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Operating Leverage
Income statements for two different companies in the same industry are as follows:
Trimax, Inc.
Quintex, Inc.
$400,000
$562,500
200,000
112,500
$200,000
$450,000
150,000
400,000
$50,000
$50,000
Sales
Less: Variable costs
Contribution margin
Less: Fixed costs
Operating income
Required:
1. Compute the degree of operating leverage for each company.
Trimax
Quintex
2. Compute the break-even point in dollars for each company.
Trimax, Inc.
Quintex, Inc.
Why is the break-even point for Quintex, Inc., higher?
3. Suppose that both companies experience a 40 percent increase in revenues. Compute the percentage change in profits for each company,
Trimax
Quintex
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Beck Inc. and Bryant Inc. have the following operating data:
Â
Beck Inc.
Bryant Inc.
Sales
$290,900Â
Â
$805,500Â
Â
Variable costs
(116,700)
Â
(483,300)
Contribution margin
$174,200Â
Â
$322,200Â
Â
Fixed costs
(107,200)
Â
(143,200)
Operating income
$67,000Â
Â
$179,000Â
Â
a. Â Compute the operating leverage for Beck Inc. and Bryant Inc. If required, round to one decimal place.
Beck Inc.
Â
Bryant Inc.
Â
b. Â How much would operating income increase for each company if the sales of each increased by 10%? If required, round answers to nearest whole number.
Â
Dollars
Percentage
Beck Inc.
$
Â
%
Bryant Inc.
$
Â
%
c.  The difference in the  of operating income is due to the difference in the operating leverages. Beck Inc.'s  operating leverage means that its fixed costs are a  percentage of contribution margin than are Bryant Inc.'s.
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Jakara Company is a service firm with current service revenue of $400,000 and a 40% contribution margin. Its fixed costs are $80,000.Â
Maldives Company has current sales of $6,610,000 and a 45% contribution margin. Its fixed costs are $1,800,000.
a. Compute the degree of operating leverage for both companies. Which company will benefit most from a 15% increase in sales? Explain why.
b. Illustrate your findings in an Income Statement that is increased by 15%.
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Income statements for two different companies in the same industry are as follows:
                         Elgin, Inc        Hobart, Inc.
Sales:Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â $600,000Â Â Â Â Â Â Â $600,000
Less: Variable costs:Â Â Â Â Â Â Â Â Â Â Â 360,000Â Â Â Â Â Â Â Â 120,000
Contribution margin:Â Â Â Â Â Â Â Â Â $240,000Â Â Â Â Â Â Â $480,000
Less: Fixed Costs:Â Â Â Â Â Â Â Â Â Â Â Â 120,000Â Â Â Â Â Â Â Â 360,000
Operating income           $120,000       $120,000Â
REQUIRED:
1. Compute the degree of operating leverage for each company.
2. Compute the break-even point for each company. Explain why the break-even point for Hobart, Inc., is higher.
3. Suppose that both companies experience a 30 percent increase in revenues. Compute the percentage change in profits for each company. Explain why the percentage increase in Hobart’s profits is so much greater than that of Elgin.
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