Financial and Managerial Accounting (Looseleaf) (Custom Package)
Financial and Managerial Accounting (Looseleaf) (Custom Package)
6th Edition
ISBN: 9781259754883
Author: Wild
Publisher: MCG
Question
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Chapter 18, Problem 7PSA

1.

To determine

To identify: Break-even point in total sales in units and in dollars when old material is used.

1.

Expert Solution
Check Mark

Explanation of Solution

Given,
Fixed cost is $250,000.

Calculated values (working note),
Unit contribution margin is $122.

Formula to calculate break- even point of sales units,

    Breakeven point= Fixedcost Unitcontributionmargin

Substitute $250,000 for fixed cost and $122 for unit margin.

    Breakeven point= $250,000 $122 =2049.18units

Given,
Fixed cost is $250,000.

Calculated values,
Contribution margin ratio is 32.97% or 0.3297 (from working note).

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

    Breakeven point= Fixedcost Contribution margin ratio

Substitute $250,000 for fixed cost and 0.3297 for contribution margin ratio.

    Breakeven point= $250,000 0.3297 =$758,265.089

Table represents the number of units of each product sold at break-even point.

Particulars Ratio ( A ) Break-even unit of composite unit ( B ) Break-even unit ( ( C )=( A )×( B ) ) Selling price ($) ( D ) Break-even sales in ($) ( ( D )×( C ) )
Red 5 2,050 10,250 20 205,000
White 4 2,050 8,200 35 287,000
Blue 2 2,050 4,100 65 266,500

Table(1)

Working note:

Given,
Sales price of red is $20.
Sales price of white is $35.
Sales price of blue is $65.
Fixed cost is $250,000.
Ratio of red, white and blue is 5:4:2.

Table represents the selling price per composite unit.

Particulars Ratio ( A ) Selling price per unit ($) ( B ) Total amount ($) ( ( A )×( B ) )
Red 5 20 100
White 4 35 140
Blue 2 65 130
Selling price per composite unit
370

Table(2)

Hence, selling price per composite unit is $370.

Given,
Variable cost of white is $22.
Variable cost of red is $12.
Variable cost of blue is $50.
Ratio of red, white and blue is 5:4:2.

Table represents the variable cost per composite unit.

Particulars Ratio ( A ) Variable cost per unit ($) ( B ) Total amount ($) ( ( A )×( B ) )
Red 5 12 60
White 4 22 88
Blue 2 50 100
Variable cost per composite unit
248

Table(3)

Hence, the variable cost per composite unit is $248.

Calculated values,
Selling price per composite unit is $370.
Variable cost per composite unit is $248.

Calculation of unit contribution margin,

    Unitcontributionmargin=PerunitsellingpricePerunitvariablecost =$370$248 =$122

Contribution margin per composite unit is $122.

Calculation of contribution margin ratio,

    Contribution margin ratio= Unitcontributionmargin Unitsellingprice = $122 $370 =0.3297or32.97%

Contribution margin ratio is 32.97%.

Hence, break-even point of sale is 2,050 composite units and $758,265 (round off).

2.

To determine

To identify: Break-even point in total sales in dollars and in units when a firm uses new material.

2.

Expert Solution
Check Mark

Explanation of Solution

Given,
Fixed cost is $300,000 ( $250,000+$50,000 ) .

Calculated values (working note),
Unit contribution margin is $220.

Formula to calculate break- even point of sales units,

    Breakeven point= Fixedcost Unitcontributionmargin

Substitute $300,000 for fixed cost and $220 for unit margin.

    Breakeven point= $300,000 $220 =1363.64units

Given,
Fixed cost is $300,000.

Calculated values,
Contribution margin ratio is 59.46% or 0.5946 (from working note).

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

    Breakeven point= Fixedcost Contribution margin ratio

Substitute $300,000 for fixed cost and 0.5946 for contribution margin ratio.

    Breakeven point= $300,000 0.5946 =$504,540.867

Table represents the number of units of each product sold at break-even point.

Particulars Ratio ( A ) Break-even unit of composite unit ( B ) Break-even unit ( ( C )=( A )×( B ) ) Selling price ($) ( D ) Break-even sales in ($) ( ( D )×( C ) )
Red 5 1,364 6,820 20 136,400
White 4 1,364 5,456 35 190,960
Blue 2 1,364 2,728 65 177,320

Table(4)

Working note:

Given,
Sales price of red is $20.
Sales price of white is $35.
Sales price of blue is $65.
Fixed cost is $300,000.
Ratio of red, white and blue is 5:4:2.

Table represents the selling price per composite unit.

Particulars Ratio ( A ) Selling price per unit ($) ( B ) Total amount ($) ( ( A )×( B ) )
Red 5 20 100
White 4 35 140
Blue 2 65 130
Selling price per composite unit
370

Table(5)

Hence, selling price per composite unit is $370.

Given,
Variable cost of white is $10 ( $22$12 ) .
Variable cost of red is $6 ( $12$6 ) .
Variable cost of blue is $40 ( $50$10 ) .
Ratio of red, white and blue is 5:4:2.

Table represents the variable cost per composite unit.

Particulars Ratio ( A ) Variable cost per unit ($) ( B ) Total amount ($) ( ( A )×( B ) )
Red 5 6 30
White 4 10 40
Blue 2 40 80
Variable cost per composite unit
150

Table(6)

Hence, the variable cost per composite unit is $150.

Calculated values,
Selling price per composite unit is $370.
Variable cost per composite unit is $150.

Calculation of unit contribution margin,

    Unitcontributionmargin=PerunitsellingpricePerunitvariablecost =$370$150 =$220

Contribution margin per composite unit is $220.

Calculation of contribution margin ratio,

    Contribution margin ratio= Unitcontributionmargin Unitsellingprice = $220 $370 =0.5946or59.46%

Contribution margin ratio is 59.46%.

Hence, break-even point of sale is 1,364 composite units and $504,541 (round off).

3.

To determine

To identify: The insight provided by the break-even analysis to the management for long-term planning.

3.

Expert Solution
Check Mark

Explanation of Solution

  • As per the break-even analysis, increase in fixed cost increases the risk because more contribution margin is required to cover the fixed cost.
  • While variable cost decreases, break-even point also reduced, therefore for long term planning break-even analysis is beneficial.

Hence, break-even point is reduced with the decrease in variable cost.

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Chapter 18 Solutions

Financial and Managerial Accounting (Looseleaf) (Custom Package)

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. 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 - 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. 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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