Financial Accounting
Financial Accounting
18th Edition
ISBN: 9781260706307
Author: Jan Williams
Publisher: Mcgraw-hill Higher Education (us)
Question
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Chapter 20, Problem 5BP

a.

To determine

Determine the unit contribution margin and break-even point in units and break-even point in dollar sales.

a.

Expert Solution
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Explanation of Solution

Contribution Margin:

The process or theory which is used to judge the benefit given by each unit of the goods produced is called as contribution margin.

The contribution margin is the difference between the selling price and the cost of the product.

Formula to compute the unit contribution margin:

Unit Contribution Margin=Unit Sales PricePer Unit Variable Cost

Calculate the contribution margin per unit:

Step 1: Calculate the variable cost per unit.

Variable cost per unit = (Cost of merchandise + Amount of rental commission)=($1.10+$.10)=$1.20

Step 2: Calculate the contribution margin per unit.

Unit Contribution Margin=(Sales price per unitVariable cost per unit)=($3.20$1.20)=$.2.00

Calculate the break-even volume in units:

Step 1: Calculate the total monthly fixed costs.

Total monthly fixed costs = (Depreciation + Wages + Others)=($1,000+$1,800+$200)=$3,000

Step 2: Calculate the break-even volume in units.

Break-even volume in units = (Total monthly fixed costsUnit contribution margin)=($3,000$2)=1,500

Working note:

Calculate the amount of depreciation:

Depreciation = (Cost of machine×.20×Depreciation for one month)=($60,000×.20×112)=$1,000

Calculate the break-even volume in dollars:

Break-even volume in dollars =( Break-even volume in units ×Unit sales price)=(1,500×$3.20)=$4,800

b.

To determine

Draw a monthly cost-volume-profit graph for the sales volume up to 800 units per machine per month.

b.

Expert Solution
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Explanation of Solution

Cost-Volume- Profit Analysis (CVP Analysis): This analysis is helpful in determining that how any type of change in cost determines company’s income.

Financial Accounting, Chapter 20, Problem 5BP

c.

To determine

Compute the sales volume in units and in dollars per month.

c.

Expert Solution
Check Mark

Explanation of Solution

Compute the sales volume in units:

Step 1: Calculate the total desired contribution margin.

Total desired contribution margin = (Total monthly fixed costs + Desired operating income)=($3,000+$700)=$3,700

Step 2: Calculate the sales volume in units.

Sales volume in units = (Total desired contribution marginContribution margin per unit)=($3,700$2.00)=1,850

Working note:

Calculate the amount of desired operating income:

Desired operating income = (Cost of investment×Annual return percentage×Operating income for one month)=($70,000×.12×112)=$700

Compute the sales volume in dollars:

Sales volume in dollars = (Sales volume in units × Unit sales price)=(1,850×$3.20)=$5,920

d.

To determine

Determine the changes in break-even volume in units.

d.

Expert Solution
Check Mark

Explanation of Solution

Calculate the changes in break-even volume in units:

Changes in break-even volume in units = (New monthly fixed costsNew contirbution margin per unit )=($5,250$.2.10)=2,500

Working notes:

Calculate the amount of new monthly fixed costs:

New monthly fixed costs = {Total monthly fixed costs +(Number of machines×Rental cost per machine per month)}={$3,000 +(50×$45)}=($3,000 +$2,250)=$5,250

Calculate the new contribution margin per unit:

New contribution margin per unit =( Unit sales priceVaraible cost per unit of merchandise)=($3.20$1.10)=$2.10

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Chapter 20 Solutions

Financial Accounting

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