Principles of Financial Accounting.
Principles of Financial Accounting.
22nd Edition
ISBN: 9780077632892
Author: John J. Wild
Publisher: McGraw Hill
bartleby

Concept explainers

bartleby

Videos

Question
Book Icon
Chapter 21, Problem 5BP

1.

To determine

Compute the break-even point in dollar sales for each product.

1.

Expert Solution
Check Mark

Explanation of Solution

Break-Even Point: It is the point of sales at which entity neither earns a profit nor suffers a loss. It can also be said that the point of sales at which sales value of the entity recovers the entire cost of fixed and variable nature is called break-even point

Break-even point ($) = Fixed costs Contribution margin ratio

For Product BB:

Given, 50,000 units sold for $800,000, variable costs incurred is $560,000, and fixed costs are $100,000. Contribution margin ratio is 30% (Working note 1).

Compute the break-even point in dollar sales for year:

Break-even point ($) = Fixed costs Contribution margin ratio=$100,00030%=$333,334(Rounded off to next dollar)

Therefore, break-even sales for Product BB for the year are $333,334.

Working note1: Compute the contribution margin ratio

Sales price per unit ($800,000÷50,000units) (A)$16
Variable costs per unit ($560,000÷50,000units)$11.20
Contribution margin per unit (B)$4.80
Contribution margin ratio [(B)÷(A)]×100% 30%

Table (1)

For Product TT:

Given, 50,000 units sold for $800,000, variable costs incurred is $100,000, and fixed costs are $560,000. Contribution margin ratio is 87.5% (Working note 2).

Compute the break-even point in dollar sales for year:

Break-even point ($) = Fixed costs Contribution margin ratio=$560,00087.5%=$640,000

Working note 2: Compute the contribution margin ratio

Sales price per unit ($800,000÷50,000units) (A)$16
Variable costs per unit ($100,000÷50,000units)$2
Contribution margin per unit (B)$14
Contribution margin ratio [(B)÷(A)]×100% 87.5%

Table (1)

Therefore, break-even sales for Product TT for the year are $640,000.

2.

To determine

Prepare the contribution margin income statement.

2.

Expert Solution
Check Mark

Explanation of Solution

Contribution margin income statement: It is a kind of income statement which reports the sales, variable costs, contribution margin, fixed costs, and net profit.

Sales are declined to 33,000 units. Therefore revised sales for Product BB are $528,000(33,000units×$16 per unit) and variable costs are $369,600(33,000units×$11.20 per unit) and sales for Product TT are $258,000(33,000units×$16 per unit) and variable costs are $66,000(33,000units×$2 per unit).

Prepare the contribution margin income statement:

Company S
Forecasted Contribution Margin Income Statement
 Product BBProduct TT
Sales$528,000$ 528,000
Less: Variable costs369,60066,000
Contribution margin158,400462,000
Less: Fixed costs100,000560,000
Income before taxes58,400(98,000)
Less: Income taxes (32%)18,688(31,360)
Net income$39,712$(66,640)

Table (2)

Therefore, net income for Product BB is $39,712 and net loss for Production TT are $66,640.

3.

To determine

Prepare the contribution margin income statement.

3.

Expert Solution
Check Mark

Explanation of Solution

Contribution margin income statement: It is a kind of income statement which reports the sales, variable costs, contribution margin, fixed costs, and net profit.

Sales are increased to 64,000 units. Therefore revised sales for Product BB are $1,024,000(64,000units×$16 per unit) and variable costs are $716,800(64,000units×$11.20 per unit) and sales for Product TT are $1,024,000(64,000units×$16 per unit) and variable costs are $128,000(64,000units×$2 per unit).

Prepare the contribution margin income statement:

Company H
Forecasted Contribution Margin Income Statement
 Product BBProduct TT
Sales$1,024,000$1,024,000
Less: Variable costs716,800128,000
Contribution margin307,200896,000
Less: Fixed costs100,000 560,000
Income before taxes207,200336,000
Less: Income taxes (32%)66,304107,520
Net income$140,896$228,480

Table (3)

Therefore, net income for Product BB is $140,896 and for Production TT is $228,480.

4.

To determine

Identify the Product that would experience a greater increase in income when the sales are increase greatly. Explain the same.

4.

Expert Solution
Check Mark

Explanation of Solution

Product TT will experience a greater Increase in the income when the sales are increased greatly. The operating leverage of these two products would yield the same implication.  Precisely, higher operating leverage reveals higher fixed costs, which indicates greater influences on income from changes in sales levels.

5.

To determine

Describe some factors that might have created the different cost structures for these two products.

5.

Expert Solution
Check Mark

Explanation of Solution

Factors that could cause Product BB to have lower fixed costs might include:

  • The labours are paid based on the units produced.
  • Sales representatives work only on the basis sales commission.
  • Managers are remunerated with a share of profits instead of salaries.
  • Assets that are used in production of Product BB are taken on lease with the rent based on asset usage.

In contrast, fixed costs for Product TT may be higher because of:

  • A salary structure that is not based on production or sales.
  • Product TT's assets that are owned or acquired under a lease agreement based on time, and not on asset usage.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Chapter 21 Solutions

Principles of Financial Accounting.

Knowledge Booster
Background pattern image
Accounting
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.
Recommended textbooks for you
Text book image
FINANCIAL ACCOUNTING
Accounting
ISBN:9781259964947
Author:Libby
Publisher:MCG
Text book image
Accounting
Accounting
ISBN:9781337272094
Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:Cengage Learning,
Text book image
Accounting Information Systems
Accounting
ISBN:9781337619202
Author:Hall, James A.
Publisher:Cengage Learning,
Text book image
Horngren's Cost Accounting: A Managerial Emphasis...
Accounting
ISBN:9780134475585
Author:Srikant M. Datar, Madhav V. Rajan
Publisher:PEARSON
Text book image
Intermediate Accounting
Accounting
ISBN:9781259722660
Author:J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:McGraw-Hill Education
Text book image
Financial and Managerial Accounting
Accounting
ISBN:9781259726705
Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:McGraw-Hill Education
The management of receivables Introduction - ACCA Financial Management (FM); Author: OpenTuition;https://www.youtube.com/watch?v=tLmePnbC3ZQ;License: Standard YouTube License, CC-BY