Fundamental Accounting Principles
Fundamental Accounting Principles
24th Edition
ISBN: 9781259916960
Author: Wild, John J., Shaw, Ken W.
Publisher: Mcgraw-hill Education,
Question
Book Icon
Chapter 21, Problem 5BPSB
To determine

Concept Introduction:

Breakeven point-

Breakeven point is the point where total revenues are equal to total costs. Total cost includes fixed costs as well as variable costs. It is calculated as follows-

  Breakeven point in sales dollars = Fixed costs / Contribution margin ratio

Requirement 1-:

To compute:

Break even points in sales dollars.

Expert Solution
Check Mark

Answer to Problem 5BPSB

Product BB

  Breakeven point in sales dollars =  Fixed costs Contribution margin ratio  Breakeven point in sales dollars = $100,000 30%  Breakeven point in sales dollars =$333,334

Product TT

  Breakeven point in sales dollars =  Fixed costs Contribution margin ratio  Breakeven point in sales dollars = $560,000 87.5%  Breakeven point in sales dollars =$640,000

Explanation of Solution

Product BB

Given,

  • Fixed costs = $100,000
  • Sales = $800,000
  • Contribution margin = $240,000
First we need to find contribution margin ratio-

  Contribution margin ratio = Contribution margin / SalesContribution margin ratio = $240,000 / $800,000Contribution margin ratio = 30%

Breakeven point is calculated as follows-

  Breakeven point in sales dollars =  Fixed costs Contribution margin ratio  Breakeven point in sales dollars = $100,000 30%  Breakeven point in sales dollars =$333,334

Product TT

Given,

  • Fixed costs = $560,000
  • Sales = $800,000
  • Contribution margin = $700,000
  • First we need to find contribution margin ratio-

      Contribution margin ratio = Contribution margin / SalesContribution margin ratio = $700,000 / $800,000Contribution margin ratio = 87.5%

Breakeven point is calculated as follows-

  Breakeven point in sales dollars =  Fixed costs Contribution margin ratio  Breakeven point in sales dollars = $560,000 87.5%  Breakeven point in sales dollars =$640,000

Conclusion:

Thus, breakeven point in sales dollars is calculated.

To determine

Concept Introduction:

Contribution margin income statement-

It is a statement wherein all the variable costs are deducted from the sales to get the contribution margin and after getting contribution margin, fixed expenses are deducted from contribution margin to get net income or loss.

Requirement 2-:

To prepare:

Forecasted contribution margin income statement.

Expert Solution
Check Mark

Answer to Problem 5BPSB

    STAM Company
    Forecasted contribution margin income statement
    ParticularsProduct BBProduct TT
    Sales528,000528,000
    Variable costs369,60066,000
    Contribution margin158,400462,000
    Fixed costs100,000560,000
    Income before tax58,400(98,000)
    Tax on income (32%)18,68831,360
    Net income / (Loss)39,712(66,640)

Explanation of Solution

Product BB

Given, Fixed costs = $100,000

  Selling price per unit = Sales / No. of unitsSelling price per unit = 800,000 / 50,000Selling price per unit = $16

  Sales = No. of units * Selling per unitSales = 33,000 * $16Sales = $528,000

  Variable cost per unit = 560,000 / 50,000Variable cost per unit = $11.20 

  Variable costs = No. of units * Variable cost per unitVariable costs = 33,000 * $11.20Variable costs = 369,600

  Contribution margin = Sales  Variable costsContribution margin = $528,000  $369,600Contribution margin = $158,400

  Income before tax = Contribution margin  Fixed costsIncome before tax = $158,400  $100,000Income before tax = $58,400

  Tax on income = Income before tax * Tax rateTax on income = $58,400 * 32%Tax on income = $18,688

Net income is calculated as follows-

  Net income = Income before tax  Tax on incomeNet income = $58,400  $18,688Net income = $39,712

Product TT

Given, Fixed costs = $560,000

  Selling price per unit = Sales / No. of unitsSelling price per unit = 800,000 / 50,000Selling price per unit = $16

  Sales = No. of units * Selling per unitSales = 33,000 * $16Sales = $528,000

  Variable cost per unit = 100,000 / 50,000Variable cost per unit = $2.00 

  Variable costs = No. of units * Variable cost per unitVariable costs = 33,000 * $2.00Variable costs = $66,000

  Contribution margin = Sales  Variable costsContribution margin = $528,000  $66,000Contribution margin = $462,000

  Income before tax = Contribution margin  Fixed costsIncome before tax = $462,000  $560,000Income before tax = ($98,000)

  Tax on income = Income before tax * Tax rateTax on income = $98,000 * 32%Tax on income = $31,360

Net income is calculated as follows-

  Net income = Income before tax  Tax on incomeNet income = ($98,000)  $31,360Net income = ($66,640)

Conclusion:

Thus, contribution margin income statement is prepared.

To determine

Concept Introduction:

Contribution margin income statement-

It is a statement wherein all the variable costs are deducted from the sales to get the contribution margin and after getting contribution margin, fixed expenses are deducted from contribution margin to get net income or loss.

Requirement 3-:

To prepare:

Forecasted contribution margin income statement.

Expert Solution
Check Mark

Answer to Problem 5BPSB

    STAM Company
    Forecasted contribution margin income statement
    ParticularsProduct BBProduct TT
    Sales1,024,0001,024,000
    Variable costs716,800128,000
    Contribution margin307,200896,000
    Fixed costs100,000560,000
    Income before tax207,200336,000
    Tax on income (32%)66,304107,520
    Net income / (Loss)140,896228,480

Explanation of Solution

Product BB

Given, Fixed costs = $100,000

  Selling price per unit = Sales / No. of unitsSelling price per unit = 800,000 / 50,000Selling price per unit = $16

  Sales = No. of units * Selling per unitSales = 64,000 * $16Sales = $1,024,000

  Variable cost per unit = 560,000 / 50,000Variable cost per unit = $11.20 

  Variable costs = No. of units * Variable cost per unitVariable costs = 64,000 * $11.20Variable costs = 716,800

  Contribution margin = Sales  Variable costsContribution margin = $1,024,000  $716,800Contribution margin = $307,200

  Income before tax = Contribution margin  Fixed costsIncome before tax = $307,200  $100,000Income before tax = $207,200

  Tax on income = Income before tax * Tax rateTax on income = $207,200 * 32%Tax on income = $66,304

Net income is calculated as follows-

  Net income = Income before tax  Tax on incomeNet income = $207,200  $66,304Net income = $140,896

Product TT

Given, Fixed costs = $560,000

  Selling price per unit = Sales / No. of unitsSelling price per unit = 800,000 / 50,000Selling price per unit = $16

  Sales = No. of units * Selling per unitSales = 64,000 * $16Sales = $1,024,000

  Variable cost per unit = 100,000 / 50,000Variable cost per unit = $2.00 

  Variable costs = No. of units * Variable cost per unitVariable costs = 64,000 * $2.00Variable costs = $128,000

  Contribution margin = Sales  Variable costsContribution margin = $1,024,000  $128,000Contribution margin = $896,000

  Income before tax = Contribution margin  Fixed costsIncome before tax = $896,000  $560,000Income before tax = 336,000

  Tax on income = Income before tax * Tax rateTax on income = $336,000 * 32%Tax on income = $107,520

Net income is calculated as follows-

  Net income = Income before tax  Tax on incomeNet income = $336,000  $107,520Net income = $228,480

Conclusion:

Thus, contribution margin income statement is prepared.

To determine

Concept Introduction:

Contribution margin income statement-

It is a statement wherein all the variable costs are deducted from the sales to get the contribution margin and after getting contribution margin, fixed expenses are deducted from contribution margin to get net income or loss.

Requirement 4-:

To Explain:

To explain which product would experience greater increase in profit.

Expert Solution
Check Mark

Answer to Problem 5BPSB

When sales are increased, there will be improvement in income in case of product TT as it will earn more contribution margin per unit as compared to product BB. The operating leverage of given items will yield same result.

Explanation of Solution

The requirement is explained in the answer.

Conclusion:

Thus, Product TT will experience greater increase in profit.

To determine

Concept Introduction:

Contribution margin income statement-

It is a statement wherein all the variable costs are deducted from the sales to get the contribution margin and after getting contribution margin, fixed expenses are deducted from contribution margin to get net income or loss.

Requirement 5-:

To Explain:

To explain the factors which might create different cost structures for two products.

Expert Solution
Check Mark

Answer to Problem 5BPSB

Following are the factors-

  • Sales representative works only on commission.
  • Labor arrangement paying workers for per unit manufactured.
  • Salary structure is not dependent on sales or production.
  • Assets utilized in manufacturing of BB are leased with rent dependent on the basis of assets utilized.

Explanation of Solution

The requirement is explained in the answer.

Conclusion:

Thus, factors are explained.

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

Fundamental Accounting Principles

Ch. 21 - Prob. 11DQCh. 21 - List three methods to measure cost behavior.Ch. 21 - Prob. 13DQCh. 21 - Prob. 14DQCh. 21 - Prob. 15DQCh. 21 - Prob. 16DQCh. 21 - Prob. 17DQCh. 21 - Prob. 18DQCh. 21 - Prob. 19DQCh. 21 - Prob. 20DQCh. 21 - Prob. 21DQCh. 21 - Prob. 22DQCh. 21 - Cost behavior identification C1 Listed here are...Ch. 21 - QS 21-2 Cost behavior identification c1 ...Ch. 21 - QS 21-3 Cost behavior estimation—high-low method...Ch. 21 - Prob. 4QSCh. 21 - Prob. 5QSCh. 21 - Prob. 6QSCh. 21 - Prob. 7QSCh. 21 - Prob. 8QSCh. 21 - Prob. 9QSCh. 21 - Prob. 10QSCh. 21 - Prob. 11QSCh. 21 - Prob. 12QSCh. 21 - Prob. 13QSCh. 21 - Prob. 14QSCh. 21 - Prob. 15QSCh. 21 - Prob. 16QSCh. 21 - Prob. 17QSCh. 21 - Prob. 18QSCh. 21 - Prob. 19QSCh. 21 - Prob. 20QSCh. 21 - Prob. 21QSCh. 21 - Prob. 1ECh. 21 - Prob. 2ECh. 21 - Prob. 3ECh. 21 - Prob. 4ECh. 21 - Prob. 5ECh. 21 - Prob. 6ECh. 21 - Prob. 7ECh. 21 - Prob. 8ECh. 21 - Prob. 9ECh. 21 - Prob. 10ECh. 21 - Prob. 11ECh. 21 - Prob. 12ECh. 21 - Prob. 13ECh. 21 - Prob. 14ECh. 21 - Prob. 15ECh. 21 - Prob. 16ECh. 21 - Prob. 17ECh. 21 - Prob. 18ECh. 21 - Prob. 19ECh. 21 - Prob. 20ECh. 21 - Prob. 21ECh. 21 - Prob. 22ECh. 21 - Prob. 23ECh. 21 - Prob. 24ECh. 21 - Prob. 25ECh. 21 - Prob. 26ECh. 21 - Prob. 27ECh. 21 - Prob. 1APSACh. 21 - Prob. 2APSACh. 21 - Prob. 3APSACh. 21 - Prob. 4APSACh. 21 - Prob. 5APSACh. 21 - Prob. 6APSACh. 21 - Prob. 7APSACh. 21 - Prob. 1BPSBCh. 21 - Prob. 2BPSBCh. 21 - Prob. 3BPSBCh. 21 - Prob. 4BPSBCh. 21 - Prob. 5BPSBCh. 21 - Prob. 6BPSBCh. 21 - Prob. 7BPSBCh. 21 - Prob. 21SPCh. 21 - Prob. 2AACh. 21 - Prob. 3AACh. 21 - Labor costs of an auto repair mechanic are seldom...Ch. 21 - Prob. 2BTNCh. 21 - Prob. 4BTNCh. 21 - Prob. 6BTN
Knowledge Booster
Background pattern image
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