Fundamental Managerial Accounting Concepts
Fundamental Managerial Accounting Concepts
8th Edition
ISBN: 9781259569197
Author: Thomas P Edmonds, Christopher Edmonds, Bor-Yi Tsay, Philip R Olds
Publisher: McGraw-Hill Education
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Chapter 3, Problem 24PSB

a.

To determine

Calculate the sales volume in units and dollars that is required to earn profit and prepare income statement.

a.

Expert Solution
Check Mark

Explanation of Solution

The calculation of sales volume in units is as follows:

Sales volume in units=Fixed cost+Target profitContribution margin per unit=$540,000+$270,000$90 (1)=$810,000$90=9,000 units

Hence, the sales volume in units is 9,000 units.

The calculation of sales volume in dollars is as follows:

Sales volume in dollars=Sales volume in units×Sales price=9,000 units×$135 per unit=$1,215,000

Hence, the sales volume in dollars is $1,215,000.

The calculation of income statement is as follows:

Fundamental Managerial Accounting Concepts, Chapter 3, Problem 24PSB , additional homework tip  1

(Table 1)

Working note:

The calculation of contribution margin per unit is as follows:

Contribution margin per unit=Sales priceVariable cost=$135$45=$90

Hence, the contribution margin per unit is $90.

(1)

The calculation of variable cost is as follows:

Variable cost=Number of units×Variable cost per unit=9,000 units×$45=$405,000

Hence, the variable cost is $405,000.

(2)

b.

To determine

Calculate the income statement and comment whether Company C should whether proceed with the plan.

b.

Expert Solution
Check Mark

Explanation of Solution

The calculation of income statement is as follows:

Fundamental Managerial Accounting Concepts, Chapter 3, Problem 24PSB , additional homework tip  2

(Table 2)

Company M should continue with the plan to improve the quality of the product. As specified the project should add $90,000 to net income ($360,000$270,000).

Note:

The total number of units is 14,000 units (9,000+5,000).

The variable cost is $60($45+$15)

Working note:

The calculation of sales volume in dollars is as follows:

Sales volume in dollars=Change in sales volume units×Sales price=14,000 units×$135 per unit=$1,890,000

Hence, the sales volume in dollars is $1,890,000.

(3)

The calculation of variable cost is as follows:

Variable cost=Number of units×Variable cost per unit=14,000 units×$60=$840,000

Hence, the variable cost is $840,000.

(4)

The calculation of fixed cost is as follows:

Total fixed cost=Fixed cost+Additional spending (advertising)=$540,000+$150,000=$690,000

Hence, the total fixed cost is $690,000.

(5)

c.

To determine

Calculate the margin of safety in dollars, units and as a percentage.

c.

Expert Solution
Check Mark

Explanation of Solution

The calculation of break-even points in units is as follows:

Break-even point in units=Fixed costContribution margin per unit=$690,000 (5)$75 (6)=9,200 units

Hence, the break-even units is 9,200 units.

The calculation of sales volume in dollars is as follows:

Break-even in dollars=Break-even in units×Sales price=9,200 units×$135 per unit=$1,242,000

Hence, the sales volume in dollars is $1,242,000.

The calculation of margin of safety in dollars and units is as follows:

Fundamental Managerial Accounting Concepts, Chapter 3, Problem 24PSB , additional homework tip  3

(Table 3)

The calculation of margin of safety in percentage is as follows:

Margin of safety in percentage=Margin of safety in dollarsBudgeted sales=$648,000$1,890,000=0.3429=34.29%

Hence, the margin of safety in percentage is 34.29%

Working note:

The calculation of contribution margin per unit is as follows:

Contribution margin per unit=Sales priceVariable cost=$135($45+$15)=$135$60=$75

Hence, the contribution margin per unit is $75.

(6)

d.

To determine

Draw a break-even graph using the data in requirement (c).

d.

Expert Solution
Check Mark

Explanation of Solution

The break-even graph is as follows:

Fundamental Managerial Accounting Concepts, Chapter 3, Problem 24PSB , additional homework tip  4

Figure 1

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Fundamental Managerial Accounting Concepts

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