Managerial Accounting
Managerial Accounting
7th Edition
ISBN: 9781260247886
Author: Wild
Publisher: MCG
Question
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Chapter 5, Problem 7PSB

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 $270,000.

Calculated values (working note),
Unit contribution margin is $144.

Formula to calculate break- even point of sales units,

    Breakeven point= Fixedcost Unitcontributionmargin

Substitute $270,000 for fixed cost and $144 for unit margin.

    Breakeven point= $270,000 $144 =1,875units

Given,
Fixed cost is $270,000.

Calculated values,
Contribution margin ratio is 36% or 0.36 (from working note).

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

    Breakeven point= Fixedcost Contribution margin ratio

Substitute $270,000 for fixed cost and 0.36 for contribution margin ratio.

    Breakeven point= $270,000 0.36 =$750,000

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 ) )
Product 1 6 1,875 11,250 40 450,000
Product 2 4 1,875 7,500 30 225,000
Product 3 2 1,875 3,750 20 75,000

Table(1)

Working note:

Given,
Sales price of product 1 is $40.
Sales price of product 2 is $30
Sales price of product 3 is $20.
Fixed cost is $270,000.
Ratio of product 1, product 2 and product 3 is 6:4:2.

Table represents the selling price per composite unit.

Particulars Ratio ( A ) Selling price per unit ($) ( B ) Total amount ($) ( ( A )×( B ) )
Product 1 6 40 240
Product 2 4 30 120
Product 3 2 20 40
Selling price per composite unit
400

Table(2)

Hence, selling price per composite unit is $400.

Given,
Variable cost of product 2 is $15.
Variable cost of product 1 is $30.
Variable cost of product 3 is $8.
Ratio of product 1, product 2 and product 3 is 6:4:2.

Table represents the variable cost per composite unit.

Particulars Ratio ( A ) Variable cost per unit ($) ( B ) Total amount ($) ( ( A )×( B ) )
Product 1 6 30 180
Product 2 4 15 60
Product 3 2 8 16
Variable cost per composite unit
256

Table(3)

Hence, the variable cost per composite unit is $256.

Calculated values,
Selling price per composite unit is $400.
Variable cost per composite unit is $256.

Calculation of unit contribution margin,

    Unitcontributionmargin=PerunitsellingpricePerunitvariablecost =$400$256 =$144

Contribution margin per composite unit is $144.

Calculation of contribution margin ratio,

    Contribution margin ratio= Unitcontributionmargin Unitsellingprice = $144 $400 =0.36or36%

Contribution margin ratio is 36%.

Hence, break-even point of sale is 1,875 composite units and $750,000.

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 $320,000 ( $270,000+$50,000 ) .

Calculated values (working note),
Unit contribution margin is $224.

Formula to calculate break- even point of sales units,

    Breakeven point= Fixedcost Unitcontributionmargin

Substitute $320,000 for fixed cost and $224 for unit margin.

    Breakeven point= $320,000 $224 =1,428.57units

Given,
Fixed cost is $320,000.

Calculated values,
Contribution margin ratio is 56% or 0.56 (from working note).

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

    Breakeven point= Fixedcost Contribution margin ratio

Substitute $320,000 for fixed cost and 0.56 for contribution margin ratio.

    Breakeven point= $320,000 0.56 =$571,428.57

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 ) )
Product 1 6 1,429 8,574 40 342,960
Product 2 4 1,429 5,716 30 171,480
Product 3 2 1,429 2,858 20 57,160

Table(4)

Working note:

Given,
Sales price of product 1 is $40.
Sales price of product 2 is $30.
Sales price of product 3 is $20.
Fixed cost is $320,000.
Ratio of product 1, product 2 and product 3 is 6:4:2.

Table represents the selling price per composite unit.

Particulars Ratio ( A ) Selling price per unit ($) ( B ) Total amount ($) ( ( A )×( B ) )
Product 1 6 40 240
Product 2 4 30 120
Product 3 2 20 40
Selling price per composite unit
400

Table(5)

Hence, selling price per composite unit is $400.

Given,
Variable cost of product 2 is $10 ( $15$5 ) .
Variable cost of product 1 is $20 ( $30$10 ) .
Variable cost of product 3 is $8.
Ratio of product 1, product 2 and product 3 is 5:4:2.

Table represents the variable cost per composite unit.

Particulars Ratio ( A ) Variable cost per unit ($) ( B ) Total amount ($) ( ( A )×( B ) )
Product 1 6 20 120
Product 2 4 10 40
Product 3 2 8 16
Variable cost per composite unit
176

Table(6)

Hence, the variable cost per composite unit is $176.

Calculated values,
Selling price per composite unit is $400.
Variable cost per composite unit is $176.

Calculation of unit contribution margin,

    Unitcontributionmargin=PerunitsellingpricePerunitvariablecost =$400$176 =$224

Contribution margin per composite unit is $224.

Calculation of contribution margin ratio,

    Contribution margin ratio= Unitcontributionmargin Unitsellingprice = $224 $400 =0.56or56%

Contribution margin ratio is 56%.

Hence, break-even point of sale is 1,364 composite units and $571,429 (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 product 1uced, therefore for long term planning break-even analysis is beneficial.

Hence, break-even point is product 1uced with the decrease in variable cost.

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Chapter 5 Solutions

Managerial Accounting

Ch. 5 - Prob. 6DQCh. 5 - Prob. 7DQCh. 5 - Prob. 8DQCh. 5 - Prob. 9DQCh. 5 - Prob. 10DQCh. 5 - Prob. 11DQCh. 5 - Prob. 12DQCh. 5 - Prob. 13DQCh. 5 - Prob. 14DQCh. 5 - Prob. 15DQCh. 5 - Prob. 16DQCh. 5 - Prob. 17DQCh. 5 - Prob. 18DQCh. 5 - Prob. 19DQCh. 5 - APPLE Should Apple use single product or...Ch. 5 - Prob. 21DQCh. 5 - Prob. 22DQCh. 5 - Prob. 1QSCh. 5 - Prob. 2QSCh. 5 - Cost behavior estimation---high-low method P1 The...Ch. 5 - Prob. 4QSCh. 5 - Prob. 5QSCh. 5 - Prob. 6QSCh. 5 - Prob. 7QSCh. 5 - Prob. 8QSCh. 5 - Prob. 9QSCh. 5 - Prob. 10QSCh. 5 - Prob. 11QSCh. 5 - Prob. 12QSCh. 5 - Prob. 13QSCh. 5 - Prob. 14QSCh. 5 - Prob. 15QSCh. 5 - Prob. 16QSCh. 5 - Prob. 17QSCh. 5 - Prob. 18QSCh. 5 - Prob. 19QSCh. 5 - Prob. 20QSCh. 5 - Prob. 21QSCh. 5 - Following are five graphs representing various...Ch. 5 - Prob. 2ECh. 5 - Prob. 3ECh. 5 - Prob. 4ECh. 5 - Prob. 5ECh. 5 - Prob. 6ECh. 5 - Prob. 7ECh. 5 - Prob. 8ECh. 5 - Prob. 9ECh. 5 - Prob. 10ECh. 5 - Prob. 11ECh. 5 - Prob. 12ECh. 5 - Prob. 13ECh. 5 - Prob. 14ECh. 5 - Prob. 15ECh. 5 - Prob. 16ECh. 5 - Prob. 17ECh. 5 - Prob. 18ECh. 5 - Prob. 19ECh. 5 - Prob. 20ECh. 5 - Prob. 21ECh. 5 - Prob. 22ECh. 5 - Prob. 23ECh. 5 - Prob. 24ECh. 5 - Prob. 25ECh. 5 - Prob. 26ECh. 5 - Prob. 27ECh. 5 - Prob. 1PSACh. 5 - Prob. 2PSACh. 5 - Prob. 3PSACh. 5 - Prob. 4PSACh. 5 - Prob. 5PSACh. 5 - Prob. 6PSACh. 5 - Prob. 7PSACh. 5 - Prob. 1PSBCh. 5 - Prob. 2PSBCh. 5 - Prob. 3PSBCh. 5 - Prob. 4PSBCh. 5 - Prob. 5PSBCh. 5 - Prob. 6PSBCh. 5 - Prob. 7PSBCh. 5 - Prob. 5SPCh. 5 - Prob. 1AACh. 5 - Prob. 2AACh. 5 - Prob. 3AACh. 5 - Prob. 1BTNCh. 5 - Prob. 2BTNCh. 5 - Prob. 3BTNCh. 5 - Prob. 4BTNCh. 5 - Prob. 5BTNCh. 5 - Prob. 6BTN
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