Hilton CH 7 Select Solutions
Hilton CH 7 Select Solutions
Hilton CH 7 Select Solutions
7-14 East Company, which is highly automated, will have a cost structure dominated
by fixed costs. West Company's cost structure will include a larger proportion
of variable costs than East Company's cost structure.
A firm's operating leverage factor, at a particular sales volume, is defined as
its total contribution margin divided by its net income. Since East Company has
proportionately higher fixed costs, it will have a proportionately higher total
contribution margin. Therefore, East Company's operating leverage factor will
be higher.
7-15 When sales volume increases, Company X will have a higher percentage
increase in profit than Company Y. Company X's higher proportion of fixed
costs gives the firm a higher operating leverage factor. The company's
percentage increase in profit can be found by multiplying the percentage
increase in sales volume by the firm's operating leverage factor.
7-16 The sales mix of a multiproduct organization is the relative proportion of sales
of its products.
The weighted-average unit contribution margin is the average of the unit
contribution margins for a firm's several products, with each product's
contribution margin weighted by the relative proportion of that product's sales.
7-17 The car rental agency's sales mix is the relative proportion of its rental
business associated with each of the three types of automobiles: subcompact,
compact, and full-size. In a multi-product CVP analysis, the sales mix is
assumed to be constant over the relevant range of activity.
7-18 Cost-volume-profit analysis shows the effect on profit of changes in expenses,
sales prices, and sales mix. A change in the hotel's room rate (price) will
change the hotel's unit contribution margin. This contribution-margin change
will alter the relationship between volume and profit.
7-21 The statement makes three assertions, but only two of them are true. Thus the
statement is false . A company with an advanced manufacturing environment
typically will have a larger proportion of fixed costs in its cost structure. This
will result in a higher break-even point and greater operating leverage.
However, the firm's higher break-even point will result in a reduced safety
margin.
7-22 Activity-based costing (ABC) results in a richer description of an organization's
cost behavior and CVP relationships. Costs that are fixed with respect to sales
volume may not be fixed with respect to other important cost drivers. An ABC
system recognizes these nonvolume cost drivers, whereas a traditional costing
system does not.
EXERCISE 7-24 (25 MINUTES)
Total Break-Even
Sales Variable Contribution Fixed Net Sales
Revenue Expenses Margin Expenses Income Revenue
1 $360,000 $120,000 $240,000 $90,000 $150,00 $135,000 a
0
2 55,000 11,000 44,000 25,000 19,000 31,250 b
3 320,000 c 80,000 240,000 60,000 80,000
180,000
d
4 160,000 130,000 30,000 30,000 -0- 160,000
1. Profit-volume graph:
Dollars per year
$300,000
$200,000
$100,000
Break-even point: Profit
20,000 tickets area
0 Tickets sold
5,000 10,000 15,000 20,000 25,000 per year
Loss
area
$(100,000)
$(200,000)
Annual fixed
expenses
$(300,000)
$(360,000)
EXERCISE 7-26 (CONTINUED)
2. Safety margin:
3. Let P denote the break-even ticket price, assuming a 10-game season and 40
percent attendance:
contribution margin
2. Operatingleveragefactor (at $1,000,000sales level)
net income
$435,000
4.35
$100,000
EXERCISE 7-28 (CONTINUED)
percentageincrease operating
3.
Percentageincreasein et income
i nsalesrev nue lev ragefactor
= 12% 4.35
= 52.2%
4. Most operating managers prefer the contribution income statement for answering
this type of question. The contribution format highlights the contribution margin and
separates fixed and variable expenses.
4. Let P denote the selling price that will yield the same contribution-margin ratio:
$30.00 $12.00 $6.00 P $13.20 $6.00
$30.00 P
P $19.20
.4
P
.4P P $19.20
$19.20 .6P
P $19.20/.6
P $32.00
Check: New contribution-margin ratio is:
$32.00 $13.20 $6.00
.4
$32.00
PROBLEM 7-36 (30 MINUTES)
= (440,000)($6) $1,800,000
4. Let P denote the selling price that will yield the same contribution-margin ratio:
$24 $15 $3 P $19.50 $3
$24 P
P $22.50
.25
P
.25P P $22.50
$22.50 .75P
P $22.50/.75
P $30
$30 $22.50
.25
$30
2. Model A is more profitable when sales and production average 184,000 units.
Model A Model B
3. Annual fixed costs will increase by $180,000 ($900,000 5 years) because of straight-
line depreciation associated with the new equipment, to $2,407,200 ($2,227,200 +
$180,000). The unit contribution margin is $24 ($4,416,000 184,000 units). Thus:
Required sales = (fixed costs + target net profit) unit contribution margin
= ($2,407,200 + $1,912,800) $24
= 180,000 units
2. Promotional campaign:
We can restate the November 20x4 data for the Mall Store as follows:
Mall Store
Items Sold at
Their
Variable Other Items
Cost
Sales....................................................................... $180,000*
$180,000*
Less: variable expenses........................................... 180,000 72,000
Contribution margin................................................. $ -0- $108,000
*$180,000 is one half of the Mall Store's dollar sales for November 20x4.
2. (a) Yes. Plan A sales are expected to total 65,000 units (19,500 + 45,500), which
compares favorably against current sales of 60,000 units.
(b) Yes. Sales personnel earn a commission based on gross dollar sales. As the
following figures show, Cold King sales will comprise a greater proportion of
total sales under Plan A. This is not surprising in light of the fact that Cold
King has a higher selling price than Mister Ice Cream ($43 vs. $37).
Current Plan A
Sales Sales
Units Mix Units Mix
(c) Yes. Commissions will total $267,800 ($2,678,000 x 10%), which compares
favorably against the current flat salaries of $200,000.
(d) No. The company would be less profitable under the new plan.
Current Plan A
Sales revenue:
Mister Ice Cream: 21,000 units x $37; 19,500 units x $37................ $ 777,000 $ 721,500
Cold King: 39,000 units x $43; 45,500 units x $43........................... 1,677,000 1,956,500
Total revenue................................................................................ $2,454,000 $2,678,000
Less variable cost:
Mister Ice Cream: 21,000 units x $20.50; 19,500 units x $20.50...... $ 430,500 $ 399,750
Cold King: 39,000 units x $32.50; 45,500 units x $32.50................. 1,267,500 1,478,750
Sales commissions (10% of sales revenue)....................................... 267,800
Total variable cost........................................................................ $1,698,000 $2,146,300
Contribution margin................................................................................. $ 756,000 $ 531,700
Less fixed cost (salaries).......................................................................... 200,000 ----___
Net income............................................................................................... $ 556,000 $ 531,700
3. (a) The total units sold under both plans are the same; however, the sales mix has
shifted under Plan B in favor of the more profitable product as judged by the
contribution margin. Cold King has a contribution margin of $10.50 ($43.00 -
$32.50), and Mister Ice Cream has a contribution margin of $16.50 ($37.00 -
$20.50).
Plan A Plan B
Sales Sales
Units Mix Units Mix
(b) Plan B is more attractive both to the sales force and to the company.
Salespeople earn more money under this arrangement ($274,950 vs. $200,000),
and the company is more profitable ($641,550 vs. $556,000).
Current Plan B
Sales revenue:
Mister Ice Cream: 21,000 units x $37; 39,000 units x $37 $ 777,000 $1,443,000
.................................................................................................................
Cold King: 39,000 units x $43; 26,000 units x $43 1,677,000 1,118,000
.................................................................................................................
Total revenue $2,454,000 $2,561,000
.................................................................................................................
Less variable cost:
Mister Ice Cream: 21,000 units x $20.50; 39,000 units x $20.50 $ 430,500 $ 799,500
.................................................................................................................
Cold King: 39,000 units x $32.50; 26,000 units x $32.50 1,267,500 845,000
.................................................................................................................
Total variable cost $1,698,000 $1,644,500
.................................................................................................................
Contribution margin................................................................................ $ 756,000 $ 916,500
Less: Sales force compensation:
Flat salaries 200,000
.................................................................................................................
Commissions ($916,500 x 30%) 274,950
.................................................................................................................
Net income.............................................................................................. $ 556,000 $ 641,550
PROBLEM 7-41 (45 MINUTES)
2. Profit-volume graph:
$40
Profit
$20
Break-even point:
40,816 tubs
Profit
area Tubs sold
0 per year
10 20 30 40 50 (in thousands)
Loss
area
Loss
($20)
3. The sales price per tub is the same regardless of the type of machine selected.
Therefore, the same profit (or loss) will be achieved with the Standard and
Super models at the sales volume, X , where the total costs are the same.
Variable Cost Total
Model per Tub Fixed Cost
Standard............................................. $2.86 $16,000
Super................................................. 2.70 22,000
Check: the total cost is the same with either model if 37,500 tubs are sold.
Standard Super
Variable cost:
Standard, 37,500 $2.86.................... $107,250
Super, 37,500 $2.70......................... $101,250
Fixed cost:
Standard, $16,000............................... 16,000
Super, $22,000.................................... 22,000
Total cost................................................. $123,250 $123,250
Since the sales price for popcorn does not depend on the popper model, the
sales revenue will be the same under either alternative.
PROBLEM 7-43 (35 MINUTES)
2. Operating leverage refers to the use of fixed costs in an organizations overall cost
structure. An organization that has a relatively high proportion of fixed costs and
low proportion of variable costs has a high degree of operating leverage.
PROBLEM 7-43 (CONTINUED)
Plan A Plan B
Plan A has a higher percentage of variable costs to sales (72.5%) compared to Plan
B (62.5%). Plan Bs fixed costs are 13.75% of sales, compared to Plan As 4.58%.
Sales.........................................................................................
......................................................................... $15,000,000
Cost of goods sold..................................................................... 9,000,000
Gross margin............................................................................. $
6,000,000
Commissions (at 5%)................................................................. 750,000
Contribution margin.................................................................... $
............................................................................. 5,250,000
$5,250,000
Contribution - margin ratio .35
$15,000,000
fixed expenses
Estimatedbreak - even point
contributi on - margin ratio
$525,000
$1,500,000
.35
CASE 7-55 (CONTINUED)
Sales.........................................................................................
......................................................................... $15,000,000
Cost of goods sold..................................................................... 9,000,000
Gross margin............................................................................. $
............................................................................. 6,000,000
Commissions (at 25%)............................................................... 3,750,000
Contribution margin.................................................................... $
............................................................................. 2,250,000
$2,250,000
Contributi on - margin ratio .15
$15,000,000
target after - tax net income
fixed expenses
Sales volume in dollars (1 t )
required to earn after- contributi on - margin ratio
tax net income $1,995,000
$150,000
(1 .3) $3,000,000
.15 .15
$20,000,000
Check:
Sales.......................................................... $
20,000,000
Cost of goods sold (60% of sales)................
12,000,000
Gross margin.............................................. $
8,000,000
Selling and administrative expenses:
Commissions......................................... $ 5,000,000
All other expenses (fixed)....................... 150,000 5,150,000
Income before taxes.................................... $
2,850,000
Income tax expense (30%).......................... 855,000
Net income................................................. $
1,995,000
CASE 7-55 (CONTINUED)
Since the tax rate is the same regardless of which approach management
chooses, we can find X so that the companys before-tax income is the same
under the two alternatives. (In the following equations, the contribution-margin
ratios of .35 and .15, respectively, were computed in the preceding two
requirements.)
Thus, the company will have the same before-tax income under the two
alternatives if the sales volume is $1,875,000.
Check:
Alternatives
Employ
Sales Pay 25%
Personnel Commission
Sales................................................................. $1,875,000 $1,875,000
Cost of goods sold (60% of sales)....................... 1,125,000 1,125,000
Gross margin...................................................... $ 750,000 $ 750,000
Selling and administrative expenses:
Commissions.................................................. 93,750* 468,750
All other expenses (fixed)................................ 525,000 150,000
Income before taxes........................................... $ 131,250 $ 131,250
Income tax expense (30%).................................. 39,375 39,375
Net income......................................................... $ 91,875 $ 91,875
*$1,875,000 5% = $93,750
$1,875,000 25% = $468,750