Solution Manual For Managerial Accounting 10th Edition
Solution Manual For Managerial Accounting 10th Edition
Solution Manual For Managerial Accounting 10th Edition
Edition
CHAPTER 19—Solutions
COST-VOLUME-PROFIT ANALYSIS
Discussion Questions
DQ1. Total costs that change in direct proportion to changes in productive output (or any other
volume measure) are called variable costs. Total fixed costs remain constant within a rele-
vant range of volume or activity. They change only when volume or activity exceeds the
relevant range. A mixed cost has both variable and fixed cost components. If managers
can identify a cost's behavior then they can use this understanding to make comparisons
and determine selling prices that cover both fixed and variable costs within the relevant
range of activity.
DQ2. Mixed costs can be separated into their variable and fixed components using a variety
of methods, including the engineering, scatter diagram, high-low, and statistical methods.
Understanding cost behavior enhances its usefulness in decision making.
DQ3. When preparing a contribution margin income statement, all variable costs related to pro-
duction, selling, and administration are subtracted from sales to determine the total contri-
bution margin. Then, all fixed costs are subtracted from the total contribution margin to
determine operating income. The contribution margin income statement emphasizes cost
behavior rather than organizational functions, which enables managers to understand or
compare revenue and cost relationships on a per-unit basis or as a percentage of sales.
DQ4. CVP analysis examines the cost behavior patterns that underlie the relationships among
cost, volume of output, and profit. Generally the unit contribution margin for a single prod-
uct is used to find the breakeven point, but a contribution margin weighted by the sales
mix of multiple products can be used instead if the company sells a variety of products.
Since the breakeven point is when the company can begin to earn a profit, its determina-
tion in units or sales dollars empowers managers to understand and compare alternative
plans.
DQ5. CVP relationships provide a model of financial activity that management can use for plan-
ning and evaluating performance and analyzing alternatives. The addition of targeted
profit to the breakeven equation makes it possible to plan levels of operation that yield de-
sired profit. CVP analysis allows managers to compare several “what-if” scenarios and to
understand the outcome of each to determine which will generate the desired amount of
profit.
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1. b
2. a
Activity
Volume Month Level Cost
High June 100 hours $4,680
Low May 90 hours 4,230
Difference 10 hours $ 450
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SE5. Breakeven Analysis in Units and Dollars
$9 x = $5 x + $6,000
$4 x = $6,000
x = 1,500 units
*$16 – $8 = $8
Weighted-
Selling – Variable = Contribution × Sales = Average
Price Costs Margin (CM) Mix CM
A $10 – $4 = $6 × 0.7500 = $4.50
B $ 8 – $5 = $3 × 0.2500 = 0.75
Weighted-average contribution margin $5.25
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SE9. Monthly Costs and the High-Low Method
*Rounded
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Exercises: Set A
1. (b) fixed
2. (a) variable
3. (a) variable
4. (a) variable
5. (b) fixed
6. (a) variable
7. (a) variable
8. (a) variable
Machine Electricity
Volume Month Hours Cost
Highest July 6,000 $60,000
Lowest December 3,000 36,000
Difference 3,000 $24,000
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E4A. Mixed Costs: High-Low Method
Variable rate:
$80,000 – $60,000 $20,000
= = 50% of sales
$90,000 – $50,000 $40,000
Fixed costs:
$80,000 = 50% ( $90,000 ) + FC
FC = $35,000
or
$60,000 = 50% ( $50,000 ) + FC
FC = $35,000
Cost formula:
Monthly costs = 50% of sales + $35,000
2. CM / Sales = CM Ratio
$60 / $100 = 60%
3. Sales – VC – FC = $0
$100 x – $40 x – $18,000 = $0
$60 x = $18,000
x = 300 units
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E6A. Contribution Margin Income Statement and Breakeven Analysis
c. Breakeven in units:
Sales – VC – FC = $0
$800 x – $600 x – $2,000,000 = $0
$200 x = $2,000,000
x = 10,000 units
Breakeven in dollars:
Breakeven in units × Selling price = Breakeven in dollars
10,000 units × $800 = $8,000,000
FC
1. BE Units =
CM per Unit
$200,500 + $80,000
=
$30 – ( $8 + $12 )
$280,500
=
$10
= 28,050 sets
FC
3. BE Units =
CM per Unit
$200,500 + $37,500
=
$34 – ( $8 + $12 )
$238,000
=
$14
= 17,000 sets
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E7A. Breakeven Analysis (Concluded)
Breakeven Graph
Dollars (in thousands)
Fixed Costs
238 ($238,000)
Fixed Cost
Breakeven Point
Total Cost in Sales Units
Total Revenue (17,000 units)
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E8A. Breakeven Point for Multiple Products
Percentage Weighted-
Selling Variable Contribution of Sales Average
Price – Costs = Margin (CM) × Mix = CM
Aquariums $60 – $25 = $35 × 20% = $ 7.00
Water pumps 20 – 12 = 8 × 40% = 3.20
Air filters 10 – 3 = 7 × 40% = 2.80
Weighted-average contribution margin $13.00
Fraction Weighted-
Selling Variable Contribution of Sales Average
Price – Costs = Margin (CM) × Mix = CM
Hamburgers $0.99 – $0.27 = $0.72 × 1/6 = $0.12
Drinks $0.99 – $0.09 = $0.90 × 1/2 = 0.45
Fries $0.99 – $0.15 = $0.84 × 1/3 = 0.28
Weighted-average contribution margin $0.85
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E10A. Sales Mix Analysis
* Contribution margin/unit:
Shampoo and set $14,700 / 1,200 = $12.25
Permanent $15,120 / 420 = $36.00
Cut and blow dry $10,000 / 1,000 = $10.00
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E11A. Cost Behavior in a Service Business
Variable overhead rate = $1,500 / 50 tax returns = $30 per tax return
= $500
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E12A. CVP Analysis and Profit Planning
FC + P
1. Target Sales Units =
CM per Unit
$4,035,000 + $1,500,000
=
$130,000 – $68,500
$5,535,000
=
$61,500
= 90 units
FC + P
2. Target Sales Units =
CM per Unit
$4,064,240 + $1,500,000
=
$130,000 – $66,770
$5,564,240
=
$63,230
= 88 units
Increase in P
3. Additional Units =
CM per Unit
$1,264,600
=
$63,230
= 20 units
Proof:
FC + P
Target Sales Units =
CM per Unit
$4,064,240 + $2,764,600
=
$63,230
$6,828,840
=
$63,230
= 108 units
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E13A. Planning Future Sales
FC + P
1. Target Sales Units =
CM per Unit
$150,000 + $50,000
=
$40 – $20
$200,000
=
$20
2. 10,000 daily rentals / 50 autos = 200 days per auto per year
Revised Target FC + P
4. = × Selling Price
Sales Dollars CM per Unit
$145,000 + $70,000
= × $40
$20
$215,000
= × $40
$20
= $430,000
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E15A. CVP and Breakeven Analysis and Pricing
FC $135,000 *
1. BE Units = = = 90,000 units
CM per Unit $1.50 **
**CM per Unit = SP per Unit – VC per Unit = $3.75 – $2.25 = $1.50
= $145,000 – $135,000
= $10,000
Yes, the price should be reduced. If the market research proves to be true, the operating
income will increase from a negative $45,000 to a positive $10,000.
Note to Instructor: Solutions for Exercises: Set B are provided separately on the Instructor’s
Resource CD and website.
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Problems
$2,340
Variable rate = = $3.25 per hour worked
720 hours
August fixed cost = $5,890 – ( 1,460 hours × $3.25 )
= $5,890 – $4,745 = $1,145
3. Variable costs:
Skilled labor $20 × 12 hours × 500 = $120,000
Unskilled labor $8 × 8 hours × 500 = 32,000
Chlorine $5.50 × 3,000 gallons = 16,500
Paint primer $15.50 × 7,536 gallons = 116,808
Paint $16.00 × 6,280 gallons = 100,480
Total average variable costs $385,788
Fixed costs:
Depreciation, lease, rent $1,821 */mo. × 12 months = 21,852
Mixed costs:
Utilities 46,240 **
Total costs $453,880
Average cost per job = $453,880 / 500 jobs = $907.76 per job
*Rounded
5. The utilities cost formula is an estimate based solely on two data points, the highest and
lowest activity months.
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P2. Breakeven Analysis
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P3. Planning Future Sales: Contribution Margin Approach
19-17
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P4. Breakeven Analysis and Planning Future Sales
FC
1. a. BE Units =
CM per Unit
$600,000 + $300,000
=
$23 – ( $12 + $5 )
$900,000
=
$6
= 150,000 units
FC + P
2. Target Sales Units =
CM per Unit
$900,000 + $240,000
=
$6
$1,140,000
=
$6
= 190,000 units
b. FC + P
= CM per Unit
Units
$871,000
=
130,000 units
At sales of 160,000 units, the total required contribution margin equals the target profit
plus the revised fixed costs ($841,000) to be recovered.
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P4. Breakeven Analysis and Planning Future Sales (Concluded)
Proof:
Required contribution margin ( $210,000 + $841,000 ) $1,051,000
Less contribution margin already generated
( 30,000 units × $6 ) 180,000
Balance of contribution margin to be generated $ 871,000
$871,000
=
160,000 units – 30,000 units
$871,000
=
130,000 units
= $6.70
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P5. Planning Future Sales for a Service Business
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Alternate Problems
1. Electricity expense:
Kilowatt-
Month Cost Hours Used
Highest April $8,960 268,400
Lowest July 6,970 188,800
Difference $1,990 79,600
2. Electricity expense:
Total variable cost:
2,622,000 kilowatt-hours × $0.025 per kilowatt-hour $65,550
Total fixed cost:
$2,250 × 12 months $27,000
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P6. Mixed Costs (Concluded)
3. Electricity expense:
Total variable cost:
2,622,000 kilowatt-hours × ( $0.025 + $0.003 per kilowatt-hour ) $ 73,416
Total fixed cost:
$2,250 × 12 months 27,000
Total $100,416
The increased electricity and repairs and maintenance expenses will reduce the club's profits
and cash flows. To offset those reductions, the club can consider either increasing its mem-
bership dues or usage fees, or reducing some other costs.
19-22
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P7. Breakeven Analysis
19-23
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P8. Planning Future Sales: Contribution Margin Approach
19-24
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P9. Breakeven Analysis and Planning Future Sales
FC
1. a. BE Units =
CM per Unit
$900,000 + $300,000
=
$36 – ( $25 + $5 )
$1,200,000
=
$6
= 200,000 units
= $7,200,000
Target FC + P
2. =
Sales Units CM per Unit
$1,200,000 + $600,000
=
$6
$1,800,000
=
$6
= 300,000 units
FC + P
b. = CM per Unit
Units
$1,110,000
=
370,000 units
At sales of 370,000 units, the total required contribution margin equals the target profit
plus the revised fixed costs ($1,000,000) to be recovered.
19-25
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P9. Breakeven Analysis and Planning Future Sales (Concluded)
Proof:
Required contribution margin ( $290,000 + $1,000,000 ) $1,290,000
Less contribution margin already generated ( 30,000 units × $6 ) 180,000
Balance of contribution margin to be generated $1,110,000
$1,110,000
=
400,000 units – 30,000 units
$1,110,000
=
370,000 units
= $3.00
19-26
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P10. Planning Future Sales for a Service Business
19-27
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Cases
Les Pulaski should report the accounting error to the accountant and the error in her bonus cal-
culation to her supervisor. She should not receive a bonus based on an accounting error. Prod-
uct R56 would not have reached or exceeded the breakeven point if the returned goods had
been subtracted from total unit sales. Therefore, Pulaski should not receive the $1,000+ bonus.
Note to Instructor: There is no set solution for this assignment. This is one of the best activities
for driving home the concepts of this chapter because students are familiar with the operations
of a fast-food restaurant. Many have probably worked in one. Class discussion is likely to be
lively and interesting and to include many examples of variable and fixed costs. Sometimes
there will be debates over whether a cost is fixed or variable. Bring out the fact that the incre-
mental variable cost of a large drink over a medium drink is less than the incremental revenue.
Thus, selling the larger drink increases the contribution margin. For a value meal, the logic is a
little different. The contribution margin on each item in a value meal is less, but the total con-
tribution margin is greater than if only an individual item were purchased. Thus, the restaurant
is better off.
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C3. Conceptual Understanding: CVP Analysis
Total Sales
1. a. Selling Price per Set =
Number of Sets Sold
€13,500,000
=
15,000 sets
= €900
€6,000,000
=
15,000 sets
= €400
€2,115,000
=
15,000 sets
= €141
€1,410,000
=
15,000 sets
= €94
19-29
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C3. Conceptual Understanding: CVP Analysis (Concluded)
€3,040,875
=
€265
= 11,475 sets
Variable Costs
3. Variable Cost Ratio =
Sales
= €9,525,000 / €13,500,000
= 70.56%*
*Rounded
To reduce variable costs, the following actions could be taken (students should list three):
● Find new suppliers of high-quality, lower-cost pottery.
● Find alternative, less expensive ways to receive shipments from suppliers.
● Find less expensive ways to ship pottery to customers.
● Consider opening regional distribution centers.
● Reduce the percentage of the sales commission.
● Examine sales territories to identify costly inefficiencies in distribution and sales
activities.
4. There would have been no impact. Fixed costs are not affected by changes in sales
volume in the short run.
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C4. Business Communications: CVP Analysis Applied
1. Datura, Ltd.
Budgeted Contribution Margin Income Statement
For the Year Ending December 31, 2015
Sales ( 15,000 × €890 ) €13,350,000
Less variable costs:
Purchases €6,000,000
Distribution ( 0.96 × €2,115,000 ) 2,030,400
Sales commissions
( 0.12 × €890 × 15,000 ) 1,602,000
Total variable costs 9,632,400
Contribution margin € 3,717,600
Less fixed costs
Distribution ( 0.90 × €985,000 ) € 886,500
Selling 1,184,000
General and administrative 871,875
Total fixed costs 2,942,375
Operating income € 775,225
The changes will not improve operating income. The estimates indicate that operating in-
come will decrease by €158,900. The president will need to work with the strategic planning
team to find ways to reduce operating costs.
2. a. The budgeted contribution margin income statement will help the president in the stra-
tegic planning process. She wants to know if certain changes will improve operating
income.
b. The president of Datura, Ltd., needs the report.
c. The sources of information are the contribution margin income statement from last year
and information from the vice presidents of sales and distribution.
d. The report is due within five days. Because the new year has begun and the strategic
planning process has been late in getting under way, the president needs to take
immediate action.
*Rounded
19-31
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C5. Decision Analysis: Planning Future Sales (Concluded)
2., 3., and 4.
Datura, Ltd.
Revised Budgeted Contribution Margin Income Statements
For the Year Ending December 31, 2015
From C4 Australian Revised Income
Total Units Unit Sales Statement for Sales of
15,000 Per Unit 4,500 Per Unit 19,500 Units
Sales €13,350,000 €890.00 €4,005,000 € 890.00 €17,355,000
Less variable costs:
Purchases €6,000,000 €400.00 €1,800,000 € 400.00 € 7,800,000
Distribution 2,030,400 135.36 720,000 160.00 2,750,400
Sales commissions 1,602,000 106.80 480,600 106.80 2,082,600
Total variable costs 9,632,400 €642.16 €3,000,600 € 666.80 €12,633,000
Contribution margin € 3,717,600 €247.84 €1,004,400 € 223.20 € 4,722,000
*Rounded
19-32
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C6. Continuing Case: Cookie Company
2. Note to Instructor: Answers will vary if students choose to use personal utility bills but will be
as follows if using the provided optional data.
Activity
Volume Month Level Cost
High September 1,866 kWh $230
Low October 1,146 kWh 158
Difference 720 kWh $ 72
3. a. My Cookie Company
Daily Contribution Margin Income Statement
Sales $1.00 × 500 units = $500
Less variable costs 0.30 * × 500 units = 150
Contribution margin $0.70 × 500 units = $350
Less fixed costs 180 **
Operating income $170
b. CM / Sales = CM Ratio
$0.70 / $1.00 = 70%
c. x = breakeven in units
Sales – VC – FC = $0
$1.00 x – $0.30 x – $180 = $0
$0.70 x = $180
x = 257 units*
*Rounded
19-33
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Solution Manual for Managerial Accounting, 10th Edition