Determine the missing amounts. (Round all answers to 0 decimal places, e.g. 23.

Contribution Contribution
Unit Selling Price Unit Variable Costs Margin per Unit Margin Ratio

1. $292 $188 (a) (b)

$ 104 36 %

2. $546 (c) $230 (d)

$ 316 42 %

3. (e) (f) $354 30%

$ 1180 $ 826

1.(a)$104 = ($292 - $188) (b)36% ($104 ÷ $292) 2.(c)$316 = ($546 -

$230) (d)42% ($230 ÷ $546) 3.(e)$1,180 = ($354 ÷ 30%) (f)$826 ($1,180
- $354)

Family Furniture Co. consists of two divisions, Bedroom Division and Dining Room Division. The results of
operations for the most recent quarter are:

Dining Room
Bedroom Division Division Total

Sales $507,400 $751,500 $1,258,900

242,100 443,400 685,500
Variable costs
$265,300 $308,100 $573,400
Contribution margin

(a) Determine the company's sales mix. (Round answers to 2 decimal places, e.g. 0.25.)

Bedroom Division
.40

Dinning Room Division

.60

(b) Determine the company's weighted average contribution margin ratio. (Round to 2 decimal places, e.g.
0.25.)
 .46

(a) Sales Mix

Bedroom Division [$507,400 ÷ ($507,400 + $751,500)] = 0.40

Dining Room Division [$751,500 ÷ ($507,400 + $751,500)] = 0.60

$573,400
(b) Weighted-average contribution margin ratio = = 0.46
$1,258,900
OR

Contribution Margin Ratio

Bedroom Division ($265,300 ÷ $507,400) = 0.52

Dining Room Division ($308,100 ÷ $751,500) = 0.41

Weighted-average contribution margin ratio = (0.52 × 0.40) + (0.41 × 0.60) = 0.45

Both answers are correct. If there is a difference in the two amounts, it is due to rounding.

Grass King manufactures lawnmowers, weed-trimmers, and chainsaws. Its sales mix and contribution margin per
unit are as follows.

Contribution Margin
Sales Mix per Unit

Lawnmowers 30% $50

Weed-trimmers 50% $22
Chainsaws 20% $45
Grass King has fixed costs of $5,974,850.

Compute the number of units of each product that Grass King must sell in order to break even under this product
mix.

Lawnmowers
51213 units

Weed-trimmers
85355 units

Chainsaws
34142 units

Sales Mix Contribution Weighted-Average

Percentage Margin Per Unit Contribution Margin
Lawnmowers 30% $50 $15.00
Weed-trimmers 50% $22 11.00
9.00
Chainsaws 20% $45
$35.00

Total break-even = $5,974,850 ÷ $35.00 = 170,710 units

Total
Sales Mix Breakeven
Sales Units Percentage Sales Units Sales Units Needed Per Product

Lawnmowers 30% × 170,710 = 51,213 units

Weed-trimmers 50% × 170,710 = 85,355 units
34,142 units
Chainsaws 20% × 170,710 =
170,710 units

An investment banker is analyzing two companies that specialize in the production and sale of candied apples. Old-
Fashion Apples uses a labor-intensive approach, and Mech-Apple uses a mechanized system. CVP income
statements for the two companies are shown below.

Old Fashion Apples Mech-Apple

Sales $400,000 $400,000

320,000 160,000
Variable costs
Contribution margin 80,000 240,000
20,000 180,000
Fixed costs
$60,000 $60,000
Net income
The investment banker is interested in acquiring one of these companies. However, she is concerned about the
impact that each company's cost structure might have on its profitability.

Calculate each company's degree of operating leverage. (Round your answers to 2 decimal places, e.g. 1.55.)

Old-Fashion Apples
1.33

Mech-Apple
4

Determine which company's cost structure makes it more sensitive to changes in sales volume.

Mech-Apple
 Degree of
Contribution Margin Net Income Operating Leverage
÷ =
Old Fashion $80,000 ÷ $60,000 = 1.33
Mech-Apple 240,000 ÷ $60,000 = 4.00
Mech-Apple, which relies more heavily on fixed costs, has the higher degree of operating leverage, 4.0 versus 1.33.
That means for every dollar of increase (decrease) in sales, Mech-Apple will generate 3 (4 ÷ 1.33) times more in
contribution margin and net income.

Determine the effect on each company's net income if sales decrease by 10% and if sales increase by 5%. Do not
prepare income statements. (Round your answers to 2 decimal places, e.g. 5.50. If percentage change is negative
please use either a negative sign preceding the number, e.g. -45 or parenthesis, e.g. (45).)

Sales decrease by 10%

Old-Fashion Apples
-13.33 %

Mech-Apple
-40 %

Sales increase by 5%

Old-Fashion Apples
6.67 %

Mech-Apple
20 %

% Change
in Sales

×
Degree of Operating Leverage

=
Change in Net Income

10% decrease: Old Fashion(10%)×1.33=(13.30%) Mech-Apple(10%)×4.00=(40.00%) 5% increase: Old

Fashion5%×1.33=6.65% Mech-Apple5%×4.00=20.00%

The following CVP income statements are available for Old Company and New Company.

Old Company New Company

Sales revenue $399,800 $399,800

Variable costs 180,400 80,240

 Contribution margin 219,400 319,560
168,400 268,560
Fixed costs
$51,000 $51,000
Net income

Compute the break-even point in dollars and the margin of safety ratio for each company. (Round computations for
contribution margin ratio to 2 decimal places, e.g. 0.25. Round break-even point in dollars to 0 decimal places,
e.g. 215,100 and margin of safety ratio to 2 decimal places, e.g. 0.25.)

Old Company New Company

Break-even point in dollars

$ 306182 $ 335700

Margin of safety ratio .16

.23

Contribution
Contribution Margin Sales Margin Ratio
÷ =
Old Company $219,400 ÷ $399,800 = 0.55
New Company $319,560 ÷ $399,800 = 0.80

Contribution Break-even
Fixed Costs Margin Ratio Point in Dollars
÷ =
Old Company $168,400 ÷ 0.55 = $306,182
New Company $268,560 ÷ 0.80 = $335,700

Margin of
(Actual Sales - Break-even Sales) Actual Sales Safety Ratio
÷ =
Old Company ($399,800 - $306,182) ÷ $399,800 = 0.23
New Company ($399,800 - $335,700) ÷ $399,800 = 0.16

Compute the degree of operating leverage for each company. (Round answers to 1 decimal place, e.g. 2.5.)

Old Company
4.3
New Company
6.3

Degree
of
Operati
ng
Net Leverag
Contribution Margin Income e
÷ =
Old Company $219,400 ÷ $51,000 = 4.3
New Company $319,560 ÷ $51,000 = 6.3
Because New Company relies more heavily on fixed costs, it has a higher degree of operating leverage. This
means that its net income will be more sensitive to changes in sales. For a given change in sales, the change in
net income will be 1.47 (6.3 ÷ 4.3) times higher for New Company than for Old Company.

Assuming that sales revenue increases by 20%, complete the CVP income statement for each company. (If there is
a loss, use either a negative sign preceding the number, e.g. -45 or parenthesis, e.g. (45).)

Old Company New Company

Sales
$ 479760 $ 479760

Variable costs
216480 96288

Contribution margin
263280 383472

Fixed costs 168400 268560

$ 114912
Net income $ 94880

Old Company New Company

Sales revenue *$479,760 $479,760

Variable costs **216,480 ***96,288

Contribution margin 263,280 383,472
168,400 268,560
Fixed costs
$94,880 $114,912
Net income
* $399,800 × 1.20
** $180,400 × 1.20
*** $80,240 × 1.20

Assuming that sales revenue decreases by 20%, complete the CVP income statement for each company. (If there is
a loss, use either a negative sign preceding the number, e.g. -45 or parenthesis, e.g. (45).)

Old Company New Company

Sales
$ 319840 $ 319840

Variable costs
144320 64192

Contribution margin
175520 255648

Fixed costs 168400 268560

$ -12912
Net income (loss) $ 7120

Old Company New Company

Sales revenue *$319,840 $319,840

Variable costs **144,320 ***64,192

Contribution margin 175,520 255,648

168,400 268,560
Fixed costs
$7,120 ($12,912)
Net income (loss)
* $399,800 × .80
** $180,400 × .80
*** $80,240 × .80
If fixed costs are $100,000 and weighted-average unit contribution margin is $50, then the break-even point in units
is 2,000 units.

false

true

Manufacturing cost per unit will be higher under variable costing than under absorption costing.
fals
e

tru
e

Garland's CVP income statement included sales of 3,000 units, a selling price of $100, variable expenses of $60 per
unit, and net income of $50,000. Fixed expenses are
$180,00
0.

$120,00
0.

$300,00
0.

$70,00
0.
Jenks Corporation reported sales of $2,000,000 last year (100,000 units at $20 each), when the break-even point was
80,000 units. Jenks' margin of safety ratio is
120%
.

80%
.

20%
.

The sales mix percentages for Guillen's Chicago and Charlotte Divisions are 70% and 30%. The contribution margin
ratios are: Chicago (40%) and Charlotte (30%). Fixed costs are $555,000. What is Guillen's break-even point in
dollars?
$1,585,7
14

$1681,8
18

$194,25
0

$1,500,0
00

Variable costing
 treats fixed manufacturing overhead as a
period cost.

is used for external reporting

purposes.

is required under
GAAP.

is also known as full

costing.

Some fixed manufacturing overhead costs of the current period are deferred to future periods under
neither absorption nor variable
costing.

variable
costing.

absorption
costing.

both absorption and variable

costing.

Manning Industries manufactures and sells three different models of

wet-dry shop vacuum cleaners. Although the shop vacs vary in terms of
quality and features, all are good sellers. Manning is currently operating
at full capacity with limited machine time. Sales and production
information relevant to each model follows.
Product

Econo Stan
Deluxe
my dard

$1
Selling price $30 $50
00

Variable costs and

$12 $18 $42
expenses

Machine hours
.5 .8 1.6
required

Correct.

Ignoring the machine time constraint, which single product should

Manning Industries produce?
Deluxe

Product

Economy Standard Deluxe

Selling price $30 $50 $100

Less: Variable costs 12 18 42

Contribution margin per unit $18 $32 $58

Ignoring the machine time constraint, the Deluxe product should be produced because it has the highest contribution
margin per unit.
What is the contribution margin per unit of limited resource for each
product? (Round answers to 2 decimal places, e.g. 25.25.)
Economy $36.00

Standard $40.00

Deluxe $36.25

Product

Econo Stan
Deluxe
my dard

$5
Contribution margin per unit (a) $18 $32
8

Machine hours required (b) .5 .8 1.6

Contribution margin per limited $40.0 $36.

resource (a)/(b) $36.00
0 25

If additional machine time could be obtained, how should the additional time
be used?
To produce the Standard product

If additional machine hours become available, the additional time should be

used to produce the Standard product since it has the highest
contribution margin per machine hour.