CH 03

CHAPTER 3 SOLUTIONS
Solutions to Questions for Review and Discussion
1. In profit planning, the contribution margin per unit (selling price per unit less variable cost per
unit), the volume of sales, the mix of product lines in sales, and total fixed costs are all
interrelated.
2. When the total contribution margin is equal to the total fixed cost, the company is operating at
the break-even point. Neither profit nor loss exists.
3. The contribution margin per unit of product is divided into the total fixed cost to obtain the
number of units that must be sold to break even.
4. In a break-even chart, units of product are shown on the horizontal scale, and dollars are
shown on the vertical scale. Dollars of cost for various quantities of product are plotted with
the points connected to form a total cost line. Dollars of revenue for various quantities of
product are plotted with the points connected to form a total revenue line. The point at which
the total cost line crosses the revenue line is called the break-even point. The area between
the total cost line and the total revenue line below the break-even point is the loss area. The
area between the total revenue line and the total cost line above the break-even point is the
profit area.
5. The contribution margin percentage is divided into the total fixed cost to obtain the revenue at
the break-even point.
6. Yes. The percentage of the variable cost to revenue is subtracted from 100 percent to obtain
the contribution margin percentage. The contribution margin percentage is then divided into
the total fixed cost to obtain the revenue at the break-even point.
7. Yes. It may not be possible to sell all units of product at the same price. To sell more units, the
company may have to reduce the price. The total revenue line on the break-even chart will
then be a curved line. Also, the variable cost may become proportionately higher as more
units are manufactured and sold. The total cost line will also be curved. The revenue and cost
lines will cross once and eventually may curve in such a way that they will cross again.
8. Ordinarily, a break-even chart is prepared on the assumption that a company will operate
within a range where the selling price per unit of product and the variable cost per unit of
product will be constant. Therefore, the total revenue line and the total cost line will not be
curved. There will be only one point of crossover or one break-even point.
9. It is possible to compute the number of units that must be sold to earn a certain amount of
profit after income tax. First, the profit after tax must be converted to profit before tax by
dividing the profit after tax by 1 minus the tax rate. Then, the profit is treated as if it were a
fixed cost. The contribution margin per unit of product is divided into the total fixed cost plus
the desired profit before income tax to arrive at the number of units that must be sold to
achieve the profit objective.
10. On a P/V graph, there are no cost or revenue lines. A horizontal line on the graph separates
the profits from the losses. A profit line is drawn on the graph and at its point of intersection
with the horizontal line, the company breaks even. Profits are measured on a scale above the
Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 3, Page 3-1
horizontal line and losses are measured on a scale below it. On the P/V graph, profits or
losses can be read directly and do not have to be measured as the spread between the
revenue and cost lines.
Neither form of presentation is superior. The P/V graph has an advantage in that profits and
losses are given directly, but the break-even chart shows how costs vary with different levels of
activity.
11. The slope of the profit line on the P/V graph represents the contribution margin per unit if the
activity measure is units of product sold or the contribution margin percentage if the activity
measure is revenue.
12. Operating leverage is a measure of the effect a percentage change in revenue has on profit
before taxes. The measure is a ratio of the contribution margin divided by profit. Operating
leverage is related to the distance between the break-even point and a current or expected
sales volume, because the difference between the contribution margin and the profit before
taxes is the fixed cost. As profit moves closer to zero, the closer the fixed costs are to the
contribution margin and the closer the company is to the break-even point. The ratio is
designed to yield a high number when sales volume is close to the break-even point and a
progressively lower number as sales volume increases.
13. The margin of safety is the excess of actual sales over sales at the break-even point. The
excess may also be computed as a percentage of actual or expected sales. The margin of
safety, expressed either in dollars or as a percentage, shows how much sales volume can be
reduced without sustaining losses.
The margin of safety and the operating leverage have a reciprocal relationship. Operating
leverage factors are higher near break-even points and decrease as sales volume increases.
Margins of safety are quite the opposite. They are low near break-even points and get larger
with increases in sales volume.
14. If a company has multiple products, then many possible break-even points exist depending on
the assumed mix of products sold. Each possible sales mix has an associated contribution
margin, which results in a unique break-even point. This point is not the break-even point for
the company because breakeven will fall within a range of values. All we can say is that we
have a break-even point for a given sales mix.
The calculation of the break-even point with multiple products means each product is weighted
by the sales mix. Therefore, the break-even point is divided up by the weights to determine
the number of units for each product.
15. Cost estimation is important because it enables management to budget costs more accurately
and to have a better basis for control. Management armed with a better knowledge of costs
has a distinct advantage in competing with less knowledgeable competitors.
16. A dependent variable is what we want to predict. It is the Y value in the cost-estimating
equation. An independent variable, the X value in the equation, is what we use to predict the
dependent variable.
17. The two major steps in applying the account analysis method are: (1) an interpretation of
managerial policies with respect to the cost category in question, and (2) an inspection of the
historical activity of the cost. All cost accounts are then classified as fixed or variable.

18. The engineering approach uses analysis and direct observation of processes to identify the
relationship between inputs and outputs, and then quantifies an expected cost behavior. The
basic issue in manufacturing a product is what amount of direct materials, direct labor, and
overhead is required to run a given process. In assessing the costs of a service, the question
relates primarily to the labor and overhead costs.
19. The scattergraph and visual fit method requires three steps: (1) plot the cost observations on
a graph with dollars on the vertical axis and activity on the horizontal axis; (2) fit a line to the
data, visually and judgmentally, and (3) estimate the fixed and variable costs from the line
plotted.
20. In using the high-low method, the highest and lowest activity should be assessed to determine
their related costs. Do not pick the highest and lowest costs. If either of these two extreme
points do not represent the data pattern, select the next highest or next lowest activity to obtain
more representative points.
21. The high-low method of cost estimation is one method that may be used to compute the
average rate of cost variability per hour or per some other measurable cost driver. This
method is also used to determine the fixed portion of the cost. The difference between the
highest and the lowest level of activity is divided into the difference in costs for the
corresponding points to arrive at a rate of variable cost per unit of activity. Fixed costs can be
determined at any level (assuming a uniform rate of variability) by subtracting the variable cost,
as determined at that level, from the total costs.
22. The main differences that the regression method has over other methods of cost estimation
are really two-fold: (1) every observation is explicitly included in the analysis; and (2) the
method computes values that permit the measurement of the correlation of the dependent and
independent variables and the reliability of the cost estimates.
23. r2 is the measure of the association identified by the regression equation. It can vary from 0 to 1.
24. The standard error of the estimate is a measure of the average deviation between the actual
observations of the dependent variable and the values predicted by the regression equation.
When the regression equation is used to predict a cost, the standard error of the estimate
provides an estimate of the amount by which the actual outcome might differ from the
estimate.
25. In a normal distribution of data, approximately two-thirds of the data (more precisely, 68.27%)
can be expected to lie within plus and minus one standard deviation from the mean.
26. In many situations, more than one factor or cost driver will be related to cost behavior. Insofar
as possible, all factors that are related to cost behavior should be brought into the analysis. In
simple regression, only one cost driver is considered; but in multiple regression, several factors
or cost drivers are cumulatively considered as a composite cost behavior.
The basic process of multiple regression also permits analysis of nonlinear cost behavior.
27. Multicollinearity is the existence of very high correlation between two or more independent
variables. The variables move together so closely that the regression technique cannot
differentiate them. It is important to remember that this process is a correlation between
independent variables, not between an independent and a dependent variable. The existence
of multicollinearity makes the accuracy of coefficients in the regression equation suspect, but
total cost estimates would not be affected. Symptoms of multicollinearity will include: (1)
negative coefficients when positive ones were expected; (2) coefficients that are insignificant
which in theory should be highly significant; and (3) unreasonable coefficients that do not
make economic sense.
Solutions to Exercises
3-1.
(1) Break-even point:
B-E Sales = FC + VC
B-E S = $120,000 + (0.6) B-E S
(0.4) B-E S = $120,000
B-E S = $300,000
B-E point in units = $300,000 ÷ $50 per unit
= 6,000 units
(2) Increase in break-even point:
New break-even sales: B-E Sales = ($120,000 + $36,000) + (0.6) B-E S

(0.4) B-E Sales = $156,000
B-E Sales = $390,000
Break-even point in units = $390,000 ÷ $50
= 7,800 units
New B-E point - Old B-E point = 7,800 – 6,000 = 1,800 units
Or, increased fixed costs divided by the contribution margin per unit:
$36,000 ÷ ($50 x 0.4) = 1,800 units
3-2.
(1) Price needed to earn $60,000 after taxes:
Price x Units sold = FC + VC + Before Tax Profit

Before Tax Profit = After Tax Profit ÷ (1.0 – Tax rate)
= $60,000 (0.6)
= $100,000
P (20,000) = $100,000 + ($10 x 20,000) + $100,000
P = $400,000 ÷ 20,000
P = $20 per unit
(2) Units to be sold to earn $60,000 after taxes:
Price x Units sold = FC + VC + Before Tax Profit

Before Tax Profit = After Tax Profit ÷ (1.0 – Tax rate)
= $60,000 (0.6)
= $100,000
$20 (X) = $100,000 + $10 (X) + $100,000

$10 (X) = $200,000
X = $200,000 ÷ $10
X = 20,000 units
(3) Maximum fixed costs:
Sales = FC + VC + Before Tax Profit

FC = Sales – VC – Before Tax Profit
= ($20 x 20,000) – ($10 x 20,000) – $100,000
= $100,000
(4) Maximum variable costs per unit:
Sales = FC + VC + Before Tax Profit

VC = Sales – FC – Before Tax Profit
= ($20 x 20,000) – $100,000 – $100,000
= $200,000
VC per unit = $200,000 ÷ 20,000 units
= $10 per unit
3-3.
(1) Current break-even point:
FC = $6 per unit x 10,000 units = $60,000

B-E Sales = FC + VC
$13 (X) = $60,000 + $5 (X)
$8 (X) = $60,000
X = 7,500 units
(2) Change in break-even point:
B-E Sales = FC + VC
$13 (X) = ($60,000 + $20,000) + ($5 – $2)(X)
$10 (X) = $80,000
X = 8,000 units
Change in break-even point: 8,000 – 7,500 = 500 unit increase
Strictly based on the break-even point itself, the answer is no. But, the new equipment may
add capacity that would not otherwise be available. Also, the normal or expected level of
activity may be above both the old and new break-even points, e.g. the 10,000 units for which
the per unit data was provided. In fact, the 10,000 unit level is the indifferent point of the two
cost functions. Above 10,000 units, the new equipment would generate more profit. Below
10,000 units, the current operation would generate higher profit.
3-4.
(1) Variable cost per unit = $360,000 ÷ 12,000 units = $30 per unit
P (12,000 units) = $180,000 + ($30 – $4) x 12,000 units + $90,000

P (12,000) = $180,000 + $312,000 + $90,000
P = $582,000 ÷ 12,000
P = $48.50 per unit
(2) P (12,000) = ($180,000 + $20,000) + $30 (12,000) + $120,000

P (12,000) = $680,000
P = $680,000 ÷ 12,000
P = $56.67 (rounded)

3-5.
(1) Current break-even point:
Units:$7.70 (X) = $200,000 + $4 (X) Dollars: B-E S = $200,000 + ($4 ÷ $7.70) B-E S
$3.70 (X) = $200,000 B-E S = $200,000 + (0.5195) B-E S
X = $200,000 ÷ $3.70 (0.4805) B-E S = $200,000
X = 54,054 units (rounded) B-E S = $416,233 (rounded)
New break-even point:

Units: $8 (X) = $200,000 + $4.50 (X) Dollars: B-E S = $200,000 + ($4.50 ÷ $8) B-E S
$3.50 (X) = $200,000 B-E S = $200,000 + (0.5625) B-E S
X = $200,000 ÷ $3.50 (0.4375) B-E S = $200,000
X = 57,143 units (rounded) B-E S = $457,143 (rounded)
Change in break-even point:

Increase by 3,089 units (57,143 – 54,054) or by $40,910 in sales ($457,143 – $416,233).
(2) Current profit = $7.70 (60,000 units) – $200,000 – $4 (60,000 units)

= $22,000
New fixed costs = $8 (60,000) – $4.50 (60,000) – $22,000

= $188,000
(3) $8 (X) = $200,000 + $4.50 (X) + $22,000

$3.50 (X) = $222,000
X = $222,000 ÷ $3.50
X = 63,429 units (rounded)
3-6.
(1) $42,000 fixed cost ÷ ($18 – $2.20) contribution margin per visit = 2,658 visits
(2) $49,500 fixed cost ÷ ($18 – $2.20) contribution margin per visit = 3,133 visits
(3) ($49,500 + $13,900 desired profit) ÷ ($18 – $2.20) contribution margin per visit = 4,013 visits
4,013 total visits – 3,133 total to break even = 880 visits above the break-even point
3-7.
(1) €90,000 fixed cost ÷ (€39 – €28) contribution margin per unit = 8,182 units
(2) €90,000 fixed cost ÷ (€11  €39) contribution margin percent = €319,149
or 8,182 units x €39 per unit = € 319,098 (difference due to rounding)
(3) €90,000 fixed cost  (€39 – €32) contribution margin per unit = 12,857 units
(4) €90,000 fixed cost  (€7  €39) contribution margin percent = €501,392
or 12,857 units x €39 per unit = €501,423 (difference due to rounding)

3-8.
(1) Number of patrons required to break even:
Unit contribution margin = ($1.75 – $1.10) + $0.60 = $1.25

$900,000 ÷ $1.25 = 720,000 patrons needed to break even
(2) Ticket price:
Let p = ticket price

(800,000 x p) + (800,000 x $.60) – (800,000 x $1.10) – $900,000 = $150,000
(800,000 x p) + $480,000 – $880,000 – $900,000 = $150,000
(800,000 x p) = $150,000 – $480,000 + $880,000 + $900,000
(800,000 x p) = $1,450,000
p = $1.8125
Thus, the ticket price should be $1.82 (rounded up).
3-9.
(1) Change in net income:
Contribution margin = 0.35 x $440,000 = $154,000

Unit contribution margin = $154,000 ÷ 40,000 = $3.85
Additional contribution margin from 850 more units = $3.85 x 850 = $3,272.50
Since fixed costs do not change, the additional net income is $3,272.50.
(Note: You could also calculate this by seeing that each umbrella sells for $11, so sales
increase is $9,350. Hence CM increases by 35% x $9,350 = $3,272.50)
(2) Additional net income:
Additional contribution margin = 0.35 x $75,000 = $26,250

Additional fixed cost = $18,000
Additional net income = $26,250 – $18,000 = $8,250
(3) Predicted additional net income or loss:
Original price = $440,000 ÷ 40,000 = $11

Original variable cost = $11 – $3.85 = $7.15
New contribution margin per unit = [(1 – 0.15) x $11] – $7.15 = $9.35 – $7.15 = $2.20
New sales volume = 40,000 units x 1.3 = 52,000 units
New contribution margin = $2.20 x 52,000 = $114,400
Change in contribution margin = $114,400 – $154,000 = –$39,600
Change in net income = –$39,600 – $12,000 = –$51,600
Hence the store manager’s suggestion would reduce profit by $51,600
3-10.
(1) 12% after tax profit ÷ (1 – 40% tax rate) = 0.12 ÷ (1.00 – 0.40) = 20% before tax profit
$522,000 fixed cost ÷ (30% contribution margin ratio – 20% profit margin) = $5,220,000 revenue

(2) Excess revenue over break-even revenue:
Revenue $5,220,000
Break-even revenue:
($522,000 fixed cost  30% contribution margin ratio) 1,740,000
Revenue above break-even $3,480,000
3-11.
$25,000 fixed cost  ($210 – $110) contribution margin = $25,000  $100 = 250 tables
(2) Profit level:
Revenue (330 tables x $210 $69,300

Variable cost (330 tables x $110) 36,300
Contribution margin (330 tables x $100) $33,000
Fixed cost 25,000
Profit $8,000
(3) Tables needed for $11,000 profit objective:
($25,000 fixed cost + $11,000 profit)  $100 contribution margin per unit = 360 tables
3-12. Target sales in units:

Variable costs per unit = $360,000 ÷ ($600,000 ÷ $200 per unit)
= $120 per unit
$200 (X) = $180,000 + $120 (X) + [$60,000 ÷ (1 – 0.40)]

$80 (X) = $280,000
X = 3,500 units
3-13.
(1) Fixed cost:
$560,000 = Fixed cost ÷ 35%

Fixed cost = $560,000 x 0.35 = $196,000
(2) Fee per rider:
Let p = fee per rider

0.35 = (p – $6.50) ÷ p
0.35 x p = (p – $6.50)
0.65 x p = $6.50
p = $6.50 ÷ 0.65
p = $10
3-14.
(1) Sales revenue for last year:
Fixed manufacturing costs M$ 600,000
Fixed selling and administrative costs 540,000
Total fixed costs M$1,140,000

(M$1,140,000 fixed cost + M$910,000 profit) ÷ 30% contribution margin ratio = M$6,833,333
(2) Increased in revenue:

Fixed manufacturing costs M$ 750,000
Fixed selling and administrative costs 540,000
Total fixed costs M$1,290,000
(M$1,290,000 fixed cost + M$910,000 profit) ÷ 30% contribution margin ratio = M$7,333,333
This year’s revenue needed M$7,333,333

Last year’s revenue 6,833,333
Increase in revenue M$ 500,000
(3) Margin of safety for last year:
M$1,140,000 fixed cost ÷ 30% contribution margin ratio = M$3,800,000 break-even revenue
(M$6,833,333 – M$3,800,000) ÷ M$6,833,333 = 44.39% margin of safety
Margin of safety for this year:
M$1,290,000 fixed cost ÷ 30% contribution margin ratio = M$4,300,000 break-even revenue
(M$7,333,333 – M$4,300,000) ÷ M$7,333,333 = 41.36% margin of safety
Last year had the better margin of safety.
3-15. Contribution margin ratio:
2008 revenue = $250,000 ÷ 1.25 = $200,000

2008 contribution margin = 0.22 x $200,000 = $44,000
2008 pretax income = $44,000 – $41,000 = $3,000
2009 pretax income = $3,000 + $8,000 = $11,000

2009 contribution margin = $11,000 + $41,000 = $52,000
2009 contribution margin ratio = $52,000 ÷ $250,000 = 20.8%
3-16. Sales volumes needed to achieve the target profit:
Let: X = number of Best alarms, Y = number of Better alarms, Z = number of Good alarms
$50 (X) + $45 (Y) + ($38 x Z) – $315,000 = $190,000

$50 (X) + $45 (1.1 X) + $38 (1.3 X) = $505,000
$50 (X) + $49.5 (X) + $49.4 (X) = $505,000
$148.9 (X) = $505,000
X = $505,000 ÷ $148.9 = 3,392 Best alarms
Y = 1.1 x 3,392 = 3,731 Better alarms
Z = 1.3 x 3,392 = 4,410 Good alarms

3-17.
(1) Contribution Sales Weighted
Margin Per Mix Contribution
Roll Proportions Margin
Lite-Weight $25 x 0.5 = $12.50
Heavy-Duty 75 x 0.5 = 37.50
Total weighted contribution margin per roll $50.00
($675,000 fixed cost + $540,000 profit) ÷ $50 weighted contribution margin = 24,300 total units
Total Sales Mix Number of

Units Proportions Rolls
Lite-Weight 24,300 x 0.5 = 12,150
Heavy-Duty 24,300 x 0.5 = 12,150
(2) Proportions:
Lite-Weight: 14,000 ÷ 20,000 = 0.7

Heavy-Duty: 6,000 ÷ 20,000 = 0.3
Contribution Sales Weighted

Margin Per Mix Contribution
Roll Proportions Margin
Lite-Weight $25 x 0.7 = $17.50
Heavy-Duty 75 x 0.3 = 22.50
Total weighted contribution margin per roll $40.00
($675,000 fixed cost + $540,000 profit) ÷ $40 weighted contribution margin = 30,375 total units
Total Sales Mix Number of

Units Proportions Rolls
Lite-Weight 30,375 x 0.7 = 21,252
Heavy-Duty 30,375 x 0.3 = 9,113
3-18. High-low method for variable and fixed costs:
Hours Cost
High point 21,000 $69,200
Low point 15,000 51,200
Difference 6,000 $18,000
Rate of cost variability: $18,000  6,000 hours = $3 per hour
Fixed cost: $69,200 – (21,000 x $3) = $69,200 – $63,000 = $6,200

$51,200 – (15,000 x $3) = $51,200 – $45,000 = $62,00
3-19. High-low method for travel expenses:
Miles Cost
High point 340 $472
Low point 50 240
Difference 290 $232
Rate of cost variability: $232  290 miles = $0.80 per mile
Fixed cost: $472 – (340 x $0.80) = $472 – $272 = $200

$240 – (50 x $0.80) = $240 – $40 = $200
3-20. Utilities cost prediction for 920 hours of activity:
Fixed cost = $6,500

Variable cost = $9,700 – $6,500 = $3,200
Variable cost per hour = $3,200 ÷ 800 = $4
Cost prediction for 920 hours: $6,500 + (920 x $4) = $6,500 + $3,680 = $10,180
3-21. Total cost estimate for next month:
Fixed costs = $12,000 + $3,700 + $11,300 = $27,000

Variable costs = $44,500 + $9,200 + $20,000 = $73,700
Variable cost per unit = $73,700 ÷ 1,593 = $46.26
Cost estimate for next month: $27,000 + ($46.26 x 1,780) = $27,000 + $82,343 = $109,343
3-22.
(1) Graph of visual fit:
13000
12000
11000
10000
9000
8000
Total Cost
7000
6000
5000
4000
3000
2000
1000
0
0 100 200 300 400 500 600 700 800 900
Hours
From the graph, the fixed cost appears to be about NZ$4,500. To obtain the variable cost, we
select the 300 hour level and its associated total cost of NZ$7,000:
Total variable cost = NZ$7,000 – NZ$4,500 = NZ$2,500

Variable cost per hour = NZ$2,500  300 = NZ$8.33

(2) High-low method:
Hours Cost
High 900 NZ$13,000
Low 450 8,600
Difference 450 NZ$4,400
Variable cost per hour = NZ$4,400  450 hours = NZ$9.78 per hour
Fixed cost = NZ$13,000 – (900 x NZ$9.78)

= NZ$13,000 – NZ$8,802
= NZ$4,198
(3) The reason the variable cost per hour and the fixed costs differ between the two methods is
that the visual fit method considers all of the observations and the high-low method considers
only two of the observations. Another difference is that the two points selected for the high-low
method are not representative of the observations in between. A third difference is that the
visual fit method relies on subjective judgment in drawing a line that best fits the data.
(4) With the visual fit method, one can intentionally bias the cost estimate by drawing a line that
does not best fit the data. With the high-low method, one can bias the estimates by claiming
that the high or low point reflects unusual circumstances and throwing out that data point.
(Clearly, neither point represents unusual circumstances.)
3-23.
(1) Graph of visual fit:
1.8
1.7
1.6
1.5
1.4
(Thousands)
Total Costs
1.3
1.2
1.1
1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1
Hours of Operation
(Thousands)
(2) The plot of these points shows an interesting situation. The high and low points are not
representative of the other data. The remaining points are in line with each other, giving an
appearance of correlation.

Since we want to eliminate the two extreme points from our data because they will cause
distorted results, the remaining data are quite easy to work with. From the visual fit, after
omitting the observations for 100 and 900 hours, the variable cost is estimated at $1 per hour
and the monthly fixed cost is $500.
After eliminating the extremes, the high-low method gives the following results:
Hours Cost
Next High 800 $1,300
Low 200 700
Difference 600 $600
Variable cost per hour = $600  600 hours = $1 per hour

Fixed cost = $1,300 – (800 x $1)
= $1,300 – $800
= $500
(4) Because the two extreme points were eliminated and the other points were very well
correlated, either method produces results in which we can have confidence.
Under normal circumstances, we can have more confidence in the variable cost amount
produced from the visual fit method than in the amount produced from the high-low method.
We really cannot have confidence in the fixed cost amounts under either method.
3-24. Monthly variable operating cost per bed:
Number of beds at high occupancy rate = 0.8 x 500 = 400

Number of beds at low occupancy rate = 0.7 x 500 = 350
Total cost at high occupancy level = $23 per bed per day x 400 beds x 30 days
= $276,000
Monthly variable operating cost per bed:
($276,000 – $250,000) ÷ (400 – 350) = $26,000 ÷ 50 = $520
3-25.
(1) Variable cost per gallon:
($35,900 – $25,500)  (2,300,000 – 1,500,000) = $10,400  800,000 = $0.013
Fixed cost:
$35,900 – $0.013 (2,300,000) = $35,900 – $29,900 = $6,000
Cost function: Y = $6,000 + $0.013X
($75,000 + $6,000)  [$0.046 – ($0.011 + $0.013)] = $81,000  $0.022 = 3,681,818 gallons

3-26.
(1) The estimating equation for a given set of data is Y = 966 + 6.3 X. The interpretation of each
element of the equation is as follows:
Y = The dependent variable: overhead cost

X = The independent variable: a measure of activity or cost driver, such as labor hours or
machine hours
966 = The fixed component of the equation at point zero activity. Since we usually do not
have data for zero activity, this component relates to the behavior of the dependent variable
within the relevant range.
6.3 = The variable component of the equation. The dependent variable will increase or
decrease by 6.3 as the independent variable increases or decreases by one unit.
(2) r2 measures the percentage of variation in the data that can be explained by the regression
equation. In this particular case, that percentage is 79%. This percentage represents a high
correlation.
(3) The standard error (Se) of the estimate is a measure of the average deviation between the
actual observations of the dependent variable and values predicted by the regression
equation. When the regression equation is used to predict future costs, S e gives an estimate
of the amount by which the actual outcome might differ from the prediction.
3-27. Confidence interval for 18 trips:
Predicted cost = $11,000 + ($950 x 18) = $28,100

Lower limit = $28,100 – ($3,125 x 1.96) = $28,100 – $6,125 = $21,975
Upper limit = $28,100 + ($3,125 x 1.96) = $28,100 + $6,125 = $34,225
Thus, the 95% confidence interval ranges from $21,975 to $34,225.
3-28.
 The regression output for multiple regression is similar to that for simple regression. The
output is a summary of all of the measures and information we are concerned with in
developing a cost estimating equation, identifying degree of correlation, and developing control
limits.
 “Constant 2,250” is the fixed component of the equation for the data within the relevant range.
 “Std. Err. Of Y Est. 221” is the standard error of the estimate and represents one standard
deviation of actual observations from the regression line. This amount can be used in
developing control limits.
 “r2 0.95142” indicates that 95.142% of the variation in the data is explained by the regression
line. This is a good correlation of dependent and independent variables.
 “No. of observations 12” means that 12 observations were used in this regression analysis.
 “X coefficient(s) 0.335, 0.458, and 0.189” are the three cost drivers or measures of activity for
the costs. Each of the three drivers is a variable component of the equation. The dependent
variable will increase or decrease by these amounts as the related individual independent
variable increases or decreases by one unit.

3-29.
(1) Since $830 ÷ 90 and $970 ÷ 110 result in different amounts, the cost is not strictly variable.
Rather, we have a mixed cost function here.
(2) The $780 and $880 estimates were obtained by adding and subtracting from $830 the
following term: 1.96 x standard error of the estimate.
(3) Since the total weight of the students has a higher r2 than the number of students, it would be
better to budget the dinner costs using the weight of the students. However, getting that
information may not be easy!
Solutions to Problems
3-30. Fee per child:
Variable cost per shirt = ($4.10 + $1) + $9.50 = $14.60

Fixed costs = ($20 + $100) + $85 + $120 + $70 = $395
Let f = fee per child

70 = $395 ÷ (f - $14.60)
f – $14.60 = $395 ÷ 70
f = $14.60 + $5.64
f = $20.24
3-31.
(1) $360,000 ÷ $20 contribution margin per unit = 18,000 units breakeven
(2) ($360,000 fixed + $270,000 profit) ÷ $20 contribution margin per unit = 31,500 units
(3) $180,000 profit after tax ÷ (1 – 0.40) = $300,000 profit before tax
($360,000 fixed cost + $300,000 profit) ÷ $20 contribution margin per unit = 33,000 units
(4) Revised selling price ($50 x 90%) $45

Variable cost (30)
Revised contribution margin $15
$360,000 fixed cost ÷ ($15 contribution margin per unit – $8 profit per unit) = 51,429 units
(5) Selling price $50

Revised variable cost ($30 x 1.10) (33)
Revised contribution margin $17
$360,000 fixed cost ÷ ($17 contribution margin per unit – $8 profit per unit) = 40,000 units
(6) The same percentage increase in the selling price and decrease in the variable cost,
considered separately, will yield different contribution margins because the base upon which
the change in selling price is computed is higher than the base for the variable cost. Hence,
the sales dollar impact is larger and has more effect on the final contribution margin.

3-32. Revenue per customer:
$46,000 revenue ÷ 4,000 customers = $11.50 per customer
Variable cost per customer:

Pole rental $0.75
Bait bucket 0.75
Part-time worker's piece rate Unknown = X
Variable cost per customer $1.50 + X
Contribution margin per customer:

$11.50 – ($1.50 + X) = $10.00 – X
Fixed Costs:
Fuel cost $800
Dock rental 400
Boat maintenance 1,200
Depreciation 3,000
Taxes and permits 400
Gross' salary 3,000
Part-time worker’s salary 1,000
Total $9,800
($9,800 fixed cost + $5,000 profit) ÷ ($10.00 – X) = 4,000 customers
$14,800 = 4,000 ($10.00 – X)

$14,800 = $40,000 – 4,000X
4,000 X = $40,000 – $14,800
X = $25,200  4,000
= $6.30 maximum per person fee paid to part-time worker
3-33.
(1) Selling price at 800 chairs:
Variable costs without commission:

Lumber and other materials $30 per chair
Labor 15 per chair
Total $45 per chair
Fixed cost and profit:

Advertising $5,000
Truck rental 1,000
Profit (2 x $4,500) 9,000
Total $15,000
Selling price per chair:
$15,000 ÷ (X – 0.08X) – $45 = 800 chairs

$15,000 = 800 (0.92 X – $45)
$15,000 = 736 X – $36,000
736X = $51,000
X = $51,000  736
= 69.29
= $70 selling price (rounded to next dollar)

(2) Selling price at 900 chairs:
$15,0000 ÷ 0.92 X – $45 = 900 chairs

$15,000 = 900 (.92X – $45)
$15,000 = 828X – $40,500
0.828X = $55,500
X = $55,500  828
= $67.03
= $68 selling price (rounded to next dollar)
(3) Sales ($70 x 900) $63,000

Variable costs:
Commissions at 8% $5,040
Other ($45 x 900) 40,500 45,540
Contribution margin $17,460
Fixed cost and profit 15,000
Additional profit $2,460
Additional profit each ($2,460  2) $1,230
(4) Sales ($70 x 700) $49,000

Variable costs:
Commissions at 8% $3,920
Other ($45 x 700) 31,500 35,420
Fixed cost 6,000
Profit $7,580
Profit each ($7,580  2) $3,790
Since $3,790 is less than $4,500, they will not meet their profit objectives.
3-34.
(1) Break-even point in units = $72,000  ($10 - $7.50) = 28,800
(2) Number of units = ($72,000 + $45,000)  ($10 - $7.50) = 46,800
(3) Contribution margin ratio = ($10 - $7.50)  $10 = 25%
Sales dollars needed: S = ($72,000 + 0.12S)  0.25

0.25S = $72,000 + 0.12S
0.13S = $72,000
S = $553,846
(4) Number of units = [$72,000 + ($30,000  0.6)]  ($10 - $7.50)

= ($72,000 + $50,000)  ($2.50)
= $48,800
(5) Change in contribution margin – Change in fixed costs = Change in profit
$5,000 x $2.50 – Change in fixed costs = $0

Change in fixed costs = $5,000 x $2.50 = $12,500
Therefore, $12,500 could be spent on the advertising campaign without changing the expected
profit.

(6) Let p = selling price
50,000 = [$72,000 + ($24,000  0.6)]  (p - $7.50)
50,000 x (p - $7.50) = $72,000 + $40,000
50,000 x p = $375,000 + $72,000 + $40,000
50,000 x p = $487,000
p = $9.74
(7) Let p = selling price

50,000 = [$72,000 + (.2 x 50,000 x p)]  (p - $7.50)
50,000 x (p - $7.50) = $72,000 + ($10,000 x p)
40,000 x p = $375,000 + $72,000
40,000 x p = $447,000
p = $11.18
(8) Sales dollars needed (S) = ($72,000 + .04S + $70,000)  0.25

0.25S = $142,000 + .04S
0.21S = $142,000
S = $676,190
3-35.
(1) EVENING STAR MOTEL
ESTIMATED INCOME STATEMENT
PER MONTH
(MAXIMUM CAPACITY)
Summer Winter
Revenue ($40 x 300 rooms x 30 days) $360,000 $360,000
Variable cost:
Summer ($11.05 x 300 rooms x 30 days) 99,450
Winter ($11.55 x 300 rooms x 30 days) 103,950
Contribution margin $260,550 $256,050
Fixed cost:
Summer 79,150
Winter 77,350
Profit $181,400 $178,700
(2) Break-even information:
Break-even point for a summer month:
$79,150 fixed cost  ($40 – $11.05) = 2,734 room day
Break-even point for a winter month:
$77,350 fixed cost  ($40 – $11.55) = 2,719 room days
Percent of maximum capacity:
Summer 2,734  9,000 = 30.4%

Winter 2,719  9,000 = 30.2%

(3) EVENING STAR MOTEL
ESTIMATED INCOME STATEMENT
FOR THE MONTH OF AUGUST
Revenue ($40 x 5,000) $200,000

Variable cost ($11.05 x 5,000) 55,250
Fixed cost 79,150
Profit $65,600
Percentage of capacity for August: 5,000  9,000 = 55.56%
3-36.
(1) Operating leverage for this year and next:
This Year Next Year
Sales $6,000,000 $6,300,000
Contribution margin ratio 40% 40%
Contribution margin $2,400,000 $2,520,000
Fixed cost 2,000,000 2,000,000
Profit $ 400,000 $520,000
Contribution margin $2,400,000 42,520,000

Divided by profit  400,000  520,000
Operating leverage 6.0 4.85
(2) A modest increase in revenue can increase profits substantially in this case because after the
break-even point is reached, each dollar of sales produces 40 cents in profit. The relatively
generous contribution margin ratio adds substantial amounts to profits with relatively small
increases in revenue.
(3) Margin of safety:
Break-even sales:
$2,000,000 fixed cost ÷ 40% contribution margin ratio = $5,000,000 sales
Margin of safety for this year:
($6,000,000 – $5,000,000) ÷ $6,000,000 = 16.67%
Margin of safety for next year:
($6,300,000 – $5,000,000) ÷ $6,300,000 = 20.6%
(4) Because of the reciprocal relationship between operating leverage and margin of safety, we
gain little new information here. However, the perspective of the information changes. Both
measures tell us we are moving away from the break-even point and a cushion is developing
to protect against downturns.

3-37. Number of booths to break even:
Booth Variable Cost Price Per Contribution

Size Per Booth Booth Margin Per Booth
8' x 10' $25 3 x $25 = $75 $75 – $25 = $50
10' x 12' 28 3 x $28 = $84 $84 – $28 = $56
10' x 15' 30 3 x $30 = $90 $90 – $30 = $60
15' x 15' 35 3 x $35 = $105 $105 – $35 = $70
Weighted average contribution margin per unit:
[$50 x (15 ÷ 50)] + [$56 x (10 ÷ 50)] + [$60 x (20 ÷ 50)] + [$70 x (5 ÷ 50)]
= $15 + $11.20 + $24 + $7
= $57.20
Total units to break even = $9,200 ÷ $57.20 = 160.84
Number of 8' x 10' booths needed 160.84 x (15 ÷ 50) = 48

3-38.
(1) Budgeted break-even sales:
Contribution Margin Ratio Percentage of Total Sales
Koalas A$ 100  A$400 = 25% A$400  A$2,000 = 20%

Kangaroos A$ 450  A$900 = 50% A$900 
A$2,000 = 45%
Crocodiles A$ 190  A$700 = 27% A$700  A$2,000 = 35%
Contribution Percentage Weighted

Margin of Total Contribution
Ratio Sales Margin Ratio
Koalas 25% x 20% = 5.00%

Kangaroos 50% x45% = 22.50
Crocodiles 27% x 35% = 9.45
Weighted contribution margin ratio 36.95%
Break-even point:
A$350,000 fixed cost = A$947,226 total sales

36.95% weighted contribution margin ratio
Break-even Sales
Koalas A$947,226 x 20% A$189,445
Kangaroos A$947,226 x 45% 426,252
Crocodiles A$947,226 x 35% 331,529
A$947,226
(2) Actual break-even sales:

Percentage of total sales:
Koalas A$700  $2,000 = 35%
Kangaroos A$400  $2,000 = 20%
Crocodiles A$900  $2,000 = 45%
Contribution Percentage Weighted

Margin of Total Contribution
Ratio Sales Margin Ratio
Koalas 25% x 35% = 8.75%
Kangaroos 50% x 20% = 10.00
Crocodiles 27% x 45% = 12.15
Weighted contribution margin ratio 30.90%
Break-even point:
A$350,000 fixed cost ÷ 30.9% weighted contribution margin ratio = A$1,132,686 total sales
Break-even Sales
Koalas A$1,132,686 x 35% A$396,440
Kangaroos A$1,132,686 x 20% 226,537
Crocodiles A$1,132,686 x 45% 509,709
A$1,132,686
(3) Profit before income taxes from actual mix of sales:
Contribution margin (A$2,000,000 x 30.9%) A$618,000

Fixed cost 350,000
Profit before income taxes A$268,000
(4) The actual profit decreased because the sales shifted away from the most profitable product to
less profitable products. Based on budgeted data, the most profitable product is Kangaroos
(50% contribution margin ratio) yet its proportion of total sales dropped from the 45% budgeted
to 20% of actual sales. These sales were shifted to lesser profitable products.
3-39.
(1) and (2) Account analysis.
1. Direct Materials is a variable cost. The activity that determines variability is the activity that
causes the acquisition of direct materials. The best measure is units of product because a
direct input/output relationship exists between units of output and the quantity of materials
purchased.
2. Supervisory Salaries – Factory is a fixed cost.
3. Heat, Light, and Power – Factory is a semivariable cost. A minimum service amount is
charged whether or not the service is used. After the minimum charge, costs will vary with
some measure of usage, such as machine hours or square footage. An argument can also be
made that these utilities are fixed, with little variability, for a shift from day to day, or week to
week. They are, however, customarily treated as semivariable.
4. Depreciation on the Building is a fixed cost.

5. Depreciation on Equipment and Machinery (units-of-production method) has a variable cost
behavior based on the units of product, however production is measured.
6. Janitorial Labor is a variable cost if the workers are paid by the hour. Variability in this case
would be based on the number of janitorial hours worked. If all of the janitorial labor and
supervision is considered, the total cost could be semivariable.
7. Repair and Maintenance Supplies is indirect materials and is variable. The activity that
determines variability is the activity supported by the repair and maintenance supplies. If these
supplies are for production, machine hours or direct labor hours could be the activity measure.
We could also view the repair and maintenance labor time as the measure of variability
because it is more immediately related to the costs than production labor.
8. Pension Costs (as a percentage of employee wages and salaries) is semivariable. Since the
costs are based on the composite of wages and salaries, we are looking at the behavior of the
total pension costs. Such behavior is semivariable, and the measure of variability is the
underlying wages and salaries. When a cost is based on a constant percentage of an activity,
the cost will have the same behavior as the base to which it is tied.
9. FICA Tax Expense is semivariable because it is based on a percentage applied to all wages
and salaries. The variability is tied to the variability of the wages and salaries. There is a
maximum annual base for wages and salaries when computing FICA taxes which leads one to
believe that the total cost will reach a maximum, and no further amounts will then be paid for
the rest of the year. However, due to employee turnover, some wages and salaries will be
subject to FICA taxes at any given time during the year.
10. Insurance on Property is a fixed cost.
11. Sales Commissions is a variable cost and varies with sales dollars or any other basis for
determining the commissions.
12. Travel Expenses – Sales is a semivariable expense. Travel expenses can include many
different items, and they can vary with different activities. Activity bases could be miles driven,
customers called on, number of orders obtained, or sales dollars.
13. Telephone Expenses – General and Administrative is a semivariable expense. A cost occurs
for a minimum level of service with a variable charge above that minimum. Measures of
variability can be number of calls made or minutes per call.
14. Magazine Advertising is inherently a fixed cost. However, some companies tie the advertising
budget to sales giving the appearance of a variable cost behavior.
15. Bad Debt Expense is typically treated as a variable expense based on credit sales dollars.
16. Photocopying Expense is either variable or semivariable depending on the nature of the
minimum service. For example, a maintenance contract will usually have a minimum fixed
cost. Variability is based on the number of copies made.
17. Audit Fees is a fixed cost. They are negotiated each year, and management can react to the
level of cost.
18. Dues and Subscriptions is a fixed cost in the sense that it is an appropriation, evaluated
annually. However, as you progress through the year, these costs will have a step-cost or
semivariable cost appearance.
19. Depreciation on Furniture and Fixtures (double-declining-balance method) is a fixed cost.
20. Group Medical and Dental Insurance Expenses is a semivariable cost. Usually, the coverage
is dependent on the number of employees and on determination of the type of plan (single
versus family plan). Thus, variability relates to the number of employees in the plan.
(3) Account analysis would be appropriate for identifying cost behavior when: (1) a clear, direct, or
definitive relationship exists between the costs and the product, service, or object to which the
costs are to be charged; (2) the costs are predominately variable or fixed; and (3) sufficient
historical data exist to establish trends. If these conditions do not exist, the method is not
readily workable.
Additional concerns still exist. For example, the method requires proper cost category
classifications, proper cutoffs between periods, explicit recognition of inflation over time, and
recognition of changes in methods and procedures over time.
3-40.
(1) Estimate of total cost for dinner and dance:
Fixed costs:
Rental of hall $250
Head table decorations 50
Meals for head table (16 x $10) 160
Singer 25
Meals for servers (25 x $10) 250
Band for dance 250
Program 75
Total fixed costs $1,060
Variable costs:
Meal $10.00
Decorations ($10  8) 1.25
Variable costs per person $11.25
Guaranteed meals 224
Minus: Head table meals (16) x 208
Total variable costs 2,340
Total cost estimate $3,400
(2) Estimate of total cost for 272 people:
Fixed costs:
Rental of hall $250
Meals for head table (16 x $10) 160
Singer 25
Meals for servers (25 x $10) 250
Band for dance 250
Program 75
Total fixed costs $1,060
Variable costs:
Meal $10.00
Decorations ($10  8) 1.25
Variable costs per person $11.25
Guaranteed meals 272
Minus head table meals 16 x 256
Total variable costs 2,880
Total cost estimate $3,940
(3) Cost behavior for dinner and dance costs:
Variable costs per table:

The decoration costs of $10 per table will vary with the number of tables needed.
Variable costs per person:

The meal cost of $10 per person for people not at the head table is a variable cost. The
more people, the higher the total meal cost.
Fixed costs:
Rental of hall $250
Singer 25
Band for dance 250
Program 75
Total fixed costs $650
Could be considered fixed costs:
The meals for the head table are based on a cost per meal. However, when you set the
head table for 16 people, you do not want any empty places. Sixteen people will sit at the
head table if the dinner occurs. Therefore, for purposes of cost estimating, the meal cost
of $160 (16 x $10) for the head table is fixed.
The numbers of servers can vary by up to 25 people. Consequently, the cost is variable in
appearance up to the maximum of 25 people. For purposes of planning, the total possible
must be anticipated. Since payment will be made for 25 people, if all of them show up, the
cost of $250 (25 x $10) is fixed.
Note: One can easily argue that once a guaranteed number is submitted, all costs
become fixed.
3-41.
Claims Costs
High 330 $21,650
Low 114 20,570
Difference 216 $1,080
Variable cost = $1,080 ÷ 216 claims = $5 per claim
Fixed cost = $21,650 – (330 x $5) = $21,650 – $1,650

= $20,000
(2) Scattergraph and visual fit method:
The fixed cost on the graph is approximately $20,000. We pick a point about midrange, such
as 220 claims at approximately $21,000, and calculate the variable cost:
Total variable cost = Total cost – Fixed cost
= $21,000 – $20,000
= $1,000
Variable cost per unit = $1,000 ÷ 220 claims = $4.55
$22.0
x
21.5
x x x
21.0 x x
x x x
20.5 x
x
x
20.0
1.0
0.5
0 100 200 300 400
(3) The plot on the data suggests a very high correlation, so we would not expect a big difference.
In any event, differences are due to two reasons. First, visual fit is a judgmental method that
attempts to consider all of the observations. Second, the high-low method only considers the
extremes. Observations between the extremes are totally ignored.
3-42.
(1) High-low method for past practices:
Hours Costs
High 1,600 $15,800

Low 500 7,600
Variable cost per hour = $8,200  1,100 = $7.45 per hour
Fixed cost = $15,800 – ($7.45 x 1,600) = $15,800 – $11,920

= $3,880
(2) High-low method for current practices:
Hours Costs

High 2,000 $19,000
Low 800 16,500
Variable cost per hour = $2,500  1,200 = $2.08 per hour
Fixed cost = $19,000 – ($2.08 x 2,000) = $19,000 – $4,160

= $14,840

(3) The variable cost per hour decreased from $7.45 to $2.08, while the fixed cost per month
increased from $3,880 to $14,840. Because of the higher fixed cost, management will focus
more consideration on full utilization of capacity. Before the emphasis was on controlling
variable costs; but now variable costs are substantially lower, and the company must look at its
capacity and use automated equipment to maximize return on investment.
3-43. Cost estimate for November:
First, the costs need to be classified as fixed or variable. This decision is sometimes very
subjective, as is the case for electricity and telephone, for instance, in this problem. Therefore,
alternative solutions are possible. One plausible classification is the following:
Variable Fixed
Rent $1,600
Depreciation on equipment 70
Wages for part-time help $1,650
Insurance 120
Prizes 200
Supplies 85
Manager's salary 2,000
Electricity 500
Telephone 100
Heat 250
Advertising 150
Totals $2,435 $4,290
Variable cost per game: ($1,650 + $200 + $85 + $500) ÷ 9,500 = $2,435 ÷ 9,500 = $0.26
Cost estimate for November: $4,290 + ($0.26 x 11,000) = $4,290 + $2,860 = $7,150
3-44.
(1) Variable Costs Fixed Costs
Account Amount Account Amount
Paper €20,000 Equipment depreciation €87,000
Binding materials 1,000 Rent 24,000
Covers 4,000 Staff/managers/ salaries 220,000
Production wages 66,000 Utilities 48,000
Printing ink 13,000 Insurance 7,000
€104,000 €386,000
Variable cost: €104,000  8,000 = €13 per subscription
Cost function: Y = €386,000 + €13X
€386,000  (€93 – €13) = 4,825 subscriptions
(3) Subscriptions to achieve target pretax profit:
(€386,000 + €250,000)  (€93 – €13) = 7,950 subscriptions

3-45.
(1) and (2) Differences
Between
Power Predicted Actual Cost
Month Hours Cost Cost and Prediction
January 600 $980 $980 $0
February 550 970 940 30
March 600 960 980 (20)
April 650 1,050 1,020 30
May 550 940 940 0
June 500 980 900 80
July 700 1,180 1,060 120
August 800 1,150 1,140 10
September 750 1,050 1,100 (50)
October 900 1,330 1,220 110
November 850 1,180 1,180 0
December 450 900 860 40
(3) Plot of differences:
140
120
100
80
Power Cost Difference
60
40
20
-20
-40
-60
-80
0.4 0.5 0.6 0.7 0.8 0.9 1
Hours of Operations (Thousands)
(4) Months to investigate:
Under the current rule, months will be investigated when the cost falls outside of plus and
minus one standard error. The standard deviation given is $60. We can determine from the

chart above which costs fall outside the acceptable range. We then associate the month with
each cost as follows:
Actual Cost
Hours Minus Prediction Month
500 $80 June
700 120 July
900 110 October
3-46.
(1) Yes, the regression line provides a good fit to the data, as indicated by the high R 2 of 83%.
(2) Cost to paint an extra 400 sq. ft. = $0.127 x 400 = $50.80
(3) Cost to get set up = $102.50
(4) Cost of new job = $102.50 + ($0.127 x 8,800) + ($0.214 x 2,900)

= $102.50 + $1,117.60 + $620.60
= $1,840.70
3-47.
(1) Calculation of differences: Actual Cost
Predicted Minus
Month Hours Cost Cost Predicted Cost
January 1,200 S$10,850 S$10,700 S$150
February 1,400 12,000 11,900 100
March 1,000 9,800 9,500 300
April 1,100 10,000 10,100 (100)
May 1,000 9,650 9,500 150
June 600 7,600 7,100 500
July 500 6,350 6,500 (150)
August 700 7,700 7,700 0
September 900 9,100 8,900 200
October 1,000 9,850 9,500 350
November 1,200 10,600 10,700 (100)
December 1,300 11,450 11,300 150
(2) Months outside of one standard deviation:

We are looking for the months where the absolute value of the cost difference exceeds
S$205. These months are:
Month Cost
March S$9,800
June 7,600
October 9,850
(3) Months outside of 1.96 standard errors:

1.96 standard error equals S$402 (1.96 x S$205).
Month Cost
June S$7,600

(4) The month that would have been missed is October with a cost difference of S$350. March
could have been a record month with a cost difference of S$300.
3-48.
(1) Months to investigate:
Month Difference Investigate

January $350 --
February 230 --
March 650 Yes
April 500 --
May (300) --
June 800 Yes
July 1,200 Yes
August (250) --
September 400 --
October 700 Yes
November 100 --
December (200) --
(2) The control limit at 1.96 standard errors is $1,176 (1.96 x $600). This control limit would not
have specified June as a month to investigate.
(3) At l.96 standard errors, or $1,176, the only month that would have been investigated is July.
(4) Yes, there is the cost of diverting employees' time from one task to another, even though no
increase exists in incurr6d cost. The cost is an opportunity cost, the benefit that could have
been obtained if the time had been used for another purpose.
3-49.
(1) Budgeted cost for 50,000 fans:
$2,642.63 + ($0.10143 x 50,000) = $2,642.63 + $5,071.50 = $7,714.13
(2) There are several caveats about using the estimate from Part (1):
• Costs from 2004 may not be representative of 2005 costs. Prices and wages for clean-up
costs may have risen from the prior year.
• The data from 2004 has a range from 19,636 fans to 42,119 fans. Predicting costs for
50,000 fans is outside this range; and, therefore, the cost function obtained in the
regression output may not be valid outside the range of data used.
• Clean-up costs may be seasonal. Perhaps clean-up costs are different in April than in July.
• Perhaps cleaning up on opening day is different than cleaning up for any other game.

Solutions to Cases
CASE 3A – Jozef Plastics, Inc.
(1) Contribution margins for each product line for the past year:
Figures Mats Dishware

Selling price $12 $8 $40
Variable cost per unit 6 6 21
Contribution margin per unit $6 $2 $19
Contribution margin ratio 50 % 25 % 47.5 %
(2) Contribution margins for each product line for the next year:
Figures Mats Dishware

Selling price $10.00 $9.00 $ 40.00
Variable cost per unit 7.50 7.50 24.50
Contribution margin per unit $2.50 $1.50 $15.50
Contribution margin ratio 25 % 16.67 % 38.75 %
(3) Income statement for past year:

Jozef Plastics, Inc.
Income Statement
For Past Year
(000s Omitted)
Figures Mats Dishware Total

Units sold 550 1,200 350 2,100
Sales $6,600 $9,600 $14,000 $30,200
Variable cost 3,300 7,200 7,350 17,850
Contribution margin $3,300 $2,400 $6,650 $12,350
Fixed costs 2,885
Income before taxes $9,465
Income taxes at 40% 3,786
Net income $5,679
(4) Income statement for next year:

Jozef Plastics, Inc.
Income Statement
For Past Year
(000s Omitted)
Figures Mats Dishware Total

Units sold 440 1,200 385 2,025
Sales $4,400 $10,800 $15,400.00 $30,600.00
Variable cost 3,300 9,000 9,432.50 21,732.50
Contribution margin $1,100 $1,800 $5,967.50 $8,867.50
Fixed costs 3,288.60
Income before taxes $5,578.90
Income taxes at 40% 2,231.56
Net income $3,347.34

Fixed costs: ((($2,885 – $549) x 1.10) + $549 + $170) = $3,288.60
(5) No. The increase in dishware volume does not compensate for the decrease in contribution
margin resulting from the cost increases. In fact, with all of the changes made, the direct
contribution margin will be much lower next year.
Last year (350,000 x $19) $6,650,000

Next year (385,000 x $15.50) 5,967,500
Estimated decrease in variable contribution margin $682,500
Plus additional advertising expense 170,000
Decrease in direct contribution margin $852,500
(6) Break-even points:
Break-even point for past year:
$2,885,000 fixed cost  ($12,350,000  2,100,000) contribution margin per unit =
$2,885,000 fixed cost  $5.88 contribution margin per unit = 490,646 units
Break-even point for next year:
$3,288,600 fixed cost  ($8,867,500  2,025,000) contribution margin per unit =
$3,288,600 fixed cost  $4.379 contribution margin per unit = 750,993 units
The break-even point changed from the past year to next year for three reasons:
 Fixed costs will increase next year ($2,885,000 + $170,000 + $233,600).

 Contribution margin rates decreased for all products.
 Quantities sold were proportionately weighted toward the least profitable product, mats.
Observations:
The presentation should point out all the problems this company is having:
 Increased costs of materials

 Increased costs of labor
 Volume shifts
 Fixed increases that are very large
 No new business on the horizon
 Advertising that doesn’t even pay for itself
What should management do? It is not clear from the case, but something must be done:
 New products
 Efficiency push in production
 New sources of materials
 Move production
 Focus on what the company does well – which is what????

The presentations should at least point to the problems the company is having. You need to
point to what the numbers are saying, not just how you got the numbers!
CASE 3B – Mendel Paper Company
(1) Estimated contribution margins for the next fiscal quarter (000s omitted):
Computer Place Poster

Paper Napkins Mats Board Total
Number of units 30 120 45 80 275
Sales $420 $840 $540 $680 $2,480
Cost of goods sold:
Variable costs 225 612 270 360 1,467
Contribution margin $195 $228 $270 $320 $1,013
Unit revenue and costs information:

Paper Napkins Mats Board
Selling price $14.00 $ 7.00 $12.00 $ 8.50
Materials $ 6.00 $ 4.50 $ 3.60 $ 2.50
Variable factory overhead 1.50 .60 2.40 2.00
Unit variable cost $ 7.50 $ 5.10 $ 6.00 $ 4.50
Contribution margin per unit $ 6.50 $ 1.90 $ 6.00 $ 4.00
(2) Revised contribution margins:

Paper Napkins Mats Board Total
Number of units 35 120 45 80 280
Sales $490.00 $840 $540 $680 $2,550.00
Cost of goods sold:
Variable costs 297.50 612 288 360 1,557.50
Contribution margin $192.50 $228 $252 $320 $ 992.50
Unit revenue and costs information:

Paper Napkins Mats Board
Selling price $14.00 $ 7.00 $12.00 $ 8.50
Materials $ 7.00 $ 4.50 $ 4.00 $ 2.50
Variable factory overhead 1.50 .60 2.40 2.00
Unit variable cost $ 8.50 $ 5.10 $ 6.40 $ 4.50
Contribution margin per unit $ 5.50 $ 1.90 $ 5.60 $ 4.00
(3) (a) Breakeven point:
$1,013,000 contribution margin  275,000 units = $3.684 contribution margin per unit
$1,013,000 contribution margin  $2,480,000 sales = 40.8% contribution margin ratio
($420,000 + $118,000 fixed costs)  $3.684 per unit = 146,037 units
($420,000 + $118,000 fixed costs)  40.8% contribution margin ratio = $1,318,627 revenue

(b) Margin of safety:
($2,480,000 sales – $1,318,627 break-even revenue)  $2,480,000 sales = 46.83%
(4) (a) Breakeven point:
$992,500 contribution margin  280,000 units = $3.545 contribution margin per unit
$992,500 contribution margin  $2,550,000 sales = 38.9 contribution margin ratio
($378,000 + $118,000 fixed costs)  $3.545 per unit = 139,915 units
($378,000 + $118,000 fixed costs)  38.9% contribution margin ratio = $1,275,064 revenue
(b) Margin of safety:
($2,550,000 sales – $1,275,064 break-even revenue)  $2,550,000 = 50.0%
(5) The variable cost per hour for place mats is relatively high, but no reason for concern should
be present. The product line is contributing well and is able to cover the fixed costs allocated
to it. Unless a better product line can be substituted, the place mats should be retained.

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CHAPTER 3 SOLUTIONS

Solutions to Questions for Review and Discussion

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 3, Page 3-2

(2) Increase in break-even point:

New break-even sales: B-E Sales = ($120,000 + $36,000) + (0.6) B-E S

$36,000 ÷ ($50 x 0.4) = 1,800 units

Price x Units sold = FC + VC + Before Tax Profit

(2) Units to be sold to earn $60,000 after taxes:

Price x Units sold = FC + VC + Before Tax Profit

$20 (X) = $100,000 + $10 (X) + $100,000

Sales = FC + VC + Before Tax Profit

(4) Maximum variable costs per unit:

Sales = FC + VC + Before Tax Profit

FC = $6 per unit x 10,000 units = $60,000

(2) Change in break-even point:

Change in break-even point: 8,000 – 7,500 = 500 unit increase

P (12,000 units) = $180,000 + ($30 – $4) x 12,000 units + $90,000

(2) P (12,000) = ($180,000 + $20,000) + $30 (12,000) + $120,000

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 3, Page 3-6

New break-even point:

Change in break-even point:

(2) Current profit = $7.70 (60,000 units) – $200,000 – $4 (60,000 units)

New fixed costs = $8 (60,000) – $4.50 (60,000) – $22,000

(3) $8 (X) = $200,000 + $4.50 (X) + $22,000

or 8,182 units x €39 per unit = € 319,098 (difference due to rounding)

or 12,857 units x €39 per unit = €501,423 (difference due to rounding)

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 3, Page 3-7

Unit contribution margin = ($1.75 – $1.10) + $0.60 = $1.25

(2) Ticket price:

Let p = ticket price

Thus, the ticket price should be $1.82 (rounded up).

Contribution margin = 0.35 x $440,000 = $154,000

(2) Additional net income:

Additional contribution margin = 0.35 x $75,000 = $26,250

(3) Predicted additional net income or loss:

Original price = $440,000 ÷ 40,000 = $11

Hence the store manager’s suggestion would reduce profit by $51,600

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 3, Page 3-8

(2) Profit level:

Revenue (330 tables x $210 $69,300

(3) Tables needed for $11,000 profit objective:

3-12. Target sales in units:

$200 (X) = $180,000 + $120 (X) + [$60,000 ÷ (1 – 0.40)]

$560,000 = Fixed cost ÷ 35%

(2) Fee per rider:

Let p = fee per rider

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 3, Page 3-10

(2) Increased in revenue:

This year’s revenue needed M$7,333,333

(3) Margin of safety for last year:

(M$6,833,333 – M$3,800,000) ÷ M$6,833,333 = 44.39% margin of safety

Margin of safety for this year:

(M$7,333,333 – M$4,300,000) ÷ M$7,333,333 = 41.36% margin of safety

Last year had the better margin of safety.

3-15. Contribution margin ratio:

2008 revenue = $250,000 ÷ 1.25 = $200,000

2009 pretax income = $3,000 + $8,000 = $11,000

3-16. Sales volumes needed to achieve the target profit:

$50 (X) + $45 (Y) + ($38 x Z) – $315,000 = $190,000