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Exercise 6-5 (20 Minutes) : Per Unit Percent of Sales

This document contains multiple exercises analyzing break-even points and the effects of changes in sales, costs, and commission structures for a company. Exercise 1 calculates break-even points in units and sales dollars using the equation method. Exercise 2 analyzes how changes in sales affect operating income based on the company's degree of operating leverage. Exercise 3 constructs an income statement reflecting a sales increase. Subsequent exercises calculate break-even points, contribution margins, and degrees of operating leverage under different commission and cost structures.

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Prasoon Sri
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42 views11 pages

Exercise 6-5 (20 Minutes) : Per Unit Percent of Sales

This document contains multiple exercises analyzing break-even points and the effects of changes in sales, costs, and commission structures for a company. Exercise 1 calculates break-even points in units and sales dollars using the equation method. Exercise 2 analyzes how changes in sales affect operating income based on the company's degree of operating leverage. Exercise 3 constructs an income statement reflecting a sales increase. Subsequent exercises calculate break-even points, contribution margins, and degrees of operating leverage under different commission and cost structures.

Uploaded by

Prasoon Sri
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Exercise 6-5 (20 minutes)

1. The equation method yields the break-even point in unit sales, Q, as follows:

Sales = Variable expenses + Fixed expenses + Profits


$15Q = $12Q + $4,200 + $0
$3Q = $4,200
Q = $4,200 $3 per basket
Q = 1,400 baskets

2. The equation method can be used to compute the break-even point in sales
dollars, X, as follows:

Per Unit
Sales price

Percent of
Sales

$15

100%

12

80%

$3

20%

Less variable expenses


Contribution margin

Sales = Variable expenses + Fixed expenses + Profits


X = 0.80X + $4,200 + $0
0.20X = $4,200
X = $4,200 0.20
X = $21,000

3. The contribution margin method gives an answer that is identical to the


equation method for the break-even point in unit sales:

Break-even point in units sold = Fixed expenses Unit CM


= $4,200 $3 per basket
= 1,400 baskets

4. The contribution margin method also gives an answer that is identical to the
equation method for the break-even point in dollar sales:

Break-even point in sales dollars = Fixed expenses CM ratio


= $4,200 0.20
= $21,000

Exercise 6-9

page 264

1. The companys degree of operating leverage would be computed as follows:

Contribution margin....................... $48,000


Net operating income................. $10,000
Degree of operating leverage........

4.8

2. A 5% increase in sales should result in a 24% increase in net operating


income, computed as follows:

Degree of operating leverage.....................................................

4.8

Percent increase in sales.........................................................

5%

Estimated percent increase in net operating income..................

24%

3. The new income statement reflecting the change in sales would be:

Amount
Sales

Percent of
Sales

$84,000

100%

Less variable expenses

33,600

40%

Contribution margin

50,400

60%

Less fixed expenses

38,000

Net operating income

$12,400

Net operating income reflecting change in sales................... $12,400

Original net operating income............................................... $10,000


Percent change in net operating income...............................

24%

Exercise 6 -10 page 264

1. The overall contribution margin ratio can be computed as follows:

Overall CM ratio =
=

Total contribution margin


Total sales
$30,000
=30%
$100,000

2. The overall break-even point in sales dollars can be computed as follows:

Total fixed expenses


Overall CM ratio

Overall break-even

$24,000
30%
= $80,000

3. To construct the required income statement, we must first determine the


relative sales mix for the two products:

Claimjumper
Original dollar sales
Percent of total
Sales at break-even

Sales

$30,000

Makeover

Total

$70,000

$100,000

70%

100%

$24,000

$56,000

$80,000

Claimjumper

Makeover

Total

$24,000

$56,000

$80,000

30%

Less variable expenses*


Contribution margin
Less fixed expenses
Net operating income

16,000

40,000

56,000

$ 8,000

$16,000

24,000
24,000
$

*Claimjumper variable expenses: ($24,000/$30,000) $20,000 = $16,000


Makeover variable expenses: ($56,000/$70,000) $50,000 = $40,000

Exercise : 6 33 Page 276

1. When the income before taxes is zero, income taxes will also
be zero and net income will be zero. Therefore, the breakeven calculations can be based on the income before taxes.

a. Break-even point in dollar sales if the commission remains


15%.

Fixed costs $4,800,000


=
=$12,000,000
CM ratio
0.40
b. Break-even point in dollar sales if the commission
increases to 20%.

Fixed costs $4,800,000


=
=$13,714,286
CM ratio
0.35
c. Break-even point in dollar sales if the company employs its
own sales force.
Fixed costs $7,125,000
=
=$15,000,000
CM ratio
0.475

2. In order to generate a $1,120,000 net income, the company


must generate $1,600,000 in income before taxes.
Therefore,

Dollar sales to= Fixed expenses + Target income before taxes


attain target
CM ratio
=

$4,800,000 + $1,600,000 $6,400,000


=
= $18,285,714
0.35
0.35

3. To determine the volume of sales at which net income would


be equal under either the 20% commission plan or the
company sales force plan, we find the volume of sales where
costs before income taxes under the two plans are equal.
X = Total sales revenue
0.65X +
$4,800,000 = 0.525X + $7,125,000
0.125X = $2,325,000
X = $2,325,000 0.125
X = $18,600,000

Thus, at a sales level of $18,600,000 either plan would yield


the same income before taxes and net income. Below this
sales level, the commission plan would yield the largest net
income; above this sales level, the sales force plan would
yield the largest net income.

4. a., b., and c.


15%
Commissio
n

20%
Commissi
on

Own
Sales
Force

Contribution margin (Part 1)


(x)

$6,400,000 $5,600,000 $7,600,000

Income before taxes (Part 1)


(y)

$1,600,000 $ 800,000 $ 475,000

Degree of operating
leverage:
(x) (y)

16

5. We would continue to use the sales agents for at least one


more year, and possibly for two more years. The reasons are
as follows:
First, use of the sales agents would have a less dramatic
effect on net income.
Second, use of the sales agents for at least one more year
would give the company more time to hire competent
people and get the sales group organized.
Third, the sales force plan doesnt become more desirable
than the use of sales agents until the company reaches
sales of $18,600,000 a year. This level probably wont be
reached for at least one more year, and possibly two

years.
Fourth, the sales force plan will be highly leveraged since
it will greatly increase fixed costs (and decrease variable
costs). One or two years from now, when sales have
reached the $18,600,000 level, the company can benefit
greatly from this leverage. For the moment, profits will be
greater and risks will be less by staying with the agents,
even at the higher 20% commission rate.

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