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Increase in CM (40 Units X $200) 8,000 $ Increase in Advertising Expenses 10,000 Decrease in Net Operating Income (2,000) $

The document contains 4 examples analyzing the profit impact of changes in sales volume, variable costs, fixed costs, and selling price for a bicycle company. The first example shows that while sales increased by increasing advertising, profit decreased due to higher fixed costs. The second found that higher variable costs from improved materials increased sales and profits. The third saw that lower price, higher advertising, and more sales increased profits. The fourth found that paying sales commissions rather than salaries boosted sales and profits while lowering fixed costs.

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Sakiful Islam
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57 views

Increase in CM (40 Units X $200) 8,000 $ Increase in Advertising Expenses 10,000 Decrease in Net Operating Income (2,000) $

The document contains 4 examples analyzing the profit impact of changes in sales volume, variable costs, fixed costs, and selling price for a bicycle company. The first example shows that while sales increased by increasing advertising, profit decreased due to higher fixed costs. The second found that higher variable costs from improved materials increased sales and profits. The third saw that lower price, higher advertising, and more sales increased profits. The fourth found that paying sales commissions rather than salaries boosted sales and profits while lowering fixed costs.

Uploaded by

Sakiful Islam
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Changes in Fixed Costs and Sales Volume

What is the profit impact if Racing Bicycle can increase unit sales from 500 to 540 by
increasing the monthly advertising budget by $10,000?

500 units 540 units


Sales $ 250,000 $ 270,000
Less: Variable expenses 150,000 162,000
Contribution margin 100,000 108,000
Less: Fixed expenses 80,000 90,000
Net operating income $ 20,000 $ 18,000

New Sales = $250,000+ (40x$500) = $270,000

Fixed Expenses (new) = $80,000 + $10,000 for advertising = $90,000

Sales increased by $20,000, but net operating income decreased by $2,000.

Alternative Method (short cut):

Increase in CM (40 units X $200) $ 8,000


Increase in advertising expenses 10,000
Decrease in net operating income $ (2,000)

1
Changes in Variable Costs and Sales Volume

What is the profit impact if Racing Bicycle can use higher quality raw materials, thus
increasing variable costs per unit by $10, to generate an increase in unit sales from 500 to
580?

500 units 580 units


Sales $ 250,000 $ 290,000
Less: Variable expenses 150,000 179,800
Contribution margin 100,000 110,200
Less: Fixed expenses 80,000 80,000
Net operating income $ 20,000 $ 30,200

Sales for 580 units = $250,000 + 80x$500 = $290,000

Variable Expenses (new) = 580 units x ($300+$10=$310) = $179,800

Sales increase by $40,000 and net operating income increases by $10,200.

Change in Fixed Costs, Sales Price, and Volume

What is the profit impact if RBC: (1) cuts its selling price $20 per unit, (2) increases its
advertising budget by $15,000 per month, and (3) increases sales from 500 to 650 units per
month?

500 units 650 units


Sales $ 250,000 $ 312,000
Less: Variable expenses 150,000 195,000
Contribution margin 100,000 117,000
Less: Fixed expenses 80,000 95,000
Net operating income $ 20,000 $ 22,000

New Sales = 650 units x $480 ($20 reduction) = $312,000

2
Fixed Expenses (new) = $80,000 + $15,000 additional for advertising expenses = $95,000

Sales increase by $62,000, fixed costs increase by $15,000, and net operating income
increases by $2,000.

Changes in Variable Costs, Fixed Costs, and Sales Volume

What is the profit impact if RBC: (1) pays a $15 sales commission per bike sold instead of
paying salespersons flat salaries that currently total $6,000 per month, and (2) increases
unit sales from 500 to 575 bikes?

500 units 575 units


Sales $ 250,000 $ 287,500
Less: Variable expenses 150,000 181,125
Contribution margin 100,000 106,375
Less: Fixed expenses 80,000 74,000
Net operating income $ 20,000 $ 32,375

Variable expenses (revised after changes) = 575 units × ($300+$15) = $181,125

Fixed expenses = $6,000 reduced as no longer paid fixed salary to staffs.

Sales increase by $37,500, fixed expenses decrease by $6,000, and net operating income
increases by $12,375.

Exercises: 5-1, 5-5 (1), 5-13, 5-23 (3)

Core Reading/Textbook

Garrison, Ray, H., Noreen, Eric, W., & Brewer, Peter, C. (2015). Managerial Accounting. [15th
Edition]. The McGraw-Hill, New York, USA.

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