Chapter 12 Managerial Accounting and Cost-Volume-Profit Relationships

Accounting - What the Numbers Mean, 12e (Marshall)
Chapter 12 Managerial Accounting and Cost-Volume-Profit Relationships
1) A
2) A
3) C
4) B
5) A
6) C
7) D
8) B
9) C
10) C
11) D
12) B
13) D
14) D
15) A
16) D
17) D
18) D
19) B
20) D
21) C
22) D
23) C
24) D
25) D
26) A
27) C
28) C
29) D
30) A
31) A
32) B
33) A
34) A
35) B
36) C
37) B
38) A
39) B
40) A
41) D
42) A
43) A Explanation: $30,000 × 35% = $10,500
44) B
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45) C Explanation: Total costs = (4,000 × $40) + $60,000 = $220,000; Revenue = 4,000 ×
$100 = $400,000; $400,000 – $220,000 = $180,000
46) C Explanation: Breakeven = FC/CM; $60,000/$100 – $40 = 1,000 units
47) D Explanation: Breakeven is FC/CM; $60,000/$100 – $40 = 1,000 units; 1,000 × $100 =
$100,000
48) B Explanation: CM = $100 – $40 = $60 per unit; $60/$100 selling price = 60%
49) C Explanation: CM × (4,000 – 3,400); ($100 – $40) × 600 units = $36,000 decrease
50) A Explanation: $98 – $40 = $58 new CM. New fixed costs would be $61,000. $61,000/$58
= 1,052 units. Original breakeven was FC/CM; $60,000/$100 – $40 = 1,000 units; The
company must sell an additional 52 units to break even.
51) D
52) B Explanation: $12,000/0.40 = $30,000.
53) D
54) D Explanation: $20,000/.40 = $50,000
55) D
56) C
57) D
58) A
59) D Explanation: CM = Total sales – Variable costs. $100,000 – $30,000 = $70,000.

Operating income = Total sales – Total costs. $100,000 – ($30,000 + $50,000) = $20,000.
60) D Explanation: CM = $100,000 – $30,000 = $70,000; $70,000/$100,000 = 70%
61) C Explanation: CM = 1 − 40% = 60%; $60,000 × 60% = $36,000
62) B Explanation: Current CM = $100,000 × 40% = $40,000. Added CM = $40,000 –

$20,000 = $20,000; ($40,000 + $20,000)/$140,000 total sales = 42.9%
63) D Explanation: Target sales = ($200,000 + $100,000)/CM; $300,000/60% = $500,000
64) B Explanation: Difference in fixed costs = $300,000 − $150,000 = $150,000. Difference in

variable costs = $75 − $50 = $25; $150,000/$25 = 6,000 units
2
65) B Explanation: Total cost – total variable cost = total fixed cost. $66,000 – (30,000 × $2
per unit) = $6,000 fixed cost.
66) D Explanation: Revenues – CGS / Revenues; $200,000 – $40,000 = $160,000;

$160,000/$200,000 = 80%
67) A Explanation:
Revenues – CGS – Operating Expenses; $200,000 – $40,000 – $120,000 = $40,000
68) D Explanation:
Revenues – Variable expenses = Contribution margin; CM = $200,000 × 50% =
$100,000; Variable expenses = $200,000 – $100,000 = $100,000
69) A Explanation: Revenues × CM Ratio – Fixed expenses; $200,000 × 50% = $100,000;

$100,000 – $60,000 = $40,000
70) C Explanation:
AVG CM Ratio = Total CM / Total Sales; Current = ($40,000 × 25%) + ($60,000 × 50%)
= $40,000/$100,000 = 40%;
Breakeven sales = FC / AVG CM Ratio; $700,000/40% = $1,750,000.
After shift = ($60,000 × 25%) + ($40,000 × 50%) = $35,000/$100,000 = 35%; Breakeven
sales = $700,000/35% = $2,000,000.
71) A Explanation:
Current CM = ($40,000 × 25%) + ($60,000 × 50%) = $40,000;
After shift CM = ($60,000 × 25%) + ($40,000 × 50%) = $35,000.
Since no change in FC, operating income will decrease ($40,000 − $35,000) by $5,000.
72) B Explanation: Indifference Point: [$500,000 + ($200 × 6,000 units)] = [ ? + ($100 × 6,000
units)]; Solving for ?: $500,000 + $1,200,000 = ? + $600,000; ? = $1,100,000
73) C Explanation: Indifference Point: [$500,000 + ($200 × 6,000 units)]

= [$980,000 + (? × 6,000 units)]; Solving for ?: $500,000 + $1,200,000 = $980,000 + (? ×
6,000); ? = $120 per unit
3
74) For each of the following costs, identify the cost behavior as variable, mixed, or fixed:
1. Wages of assembly line workers ________

2. President's salary ________
3. Plant utilities ________
4. Sales force commissions ________
5. Shipping costs ________
6. Factory rent ________
7. Research and development expenses ________
8. Property taxes ________
9. Advertising ________
10. Supplies used in production ________
Answer:
1. Wages of assembly line workers Variable
2. President's salary Fixed
3. Plant utilities Mixed
4. Sales force commissions Variable
5. Shipping costs Variable
6. Factory rent Fixed
7. Research and development expenses Mixed
8. Property taxes Fixed
9. Advertising Fixed
10. Supplies used in production Variable
75) XYZ Company incurred the following costs for the month of August when it observed an
activity level of 10,000 units.
Activity level in units 10,000

Variable costs $ 30,000
Fixed costs 50,000
Mixed costs 40,000
Total costs $ 120,000
During October, the activity level was 16,000 units, and the total costs incurred were $150,000.
a. Calculate the variable costs, fixed costs, and mixed costs incurred during October.
b. Use the high-low method to calculate the cost formula for mixed costs.
c. If the activity level were expected to be 13,800 units for the month of December, what amount
of total costs would be expected?
4
Answer:
a.
First, calculate variable cost per unit in August and use the same per unit cost for October.
Second, fixed cost will be the same for each month. Third, with knowledge of total costs for
October, and variable and fixed costs for October, solve for mixed costs for October.
August October
Activity 10,000 units 16,000 units
Variable ($30,000/10,000 units = $3 per
$ 30,000 $ 48,000
unit)
Fixed (same total amount each month) 50,000 50,000
Mixed (Total costs - (Variable + Fixed)) 40,000 52,000
Total $ 120,000 $ 150,000
b.
Variable rate = (High $ - Low $)/(High units - Low units)
= ($52,000 - $40,000)/(16,000 - 10,000)
= $12,000/6,000 = $2.00 per unit
Total mixed cost = Fixed cost + Variable cost
$52,000 = ? + ($2.00 × 16,000 units)
? = $20,000
Cost formula = Fixed cost + (Variable rate × Volume)
= $20,000 + $2.00 per unit
c.
Expected total cost = Fixed cost + (Variable rate × Volume)
= $70,000 + ($5.00 per unit × 13,800)
= $70,000 + 69,000
= $139,000
5
76) During the months of January through June, the following total utility costs were paid at
various production volumes:
Month Total Utility Cost Total Production Volume

January $ 10,000 32,000 units
February 14,000 52,000 units
March 16,000 64,000 units
April 12,000 40,000 units
May 8,000 24,000 units
June 20,000 72,000 units
a. Use the high-low method to calculate the cost formula utility costs.
b. If the production volume were expected to be 50,000 units for the month of July, what amount
of total costs would be expected?
Answer:
a.
Variable rate = (High $ − Low $)/(High units − Low units)
= ($20,000 − $8,000)/(72,000 − 24,000)
= $12,000/48,000 = $0.25 per unit
Total cost = Total cost − Variable cost
= $20,000 − ($0.25 × 72,000 units)
= $2,000
= (or)
= $8,000 − ($0.25 × 24,000 units)
= $2,000
Cost formula = Fixed cost + (Variable rate × Production Volume)
= $2,000 + $0.25 per unit × Production Volume
b.
Expected total cost = Fixed cost + (Variable rate × Production Volume)
= $2,000 + ($0.25 per unit × 50,000 units)
= $14,500
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79) Presented below is the income statement for Breckenridge Farms for the month of October:
Sales $ 220,000
Cost of goods sold (114,000 )
Gross profit $ 106,000
Operating expenses (76,000 )
Operating income $ 30,000
Based on an analysis of cost behavior patterns, it has been determined that the company's
contribution margin ratio is 30%.
(a.) Rearrange the income statement to the contribution margin format.

(b.) If sales increase by 20 percent, what will be the firm's operating income?
(c.) Calculate the amount of revenue required for Breckenridge Farms to break even.
Answer:
(a.)
Sales $ 220,000 100 %
Variable expenses (154,000 ) 70 %
Contribution margin $ 66,000 30 %
Fixed expenses (36,000 )
(b.)
20 percent increase in sales = $ 44,000 (20% × 220,000)
Contribution margin ratio .30
Increase in contribution margin $ 13,200
Previous operating income 30,000
Adjusted operating income $ 43,200
The increase in operating income is the same as the increase in contribution margin because
fixed expenses do not change.
(c.)
At breakeven, contribution margin = fixed expenses
Therefore, breakeven sales = fixed expenses/contribution margin ratio
Breakeven sales = $36,000/.30 = $120,000
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80) Krultz Corp. has annual revenues of $760,000, an average contribution margin ratio of 30
percent, and fixed expenses of $75,000.
(a.) Management is considering adding a new product to the company's product line. The new
item will have $21 of variable costs per unit. Calculate the selling price that will be required if
this product is not to affect the average contribution margin ratio.
(b.) If the new product adds an additional $36,000 to Krultz's fixed expenses, how many units of
the new product must be sold to break even on the new product?
(c.) If 12,000 units of the new product could be sold at a price of $32 per unit, and the company's
other business did not change, calculate Krultz's total operating income and average contribution
margin ratio.
Answer:
(a.)
Per unit × Volume = Total%
Revenue 100 %
Variable Exp. $ 21 70 %
Cont. Margin 30 %
Variable expense ratio = 100% – 30% = 70%

Selling price = VE/VE ratio = $21.00/.70 = $30.00
(b.)
Per unit × Volume = Total
Revenue $ 30.00
Variable Exp. $ 21.00
Cont. Margin $ 9.00 ? = $ 36,000

Fixed Exp. 36,000
Operating Inc. $ 0
Breakeven in units = Fixed expenses/CM per unit = $36,000/$9 = 4,000 units
(c.)
Existing
New Product Products Total
1,144,0
Rev $ 32.00 × 12,000 = $ 384,000 $ 760,000 $
00
VE 21.00
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CM $ 11.00 × 12,000 132,000 228,000 30 % 360,000
FE 36,000 75,000 111,000
Op
$ 96,000 $ 153,000 $ 249,000
Inc.
Average CM ratio = Total CM/Total Sales = $360,000/$1,144,000 = 31.5% (rounded)
81) SoundPro, Inc. produces amplifiers for electric guitars. The firm's income statement showed
the following:

Revenues (16,000 units) $ 960,000 100 %
Variable expenses (672,000 ) 70 %
Contribution margin $ 288,000 30 %
An automated machine has been developed that can produce several components of the
amplifiers. If the machine is purchased, fixed expenses will increase to $526,500 per year. The
firm's production capacity will increase, which is expected to result in a 10 percent increase in
sales volume. It is also estimated that the variable expense ratio will be reduced to half of what it
is now.
(a.) Calculate the firm's current contribution margin per unit and breakeven point in units.
(b.) Calculate the firm's contribution margin per unit and breakeven point in terms of units if the
new machine is purchased.
(c.) Calculate the firm's operating income assuming that the new machine is purchased.
(d.) Do you believe that management of SoundPro, Inc. should purchase the new machine?
Explain your answer.
Answer:
(a.)
CM per unit = $288,000/16,000 = $18
Breakeven units = Fixed expenses/CM per unit
= $225,000/$18 = 12,500 units
(b.)
Selling price per unit = $960,000/16,000 = $60
Variable expenses per unit = $672,000/16,000 = $42
Variable expense ratio = $42/$60 = 70%
9
If the new machine is purchased:
Sales volume 16,000 × 110% = 17,600
Variable expense ratio = 70%/2 = 35%
Variable expenses per unit = $60 × 35% = $21
CM per unit = $60 - $21 = $39
Breakeven units = Fixed expenses/CM per unit
= $526,500/$39 = 13,500 units
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(c.)

Revenues (17,600 units × $60) $ 1,056,000
Variable expenses (17,600 × $21) (369,600 )
Contribution margin (17,600 × $39) $ 686,400
(d.)
If the new machine is purchased, SoundPro Inc. will have more operating leverage, which will
increase the risk associated with the firm. Based on management's estimates, the breakeven point
would increase but operating income would also increase. Thus, the machine should be
purchased. However, if less sales growth occurs than is expected, then the increase in fixed costs
and resulting increase in the breakeven point might not be offset by large increases in
contribution margin. Accordingly, it would not be wise to purchase the machine this year, unless
the estimated sales growth is based on highly reliable information.
82) Obed Corp. makes three models of high performance cross country ski machines. Current
operating data are summarized below:
MySki YourSki OurSki

Selling Price/Unit $ 400 $ 500 $ 250
Variable Cost/Unit $ 100 $ 200 $ 150
Monthly Sales Volume 600 400 500
Fixed expenses per month total $185,820.
(a) Calculate the contribution margin ratio for each product.
(b) Calculate the firm's overall contribution margin ratio.
(c) Calculate the firm's breakeven point in sales dollar.
(d) Calculate the firm's operating income.
(e) Management is considering the elimination of the OurSki model due to low sales volume. As
a result, total fixed expenses can be reduced by $60,000 per month. Assuming that this change
would not affect the other models, would you recommend the elimination of the OurSki model?
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Answer:
(a)
Selling Price/Unit $ 400 $ 500 $ 250
Variable Cost/Unit 100 200 150
Contrib. Margin $ 300 $ 300 $ 100
Contrib. Margin Ratio 75 % 60 % 40 %
Ratio
(b)
Sales Volume 600 units 400 units 500 units
Sales $ 240,000 $ 200,000 $ 125,000
VC 60,000 80,000 75,000
Contr. Margin $ 180,000 $ 120,000 $ 50,000
Total Sales $565,000

Total Contribution Margin $350,000
Overall Contribution Margin Ratio

= Total CM/Total Sales
$350,000/$565,000 = 61.94%
(c)
Breakeven point = Fixed expenses/overall CM ratio; $185,820/.6194 = $300,000
(d)
Operating Income = Total Contribution Margin – Fixed Costs
$350,000 – 185,820 = $164,180
(e)
The OurSki should be eliminated, because the contribution margin foregone would be less than
the reduction in fixed expenses as follows:

Benefit: Reduction in fixed expenses $ 60,000
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Cost: CM foregone ($100 × 500) 50,000
Net benefit of eliminating OurSki $ 10,000
13
83) Management of ABC Company is considering new production robotics to replace some
current manual labor operations for one of their product lines. ABC's current cost structure for
this product line consists of variable expenses of $40 per unit and fixed expenses totaling
$86,400 per month. If the robotics were installed, variable expenses would drop to $28 per unit,
but fixed expenses would increase to $135,600 per month.
(a.) Define the term indifference point.

Calculate the indifference point between the alternative cost structures for ABC
(b.) Company's product line.
Explain how ABC's management would use the indifference point in the
(c.) decision to replace the manual operations with the new production robotics.
Answer:
(a.)
An indifference point is the level of activity that produces the same amount of total cost from
alternative cost structures when the two are compared.

(b.)
Manual labor cost structure = Robotics cost structure
Fixed costs + (Variable cost per unit × Fixed costs + (Variable cost per unit ×
=
Activity) Activity)
$86,400 + ($40 × Activity) = $135,600 + ($28 × Activity)
($12 × Activity) = $49,200
Activity = 4,100 units
(c.)
Knowing the activity level of the indifference point will allow management to determine which
cost structure will provide higher profitability. If ABC is expected to operate at less than 4,100
units for this product line, the current manual labor cost structure will be more profitable because
total costs will be lower than the robotics cost structure. If activity is expected to be greater than
4,100 units, the new production robotics cost structure will be more profitable because total costs
will be lower than the current manual labor cost structure. If activity were expected to be exactly
4,100 units, management would be indifferent because both cost structures would produce the
exact same total cost and, therefore, the exact same profit.
14
84) Pineapple Corp. has annual revenues of $600,000, fixed expenses of $200,000, and an
average contribution margin ratio of 30%.
(a) Management is considering adding a new product to the company's product line. The new
item will have $14.00 of variable costs per unit. Calculate the selling price that will be required
for this product to maintain the 30% average contribution margin ratio on current sales.
(b) If the new product adds an additional $63,000 to Pineapple's fixed expenses, how many units
of the new product must be sold at the price calculated in part (a) in order to break even on the
new product?
(c) If 25,000 units of the new product could be sold at a price of $18.00 per unit, and the
company's other business did not change, calculate Pineapple's total operating income and
average contribution margin ratio.
Answer:
(a)
Per unit %
Revenue $ ? 100 %
Variable Expense 14.00 70 %
Contribution Margin $ ? 30 %
Variable expense ratio = 100% – 30% = 70%
Selling price = Variable expenses/Variable expense ratio = $14.00/70% = $20.00
(b)
Per unit %
Revenue $ 20.00 100 %
Variable Expense 14.00 70 %
Contribution Margin $ 6.00 30 %
Breakeven in units = Fixed expenses/Contribution margin per unit = $63,000/$6.00
= 10,500 units
(c)
Existing
New Product Products Total
Revenue $ 18.00 × 25,000 = $ 450,000 $ 600,000 $ 1,050,000
Variable
14.00
Expense
Contribution
$ 4.00 × 25,000 $ 100,000 180,000 = 30 % 280,000
Margin
Fixed
(63,000 ) (200,000 ) (263,000 )
Expense
Operating
$ 37,000 $ (20,000 ) $ 17,000
Income (loss)
Average contribution margin ratio = Total contribution margin/Total sales =
$280,000/$1,050,000 = 27% rounded
15

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What is an indifference point and how is it used in managerial decision making?

What is an indifference point and how is it used in managerial decision making?

How do you calculate the break-even point for a new product?

How do you calculate the break-even point for a new product?

Accounting - What the Numbers Mean, 12e (Marshall)

Chapter 12 Managerial Accounting and Cost-Volume-Profit Relationships

46) C Explanation: Breakeven = FC/CM; $60,000/$100 – $40 = 1,000 units

52) B Explanation: $12,000/0.40 = $30,000.

54) D Explanation: $20,000/.40 = $50,000

59) D Explanation: CM = Total sales – Variable costs. $100,000 – $30,000 = $70,000.

60) D Explanation: CM = $100,000 – $30,000 = $70,000; $70,000/$100,000 = 70%

61) C Explanation: CM = 1 − 40% = 60%; $60,000 × 60% = $36,000

62) B Explanation: Current CM = $100,000 × 40% = $40,000. Added CM = $40,000 –

63) D Explanation: Target sales = ($200,000 + $100,000)/CM; $300,000/60% = $500,000

64) B Explanation: Difference in fixed costs = $300,000 − $150,000 = $150,000. Difference in

66) D Explanation: Revenues – CGS / Revenues; $200,000 – $40,000 = $160,000;

69) A Explanation: Revenues × CM Ratio – Fixed expenses; $200,000 × 50% = $100,000;

73) C Explanation: Indifference Point: [$500,000 + ($200 × 6,000 units)]

1. Wages of assembly line workers ________

Activity level in units 10,000

Mixed (Total costs - (Variable + Fixed)) 40,000 52,000

Total $ 120,000 $ 150,000

Month Total Utility Cost Total Production Volume

(a.) Rearrange the income statement to the contribution margin format.

Variable expense ratio = 100% – 30% = 70%

Variable Exp. $ 21.00

Cont. Margin $ 9.00 ? = $ 36,000

FE 36,000 75,000 111,000

MySki YourSki OurSki

Variable Cost/Unit $ 100 $ 200 $ 150

Monthly Sales Volume 600 400 500

Fixed expenses per month total $185,820.

(a) Calculate the contribution margin ratio for each product.

(b) Calculate the firm's overall contribution margin ratio.

(c) Calculate the firm's breakeven point in sales dollar.

(d) Calculate the firm's operating income.

Variable Cost/Unit 100 200 150

Contrib. Margin $ 300 $ 300 $ 100

Contrib. Margin Ratio 75 % 60 % 40 %

Sales $ 240,000 $ 200,000 $ 125,000

VC 60,000 80,000 75,000

Contr. Margin $ 180,000 $ 120,000 $ 50,000

Total Sales $565,000

Overall Contribution Margin Ratio

(a.) Define the term indifference point.

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