Essay on Foundational 15

10508 Words Oct 27th, 2015 43 Pages
Chapter 5
Cost-Volume-Profit Relationships
Solutions to Questions

5-1 The contribution margin (CM) ratio is the ratio of the total contribution margin to total sales revenue. It can also be expressed as the ratio of the contribution margin per unit to the selling price per unit. It is used in target profit and break-even analysis and can be used to quickly estimate the effect on profits of a change in sales revenue.
5-2 Incremental analysis focuses on the changes in revenues and costs that will result from a particular action.
5-3 All other things equal, Company B, with its higher fixed costs and lower variable costs, will have a higher contribution margin ratio than Company A. Therefore, it will tend to realize a larger increase
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5-9 A higher break-even point and a lower net operating income could result if the sales mix shifted from high contribution margin products to low contribution margin products. Such a shift would cause the average contribution margin ratio in the company to decline, resulting in less total contribution margin for a given amount of sales. Thus, net operating income would decline. With a lower contribution margin ratio, the break-even point would be higher because more sales would be required to cover the same amount of fixed costs.

The Foundational 15

1. The contribution margin per unit is calculated as follows:

Total contribution margin (a) | $8,000 | | Total units sold (b) | 1,000 | units | Contribution margin per unit (a) ÷ (b) | $8.00 | per unit |

The contribution margin per unit ($8) can also be derived by calculating the selling price per unit of $20 ($20,000 ÷ 1,000 units) and deducting the variable expense per unit of $12 ($12,000 ÷ 1,000 units).

2. The contribution margin ratio is calculated as follows: Total contribution margin (a) | $8,000 | Total sales (b) | $20,000 | Contribution margin ratio (a) ÷ (b) | 40% | 3. The variable expense ratio is calculated as follows: Total variable expenses (a) | $12,000 | Total sales (b) | $20,000 | Variable expense ratio (a) ÷ (b) | 60% | 4. The increase in net operating is calculated as follows:

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