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FIU ACG 3301 - Brief Exercise 6-1

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Brief Exercise 6-1 (20 minutes)1. The new income statement would be:Total Per UnitSales (10,100 units).... $353,500 $35.00Variable expenses....... 202,000 20.00Contribution margin.... 151,500 $15.00Fixed expenses........... 135,000Net operating income. $ 16,500You can get the same net operating income using the following approach:Original net operating income...............................$15,000Change in contribution margin (100 units × $15.00 per unit).................................... 1,500New net operating income....$16,5002. The new income statement would be:TotalPerUnitSales (9,900 units)........$346,500 $35.00Variable expenses......... 198,000 20.00Contribution margin...... 148,500 $15.00Fixed expenses............. 135,0006-1Net operating income. . . $ 13,500You can get the same net operating income using the following approach:Original net operating income....... $15,000 Change in contribution margin (-100 units × $15.00 per unit).... (1,500)New net operating income............ $13,500 6-2Brief Exercise 6-1 (continued)3. The new income statement would be:Total Per UnitSales (9,000 units).... $315,000 $35.00Variable expenses..... 180,000 20.00Contribution margin. . 135,000 $15.00Fixed expenses......... 135,000Net operating income................... $ 0Note: This is the company’s break-even point.6-3Brief Exercise 6-2 (30 minutes)1. The CVP graph can be plotted using the three steps outlined in the text. The graph appears on the next page.Step 1. Draw a line parallel to the volume axis to represent the total fixed expense. For this company, the total fixed expense is $24,000.Step 2. Choose some volume of sales and plot the point representing total expenses (fixed and variable) at the activity level you have selected. We’ll use the sales level of 8,000 units.Fixed expenses............................................. $ 24,000Variable expenses (8,000 units × $18 per unit)............................................................ 144,000Total expense................................................$168,000Step 3. Choose some volume of sales and plot the point representing total sales dollars at the activity level you have selected. We’ll use the sales level of 8,000 units again.Total sales revenue (8,000 units × $24 per unit)............................................................$192,0002. The break-even point is the point where the total sales revenue and the total expense lines intersect. This occurs at sales of 4,000 units. This can be verified as follows:Profit = Unit CM × Q − Fixed expenses= ($24 − $18) × 4,000 − $24,000= $6 × 4,000 − $24,000= $24,000− $24,000 = $06-4Brief Exercise 6-2 (continued)6-56-6CVP Graph$0$50,000$100,000$150,000$200,0000 2,000 4,000 6,000 8,000Volume in UnitsDollarsFixed Expense Total ExpenseTotal Sales RevenueBrief Exercise 6-3 (15 minutes)1. The profit graph is based on the following simple equation:Profit = Unit CM × Q − Fixed expensesProfit = ($16 − $11) × Q − $16,000Profit = $5 × Q − $16,000To plot the graph, select two different levels of sales such as Q=0 and Q=4,000. The profit at these two levels of sales are -$16,000 (=$5 × 0 − $16,000) and $4,000 (= $5 × 4,000 − $16,000).6-76-8Profit Graph-$20,000-$15,000-$10,000-$5,000$0$5,0000 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000Sales Volume in UnitsProfitBrief Exercise 6-3 (continued)2. Looking at the graph, the break-even point appears to be 3,200 units. This can be verified as follows:Profit = Unit CM × Q − Fixed expenses= $5 × Q − $16,000= $5 × 3,200 − $16,000= $16,000 − $16,000 = $06-9Brief Exercise 6-4 (10 minutes)1. The company’s contribution margin (CM) ratio is:Total sales......................... $200,000Total variable expenses..... 120,000= Total contribution margin............................ 80,000÷ Total sales..................... $200,000= CM ratio......................... 40%2. The change in net operating income from an increase in total sales of $1,000 can be estimated by using the CM ratio as follows:Change in total sales................................ $1,000× CM ratio................................................. 40 %= Estimated change in net operating income................................................... $ 400This computation can be verified as follows:Total sales...................$200,000÷ Total units sold........ 50,000 units= Selling price per unit........................... $4.00per unitIncrease in total sales. $1,000÷ Selling price per unit........................... $4.00per unit= Increase in unit 250 units6-10sales.........................Original total unit sales......................... 50,000 unitsNew total unit sales.... 50,250 unitsOriginal NewTotal unit sales............ 50,000 50,250Sales...........................$200,000$201,000Variable expenses....... 120,000 120,600Contribution margin.... 80,000 80,400Fixed expenses........... 65,000 65,000Net operating income. $ 15,000 $ 15,4006-11Brief Exercise 6-5 (20 minutes)1. The following table shows the effect of the proposed change in monthly advertising budget:SalesWithAdditionalCurrentAdvertisingSales BudgetDifferenceSales...........................$180,000 $189,000 $ 9,000Variable expenses....... 126,000 132,300 6,300Contribution margin.... 54,000 56,700 2,700Fixed expenses............ 30,000 35,000 5,000Net operating income.$ 24,000 $ 21,700 ($ 2,300)Assuming no other important factors need to be considered, the increase in the advertising budget should not be approved because it would lead to a decrease in net operating income of $2,300.Alternative Solution 1Expected total contribution margin:$189,000 × 30% CM ratio............. $56,700Present total contribution margin:$180,000 × 30% CM ratio............. 54,0006-12Incremental contribution margin..... 2,700Change in fixed expenses:Less incremental advertising expense........................................ 5,000Change in net operating income..... ($ 2,300)Alternative Solution 2Incremental contribution margin:$9,000 × 30% CM ratio................ $2,700Less incremental advertising expense........................................ 5,000Change in net operating income..... ($2,300)6-13Brief Exercise 6-5 (continued)2. The $2 increase in variable cost will cause the unit contribution margin to decrease


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FIU ACG 3301 - Brief Exercise 6-1

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