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ACC560 Chapter 6

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ACC560 Chapter 6
E6-5 E6-10 E6-13 E6-14 P6-1A P6-5A

E6-5 Hall Company had sales in 2014 of $1,560,000 on 60,000 units. Variable costs totaled
$720,000, and fixed costs totaled $500,000.

A new raw material is available that will decrease the variable costs per unit by 25%
(or $3.00). However, to process the new raw material, fixed operating costs will increase
by $150,000. Management feels that one-half of the decline in the variable costs per unit
should be passed on to customers in the form of a sales price reduction. The marketing
department expects that this sales price reduction will result in a 5% increase in the number
of units sold.

Instructions
Prepare a projected CVP income statement for 2014 (a) assuming the changes have not
been made, and (b) assuming that changes are made as described.

E6-10 Personal Electronix sells iPads and iPods. The business is divided into two divisions
along product lines. CVP income statements for a recent quarter’s activity are presented
below.
Instructions
(a) Determine sales mix percentage and contribution margin ratio for each division.
(b) Calculate the company’s weighted-average contribution margin ratio.
(c) Calculate the company’s break-even point in dollars.
(d) Determine the sales level in dollars for each division at the break-even point.

E6-13 Billings Company manufactures and sells two products. Relevant per unit data
concerning each product follow.

Basic Deluxe 
Selling price $40$52
Variable costs $20$22
Machine hours 0.50.8

Instructions
(a) Compute the contribution margin per machine hour for each product.
(b) If 1,000 additional machine hours are available, which product should Billings manufacture?
(c) Prepare an analysis showing the total contribution margin if the additional hours are:
(1) Divided equally between the products.
(2) Allocated entirely to the product identified in part (b).

E6-14 The CVP income statements shown below are available for Armstrong Company
and Contador Company.

Armstrong Co. Contador Co. 
Sales Variable costs  500,000 500,000
Variable costs  240,000 50,000
Contribution margin 260,000 450,000
Fixed costs160000350000
Net income 100,000 100,000

Instructions
(a) Compute the degree of operating leverage for each company
(b) Assuming that sales revenue increases by 10%, prepare a variable costing income
statement for each company.

P6-1A Fredonia Inc. had a bad year in 2013. For the first time in its history, it operated at
a loss. The company’s income statement showed the following results from selling 80,000
units of product: net sales $2,000,000; total costs and expenses $1,740,000; and net loss
$135,000. Costs and expenses consisted of the following.

  Total   Variable   Fixed  
Cost of goods sold  1,468,000 950,000 518,000
Selling expenses  517,000 92,000 425,000
Administrative expenses  150,000 58,000 92,000
 2,135,000 1,100,000 1,035,000
Management is considering the following independent alternatives for 2014.
1. Increase unit selling price 25% with no change in costs and expenses.
2. Change the compensation of salespersons from fixed annual salaries totaling $200,000
to total salaries of $40,000 plus a 5% commission on net sales.
3. Purchase new high-tech factory machinery that will change the proportion between
variable and fixed cost of goods sold to 50:50.

Instructions
(a) Compute the break-even point in dollars for 2014.
(b) Compute the break-even point in dollars under each of the alternative courses of
action. (Round to the nearest dollar.) Which course of action do you recommend?

P6-5A The following CVP income statements are available for Viejo Company and Nuevo
Company.
Viejo Company
Nuevo Company
Sales  500,000 500,000
Variable costs  280,000 180,000
Contribution margin  220,000 320,000
Fixed costs 180,000 280,000
Net income 40,000 40,000

Instructions
(a) Compute the break-even point in dollars and the margin of safety ratio for each company.
(b) Compute the degree of operating leverage for each company
(c) Assuming that sales revenue increases by 20%, prepare a CVP income statement for each company.
(d) Assuming that sales revenue decreases by 20%, prepare a CVP income statement for each company.

1 comment:

  1. In P6-1A part b the break-even point is not the actual reason i think. No one suggested me a suitable action except http://www.solutioninn.com/fredonia-inc-had-a-bad-year-in-2013-for-the and then i submitted my assignment. My teacher appreciated me.

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