Solution Manual of Chapter 5 -
Managerial Accounting 15th
Edition (Ray H. Garrison, Eric
W. Noreen and Peter C.)
, lOMoARcPSD|58847208
Chapter 5
Cost-Volume-Profit Relationships
Solutions to Questions and the break-even point would occur at a
higher unit volume. (b) If the fixed cost
increased, then both the fixed cost line and the
5-1 The contribution margin (CM) ratio is total cost line would shift upward and the
the ratio of the total contribution margin to total breakeven point would occur at a higher unit
sales revenue. It can also be expressed as the volume. (c) If the variable cost increased, then
ratio of the contribution margin per unit to the the total cost line would rise more steeply and
selling price per unit. It is used in target profit the breakeven point would occur at a higher
and break-even analysis and can be used to unit volume.
quickly estimate the effect on profits of a
change in sales revenue. 5-7 The margin of safety is the excess of
budgeted (or actual) sales over the break-even
5-2 Incremental analysis focuses on the volume of sales. It is the amount by which sales
changes in revenues and costs that will result can drop before losses begin to be incurred.
from a particular action.
5-8 The sales mix is the relative proportions
5-3 All other things equal, Company B, with in which a company’s products are sold. The
its higher fixed costs and lower variable costs, usual assumption in cost-volume-profit analysis
will have a higher contribution margin ratio than is that the sales mix will not change.
Company A. Therefore, it will tend to realize a
larger increase in contribution margin and in 5-9 A higher break-even point and a lower
profits when sales increase. net operating income could result if the sales
mix shifted from high contribution margin
5-4 Operating leverage measures the products to low contribution margin products.
impact on net operating income of a given Such a shift would cause the average
percentage change in sales. The degree of contribution margin ratio in the company to
operating leverage at a given level of sales is decline, resulting in less total contribution
computed by dividing the contribution margin at margin for a given amount of sales. Thus, net
that level of sales by the net operating income operating income would decline. With a lower
at that level of sales. contribution margin ratio, the break-even point
would be higher because more sales would be
5-5 The break-even point is the level of required to cover the same amount of fixed
sales at which profits are zero. costs.
5-6 (a) If the selling price decreased, then
the total revenue line would rise less steeply,
1
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
, lOMoARcPSD|58847208
The Foundational 15
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:
Contribution margin per unit (a) ..................... $8.00 per unit
Increase in unit sales (b) ............................... 1 unit
Increase in net operating income (a) × (b) ..... $8.00
5. If sales decline to 900 units, the net operating would be computed as
follows:
Total Per Unit
Sales (900 units) .......... $18,000 $20.00
Variable expenses ......... 10,800 12.00
Contribution margin ...... 7,200 $ 8.00
Fixed expenses ............. 6,000
Net operating income .... $ 1,200
, lOMoARcPSD|58847208
The Foundational 15 (continued)
6. The new net operating income would be computed as follows:
Total Per Unit
Sales (900 units) .......... $19,800 $22.00
Variable expenses ......... 10,800 12.00
Contribution margin ...... 9,000 $10.00
Fixed expenses ............. 6,000
Net operating income .... $ 3,000
7. The new net operating income would be computed as follows:
Total Per Unit
Sales (1,250 units) ........ $25,000 $20.00
Variable expenses ......... 16,250 13.00
Contribution margin ...... 8,750 $ 7.00
Fixed expenses ............. 7,500
Net operating income .... $ 1,250
8. The equation method yields the break-even point in unit sales, Q, as
follows:
Profit = Unit CM × Q − Fixed expenses
$0 = ($20 − $12) × Q − $6,000
$0 = ($8) × Q − $6,000
$8Q = $6,000
Q = $6,000 ÷ $8
Q = 750 units
9. The equation method yields the dollar sales to break-even as follows:
Profit = CM ratio × Sales − Fixed expenses
$0 = 0.40 × Sales − $6,000
0.40 × Sales = $6,000 Sales
= $6,000 ÷ 0.40
Managerial Accounting 15th
Edition (Ray H. Garrison, Eric
W. Noreen and Peter C.)
, lOMoARcPSD|58847208
Chapter 5
Cost-Volume-Profit Relationships
Solutions to Questions and the break-even point would occur at a
higher unit volume. (b) If the fixed cost
increased, then both the fixed cost line and the
5-1 The contribution margin (CM) ratio is total cost line would shift upward and the
the ratio of the total contribution margin to total breakeven point would occur at a higher unit
sales revenue. It can also be expressed as the volume. (c) If the variable cost increased, then
ratio of the contribution margin per unit to the the total cost line would rise more steeply and
selling price per unit. It is used in target profit the breakeven point would occur at a higher
and break-even analysis and can be used to unit volume.
quickly estimate the effect on profits of a
change in sales revenue. 5-7 The margin of safety is the excess of
budgeted (or actual) sales over the break-even
5-2 Incremental analysis focuses on the volume of sales. It is the amount by which sales
changes in revenues and costs that will result can drop before losses begin to be incurred.
from a particular action.
5-8 The sales mix is the relative proportions
5-3 All other things equal, Company B, with in which a company’s products are sold. The
its higher fixed costs and lower variable costs, usual assumption in cost-volume-profit analysis
will have a higher contribution margin ratio than is that the sales mix will not change.
Company A. Therefore, it will tend to realize a
larger increase in contribution margin and in 5-9 A higher break-even point and a lower
profits when sales increase. net operating income could result if the sales
mix shifted from high contribution margin
5-4 Operating leverage measures the products to low contribution margin products.
impact on net operating income of a given Such a shift would cause the average
percentage change in sales. The degree of contribution margin ratio in the company to
operating leverage at a given level of sales is decline, resulting in less total contribution
computed by dividing the contribution margin at margin for a given amount of sales. Thus, net
that level of sales by the net operating income operating income would decline. With a lower
at that level of sales. contribution margin ratio, the break-even point
would be higher because more sales would be
5-5 The break-even point is the level of required to cover the same amount of fixed
sales at which profits are zero. costs.
5-6 (a) If the selling price decreased, then
the total revenue line would rise less steeply,
1
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
, lOMoARcPSD|58847208
The Foundational 15
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:
Contribution margin per unit (a) ..................... $8.00 per unit
Increase in unit sales (b) ............................... 1 unit
Increase in net operating income (a) × (b) ..... $8.00
5. If sales decline to 900 units, the net operating would be computed as
follows:
Total Per Unit
Sales (900 units) .......... $18,000 $20.00
Variable expenses ......... 10,800 12.00
Contribution margin ...... 7,200 $ 8.00
Fixed expenses ............. 6,000
Net operating income .... $ 1,200
, lOMoARcPSD|58847208
The Foundational 15 (continued)
6. The new net operating income would be computed as follows:
Total Per Unit
Sales (900 units) .......... $19,800 $22.00
Variable expenses ......... 10,800 12.00
Contribution margin ...... 9,000 $10.00
Fixed expenses ............. 6,000
Net operating income .... $ 3,000
7. The new net operating income would be computed as follows:
Total Per Unit
Sales (1,250 units) ........ $25,000 $20.00
Variable expenses ......... 16,250 13.00
Contribution margin ...... 8,750 $ 7.00
Fixed expenses ............. 7,500
Net operating income .... $ 1,250
8. The equation method yields the break-even point in unit sales, Q, as
follows:
Profit = Unit CM × Q − Fixed expenses
$0 = ($20 − $12) × Q − $6,000
$0 = ($8) × Q − $6,000
$8Q = $6,000
Q = $6,000 ÷ $8
Q = 750 units
9. The equation method yields the dollar sales to break-even as follows:
Profit = CM ratio × Sales − Fixed expenses
$0 = 0.40 × Sales − $6,000
0.40 × Sales = $6,000 Sales
= $6,000 ÷ 0.40
