Q37PGA - Horngren'S Financial And Managerial Accounting

Question

The budgets of four companies yield the following information: 

                                                                              Company 

                                                                Beach        Lake       Mountain      Valley 

Net Sales Revenue                             \( 1,615,000    \)(d)        \( 1,050,000    \)(j) 

Variable Costs                                      (a)               60,000       525,000     100,800 

Fixed Costs                                             (b)             232,000         260,000      (k) 

Operating Income (Loss)                     285,600          (e)                 (g)         31,500 

Units Sold                                               170,000       10,000             (h)           (l) 

Contribution Margin per Unit                   \( 3.80         \) (f)            \( 75.00    \) 9.00 

Contribution Margin Ratio                         (c)                  80%           (i)         30% 

Requirements 

1. Fill in the blanks for each missing value. (Round the contribution margin per unit to the nearest cent.) 

2. Which company has the lowest breakeven point in sales dollars? 

3. What causes the low breakeven point?   

 

Step-by-Step Solution

Answer

(1)(a) $969,000

(b) 360,000

(c) 40%

(d) $300,000

(e) $8,000

(f) $24

(g) $265,000

(h) 7,000

(i) 50%

(j) $144,000

(k) $11,700

(l) 4,800

(2) The lowest breakeven point in sales dollars equals $39,000.

(3) Lower contribution margin ratio and lower fixed costs

Step 1: Calculation of (a), (b), (c)

 

Net sales revenue	$1,615,000
Variable costs ($1,615,000 / 170,000)-$3.80 ) x 170,000	(a)$969,000
Fixed costs ($1,615,000-$969,000 -$285,600)	(b)$360,400
Operating income (Loss)	$285,600
Units sold	170,000
Contribution margin per unit	$3.80
Contribution margin ratio (($3.80 x 170,000) / $1,615,000)	(c)40%

                                                                           

Step 2: Calculation of (d), (e), (f)

 

Net sales revenue ($60,000 / (1-80%)	(d) $300,000
Variable costs	$60,000
Fixed costs	$232,000
Operating income (Loss) ($300,000-$60,000-$232,000)	(e) $8,000
Units sold	10,000
Contribution margin per unit ($300,000-$60,000)/10,000	(f)$24
Contribution margin ratio	80%

Step 3: Calculation of (g), (h), (i)

 

Net sales revenue	$1,050,000
Variable costs	$525,000
Fixed costs	$260,000
Operating income (Loss) ($1,050,000-$525,000-$260,000)	(g) $265,000
Units sold ($1,050,000-$525,000) / $75	(h) 7,000
Contribution margin per unit	$75
Contribution margin ratio ($1,050,000-$525,000)/$1,050,000)	(i)50%

Step 4: Calculation of (j), (k), (l)

 

Net sales revenue ($100,800 / (1-30%))	(j)$144,000
Variable costs	$100,800
Fixed costs ($144,000-$100,800-$31,500)	(k)$11,700
Operating income (Loss)	$31,500
Units sold ($144,000 - $100,800)/$9)	(l)4,800
Contribution margin per unit	$9
Contribution margin ratio ($144,000-$100,800)/$144,000)	30%

Step 4: Calculation of breakeven sales in dollars

$$\begin{gathered} \mathbf{Breakevensales}\mathbf{\left(}\mathbf{Beach}\mathbf{\right)}\mathbf{=}\frac{\mathbf{Fixedcosts}}{\mathbf{Contributionmarginratio}} \\ \mathbf{=}\frac{\mathbf{\$}\mathbf{360}\mathbf{,}\mathbf{400}}{\mathbf{40}\mathbf{\%}} \\ \mathbf{=}\mathbf{\$}\mathbf{901}\mathbf{,}\mathbf{000} \end{gathered}$$

$$\begin{gathered} \mathbf{Breakevensales}\mathbf{\left(}\mathbf{Lake}\mathbf{\right)}\mathbf{=}\frac{\mathbf{Fixedcosts}}{\mathbf{Contributionmarginratio}} \\ \mathbf{=}\frac{\mathbf{\$}\mathbf{232}\mathbf{,}\mathbf{000}}{\mathbf{80}\mathbf{\%}} \\ \mathbf{=}\mathbf{\$}\mathbf{290}\mathbf{,}\mathbf{000} \end{gathered}$$

$$\begin{gathered} \mathbf{Breakevensales}\mathbf{\left(}\mathbf{Mountain}\mathbf{\right)}\mathbf{=}\frac{\mathbf{Fixedcosts}}{\mathbf{Contributionmarginratio}} \\ \mathbf{=}\frac{\mathbf{\$}\mathbf{260}\mathbf{,}\mathbf{000}}{\mathbf{50}\mathbf{\%}} \\ \mathbf{=}\mathbf{\$}\mathbf{520}\mathbf{,}\mathbf{000} \end{gathered}$$

$$\begin{gathered} \mathbf{Breakevensales}\mathbf{\left(}\mathbf{Valley}\mathbf{\right)}\mathbf{=}\frac{\mathbf{Fixedcosts}}{\mathbf{Contributionmarginratio}} \\ \mathbf{=}\frac{\mathbf{\$}\mathbf{11}\mathbf{,}\mathbf{700}}{\mathbf{30}\mathbf{\%}} \\ \mathbf{=}\mathbf{\$}\mathbf{39}\mathbf{,}\mathbf{000} \end{gathered}$$

Valley has the lowest breakeven point that is $39,000.

 

Step 4: Reason for low breakeven point

 

Low contribution margin causes the low breakeven point. Valley has the lowest contribution margin ratio that is why it has the lowest breakeven point.