College of Management

AE 108 (Cost Accounting and Control)

Chapter 9 Assignment – Answer Key

1. The Kringel Company provides the following information:

Sales (200,000 units) £500,000
Manufacturing costs:
Variable 170,000
Fixed 30,000
Selling and administrative costs:
Variable 80,000
Fixed 20,000
What is the break-even point in units for Kringel?
Answer:

BEP = FC / CMU
= 30,000 + 20,000 / [500,000 – (170,000 + 80,000) / 200,000] = 50,000 / 1.25 = 40,000 units

2. Lewis Production Company had the following projected information for 2011:
Selling price per unit £150
Variable cost per unit £90
Total fixed costs £300,000
What is the break-even point in units?
Answer:

BEP = FC / CMU
= 300,000 / (150 – 90) = = 5,000 units

3. Refer to problem 2. What is the profit when one unit more than the break-even point is sold?
Answer:

Profit = CMU x Unit Sold = 60 x 1 = 60

4. Refer to problem 2. What is the contribution margin ratio?

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Answer:
CMR = CM / SALES = 60 / 150 = 40%

5. Sarah Smith, a sole proprietor, has the following projected figures for next year:
Selling price per unit £150.00
Contribution margin per unit £45.00
Total fixed costs £630,000
What is the break-even point in monetary terms?
Answer:

BEP = FC / CMR = 630,000 / [ (45 / 150] = 2,100,000

6. Refer to problem 5. How many units must be sold to obtain a target before-tax profit of £270,000?
Answer:
Required Units = CM + Target Profit / CMU = 630,000 + 270,000 / 45 = 20,000 units

7. Refer to problem 5. What selling price per unit is needed to obtain a before-tax profit of £270,000 at a volume of 4,000
units?

Answer:

Selling Price = (Desired Profit + FC + VC) / number of units

VC is constant per unit = 150 – 45 = 105
Selling Price = [270,000 + 630,000 + (4,000 x 105)] / 4,000 units
= 1,320, 000 / 4,000 units
= 330

8. Dirth Company sells only one product at a regular price of £7.50 per unit. Variable expenses are 60 per cent of sales
and fixed expenses are £30,000. Management has decided to decrease the selling price to £6.00 in hopes of increasing its
volume of sales.

What is the monetary sales level required to break even at the old price of £7.50?
Answer:

BEP in Sales = FC / CMR = 30,000 / [(7.50 * 40%) / 7.5 ] = 75,000

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9. Refer to problem 8. What sales pound level is needed to obtain a before-tax profit of £60,000 when the selling price is
£6.00 per unit?
Answer:

Desired Sales = (Desired Profit + FC) / CMR

VC is constant per unit = 7.50 x 60% = 4.50
CMR = [(SP – VC / U) / SP] = 6 – 4.50 = 1.50 / 6 = 25%
Desired Sales = (60,000 + 30,000) / 25%
= 360,000

10. Refer to problem 8. What is the new break-even point in units for Dirth Company when the selling price is £6.00?
Answer:

BEP in Units = FC / CMU = 30,000 / 1.5 = 20,000 units

11. Information about the Harmon Company's two products includes:

Product X Product Y
Unit selling price £9.00 £9.00
Unit variable costs:
Manufacturing £5.25 £6.75
Selling __.75 __.75
Total £6.00 £7.50

Monthly fixed costs are as follows:

Manufacturing £ 82,500
Selling and administrative __45,000
Total £127,500
What is the total monthly sales volume in units required to break even when the sales mix in units is 70 per cent Product
X and 30 per cent Product Y?
Answer:

Product X CM = 9 – 6 = 3 x 70% = 2.10

Product Y CM = 9 – 7.50 = 1.50 x 30% = 0.45
Total CM 2.55

BEP in Units = FC / CMU = 127,500 / 2.55 = 50,000 units

12. Refer to problem 11. If the sales mix in units is 50 per cent Product X and 50 per cent Product Y, the monthly break-
even total monetary sales is
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Agricultural Colleges Association of the Philippines (ACAP)
Answer:

Product X CM = 9 – 6 = 3 x 50% = 1.50

Product Y CM = 9 – 7.50 = 1.50 x 50% = 0.75
Total CM 2.55 CMR = 2.55 / 18 = 12.50%

BEP in Sales = FC / CMU = 127,500 / 2.25 = 56,667 units x 9 = 510,000

13. Product 1 has a contribution margin of £6.00 per unit, and Product 2 has a contribution margin of £7.50 per unit. Total
fixed costs are £300,000. Sales mix and total volume varies from one period to another. Which of the following is TRUE?
a. At a sales volume in excess of 25,000 units of 1 and 25,000 units of 2, operations will be profitable.
b. The ratio of net profit to total sales for 2 will be larger than the ratio of net profit to total sales for 1.
c. The contribution margin per unit of direct materials is lower for 1 than for 2.
d. The ratio of contribution to total sales always will be larger for 1 than for 2.

Answer:
Ave. CM = 6 + 7.50 = 13.50
BEP in Units = FC / CMU = 300,000 / 13.50 = 22,222 units

Since BEP in units is 22, 222, it means that any sales in excess of it will yield a profit. Based on the above
statements, therefore letter A statements is true.

14. The following data pertain to the three products produced by Alberts Ltd.:
A B C
Selling price per unit £5.00 £7.00 £6.00
Variable costs per unit _4.00 _5.00 _3.00
Contribution margin per unit £1.00 £2.00 £3.00

Fixed costs are £90,000 per month.

Sixty per cent of all units sold are Product A, 30 per cent are Product B, and 10 per cent are Product C.

What is the monthly break-even point for total units?

Answer:

Ave. CM
Product A = 1 x 60% = .60
Product B = 2 x 30% = .60
Product C = 3 x 10% = .30
1.50
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BEP in units = FC / CMU = 90,000 / 1.50 = 60,000 units

15. The income statement for Thomas Manufacturing Company for 2011 is as follows:
Sales (10,000 units) £120,000
Variable expenses __72,000
Contribution margin £ 48,000
Fixed expenses __36,000
Operating income £ 12,000
If sales increase by £60,000, what will happen to profit?
Answer:

Sales per Unit = 120,000 / 10,000 = 12

CMU = 48,000 / 10,000 = 4.80
CMR = 4.80 / 12 = 40%

Increase in Profit = 60,000 x 40% = 24,000

16. Refer to problem 15. What is the contribution margin per unit?
Answer:

Sales per Unit = 120,000 / 10,000 = 12

CMU = 48,000 / 10,000 = 4.80

17. Camp Gordon has annual fixed operating costs of £150,000 and variable cost of £550 per camper. Total fees charged
to campers amount to £500 each. The camp expects 350 campers next summer. Projected government grants are £95,000.
How much must Camp Gordon raise from other sources to break even?
Answer:

Sales – (500 x 350) 175,000

VC - (550 x 350) 192,500
CM (17,500)
FC (150,000)
Net Loss (167,500)
Gov’t Grant 95,000
Fund Needed 72,500

18. Urban Company had the following information:

Activity Driver Unit Variable Cost Level of Activity Driver
Units sold £ 20 --
Setups 1,200 60
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Engineering hours 52 1,500

Other data:
Total fixed costs (traditional) £600,000
Total fixed costs (ABC) £300,000
Unit selling price £60

Suppose Urban could reduce setup costs by £300 per setup and could reduce the number of engineering hours needed to
1,400 hours. How many units must be sold to break even in this case?

Answer:
BEP in Units = FC / CMU
= [(1,200 – 300) x 60] + (52 x 1,400) + 300,000 / 60 – 20
= (54,000 + 72,800 + 300,000) / 40 = 10,670 units

19. Information about two products is as follows:

Product C Product D
Selling price per unit £20 £25
Variable costs per unit _11 _18
Contribution margin per unit £9 £7
The firm expects 60 per cent of its sales (in units) to be Product C (a sales mix of 6:4). Fixed costs are expected to be
£82,000. Break-even in units for product C and D would be

Answer:

Ave. CM
Product C – 9 x 60% = 5.40
Product D – 7 x 40% = 2.80
8.20

BEP in Units = FC / CMU = 82,000 / 8.20 = 10, 000 units

Product C = 10,000 units x 60% = 6,000 units
Product D = 10,000 units x 40% = 4,000 units

20. The following information is provided:

Sales price per unit £70
Variable cost per unit £45
Fixed costs £50,000
Expected sales 5,000 units
The margin of safety is
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Member: Philippine Association of State Universities and Colleges (PASUC)
Agricultural Colleges Association of the Philippines (ACAP)
Answer:

BEP in Units = FC / CMU = 50,000 / (70 - 45) = 2,000 units

Margin of Safety = Expected Sales – BEP = 5,000 units – 2,000 units = 3,000 units

At a price of £32, the estimated monthly sales of a product are 12,000 units. Variable costs include manufacturing costs of
£18 and distribution costs of £6. Fixed costs are £40,000 per month.

Required:

Determine each of the following values:

ANSWER: 21. Selling price £32

Variable costs:
Manufacturing £18
Distribution __6 _24
Unit contribution margin £8

22. Monthly break-even point = £40,000/£8 = 5,000 units

23. Monthly contribution = (£8 × 12,000) £96,000

Monthly fixed costs _40,000
Monthly before-tax monthly profit £56,000

24. Monthly sales volume 12,000 units

Monthly break-even sales volume _5,000 units
Monthly margin of safety 7,000 units

Xi Company is the exclusive Iowa distributor of lawn mowers for a small manufacturing company. It sells only one model
at £600 per unit and for which Xi pays £250. Xi's other variable costs amount to £50 per unit. Fixed costs are £2,000. In
October, Xi sold 15 lawn mowers and it sold 20 in November.

Required:

Calculate the following values:

25. Monthly break-even point in monetary sales
26. Monthly break-even point in units
27. Monthly income for October
28. Monthly income for November
29. Margin of safety for October
Answer:
ANSWER: 25. £2,000/[(600 - 250 - 50)/600] = £4,000
26. £2,000/(600 - 250 - 50) = 6.67 or 7 mowers
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 27. (15 × £300) - £2,000 = £2,500
28. (20 × £300) - £2,000 = £4,000
29. £9,000 - £4,000 = £5,000, or 9 mowers

30. The Young Manufacturing Company produces the following three products:
Hammers Screwdrivers Saws
Selling price per unit £40 £16 £50
Variable costs per unit _28 _12 _30
Contribution per unit £12 £4 £20
Fixed costs are £76,000 per year.

Fifty per cent of all sales in units are hammers, 30 per cent are screwdrivers, and 20 per cent are saws.

Required:

Calculate the following values:

a. Break-even point in total units

Answer:

ANSWER: 30. Ave. CM/unit = (£12 × 0.5) + (£4 × 0.3) + (£20 × 0.2) = £11.20
£76,000/£11.20 = 6,786 units of hammers, screwdrivers, and saws

Accredited: Accrediting Agency of Chartered Colleges and Universities of the Philippines (AACCUP)
Member: Philippine Association of State Universities and Colleges (PASUC)
Agricultural Colleges Association of the Philippines (ACAP)