Question

uy business accounting / accounting solutions manuals / accounting: what the numbers mean/lith edition ng: what the numbers mean / 11th edition / chapter 12 ccounting: What the Numbers Mean|(11th Editic ee this solution in the app Chapter 12. Problem 24P 3 Bookmarks Show all steps: ON Problem CVP analysis-what-if questions; sales mix issue Miller Metal Co. makes a single product that sells for $32 per unit. Variable costs are $20.80 per unit, and fixed costs total $47,600 per month. Required: a. Calculate the number of units that must be sold each month for the firm to break even. b. Assume current sales are $160,000. Calculate the margin of safety and the margin of safety ratio. C. Calculate operating income if 5,000 units are sold in a month. d. Calculate operating income if the selling price is raised to $33 per unit, advertising expenditures are increased by $7,000 per month, and monthly unit sales volume becomes 5,400 units. e. Assume that the firm adds another product to its product line and that the new product sells for $20 per unit, has variable costs of $14 per unit, and causes fixed expenses in total to increase to $63,000 per month. Calculate the firm's operating income if 5,000 units of the original product and 4.000 units of the new product are sold each month. For the original product, use the selling price and variable cost data given in the problem statement f. Calculate the firm's operating income if 4,000 units of the original product and 5,000 units of the new product are sold each month. g. Explain why operating income is different in parts e and f, even though sales totaled 9.000 units in each case. Step-by-step solution Step 1 of 8

Answer 1

Req / Step	Solution
a:	Sales price per unit =32
	Less:variable costs = 20.80
	Contribution per unit = Sales price - variable costs = 32 -20.8 = 11.2
	Break even sales units per month= fixed costs per month/Contribution per unit
	Fixed costs per month = 47600
	Contributioin per unit = 11.2
	Break even sales units per month= 47600/11.2 = 4250 units
b:	Margin of safety ratio = (current sales - break even sales)/current sales
	Current sales = 160000
	Break even sales = units * selling price = 4250*32 = 136000
	Margin of safety ratio = (160000-136000)/160000 = 0.15 or 15%
c:	Operating income = Total contribution on sold units per month - Fixed Costs per month
	Units sold = 5000
	Contribution per unit = 11.20
	Total contribution = 5000*11.20 = 56000
	Fixed cost per month = 47600
	Operating income = 56000 - 47600 = 8400
d:	If Selling price is $33, then contribution = 33 - 20.8 = 12.2 per unit
	New Fixed Costs = 47600 + Advertising exp. 7000 = 54600
	Sales volume = 5400 units
	Total contribution = 5400*12.20 = 65880
	Operating income = 65880 - 54600 = 11280
e:	Increased Fixed costs = 63000
	Contribution of new product = 20 - 14 = 6 per unit
	Total Contribution = (original product * original contribution per unit) + (new product * new contribution per unit)
	Total Contribution = (5000 * 11.2) + (4000 * 6) = 80000
	Firm's operating income = Total Contribution - Increased fixed costs = 80000 - 63000 = 17000
f:	If sales units are 4000 of original product & 5000 of new product, then
	Increased Fixed costs = 63000
	Total Contribution = (4000 * 11.2) + (5000 * 6) = 74800
	Firm's operating income = Total Contribution - Increased fixed costs = 74800 - 63000 = 11800
g:	The difference in operating income is due to difference in contribution per unit
	and units sold of each product, ie. due to change in product mix in case e and case f.
	In point e, original product with higher contribution per unit has higher units of sales
	to point f and new product with lower contribution per unit has lower sales in point e
	to point f. This is due to difference product sales mix under both point e & f.