Solution for Managerial Cost Accounting for Managers by Nornee
Chapter 6
Cost-Volume-Profit Relationships
Solutions to Questions
6-1 The contribution margin (CM) ratio is the ratio of the total contribution margin to total sales revenue. It can be used in a variety of ways. For example, the change in total contribution margin from a given change in total sales revenue can be estimated by multiplying the change in total sales revenue by the CM ratio. If fixed costs do not change, then a dollar increase in contribution margin will result in a dollar increase in net operating income. The CM ratio can also be used in break-even analysis. Therefore, knowledge of a product’s CM ratio is extremely helpful in forecasting contribution margin and net operating income.
6-2 Incremental analysis focuses on the changes in revenues and costs that will result from a particular action.
6-3 All other things equal, Company B, with its higher fixed costs and lower variable costs, will have a higher contribution margin ratio than Company A. Therefore, it will tend to realize a larger increase in contribution margin and in profits when sales increase.
6-4 Operating leverage measures the impact on net operating income of a given percentage change in sales. The degree of operating leverage at a given level of sales is computed by dividing the contribution margin at that level of sales by the net operating income at that level of sales.
6-5 The break-even point is the level of sales at which profits are zero. It can also be defined as the point where total revenue equals total cost or as the point where total contribution margin equals total fixed cost.
6-6 Three approaches to break-even analysis are (a) the graphical method, (b) the equation method, and (c) the contribution margin method. In the graphical method, total cost and total revenue data are plotted on a graph. The intersection of the total cost and the total revenue lines indicates the break-even point. The graph shows the break-even point in both units and
Cost-Volume-Profit Relationships
Solutions to Questions
6-1 The contribution margin (CM) ratio is the ratio of the total contribution margin to total sales revenue. It can be used in a variety of ways. For example, the change in total contribution margin from a given change in total sales revenue can be estimated by multiplying the change in total sales revenue by the CM ratio. If fixed costs do not change, then a dollar increase in contribution margin will result in a dollar increase in net operating income. The CM ratio can also be used in break-even analysis. Therefore, knowledge of a product’s CM ratio is extremely helpful in forecasting contribution margin and net operating income.
6-2 Incremental analysis focuses on the changes in revenues and costs that will result from a particular action.
6-3 All other things equal, Company B, with its higher fixed costs and lower variable costs, will have a higher contribution margin ratio than Company A. Therefore, it will tend to realize a larger increase in contribution margin and in profits when sales increase.
6-4 Operating leverage measures the impact on net operating income of a given percentage change in sales. The degree of operating leverage at a given level of sales is computed by dividing the contribution margin at that level of sales by the net operating income at that level of sales.
6-5 The break-even point is the level of sales at which profits are zero. It can also be defined as the point where total revenue equals total cost or as the point where total contribution margin equals total fixed cost.
6-6 Three approaches to break-even analysis are (a) the graphical method, (b) the equation method, and (c) the contribution margin method. In the graphical method, total cost and total revenue data are plotted on a graph. The intersection of the total cost and the total revenue lines indicates the break-even point. The graph shows the break-even point in both units and