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Select Solutions to Chapter 7

7-14 East Company, which is highly automated, will have a cost structure dominatedby fixed costs. est Company!s cost structure will include a larger proportion ofvariable costs than East Company!s cost structure.

" firm!s operating leverage factor, at a particular sales volume, is defined asits total contribution margin divided by its net income. #ince East Company hasproportionately higher fixed costs, it will have a proportionately higher totalcontribution margin. $herefore, East Company!s operating leverage factor will behigher.

7-1% hen sales volume increases, Company & will have a higher percentage increasein profit than Company '. Company &!s higher proportion of fixed costs gives thefirm a higher operating leverage factor. $he company!s percentage increase inprofit can be found by multiplying the percentage increase in sales volume by thefirm!s operating leverage factor.

7-1( $he sales mix of a multiproduct organi)ation is the relative proportion of sales ofits products.

$he weighted-average unit contribution margin is the average of the unitcontribution margins for a firm!s several products, with each product!scontribution margin weighted by the relative proportion of that product!s sales.

7-17 $he car rental agency!s sales mix is the relative proportion of its rental businessassociated with each of the three types of automobiles* subcompact, compact,and full-si)e. +n a multi-product C analysis, the sales mix is assumed to be

constant over the relevant range of activity.7-1 Cost-volume-profit analysis shows the effect on profit of changes in expenses,

sales prices, and sales mix. " change in the hotel!s room rate /price0 will changethe hotel!s unit contribution margin. $his contribution-margin change will alter therelationship between volume and profit.

7-1 $he statement ma2es three assertions, but only two of them are true. $hus thestatement is false. " company with an advanced manufacturing environmenttypically will have a larger proportion of fixed costs in its cost structure. $his willresult in a higher brea2-even point and greater operating leverage. 3owever, the

firm!s higher brea2-even point will result in areduced

safety margin.7- "ctivity-based costing /"C0 results in a richer description of an organi)ation!s

cost behavior and C relationships. Costs that are fixed with respect to salesvolume may not be fixed with respect to other important cost drivers. "n "Csystem recogni)es these nonvolume cost drivers, whereas a traditional costingsystem does not.

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%%,

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Aollars per year

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. #afety margin*

udgeted sales revenue

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E&E5C+#E 7- /% 6+8$E#0

1. /a0 $raditional income statement*

PACIFICRIMPUBLICATIONS, INC.

INCOMESTATEMENT FORTHEYEARENDEDDECEMBER31, 20XX

#ales ......................................................................... :1,

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;.

= factorleverageoperating

revenuesalesinincreasepercentageincomenetinincrease-ercentage

> 1F 4.;%

> %.F

4. 6ost operating managers prefer the contribution income statement for answering thistype of @uestion. $he contribution format highlights the contribution margin andseparates fixed and variable expenses.

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1. rea2-even point in sales dollars, using the contribution-margin ratio*

:1,=

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> :1;.$ invest+ent )henco+are& )ith fir+s that have a lo) &e4ree of oeratin4 levera4e. f course' )henti+es are 4oo&' increases in sales )oul& ten& to have a ver$ favora#le effect onearnin4s in a co+an$ )ith hi4h oeratin4 levera4e.

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C"#E 7-%% /%< 6+8$E#0

1. rea2-even point for

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C"#E 7-%% /C$+8EA0

1. "ssuming a %F sales commission*

ew contribution-margin ratio*

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C"#E 7-%% /C$+8EA0

. #ales dollar volume at which Ba2e Champlain #porting oods Company isindifferent*

BetXdenote the desired volume of sales.

#ince the tax rate is the same regardless of which approach managementchooses, we can find Xso that the companyJs before-tax income is the sameunder the two alternatives. /+n the following e@uations, the contribution-marginratios of .;% and .1%, respectively, were computed in the preceding twore@uirements.0

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