Skip to ContentGo to accessibility pageKeyboard shortcuts menu
OpenStax Logo

PA 1.

LO 3.1A company sells small motors as a component part to automobiles. The Model 101 motor sells for $850 and has per-unit variable costs of $400 associated with its production. The company has fixed expenses of $90,000 per month. In August, the company sold 425 of the Model 101 motors.

  1. Calculate the contribution margin per unit for the Model 101.
  2. Calculate the contribution margin ratio of the Model 101.
  3. Prepare a contribution margin income statement for the month of August.
PA 2.

LO 3.1A company manufactures and sells racing bicycles to specialty retailers. The Bomber model sells for $450 and has per-unit variable costs of $200 associated with its production. The company has fixed expenses of $40,000 per month. In May, the company sold 225 of the Bomber model bikes.

  1. Calculate the contribution margin per unit for the Bomber.
  2. Calculate the contribution margin ratio of the Bomber.
  3. Prepare a contribution margin income statement for the month of May.
PA 3.

LO 3.2Fill in the missing amounts for the four companies. Each case is independent of the others. Assume that only one product is being sold by each company.

Company A, Company B, Company C, Company D (respectively): Units Sold 600, ?, ?, 900; Sales in Dollars $30,000, 70,000, 240,000, ?; Total Variable Expenses $7,200, ?, ?, $144,000; Per Unit C/M ?, $80, $270, $140; Total Fixed Expenses $20,000, 50,000, 145,000, ?; Net Operating Income (loss) ?, $6,000, $(10,000), $(24,000).
PA 4.

LO 3.2Markham Farms reports the following contribution margin income statement for the month of August. The company has the opportunity to purchase new machinery that will reduce its variable cost per unit by $2 but will increase fixed costs by 15%. Prepare a projected contribution margin income statement for Markham Farms assuming it purchases the new equipment. Assume sales level remains unchanged.

Markham Farms, Contribution Margin Income Statement: Sales (1,500 units at $75 per unit) $112,500 less Variable Costs (1,500 units at $15 per unit) 22,500 equals Contribution Margin 90,000. Subtract Fixed Costs 40,000 equals Net Income $50,000.
PA 5.

LO 3.3Kylie’s Cookies is considering the purchase of a larger oven that will cost $2,200 and will increase her fixed costs by $59. What would happen if she purchased the new oven to realize the variable cost savings of $0.10 per cookie, and what would happen if she raised her price by just $0.20? She feels confident that such a small price increase will decrease the sales by only 25 units and may help her offset the increase in fixed costs. Given the following current prices how would the break-even in units and dollars change if she doesn’t increase the selling price and if she does increase the selling price? Complete the monthly contribution margin income statement for each of these cases.

Selling Price, Variable Cost, and Fixed Cost Change Analysis with Current Price, with Decreased VC and Increased FC, and with Increased SP, Decreased VC, and Increased FC (respectively): Sales price per unit $1.75, -, -; Variable cost per unit 0.40, -, -; Contribution margin per unit $1.35, -, -; Fixed costs $405, -, -; Break-even in units 300, -, -; Break-even in dollars $525.00, -, -. Monthly Contribution Margin Income Statement with Current Price, with Decreased VC and Increased FC, and with Increased SP, Decreased VC, and Increased FC (respectively): Unit sales, expected 800, -, -; Sales -, -, -; Variable costs -, -, -; Contribution Margin -, -, -; Fixed costs -, -, -; Net income -, -, -.
PA 6.

LO 3.4Morris Industries manufactures and sells three products (AA, BB, and CC). The sales price and unit variable cost for the three products are as follows:

Product, Sales Price per Unit, Variable Cost per Unit (respectively): AA $50, $30; BB 40, 15; CC 30, 10.

Their sales mix is reflected as a ratio of 5:3:2. Annual fixed costs shared by the three products are $258,000 per year.

  1. What are total variable costs for Morris with their current product mix?
  2. Calculate the number of units of each product that will need to be sold in order for Morris to break even.
  3. What is their break-even point in sales dollars?
  4. Using an income statement format, prove that this is the break-even point.
PA 7.

LO 3.4Manatoah Manufacturing produces 3 models of window air conditioners: model 101, model 201, and model 301. The sales price and variable costs for these three models are as follows:

Product, Sales Price per Unit, Variable Cost per Unit (respectively): Model 101 $275, $185; Model 201 350, 215; Model 301 400, 245.

The current product mix is 4:3:2. The three models share total fixed costs of $430,000.

  1. Calculate the sales price per composite unit.
  2. What is the contribution margin per composite unit?
  3. Calculate Manatoah’s break-even point in both dollars and units.
  4. Using an income statement format, prove that this is the break-even point.
PA 8.

LO 3.5Jakarta Company is a service firm with current service revenue of $400,000 and a 40% contribution margin. Its fixed costs are $80,000. Maldives Company has current sales of $6,610,000 and a 45% contribution margin. Its fixed costs are $1,800,000.

  1. What is the margin of safety for Jakarta and Maldives?
  2. Compare the margin of safety in dollars between the two companies. Which is stronger?
  3. Compare the margin of safety in percentage between the two companies. Now, which one is stronger?
  4. Compute the degree of operating leverage for both companies. Which company will benefit most from a 15% increase in sales? Explain why. Illustrate your findings in an Income Statement that is increased by 15%.
Order a print copy

As an Amazon Associate we earn from qualifying purchases.

Citation/Attribution

This book may not be used in the training of large language models or otherwise be ingested into large language models or generative AI offerings without OpenStax's permission.

Want to cite, share, or modify this book? This book uses the Creative Commons Attribution-NonCommercial-ShareAlike License and you must attribute OpenStax.

Attribution information
  • If you are redistributing all or part of this book in a print format, then you must include on every physical page the following attribution:
    Access for free at https://openstax.org/books/principles-managerial-accounting/pages/1-why-it-matters
  • If you are redistributing all or part of this book in a digital format, then you must include on every digital page view the following attribution:
    Access for free at https://openstax.org/books/principles-managerial-accounting/pages/1-why-it-matters
Citation information

© Dec 13, 2023 OpenStax. Textbook content produced by OpenStax is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike License . The OpenStax name, OpenStax logo, OpenStax book covers, OpenStax CNX name, and OpenStax CNX logo are not subject to the Creative Commons license and may not be reproduced without the prior and express written consent of Rice University.