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Answering Machine. The Company's Income Statement For The Most Recent Year Is Given Below

The document provides information on Zoom Company's income statement for the most recent year, including sales, variable expenses, contribution margin, and fixed expenses. It then asks questions to calculate Zoom's break-even point in units and sales, cost-volume-profit ratio, and how net income would increase if sales increased by a certain amount and costs remained unchanged. The solutions show the calculations for the break-even analysis and net income increase.

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mesele
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884 views

Answering Machine. The Company's Income Statement For The Most Recent Year Is Given Below

The document provides information on Zoom Company's income statement for the most recent year, including sales, variable expenses, contribution margin, and fixed expenses. It then asks questions to calculate Zoom's break-even point in units and sales, cost-volume-profit ratio, and how net income would increase if sales increased by a certain amount and costs remained unchanged. The solutions show the calculations for the break-even analysis and net income increase.

Uploaded by

mesele
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Example (1) Zoom Company manufactures and sells a telephone

answering machine. The company’s income statement for the


most recent year is given below:
Required: Based on the above data, answer the following questions.
A. Compute the company’s CM ratio and variable expense ratio.

B.Compute the company’s break-even point in both units and sales birrs.
Use the above three approaches to compute the break-even point.

C.Assume that sales increase by Br. 400,000 next year. If cost behavior
patterns remain unchanged, by how much will the company’s net income
increase?

13 Total Per Unit Percent

Sales (20,000 Br. 1,200,000 Br. 60 100


units)
Variable expenses Br. 900,000 Br. 45 ?
Contribution Br. 300,000 Br. 15 ?
Margin
Fixed Expenses Br. 240,000
Net Income Br. 60,000
Solution:
A. CM ratio = 60-45 = 0.25 (25%)
60
Variable expense ratio = 1 – CM ratio = P-V
P
= 1-0.25 = 60 – 15 = 0.75 (75%)
60
B. Method 1: Equation Method
i) Net Income (NI) = PQ – VQ – FC
0 = Q (60-45) – 240,000
15Q = 240,000
Q = 240,000 =16,000 units, at Br. 60 per unit, Br. 960,000
15
ii) Let “X” be sales volume in birrs to break-even point
CM- ratio = 0.25
Variable expense ratio = 0.75
Net Income = Total revenue – Total variable expense – Total fixed cost
0 = X – 0.75X-240,000
0.25X = 240,000
X = 240,000/0.25 = Br. 960,000
Method 2: Contribution Margin Method
i)BEP (in units) = Fixed expenses/CM per unit
= Br. 240,000/Br. 60 – Br. 45
= 16,000 units
ii)BEP (in birrs) = Fixed expenses/CM ratio
= Br. 240,000/0.25
= Br. 960,000

•Method 3: Graphical method


•To plot fixed costs, measure Br. 240,000 on the vertical axis and
extend a line horizontally.
•Select a point (say, 20,000 units) and determine the total costs
(the total of fixed and variable) at the selected activity level.
•The total costs at this output level are Br. 1,140,000= Br.
240,000 + (20,000 X Br. 45).
•Then, starting from the selected point draw a line back to the
origin where the fixed cost line touches the vertical axis.
•The break-even point (BEP) is where the total revenues line and
the total costs line intersect. At this point, total revenues equal
total costs.

C. Since the fixed expenses are not expected to change,


net income will increase by the entire Br. 100,000
increase in contribution margin.
Increase in sales Br. 400,000
Multiply by the CM ratio X 25%
Expected increase in contribution margin Br. 100,000

Q2
Example 1 : Addis Matador Tires, Inc. sells tires to
service stations for an average of Br 450 each. The
variable cost of each tire is Br 300 and monthly fixed
manufacturing costs total Br 150,000. Other monthly
fixed costs of the company total Br 120,000.
Required:
a)What is the break-even sale of Addis?
b)What is the break-even level in tires, assuming
variable costs increase by 20 percent?
c)What is the break-even level in tires, assuming the
selling price goes up by 10 percent, fixed
manufacturing costs and other fixed costs decline by
10% and Br 1,500, respectively? Assume all other
factors remain unchanged.
Solution:
a) BEP (in units) = Fixed expenses/CM per unit
= Br 270,000/Br 450– Br 300 = 1,800 tires
BEP (in birrs) = BEP (in units) x P=1,800 x 450 = Br 810,000
b) BEP (in units) = Fixed expenses/CM per unit
= Br 270,000/450– 360 = 3,000 tires
**New VC= 300 X 1.2=Br 360
c)BEP (in units) = Fixed expenses/CM per unit

= Br 253,500/495–300= 1,300 tires


** New fixed cost? =Br 253,500
** New sales price= 450 x 1.1=Br 495
Example 1. Selam Company has revenues of Br
500,000, variable costs of Br 350,000 and fixed
costs of Br 135,000.
Required:
a)Compute contribution margin percentage.
b)Compute total revenues needed to break
even.
c)Compute total revenues needed to achieve a
target operating income of Br 45,000.
d)Compute total revenues needed to achieve a
target after tax net income of Br 63,000,
assuming the income tax rate is 40%.
Exercise 1
1. ABC Printers provides photocopy services to its customers.
The unit variable cost and selling price are Br 0.20 and Br 0.50,
respectively, while monthly fixed costs total Br. 1,500.
Required:
a) How many pages must ABC copy in a month to break-even?
b) How many pages must ABC copy to earn Br. 900 profit per
month?
c) How much sales revenue should ABC earn in a month to
breakeven?
d) How many pages must ABC copy to earn Br. 700 profit after
30% income tax?
e) If price per page is increased to Br. 75, how many pages
must ABC copy in a month to break-even?
EXERCISE 2

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