Student:
Date: 11/08/20
Instructor: John Dallmus
Assignment: Chapter 7 Homework
II - Online/iCourse - Fall B 202
Kerrigan Garage Doors manufactures a premium garage door. Currently, the price and cost data associated with the
premium garage door are as follows:
1 (Click the icon to view the data.) 2 (Click the icon to view more information.)
Read the requirements3.
Requirement 1. What is the company's current breakeven in units and in dollars?
The basic cost-volume-profit (CVP) analysis involves analyzing what a business must sell in order to break even. The
breakeven point is the sales level at which the operating income is zero. If the sales are above the breakeven point, the
business will have a profit. If sales are below the breakeven point, the business will incur a loss. The contribution margin
approach provides a shortcut formula to make various CVP calculations.
See the formula below to compute the breakeven sales in units using the contribution margin approach.
( Fixed expenses + Operating income ) / Contribution margin per unit = Breakeven sales in units
Now calculate the contribution margin per unit4 by subtracting the variable cost per unit5 from the sales price per unit.
Sales price per unit – Variable cost per unit = Contribution margin per unit
Find the breakeven point in units using the contribution margin approach. (For amounts with a $0 balance, make sure to
enter
"0" in the appropriate cell.)
( Fixed expenses + Operating income ) / Contribution margin per unit = Breakeven sales in units
( 208,000 ) / $ 650 =
Now calculate the breakeven sales in dollars using the following formula.
Breakeven sales in units x Sales price per unit = Breakeven sales dollars
320 x $ 1,300 =
Notice that the breakeven sales in dollars can also be found by using the shortcut contribution margin approach. This
approach calculates the breakeven sales using the contribution margin ratio6.
( Fixed expenses + Operating income ) / Contribution margin ratio = Breakeven sales dollars
( $ 208,000 + $ 0 ) / 0.5 = $ 416,000
Requirement 2. If the company expects to sell 530 premium garage doors in the upcoming year, and it does not develop
the software control system, what is its expected operating income from premium garage doors?
Use the formula below to compute the operating income. Calculate the sales revenue7 and the total variable expenses8
using the expected sales of 530 units.
1,300$ –650$ =650$
$+0$
320
416,000$
Course: ACC241 Uses of Accounting Info
(required)
Sales revenue - Variable expenses - Fixed expenses = Operating income
689,000 - 208,000 =
Requirement 3. If the software control system were to be developed and implemented, what would be the company's new
breakeven point in units and in dollars? Calculate the variable cost per unit9 and subtract it from the sales price per unit to
find the company's contribution margin per unit.
Sales price per unit – Variable cost per unit = Contribution margin per unit
$ 1,300 –
10
Remember to calculate the new fixed expenses 1
2
0 to determine the new breakeven point in units.
Now calculate the new breakeven point in units.
( Fixed expenses + Operating income ) / Contribution margin per unit = Breakeven sales in units
( 273,000 ) / $ 780 =
Now calculate the breakeven point in dollars .
Breakeven sales in units x Sales price per unit = Breakeven sales dollars
350 x $ 1,300 =
Requirement 4. If the company expects to sell 5340 premium garage doors in the upcoming year, and it develops the
software control system, what is its expected operating income from premium garage doors?
In this instance the sales revenue will remain the same. Compute the total variable expenses11 using the new variable cost
per unit.
Sales revenue - Variable expenses - Fixed expenses = Operating income
$ 689,000 - - 273,000 =
Requirement 5. If the company expects to sell 530 premium garage doors in the upcoming year, do you think the company
should implement the software control system? Why or why not? What factors should the company consider?
The company should implement the software control system if the operating income is expected to be higher as a result of
implementing the system. The company should not implement the software control system if the operating income is
expected to be lower as a result of implementing the system. Additionally, recall that it is expected that the system will
significantly reduce scrap and waste generated during the manufacturing process. The potential savings from reduced
waste should also be evaluated.
1 1.What is the company's current breakeven in units and in dollars?
2 .If the company expects to sell 530 premium garage doors in the upcoming year, and it does not develop the
software control system, what is its expected operating income from premium garage doors?
3 .If the software control system were to be developed and implemented, what would be the company's new breakeven
point in units and in dollars?
4 .If the company expects to sell 530 premium garage doors in the upcoming year, and it develops the software control
system, what is its expected operating income from premium garage doors?
5 .If the company expects to sell 530 premium garage doors in the upcoming year, do you think the company should
implement the software control system? Why or why not? What factors should the company consider?
$-344,500
136,500$
520$ =780$
$+0$
350
455,000$
275,600 140,400$
1: Data Table
Average selling price per premium garage door . . . . . . . . $ 1,300
Average variable manufacturing cost per door . . . . . . . . . $ 500
Average variable selling cost per door . . . . . . . . . . . . . . . $ 150
Total annual fixed costs. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 208,000
2: More Info
Kerrigan Garage Doors has undertaken several sustainability projects over the past few years. Management is currently
evaluating whether to develop a comprehensive software control system for its manufacturing operations that would
significantly reduce scrap and waste generated during the manufacturing process. If the company were to implement this
software control system in its manufacturing operations, the use of the software control system would result in an increase
of $65,000 in its annual fixed costs while the average variable manufacturing cost per door would drop by $130.
3: Requirements
4: Definition
The contribution margin per unit is the excess of the selling price per unit over the variable cost of obtaining and selling each
unit.
5: Definition
Variable cost per unit = $500 + $150 = ?
6: Definition
The contribution margin ratio is the ratio of contribution margin to sales revenue.
Contribution margin ratio = $650 / $1,300 = 0.5
7: Definition
Sales revenue = $1,300 per unit x 530 units = ?
8: Definition
Total variable costs = $650 per unit x 530 units = ?
9: Definition
Variable cost per unit = $650 - $130 = ?
10: Definition
Fixed expenses = $208,000 + $65,000 = ?
11: Definition
Total variable costs = $520 per unit x 530 units = ?
YOU ANSWERED: Sales price per unit – Variable cost per unit = Contribution margin per unit
nothing – nothing = nothing
( Fixed expenses + Operating income ) / Contribution margin per unit = Breakeven sales in units
( nothing + nothing ) / $ 650 = nothing
Breakeven sales in units x Sales price per unit = Breakeven sales dollars
320 x $ 1,300 = nothing
Sales revenue - Variable expenses - Fixed expenses = Operating income
nothing - nothing - 208,000 = nothing
Sales price per unit – Variable cost per unit = Contribution margin per unit
$ 1,300 – nothing = nothing
( Fixed expenses + Operating income ) / Contribution margin per unit = Breakeven sales in units
( nothing + nothing ) / $ 780 = nothing
Breakeven sales in units x Sales price per unit = Breakeven sales dollars
350 x $ 1,300 = nothing
Sales revenue - Variable expenses - Fixed expenses = Operating income
$ 689,000 - nothing - 273,000 = nothing
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