Convert Accounting Statements Homework into Excel
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Problem 3-28 Teri Hall has recently opened Sheer Elegance, Inc., a store specializing in
fashionable stockings. Ms. Hall has just completed a course in managerial accounting, and she
believes that she can apply certain aspects of the course to her business. She is particularly
interested in adopting the cost- volume profit (CVP) approach to decision making. Thus, she has
prepared the following analysis:
Sales price per pair of stockings . . . . . . . . . . . . . . . . . $2.00
Variable expense per pair of stockings . . . . . . . . . . . . 0.80
Contribution margin per pair of stockings . . . . . . . . . . $1.20
Fixed expense per year:
Building rental . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,000
Equipment depreciation . . . . . . . . . . . . . . . . . . . . . . 3,000
Selling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000
Administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000
Total fixed expense . . . . . . . . . . . . . . . . . . . . . . . . . . . $60,000
Required:
1. How many pairs of stockings must be sold to break even? What does this represent in total
dollar sales?
2. Prepare a CVP graph for the store from zero pairs up to 70,000 pairs of stockings sold each
year. Indicate the break-even point on the graph.
3. How many pairs of stockings must be sold to earn a $9,000 target profit for the first year?
4. Ms. Hall now has one full-time and one part-time salesperson working in the store. It will cost
her an additional $8,000 per year to convert the part-time position to a full-time position. Ms.
Hall believes that the change would bring in an additional $20,000 in sales each year. Should she
convert the position? Use the incremental approach. (Do not prepare an income statement.)
5. Refer to the original data. Actual operating results for the first year are as follows:
Sales . . . . . . . . . . . . . . . . . . . . . . $125,000
Variable expenses . . . . . . . . . . . . 50,000
Contribution margin . . . . . . . . . . . 75,000
Fixed expenses . . . . . . . . . . . . . . 60,000
Net operating income . . . . . . . . . . $ 15,000
a. What is the store’s degree of operating leverage?
b. Ms. Hall is confident that with some effort she can increase sales by 20% next year. What
would be the expected percentage increase in net operating income? Use the degree of
operating leverage concept to compute your answer.
SOLUTION 3-28
1. Sales = Variable expenses + Fixed expenses + Profits
$2.00Q = $0.80Q + $60,000 + $0
$1.20Q = $60,000
Q = $60,000 ÷ $1.20 per pair
Q = 50,000 pairs
50,000 pairs × $2 per pair = $100,000 in sales.
Alternative solution:
Fixed expenses $60,000Break-even point= = =50,000 pairs in unit sales CM per unit $1.20 per pair
Fixed expenses $60,000Break-even point= = =$100,000 in sales in dollar sales CM ratio 0.60
2. See the graph on the following page.
3. Sales = Variable expenses + Fixed expenses + Profits
$2.00Q = $0.80Q + $60,000 + $9,000
$1.20Q = $69,000
Q = $69,000 ÷ $1.20 per pair
Q = 57,500 pairs
Alternative solution:
Fixed expenses + Target profitUnit sales to attain = target profit CM per unit
$60,000 + $9,000 =
$1.20 per pair
= 57,500 pairs
2. Cost-volume-profit graph:
4. Incremental contribution margin:
$20,000 increased sales × 60% CM ratio .................................... $12,000
Less incremental fixed salary cost .................................................. 8,000
Increased net operating income .................................................... $ 4,000
Yes, the position should be converted to a full-time basis.
$0
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
$140,000
$160,000
0 10,000 20,000 30,000 40,000 50,000 60,000 70,000
D o
ll a
rs
Number of Pairs
Break-even point: 50,000 pairs, or
$100,000 in sales
Fixed Expenses
Total Expenses
Total Sales
5. a. Degree of operating leverage:
Contribution margin $75,000 = = 5
Net operating income $15,000
b. 5 × 20% sales increase = 100% increase in net operating income. Thus, net operating
income would double next year, going from $15,000 to $30,000.