Hungry Management Accounting English 15th Edition Exercise Answers 05CHAPTER 5COVERAGE OF LEARNING OBJECTIVESLEARNING OBJECTIVEFUNDA-MENTAL ASSIGNMENTMATERIALCRITICAL THINKING EXERCISES AND EXERCISESP

$985Contribution margin $1,215Less fixed expensesManufacturing overhead $400Selling expenses 200Administrative expenses 300Total fixed expenses $900Net operating income $315Schedule 1Variable manufacturing overhead costs (in thousands of dollars)Supplies $25Indirect labor $70Utilities $30Maintenance $25Total variable manufacturing overhead $150a. Calculate the contribution margin ratio for Independence Company.b. If Independence Company desires a net operating income of $400,000, how much sales revenue must it generate?c. If the variable expenses of Independence Company increase by $50,000, how much will the company’s contribution margin and net operating income change?d. Assume Independence Company can increase its sales by 10% if it cuts its selling price by $2 per unit. Should the company make the price cut? Explain.e. Independence Company is considering outsourcing the production of one of its products. If it does so, direct materials and direct labor costs will be reduced by $20,000 and $30,000 respectively. However, $10,000 of the fixed manufacturing costs currently incurred will become variable. Should the company outsource the production? Explain.Solution:a. Contribution margin ratio = Contribution margin / Sales = $1,215,000 / $2,200,000 = 55.23%.b. Contribution margin ratio = Contribution margin / Sales. Solving for sales, we get:Sales = Contribution margin / Contribution margin ratio= $400,000 / 55.23% = $724,178.98 (rounded to nearest cent).c. If variable expenses increase by $50,000, contribution margin will decrease by the same amount, from $1,215,000 to $1,165,000. Net operating income will decrease by the same amount, from $315,000 to $265,000.d. The contribution margin per unit is $15 ($2,200,000 / 146,667 units). A reduction of $2 per unit would decrease the contribution margin per unit to $13. This would decrease the contribution margin ratio to 52.63% ($13 / $24.70). To maintain the same net operating income of $315,000, the company would need to generate sales of $2,152,542.37 ($315,000 / 52.63%). This represents an increase of $452,542.37, or 20.57%, from current sales of $2,200,000. Therefore, the company should not make the price cut.e. Currently, the product generates a contribution margin of $15 per unit ($2,200,000 / 146,667 units). If the direct materials and direct labor costs are reduced by $50,000, the contribution margin will increase by the same amount, to $17 per unit. However, if $10,000 of the fixed manufacturing costs become variable, the contribution margin will decrease by $10,000 / 146,667 units = $0.068 per unit, to $16.932 per unit. Therefore, the company should outsource the production, as the contribution margin will increase by $1.932 per unit ($17 - $15.068)