Henegree Management Accounting English 15th Edition Exercise Answers 05 ExplanationCHAPTER 5COVERAGE OF LEARNING OBJECTIVESLEARNING OBJECTIVEFUNDA-MENTAL ASSIGNMENTMATERIALCRITICAL THINKING EXERCISES

xpenses Manufacturing overhead $ 300 Selling expenses 200 Administrative expenses 150 Total fixed expenses $ 650Net operating income $ 565

Schedule 1: Variable manufacturing overhead costs are $150,000 and are comprised of 10,000 direct labor hours. The company’s budgeted fixed manufacturing overhead for the year was $500,000.

a. Calculate the contribution margin ratio for Independence Company.

Contribution margin ratio = Contribution margin / Sales

Contribution margin = Sales - Total variable expenses Contribution margin = $2,200,000 - $985,000 Contribution margin = $1,215,000

Contribution margin ratio = $1,215,000 / $2,200,000 Contribution margin ratio = 0.5527 or 55.27%

b. Calculate the breakeven point in dollars for Independence Company.

Breakeven point in dollars = Fixed expenses / Contribution margin ratio

Breakeven point in dollars = $650,000 / 0.5527 Breakeven point in dollars = $1,176,179.85

c. Calculate the margin of safety in dollars for Independence Company if actual sales were $2,400,000.

Margin of safety in dollars = Actual sales - Breakeven point in dollars

Margin of safety in dollars = $2,400,000 - $1,176,179.85 Margin of safety in dollars = $1,223,820.15

d. Should Independence Company accept a special order from a customer who wants to purchase 1,000 units at a price of $20 per unit? The cost to manufacture each unit is $15 and there will be no variable selling or administrative expenses associated with this order.

Contribution margin per unit = Sales price per unit - Variable cost per unit Contribution margin per unit = $20 - $15 Contribution margin per unit = $5

Contribution margin ratio = Contribution margin per unit / Sales price per unit Contribution margin ratio = $5 / $20 Contribution margin ratio = 0.25 or 25%

Total contribution margin for the special order = Contribution margin per unit x Number of units Total contribution margin for the special order = $5 x 1,000 Total contribution margin for the special order = $5,000

Since the contribution margin from the special order of $5,000 exceeds the additional fixed costs that will be incurred (assuming there are any), Independence Company should accept the special order.

e. List two factors that should be considered when setting prices for products or services.

1. The competitive environment: The prices of products or services should be competitive in the market, and should be set in such a way that they can attract and retain customers.

2. Cost of production: The prices should be set in such a way that they cover the costs of production, including both variable and fixed costs, and also provide a reasonable profit to the company