Case 4B-6 (continued)
3. a. The amount of overhead cost assigned to the job would be:
Step-down method:
Printing department:
$6.12 per machine-hour × 15,400 machine-hours ....... $ 94,248
Binding department:
$3.90 per direct labor-hour × 2,000 direct labor-hours 7,800
Total overhead cost ...................................................... $102,048
Direct method:
Printing department:
$5.84 per machine-hour × 15,400 machine-hours ....... $ 89,936
Binding department:
$4.14 per direct labor-hour × 2,000 direct labor-hours 8,280
Total overhead cost ...................................................... $ 98,216
b. The step-down method provides a better basis for computing
predetermined overhead rates than the direct method because it
gives recognition to services provided between service departments.
If this interdepartmental service is not recognized, then either too
much or too little of a service department’s costs may be allocated to
a producing department. The result will be an inaccuracy in the
producing department’s predetermined overhead rate.
Inaccuracies in the predetermined overhead rate can cause
corresponding inaccuracies in bids for jobs. Because the direct
method in this case understates the overhead rate in the Printing
Department and overstates the overhead rate in the Binding
Department, it is not surprising that the company tends to bid low on
jobs requiring a lot of printing work and tends to bid too high on jobs
that require a lot of binding work.
Chapter 5
Cost-Volume-Profit Relationships
Solutions to Questions
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent
of McGraw Hill LLC.
Managerial Accounting 18th Edition, Solutions Manual, Chapter 5 271
,5-1 The contribution margin (CM) ratio is higher unit volume. (b) If the fixed cost
the ratio of the total contribution margin to total increased, then both the fixed cost line and the
sales revenue. It can also be expressed as the total cost line would shift upward and the break-
ratio of the contribution margin per unit to the even point would occur at a higher unit volume.
selling price per unit. It is used in target profit (c) If the variable cost per unit increased, then
and break-even analysis and can be used to the total cost line would rise more steeply and
quickly estimate the effect on profits of a the break-even point would occur at a higher
change in sales revenue. unit volume.
5-2 Incremental analysis focuses on the 5-7 The margin of safety is the excess of
changes in revenues and costs that will result budgeted (or actual) sales over the break-even
from a particular action. volume of sales. It is the amount by which sales
can drop before losses begin to be incurred.
5-3 All other things equal, Company B, with
its higher fixed costs and lower variable costs, 5-8 The sales mix is the relative proportions
will have a higher contribution margin ratio than in which a company’s products are sold. The
Company A. Therefore, it will tend to realize a usual assumption in cost-volume-profit analysis
larger increase in contribution margin and in is that the sales mix will not change.
profits when sales increase.
5-9 A higher break-even point and a lower
5-4 Operating leverage measures the impact net operating income could result if the sales
on net operating income of a given percentage mix shifted from high contribution margin
change in unit sales. The degree of operating products to low contribution margin products.
leverage at a given level of sales is computed by Such a shift would cause the average
dividing the contribution margin at that level of contribution margin ratio in the company to
sales by the net operating income at that level decline, resulting in less total contribution
of sales. margin for a given amount of sales. Thus, net
operating income would decline. With a lower
5-5 The break-even point is the level of contribution margin ratio, the break-even point
sales at which profits are zero. would be higher because more sales would be
required to cover the same amount of fixed
5-6 (a) If the selling price decreased, then costs.
the total revenue line would rise less steeply,
and the break-even point would occur at a
© The McGraw-Hill Companies, Inc., 2012. All rights reserved.
272 Managerial Accounting, 14th Edition
,Chapter 5: Applying Excel
The completed worksheet is shown below.
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written consent of McGraw Hill LLC.
Managerial Accounting 18th Edition, Solutions Manual, Chapter 5 273
, Chapter 5: Applying Excel (continued)
The completed worksheet, with formulas displayed, is shown below.
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written consent of McGraw Hill LLC.
Managerial Accounting 18th Edition, Solutions Manual, Chapter 5
3. a. The amount of overhead cost assigned to the job would be:
Step-down method:
Printing department:
$6.12 per machine-hour × 15,400 machine-hours ....... $ 94,248
Binding department:
$3.90 per direct labor-hour × 2,000 direct labor-hours 7,800
Total overhead cost ...................................................... $102,048
Direct method:
Printing department:
$5.84 per machine-hour × 15,400 machine-hours ....... $ 89,936
Binding department:
$4.14 per direct labor-hour × 2,000 direct labor-hours 8,280
Total overhead cost ...................................................... $ 98,216
b. The step-down method provides a better basis for computing
predetermined overhead rates than the direct method because it
gives recognition to services provided between service departments.
If this interdepartmental service is not recognized, then either too
much or too little of a service department’s costs may be allocated to
a producing department. The result will be an inaccuracy in the
producing department’s predetermined overhead rate.
Inaccuracies in the predetermined overhead rate can cause
corresponding inaccuracies in bids for jobs. Because the direct
method in this case understates the overhead rate in the Printing
Department and overstates the overhead rate in the Binding
Department, it is not surprising that the company tends to bid low on
jobs requiring a lot of printing work and tends to bid too high on jobs
that require a lot of binding work.
Chapter 5
Cost-Volume-Profit Relationships
Solutions to Questions
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent
of McGraw Hill LLC.
Managerial Accounting 18th Edition, Solutions Manual, Chapter 5 271
,5-1 The contribution margin (CM) ratio is higher unit volume. (b) If the fixed cost
the ratio of the total contribution margin to total increased, then both the fixed cost line and the
sales revenue. It can also be expressed as the total cost line would shift upward and the break-
ratio of the contribution margin per unit to the even point would occur at a higher unit volume.
selling price per unit. It is used in target profit (c) If the variable cost per unit increased, then
and break-even analysis and can be used to the total cost line would rise more steeply and
quickly estimate the effect on profits of a the break-even point would occur at a higher
change in sales revenue. unit volume.
5-2 Incremental analysis focuses on the 5-7 The margin of safety is the excess of
changes in revenues and costs that will result budgeted (or actual) sales over the break-even
from a particular action. volume of sales. It is the amount by which sales
can drop before losses begin to be incurred.
5-3 All other things equal, Company B, with
its higher fixed costs and lower variable costs, 5-8 The sales mix is the relative proportions
will have a higher contribution margin ratio than in which a company’s products are sold. The
Company A. Therefore, it will tend to realize a usual assumption in cost-volume-profit analysis
larger increase in contribution margin and in is that the sales mix will not change.
profits when sales increase.
5-9 A higher break-even point and a lower
5-4 Operating leverage measures the impact net operating income could result if the sales
on net operating income of a given percentage mix shifted from high contribution margin
change in unit sales. The degree of operating products to low contribution margin products.
leverage at a given level of sales is computed by Such a shift would cause the average
dividing the contribution margin at that level of contribution margin ratio in the company to
sales by the net operating income at that level decline, resulting in less total contribution
of sales. margin for a given amount of sales. Thus, net
operating income would decline. With a lower
5-5 The break-even point is the level of contribution margin ratio, the break-even point
sales at which profits are zero. would be higher because more sales would be
required to cover the same amount of fixed
5-6 (a) If the selling price decreased, then costs.
the total revenue line would rise less steeply,
and the break-even point would occur at a
© The McGraw-Hill Companies, Inc., 2012. All rights reserved.
272 Managerial Accounting, 14th Edition
,Chapter 5: Applying Excel
The completed worksheet is shown below.
Copyright © 2024 McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw Hill LLC.
Managerial Accounting 18th Edition, Solutions Manual, Chapter 5 273
, Chapter 5: Applying Excel (continued)
The completed worksheet, with formulas displayed, is shown below.
Copyright © 2024 McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw Hill LLC.
Managerial Accounting 18th Edition, Solutions Manual, Chapter 5
