MANAGEMENT ACCOUNTING - Solutions Manual CHAPTER 12 COST-VOLUME-PROFIT RELATIONSHIPS

I. Questions 1. The total “contribution margin” is the excess of total revenue over total variable costs. The unit contribution margin is the excess of the unit price over the unit variable costs. 2. Total contribution margin: Selling price - manufacturing variable costs expensed - nonmanufacturing variable costs expensed = Total contribution margin. Gross margin: Selling price - variable manufacturing costs expensed - fixed manufacturing costs expensed = Gross margin. 3. A company operating at “break-even” is probably not covering costs which are not recorded in the accounting records. An example of such a cost is the opportunity cost of owner-invested capital. In some small businesses, owner-managers may not take a salary as large as the opportunity cost of forgone alternative employment. Hence, the opportunity cost of owner labor may be excluded. 4. In the short-run, without considering asset replacement, net operating cash flows would be expected to exceed net income, because the latter includes depreciation expense, while the former does not. Thus, the cash basis break-even would be lower than the accrual break-even if asset replacement is ignored. However, if asset replacement costs are taken into account, (i