Practice Text Exercises

Practice Test Exercises
Question 2-48
Compute the predicted 2007 operating income for Procter & Gamble and its percentage increase. Explain why the percentage increase in income differs from the percentage increase in sales.

Sales (\$68,222 x 1.1) = \$75,044
COG (\$33,125 x 1.1) = \$36,438
Selling/General/Admin Exp. \$21,848 (no change)
Operating Income \$16,758.00
Percentage Increase (\$16,758-\$13,249)/\$13,249= 26.5%

There was not an increase in all cost which caused the operating income to change from 2006 to 2007. The COG may always increase because it is considered a variable cost. Due to the increase in sales, the percentage increase is much higher.

Question 2-61
1. Compute the budgeted profit at the expected volume of 600,000 units under both the old and the new production environments.

Old Production Operation New Production Operation
Sales (600,000 X 3.10) 1,860,000 1,860,000
Less: Variable Costs (600,000 X 2.10, 1.10) 1,260,000 660,000
Contribution Margin 600,000 1,200,000
Less: Fixed Costs 580,000 1,140,000
Net Income 20,000 60,000

2. Compute the budgeted break-even point under both the old and the new production environments.

Unit Contribution Margin \$3.10-\$2.10=\$1.00 \$3.10-\$1.10=\$2.00
Fixed Cost 580,000 1,140,000
Break Even Units (FC/UCM) 580,000/1=580,000 1140,000/2=570,000
Break Even Sales 580,000x3.10=\$1,798,000 570,000 x 3.10= \$1,767,000

Fixed Cost/Unit Contribution Margin
 Old=580,000
 New=570,000

3. Discuss the effect on profits if volume falls to 500,000 units under both the old and the new production environments.
Old Production Operation New Production Operation
Sales (500,000X3.10) \$1,550,000 \$1,550,000
Less: Variable Costs (500,000 X2.1, 1.1) \$1,050,000 \$550,000
Contribution Margin \$500,000 \$1,000,000
Less: Fixed Costs \$580,000 \$1,140,000
Net Income (\$80,000) (\$140,000)

 Old Production Profit becomes smaller then New Production Profit. There is a rapid decrease under the New...