# Accounting Financial Ratios and Analysis

Problem One:

Mason Company has a product that sells for $20 per unit. The variable expenses are $12 per unit, and fixed expenses total $30,000 per year.

Required:

(a). What is the total contribution margin at the break-even point?

(b). What is the contribution margin ratio for the product?

(c). If total sales increase by $20,000 and fixed expenses remain unchanged, by how much would net operating income be expected to increase?

(d). The marketing manager wants to increase advertising by $6,000 per year. How many additional units would have to be sold to increase overall net operating income by $2,000?

Problem Two:

Zoran Company offers two products. At present, the following represents the usual results of a month's operations:

Product K Product L

Amount Per Unit Amount Per Unit Combined Amount

Sales revenue..................... $120,000 $1.20 $80,000 $0.80 $200,000

Variable expenses............... 60,000 0.60 60,000 0.60 120,000

Contribution margin.............. $ 60,000 $0.60 $20,000 $0.20 $80,000

Fixed expenses................... 50,000

Net operating income............ $30,000

Required:

(a). Find the break-even point in terms of dollars.

(b). Find the margin of safety in terms of dollars.

(c). The company is considering decreasing product K's unit sales to 80,000 and increasing product L's unit sales to 180,000, leaving unchanged the selling price per unit, variable expense per unit, and total fixed expenses. Would you advise adopting this plan?

(d). Refer to (c) above. Under the new plan, find the break-even point in terms of dollars.

(e). Under the new plan in (c) above, find the margin of safety in terms of dollars.

Problem Three:

Parkins Company produces a single product. Operating date for the company and its absorption costing income statements for the last two years are presented below:

Year 1 Year 2

Units in beginning inventory.................................... 0 1,000

Units produced.................................................... 9,000 9,000

Units sold........................................................... 8,000 10,000

Year 1 Year 2

Sales.................................................................. $80,000 $100,000

Less cost of goods sold:

Beginning inventory......................................... 0 6,000

Add cost of goods manufactured......................... 54,000 54,000

Goods available for sale.................................... 54,000 60,000

Less ending inventory....................................... 6,000 0

Cost of goods sold................................................. 48,000 60,000

Gross margin....................................................... 32,000 40,000

Less selling & administrative expenses....................... 28,000 30,000

Net operating income............................................. $ 4,000 $ 10,000

Variable manufacturing costs are $4 per unit. Fixed factory overhead totals $18,000 in each year. This overhead was applied at a rate of $2 per unit. Variable selling and administrative expenses were $1 per unit sold.

(a). What was the unit product cost in each year under variable costing?

(b). Prepare new income statement for each year using variable costing.

(c). Reconcile the absorption costing and variable costing net operating income for each year.

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