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Introduction to Management Accounting

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2-48 CVP and Financial Statements for a Mega-Brand Company
Procter & Gamble Company is a Cincinnati-based company that produces household products under
brand names such as Gillette, Bounty, Crest, Folgers, and Tide. The company's 2006 income statement
showed the following (in millions):
Net sales $68,222
Costs of products sold 33,125
Selling, general, and administrative expense 21,848
Operating income $13,249
Suppose that the cost of products sold is the only variable cost; selling, general, and administrative
expenses are fixed with respect to sales.
Assume that Procter & Gamble had a 10% increase in sales in 2007 and that there was no change
in costs except for increases associated with the higher volume of sales. 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.

2-61 CVP in a Modern Manufacturing Environment
A division of Hewlett-Packard Company changed its production operations from one where a
large labor force assembled electronic components to an automated production facility dominated
by computer-controlled robots. The change was necessary because of fierce competitive pressures.
Improvements in quality, reliability, and flexibility of production schedules were necessary just to
match the competition. As a result of the change, variable costs fell and fixed costs increased, as
shown in the following assumed budgets:
Old Production Operation New Production Operation
Unit variable cost
Material $ .88 $ .88
Labor 1.22 .22
Total per unit $ 2.10 $ 1.10
Monthly fixed costs
Rent and depreciation $450,000 $ 875,000
Supervisory labor 80,000 175,000
Other 50,000 90,000
Total per month $580,000 $1,140,000
Expected volume is 600,000 units per month, with each unit selling for $3.10. Capacity is 800,000
units.
1. Compute the budgeted profit at the expected volume of 600,000 units under both the old and the
new production environments.
2. Compute the budgeted break-even point under both the old and the new production environments.
3. Discuss the effect on profits if volume falls to 500,000 units under both the old and the new production
environments.
4. Discuss the effect on profits if volume increases to 700,000 units under both the old and the new
production environments.
5. Comment on the riskiness of the new operation versus the old operation.
2-62 Multiproduct Break-Even in a Restaurant
Study Appendix 2A. An article in Washington Business included an income statement for La
Brasserie, a French restaurant in Washington, D.C. A simplified version of the statement follows:
Revenues $2,098,400
Cost of sales, all variable 1,246,500
Gross profit 851,900
Operating expenses
Variable 222,380
Fixed 170,940
Administrative expenses, all fixed 451,500
Net income $ 7,080
The average dinner tab at La Brasserie is $40, and the average lunch tab is $20. Assume that the variable
cost of preparing and serving dinner is also twice that of a lunch. The restaurant serves twice as
many lunches as dinners. Assume that the restaurant is open 305 days a year.
1. Compute the daily break-even volume in lunches and dinners for La Brasserie. Compare this to
the actual volume reflected in the income statement.

EXCEL Application Exercise
EXCEL Application Exercise
2-65 CVP and Break-Even
Goal: Create an Excel spreadsheet to perform CVP analysis and show the relationship
between price, costs, and break-even points in terms of units and dollars. Use the results
to answer questions about your findings.
Scenario: Phonetronix is a small manufacturer of telephone and communications devices.
Recently, company management decided to investigate the profitability of cellular phone
production. They have three different proposals to evaluate. Under all the proposals, the
fixed costs for the new phone would be $110,000. Under proposal A, the selling price of the
new phone would be $99 and the variable cost per unit would be $55. Under proposal B, the
selling price of the phone would be $129 and the variable cost would remain the same.
Under proposal C, the selling price would be $99 and the variable cost would be $49.
When you have completed your spreadsheet, answer the following questions:
1. What are the break-even points in units and dollars under proposal A?
2. How did the increased selling price under proposal B impact the break-even points in
units and dollars compared to the break-even points calculated under proposal A?
3. Why did the change in variable cost under proposal C not impact the break-even points
in units and dollars as significantly as proposal B did?
Step-by-Step:
1. Open a new Excel spreadsheet.
2. In column A, create a bold-faced heading that contains the following:
Row 1: Chapter 2 Decision Guideline
Row 2: Phonetronix
Row 3: Cost-Volume-Profit (CVP) Analysis
Row 4: Today's Date
3. Merge and center the four heading rows across columns A through D.
4. In Row 7, create the following bold-faced, right-justified column headings:
Column B: Proposal A
Column C: Proposal B
Column D: Proposal C
Note: Adjust cell widths when necessary as you work.
5. In Column A, create the following row headings:
Row 8: Selling price
Row 9: Variable cost
Row 10: Contribution margin
Row 11: Contribution margin ratio
Skip a row
Row 13: Fixed cost
Skip a row
Row 15: Break-even in units
Skip a row
Row 17: Break-even in dollars
6. Use the scenario data to fill in the selling price, variable cost, and fixed cost amounts
for the three proposals.
7. Use the appropriate formulas from this chapter to calculate contribution margin,
contribution margin ratio, break-even in units, and break-even in dollars.
8. Format all amounts as:
Number tab: Category: Currency
Decimal places: 0
Symbol: None
Negative numbers: Red with parenthesis
9. Change the format of the selling price, contribution margin, fixed cost, and break-even
in dollars amounts to display a dollar symbol.
10. Change the format of both contribution margin headings to display as indented:
Alignment tab: Horizontal: Left (Indent)
Indent: 1
ISBN: 0-536-47129-0
Introduction to Management Accounting: Chapters 1-17, Fourteenth Edition, by Charles T. Horngren, Gary L. Sundem, William O. Stratton,
David Burgstahler, and Jeff Schatzberg. Published by Prentice Hall. Copyright © 2008 by Pearson Education, Inc.
90 Part 1: Focus on Decision Making
11. Change the format of the contribution margin amount cells to display a top border,
using the default line style.
Border tab: Icon: Top Border
12. Change the format of the contribution margin ratio amounts to display as a percentage
with two decimal places.
Number tab: Category: Percentage
Decimal places: 2
13. Change the format of all break-even headings and amounts to display as bold-faced.
14. Activate the ability to use heading names in formulas under Tools → Options:
Calculation tab: Check the box: Accept labels in formulas
15. Replace the cell-based formulas with "word-based" equivalents for each formula used
in Proposal A.
Example: Contribution margin for proposal B would be:
= ('Selling price' 'Proposal B') − ('Variable cost' 'Proposal B')
Note: The tic marks used in the example help avoid naming errors caused by data having similar titles (i.e., "contribution
margin" and "contribution margin ratio"). The parentheses help clarify groupings.
Help: Ask the Answer Wizard about "Name cells in a workbook."
Select "Learn about labels and names in formulas" from the right-hand panel.
16. Save your work to a disk, and print a copy for your files.

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Solution Summary

This solution includes an explanation for three questions in managerial accounting. The word documents includes the solutions as well as explanation where ever required. An Excel file is also attached for supplementing the solution for one of the questions.

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