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Determine BE61Determinethemissingamounts:
missing
UnitSelling
UnitVariable
amounts
Price
Costs
forthe
1.$750
$500
contributio
nmargin.
2.$450
(c)
3.(e)
(f)
ContributionMarginper
Unit
ContributionMargin
Ratio
(a)
(b)
$135
(d)
$400
20%
Preparea BE62FontillasManufacturingInc.hadsalesof$2.5millionforthefirstquarterof2012.In
CVP
makingthesales,thecompanyincurredthefollowingcostsandexpenses:
income
Variable
Fixed
statement.
Costofgoodssold
$850,000
$450,000
Sellingexpenses
140,000
65,000
Administrativeexpenses
70,000
90,000
PrepareaCVPincomestatementforthequarterendedMarch31,2012.
Calculate BE63PanciukCompanyhasaunitsellingpriceof$650,variablecostsperunitof$350,andfixed
thebreak
costsof$180,000.Calculatethebreakevenpointinunitsusing(a)themathematical
even
equationand(b)thecontributionmarginperunit.
point.
CalculateBE64Afirmsellsitsproductfor$30perunit.Itsdirectmaterialcostsare$6perunitanddirect
the
labourcostsare$4.Manufacturingoverheadcostsare$40,000perperiodand$8perunit.
break
Calculatetherequiredsalesindollarstobreakeven.
even
point.
CalculateBE65ForBiswellCompany,variablecostsare55%ofsalesandfixedcostsare$210,000.
salesfor
Calculatetherequiredsalesindollarsthatareneededtoachievemanagement'starget
target
operatingincomeof$80,000.(Usethecontributionmarginapproach.)
operating
income.
CalculateBE66ForKorbCompany,actualsalesare$1.2millionandbreakevensalesare$840,000.
the
Calculate(a)themarginofsafetyindollarsand(b)themarginofsafetyratio.
margin
ofsafety
and
margin
ofsafety
ratio.
CalculateBE67NYXInc.sellsitsproductfor$24perunitandvariablecostsare$14perunit.Itsfixedcosts
required
are$130,000.Calculatetherequiredsalesinunitstoachieveitstargetoperatingincomeof
salesin
10%oftotalcosts.
unitsfor
thetarget
operating
income.
Determine *BE68ThedegreesofoperatingleverageforDeltaCorp.andEpsilonCo.are1.4and5.6,
the
respectively.Bothhaveoperatingincomesof$50,000.Determinetheirrespective
contributio
contributionmargins.
nmargin
fromthe
degreeof
operating
leverage.
Calculate *BE69Sanjay'sShingleCorporationisconsideringthepurchaseofanewautomatedshingle
thedegree
cuttingmachine.Thenewmachinewillreducevariablelabourcostsbutwillincrease
ofoperating
depreciationexpense.Thecontributionmarginisexpectedtoincreasefrom$160,000to
leverage.
$240,000.Operatingincomeisexpectedtobethesameat$40,000.Calculatethedegree
ofoperatingleveragebeforeandafterthepurchaseofthenewequipment.Interpretyour
results.
Calculate BE610PresentedbelowaretheCVPincomestatementsforFinchCompanyandSparrow
thebreak
Company.Theyareinthesameindustry,withthesameoperatingincomes,butdifferent
evenpoint
coststructures.
witha
FinchCo.
SparrowCo.
changein
Sales
$150,000
$150,000
operating
leverage.
Variablecosts
60,000
15,000
Contributionmargin
90,000
135,000
Fixedcosts
50,000
95,000
$40,000
$40,000
Operatingincome
Calculatethebreakevenpointindollarsforeachcompanyandcommentonyour
findings.
Determine BE611FamilyFurnitureCo.hastwodivisions:bedroomdivisionanddiningroomdivision.The
the
resultsofoperationsforthemostrecentquarterareasfollows:
weighted
BedroomDivision
DiningRoomDivision
average
Sales
$500,000
$750,000
contributio
nmargin.
Variablecosts
250,000
450,000
Contributionmargin
$250,000
$300,000
Determinethecompany'sweightedaveragecontributionmarginratio.
Calculate BE612RussellCorporationsellsthreedifferentmodelsofmosquitozapper.ModelA12sells
the
for$50andhasvariablecostsof$40.ModelB22sellsfor$100andhasvariablecostsof
weighted
$70.ModelC124sellsfor$400andhasvariablecostsof$300.Thesalesmixofthethree
average
modelsisasfollows:A12,60%;B22,25%;andC124,15%.Whatistheweighted
unit
averageunitcontributionmargin?
contributio
nmargin
basedon
salesmix.
Calculate BE613InformationforRussellCorporationisgiveninBE612.Ifthecompanyhasfixedcosts
thebreak
of$199,500,howmanyunitsofeachmodelmustthecompanysellinordertobreak
evenpoint
even?
inunitsfor
acompany
with
multiple
products.
Calculat BE614PrestoCandleSupplymakescandles.Thesalesmix(asapercentageoftotaldollarsales)of
ethe
itsthreeproductlinesisbirthdaycandles30%,standardtaperedcandles50%,andlarge
break
scentedcandles20%.Thecontributionmarginratioofeachcandletypeisasfollows:
even
CandleType
ContributionMarginRatio
pointin
Birthday
10%
dollars
fora
Standardtapered
20%
company
Largescented
45%
with
multiple
Ifthecompany'sfixedcostsare$440,000peryear,whatisthedollaramountofeachtypeof
product
candlethatmustbesoldtobreakeven?
lines.
DoIt!Review
Calculat D615VinceCompanyhasaunitsellingpriceof$250,variablecostperunitof$160,andfixed
ebreak
costsof$135,000.
even
Instructions
pointin
Calculatethebreakevenpointinunitsusing(a)themathematicalequationand(b)
units.
contributionmarginperunit.
Calculate D616QueenslandCompanymakesradiosthatsellfor$30each.Forthecomingyear,
breakeven
managementexpectsfixedcoststototal$200,000andvariablecoststobe$20perunit.
point,
Instructions
marginof
safetyratio,
(a)Calculatethebreakevenpointindollarsusingthecontributionmargin(CM)ratio.
andsales
(b)Calculatethemarginofsafetyratioassumingactualsalesare$750,000.
fortarget
(c)Calculatethesalesdollarsrequiredtoearnoperatingincomeof$120,000.
operating
income.
Prepare
D617NaylorManufacturingInc.sold8,000unitsandrecordedsalesof$400,000forthefirst
CVP
monthof2012.Inmakingthesales,thecompanyincurredthefollowingcostsand
income
expenses.
statement
Variable
Fixed
and
calculate
Costofgoodssold
$184,000
$70,000
contribution
Sellingexpenses
40,000
30,000
margin.
Administrativeexpenses
16,000
40,000
Instructions
(a)PrepareaCVPincomestatementforthemonthendedJanuary31,2012.
(b)Calculatethecontributionmarginperunit.
(c)Calculatethecontributionmarginratio.
Calculate D618CottonwoodCompanyreportsthefollowingoperatingresultsforthemonthofApril.
thebreak
evenpoint
COTTONWOODCOMPANY
andmargin
CVPIncomeStatement
ofsafety
FortheMonthEndedApril30,2012
under
different
Total
PerUnit
alternatives.
Sales(9,000units)
$450,000
$50.00
Variablecosts
247,500
27.50
Contributionmargin
202,500
$22.50
Fixedexpenses
150,000
$52,500
Operatingincome
Managementisconsideringthefollowingcourseofactiontoincreaseoperatingincome:
Reducethesellingpriceby10%,withnochangestounitvariablecostsorfixedcosts.
Managementisconfidentthatthischangewillincreaseunitsalesby30%.
Instructions
Usingthecontributionmargintechnique,calculatethebreakevenpointinunitsanddollars
andmarginofsafetyindollars,
(a)assumingnochangestosellingpriceorcosts,and
(b)assumingchangestosalespriceandvolumeasdescribedabove.
Commentonyourfindings.
Calculate D619GlacialSpringsproducesandsellswaterfiltrationsystemsforhomeowners.Information
salesmix,
regardingitsthreemodelsisshownbelow.
weighted
Basic
BasicPlus
Premium
Total
average
contribution
Unitssold
840
350
210
1,400
margin,and
Sellingprice
$250
$400
$800
breakeven
point.
Variablecost
$195
$288
$416
Thecompany'stotalfixedcoststoproducethefiltrationsystemsare$140,000.
Instructions
(a)Determinethesalesmixasafunctionofunitssoldforthethreeproducts.
(b)Determinetheweightedaverageunitcontributionmargin.
(c)Determinethetotalnumberofunitsthatthecompanymustproducetobreakeven.
(d)Determinethenumberofunitsofeachmodelthatthecompanymustproducetobreak
even.
Exercises
Calculat E620KirklandVideoGamesInchasspent$450,000todevelopanewvideogame.Itisthemost
ebreak
sophisticatedgameinthemarket.Itsellsthevideogamefor$250percopy.Variablecoststo
even
produceandsellthevideogameamountto$50percopy.Thecompanyanticipatesselling
point
300copiesofthegamepermonth.Thecompany'spolicyistostopproducingthevideogame
andsales
assoonasacompetitorcomesoutwithamoresophisticatedversionofthevideogame.
required
Instructions
toearn
target
(a)Calculatetheamountofoperatingincomethecompanywillearnifittakes10monthsfor
operatin
acompetitortoproduceamoresophisticatedversionofthevideogame.
g
(b)Calculatehowmanyunitsofthevideogamethecompanywillhavetosellinorderto
income
breakeven.
in
(c)Ifthecompanywishestoearn$30,000overtheproduct'slife,calculatethesellingprice
dollars.
ofthevideogameifacompetitorintroducesamoresophisticatedversionofthevideo
gameinsixmonths.Assumethatunitsalesare300copiespermonth.
CalculateE621Jagswear,Inc.earnedoperatingincomeof$100,000during2012.Thecompanywantstoearn
thesales
operatingincomeof$140,000during2013.Itsfixedcostsareexpectedtobe$56,000,and
required
variablecostsareexpectedtobe30%ofsales.
toearn
Instructions
target
operating
(a)Determinetherequiredsalestomeetthetargetoperatingincomeduring2013.
income
(b)Fillinthedollaramountsforthesummaryincomestatementfor2013belowbasedon
in
youranswertopartA.
dollars.
Salesrevenue
$
Variablecosts
Contributionmargin
Fixedcosts
Operatingincome
CalculateE622TrailKingmanufacturesmountainbikes.Itssalesmixandcontributionmargininformation
the
perunitareasfollows:
break
Salesmix
Contributionmargin
even
pointin
Destroyer
15%
$120
unitsfor
Voyager
60%
$60
a
company
Rebel
25%
$40
with
Ithasfixedcostsof$5,440,000.
more
thanone
Instructions
product.
Calculatethenumberofeachtypeofbikethatthecompanywouldneedtosellinorderto
breakevenunderthisproductmix.
Calculatethe
E623TheRichibouctouInnistryingtodetermineitsbreakevenpoint.Theinnhas75
breakevenpoint
roomsavailablethatarerentedat$50anight.Operatingcostsareasfollows:
andmarginof
Salaries
$10,000permonth Maintenance
$500permonth
safety.
Utilities
2,000permonth
Housekeepingservice
Depreciation
1,000permonth
Othercosts
5perroom
25perroom
Instructions
(a)Determinetheinn'sbreakevenpointin(1)thenumberofrentedroomsper
monthand(2)dollars.
(b)Iftheinnplansonrenting30roomsperday(assuminga30daymonth),whatis
(1)themonthlymarginofsafetyindollarsand(2)themarginofsafetyratio?
Calculatethe
E624In2011,DemuthCompanyhadabreakevenpointof$350,000basedonaselling
variablecostper
priceof$7perunitandfixedcostsof$105,000.In2012,thesellingpriceandthe
unit,contribution
variablecostperunitdidnotchange,butthebreakevenpointincreasedto
marginratio,and
$420,000.
increaseinfixed
Instructions
costs.
Calculate
the
contribution
marginand
breakeven
point.
(a)Calculatethevariablecostperunitandthecontributionmarginratiofor2011.
(b)Calculatetheincreaseinfixedcostsfor2012.
E625InthemonthofJune,NewDaySpaserved2,600clientsatanaveragepriceof$30.
Duringthemonth,fixedcostswere$24,000andvariablecostswere60%ofsales.
Instructions
(a)Determinethecontributionmarginindollars,perunit,andasaratio.
(b)Usingthecontributionmargintechnique,calculatethebreakevenpointindollarsand
inunits.
Calculate E626JohansenCompanyhad$150,000ofoperatingincomein2012whenthesellingpriceper
various
unitwas$150,thevariablecostsperunitwere$90,andthefixedcostswere$570,000.
components
Managementexpectsperunitdataandtotalfixedcoststoremainthesamein2013.The
toderive
presidentofJohansenCompanyisunderpressurefromshareholderstoincreaseoperating
target
incomeby$60,000in2013.
operating
Instructions
income
under
(a)Calculatethenumberofunitssoldin2012.
different
(b)Calculatethenumberofunitsthatwouldhavetobesoldin2013toreachthe
assumptions
shareholders'desiredprofitlevel.
.
(c)AssumethatJohansenCompanysellsthesamenumberofunitsin2013asitdidin
2012.Whatwouldthesellingpricehavetobeinordertoreachtheshareholders'
desiredprofitlevel?
Calculate E627MoranCompanyreportsthefollowingoperatingresultsforthemonthofAugust:sales
operating
$310,000(units5,000);variablecosts$217,000;andfixedcosts$70,000.Managementis
income
consideringthefollowingindependentcoursesofactiontoincreaseoperatingincome:
under
different
1. Increasethesellingpriceby10%withnochangeintotalvariablecosts.
alternatives.
2. Reducevariablecoststo65%ofsales.
3. Reducefixedcostsby$10,000.
Instructions
Calculatetheoperatingincometobeearnedundereachalternative.Whichcourseofaction
willproducethehighestoperatingincome?
Calculate E628FriendlyAirways,Inc.,asmalltwoplanepassengerairline,hasaskedforyourassistance
breakeven
insomebasicanalysisofitsoperations.Bothplanesseat10passengerseach,andtheyfly
pointand
commutersfromFriendly'sbaseairporttothemajorcityintheprovince,Metropolis.Each
contributio
month40roundtripflightsaremade.Shownbelowisarecentmonth'sactivityintheform
nmargin.
ofacostvolumeprofitincomestatement.
Farerevenues(400fares)
$50,000
Variablecosts
$17,900
Snacksanddrinks
1,400
Landingfees
2,000
Suppliesandforms
1,200
22,500
Contributionmargin
27,500
Fixedcosts
3,000
15,000
Advertising
2,250
Airporthangarfees
1,750
22,000
$5,500
Fuel
Depreciation
Salaries
Operatingincome
Instructions
(a)Calculatethebreakevenpointin(1)dollarsand(2)numberoffares.
(b)Withoutcalculations,determinethecontributionmarginatthebreakevenpoint.
(c)Iffaresweredecreasedby10%,anadditional80farescouldbegenerated.However,
totalvariablecostswouldincreaseby20%.Shouldthefaredecreasebeadopted?
Preparea E629EmbletonCompanyestimatesthatvariablecostswillbe60%ofsales,andfixedcostswill
CVPgraph
total$800,000.Thesellingpriceoftheproductis$4.
andcalculate
Instructions
thebreak
evenpoint
(a)PrepareaCVPgraph,assumingmaximumsalesof$3.2million.(Note:Use$400,000
andmargin
incrementsforsalesandcosts,and100,000incrementsforunits.)
ofsafety.
(b)Calculatethebreakevenpointin(1)unitsand(2)dollars.
Preparea
(c)Assumingactualsalesare$2.5million,calculatethemarginofsafetyin(1)dollars
and(2)asaratio.
E630VolmarCompanyhadsalesin2012of$1,250,000on50,000units.Variablecoststotalled
CVPincome
statement
beforeand
afterchanges
inthe
business
environment.
$600,000,andfixedcoststotalled$500,000.
Anewrawmaterialisavailablethatwilldecreasethevariablecostsperunitby20%(or
$2.40).However,toprocessthenewrawmaterial,fixedoperatingcostswillincreaseby
$50,000.Managementfeelthatonehalfofthedeclineinthevariablecostsperunitshould
bepassedontocustomersintheformofasalespricereduction.Themarketing
departmentexpectsthatthissalespricereductionwillresultina10%increaseinthe
numberofunitssold.
Instructions
PrepareaCVPincomestatementfor2012,(a)assumingthechangeshavenotbeenmade,
and(b)assumingthatchangesaremadeasdescribed.
Calculate *E631Aninvestmentbankerisanalyzingtwocompaniesthatspecializeintheproductionandsale
thedegree
ofcandiedapples.OldFashionApplesusesalabourintensiveapproach,andMechApple
of
usesamechanizedsystem.Variablecostingincomestatementsforthetwocompaniesare
operating
shownbelow:
leverage
OldFashionApples
MechApple
andthe
impacton
Sales
$400,000
$400,000
the
Variablecosts
280,000
140,000
operating
incomeof
Contributionmargin
120,000
260,000
alternative
Fixedcosts
20,000
160,000
cost
structures.
Operatingincome
$100,000
$100,000
Theinvestmentbankerwantstoacquireoneofthesecompanies.However,sheisconcerned
abouttheimpactthateachcompany'scoststructuremighthaveonitsprofitability.
Instructions
(a)Calculateeachcompany'sdegreeofoperatingleverage.Determinewhichcompany's
coststructuremakesitmoresensitivetochangesinitssalesvolume.Presentyour
answerintermsofthecontributionmarginratio.
(b)Determinetheeffectoneachcompany'soperatingincome(1)ifsalesdecreaseby10%
and(2)ifsalesincreaseby5%.Donotprepareincomestatements.
(c)Determinewhichcompanytheinvestmentbankershouldacquire.Explain.
Calculate E632GrassKingmanufactureslawnmowers,weedtrimmers,andchainsaws.Itssalesmixand
thebreak
contributionmarginperunitareasfollows:
evenpoint
SalesMix
ContributionMarginperUnit
inunits
fora
Lawnmowers
30%
$35
company
Weedtrimmers
50%
$25
withmore
thanone
Chainsaws
20%
$50
product.
GrassKinghasfixedcostsof$4,620,000.
Instructions
CalculatethenumberofunitsofeachproductthatGrassKingmustsellinordertobreak
evenunderthisproductmix.
CalculateE633RapidAutohasover300automaintenanceserviceoutletsnationwide.Itprovidestwomain
the
linesofservice:oilchangesandbrakerepair.Oilchangesandrelatedservicesrepresent60%
product
ofitssalesandprovideacontributionmarginratioof20%.Brakerepairrepresents40%ofits
line
salesandprovidesa60%contributionmarginratio.Thecompany'sfixedcostsare$18
break
million(thatis,$60,000perserviceoutlet).
even
Instructions
pointand
target
(a)Calculatethedollaramountofeachtypeofservicethatthecompanymustprovidein
operating
ordertobreakeven.
income
(b)Thecompanyhasadesiredoperatingincomeof$66,000perserviceoutlet.Calculatethe
indollars
dollaramountofeachtypeofservicethatmustbeprovidedbyeachserviceoutlettomeet
fora
thecompany'stargetoperatingincomeperoutlet.
company
with
more
thanone
product.
CalculateE634BlazerDeliveryisarapidlygrowingdeliveryservice.Lastyear,80%ofitsrevenuecame
the
fromthedeliveryofmailingpouchesandsmall,standardizeddeliveryboxes(which
product
providesa10%contributionmargin).Theother20%ofitsrevenuecamefromdelivering
line
nonstandardizedboxes(whichprovidesa60%contributionmargin).Withtherapidgrowth
break
ofInternetretailsales,Blazerbelievesthattherearegreatopportunitiesforgrowthinthe
even
deliveryofnonstandardizedboxes.Thecompanyhasfixedcostsof$12million.
pointin
Instructions
dollars
fora
(a)Calculatethecompany'sbreakevenpointintotalsalesdollars.Atthebreakevenpoint,
company
howmuchofthecompany'ssalesareprovidedbyeachtypeofservice?
with
(b)Thecompany'smanagementwouldliketokeepitsfixedcostsconstant,butshiftitssales
more
mixsothat80%ofitsrevenuecomesfromthedeliveryofnonstandardizedboxesand
thanone
theremainderfrompouchesandsmallboxes.Determinewhatthecompany'sbreakeven
product.
saleswouldbe,andwhatamountofsaleswouldbeprovidedbyeachserviceifthiswere
tooccur.
Calculate E635VeejayGolfAccessoriessellsgolfshoes,gloves,andalaserguidedrangefinderthat
thebreak
measuresdistance.Shownbelowareunitcostandsalesdata:
evenpoint
PairsofShoes
PairsofGloves
RangeFinder
inunits
fora
Unitsalesprice
$100
$30
$270
company
Unitvariablecosts
60
10
200
with
multiple
Unitcontributionmargin
$40
$20
$70
products.
Salesmix
40%
50%
10%
Fixedcostsare$660,000.
Instructions
(a)Calculatethebreakevenpointinunitsforthecompany.
(b)Determinethenumberofunitstobesoldatthebreakevenpointforeachproductline.
(c)Verifythatthemixofsalesunitsdeterminedin(b)willgenerateazerooperating
income.
Determin E636MegaElectronixsellstelevisionsetsandBlurayDVDplayers.Thebusinessisdividedinto
ethe
twodivisionsalongproductlines.Avariablecostincomestatementforarecentquarter's
break
activityispresentedbelow:
evenpoint
TVDivision
BlurayDVDPlayerDivision
Total
indollars
fortwo
Sales
$800,000
$200,000
$1,000,000
divisions.
Variablecosts
560,000
160,000
720,000
Contributionmargin
$240,000
$40,000
280,000
Fixedcosts
140,000
Operatingincome
$140,000
Instructions
(a)Determinethepercentageofsalesandcontributionmarginforeachdivision.
(b)Calculatethecompany'sweightedaveragecontributionmarginratio.
(c)Calculatethecompany'sbreakevenpointindollars.
(d)Determinethesaleslevelindollarsforeachdivisionatthebreakevenpoint.
Calculate *E637TheCVPincomestatementsshownbelowareavailableforBillingsCompanyand
thedegree
BozemanCompany.
of
BillingsCo.
BozemanCo.
operating
leverage
Salesrevenue
$600,000
$600,000
and
Variablecosts
320,000
120,000
evaluate
theimpact
Contributionmargin
280,000
480,000
of
Fixedcosts
180,000
380,000
alternative
cost
Operatingincome
$100,000
$100,000
structures
on
Instructions
operating
(a)Calculatethedegreeofoperatingleverageforeachcompanyandinterpretyourresults.
income.
(b)Assumingthatsalesrevenueincreasesby10%,prepareavariablecostingincome
statementforeachcompany.
(c)Discusshowthecoststructureofthesetwocompaniesaffectstheiroperatingleverage
andprofitability.
Calculate *E638ImagenArquitectonicaofTijuana,Mexicoiscontemplatingamajorchangeinitscost
thedegree
structure.Currently,allofitsdraftingworkisperformedbyskilleddraftspersons.Alfredo
of
Ayala,Imagen'sowner,isconsideringreplacingthedraftspersonswithacomputerized
operating
draftingsystem.
leverage
However,beforemakingthechange,Alfredowouldliketoknowitsconsequences,since
and
thevolumeofbusinessvariessignificantlyfromyeartoyear.ShownbelowareCVP
evaluate
incomestatementsforeachalternative:
theimpact
of
ManualSystem
ComputerizedSystem
alternative
Sales
$1,500,000
$1,500,000
cost
structures
Variablecosts
$1,200,000
900,000
on
operating
income
and
marginof
safety.
ManualSystem
ComputerizedSystem
Contributionmargin
300,000
600,000
Fixedcosts
200,000
500,000
$100,000
$100,000
Operatingincome
Instructions
(a)Determinethedegreeofoperatingleverageforeachalternative.
(b)Calculatewhichalternativewouldproducethehigheroperatingincomeifsales
increasedby$100,000.
(c)Usingthemarginofsafetyratio,determineswhichalternativecouldsustainthegreater
declineinsalesbeforeoperatingataloss.
Problems:SetA
Calculat P639ARonaldEnterprises,Ltd.hasestimatedthefollowingcostsforproducingandselling15,000
ethe
unitsofitsproduct:
break
Directmaterials
$75,000
even
pointin
Directlabour
90,000
units
Variableoverhead
45,000
and
target
Fixedoverhead
30,000
income
Variablesellingandadministrativeexpenses
60,000
aftertax.
Fixedsellingandadministrativeexpenses
40,000
RonaldEnterprises'incometaxrateis40%.
Instructions
(a)Giventhatthesellingpriceofoneunitis$38,calculatehowmanyunitsRonald
Enterpriseswouldhavetosellinordertobreakeven.
(b)Assumethesellingpriceis$43perunit.CalculatehowmanyunitsRonaldEnterprises
wouldhavetosellinordertoproduceaprofitof$25,000beforetaxes.
(c)CalculatewhatpriceRonaldEnterpriseswouldhavetochargeinordertoproducea
profitof$30,000aftertaxesif7,500unitswereproducedandsold.
(d)CalculatewhatpriceRonaldEnterpriseswouldhavetochargeinordertoproducea
beforetaxprofitequalto30%ofsalesif9,000unitswereproducedandsold.
(adaptedfromCGACanada)
Determine P640AThePeaceBarberShopemploysfourbarbers.Onebarber,whoalsoservesasthe
variable
manager,ispaidasalaryof$3,900permonth.Theotherbarbersarepaid$1,900per
andfixed
month.Inaddition,eachbarberispaidacommissionof$2perhaircut.Othermonthly
costs,
costsareasfollows:storerent$700plus60centsperhaircut;depreciationonequipment
calculate
$500;barbersupplies40centsperhaircut;utilities$300;andadvertising$100.Theprice
thebreak
evenpoint,
preparea
CVPgraph,
and
determine
operating
income.
ofahaircutis$11.
Instructions
(a)Determinethevariablecostperhaircutandthetotalmonthlyfixedcosts.
(b)Calculatethebreakevenpointinunitsanddollars.
(c)PrepareaCVPgraph,assumingamaximumof1,800haircutsinamonth.Use
incrementsof300haircutsonthehorizontalaxisand$3,000incrementsonthe
verticalaxis.
(d)Determinetheoperatingincome,assuming1,700haircutsaregiveninamonth.
Determine P641AMontrealSeatingCo.,amanufacturerofchairs,hadthefollowingdatafor2012:
the
Sales
2,800units
contributio
nmargin
Salesprice
$50perunit
ratio,
Variablecosts
$30perunit
breakeven
pointin
Fixedcosts
$30,000
dollars,and
Instructions
marginof
safety.
(a)Calculatethecontributionmarginratio.
(b)Calculatethebreakevenpointindollars.
(c)Calculatethemarginofsafetyindollars.
(d)Thecompanywishestoincreaseitstotaldollarcontributionmarginby60%in2013.
Determinebyhowmuchitwillneedtoincreaseitssalesifallotherfactorsremain
constant.
(adaptedfromCGACanada)
Determine P642AYUXCorporationsellsasingleproductfor$50.Itsmanagementestimatesthefollowing
the
revenuesandcostsfortheyear2012:
contributio
Netsales
$500,000 Sellingexpensesvariable
$
nmargin
20,000
ratio,
breakeven
Directmaterials
90,000 Sellingexpensesfixed
20,000
pointin
Directlabour
60,000 Administrativeexpenses
10,000
dollars,
variable
marginof
safetyand
Manufacturingoverhead
20,000 Administrativeexpenses
10,000
sales
variable
fixed
requiredto
Manufacturingoverhead
30,000
earntarget
fixed
operating
income
under
alternative
scenarios
Instructions
(a)Assumingfixedcostsandnetsalesarespreadevenlythroughouttheyear,determine
YUX'smonthlybreakevenpointin(1)unitsand(2)dollars.
(b)Calculatethecontributionmarginratio,theannualmarginofsafetyratio,andthe
annualprofit.
(c)DeterminethepercentageincreaseofannualprofitsifYUXCorporationincreasesits
sellingpriceby20%andallotherfactors(includingdemand)remainconstant.
(d)Assumethepriceremainsat$50perunitandvariablecostsremainthesameperunit,
butfixedcostsincreaseby20%annually.Calculatethepercentageincreaseinunit
salesrequiredtoachievethesamelevelofannualprofitcalculatedinpart(b).
(e)Determinethesalesrequiredtoearnanoperatingincomeof$360,000aftertax.YUX
Corporation'sincometaxis40%.
Calculate P643AGorhamManufacturing'ssalesslumpedbadlyin2012.Forthefirsttimeinitshistory,it
thebreak
operatedataloss.Thecompany'sincomestatementshowedthefollowingresultsfrom
evenpoint
selling64,000unitsofproduct:netsales$1.6million;totalcostsandexpenses
under
$1,880,000;andnetloss$280,000.Costsandexpensesconsistedoftheamountsshown
alternative
below:
coursesof
Total
Variable
Fixed
action.
Costofgoodssold
$1,350,000
$930,000
$420,000
Sellingexpenses
420,000
65,000
355,000
Administrativeexpenses
110,000
45,000
65,000
$1,880,000
$1,040,000
$840,000
Managementisconsideringthefollowingindependentalternativesfor2013:
1.
2.
Increasetheunitsellingpriceby40%withnochangeincosts,expenses,andsales
volume.
Changethecompensationofsalespersonsfromfixedannualsalariestotalling
$200,000tototalsalariesof$30,000plusa5%commissiononnetsales.
Instructions
(a)Calculatethebreakevenpointindollarsfor2012.
(b)Calculatethebreakevenpointindollarsundereachofthealternativecoursesof
action.(Roundallratiostonearestfullpercent.)
(c)Statewhichcourseofactionyourecommend.Givereasonsforyour
recommendation.
Determine P644AThevicepresidentofmarketing,CarolChow,thinksthatherfirmcanincreasesalesby
thebreak
15,000unitsforeach$5perunitreductioninitssellingprice.Thecompany'scurrent
evenpointin
sellingpriceis$90perunitandvariableexpensesare$60perunit.Fixedexpensesare
dollarsand
units,and
target
income.
$810,000peryear.Thecurrentsalesvolumeis40,000units.
Instructions
Answerthefollowingquestions:
(a)Whatisthecurrentyearlyoperatingincome?
(b)Whatisthecurrentbreakevenpointinunitsandindollarsales?
(c)AssumingthatCaroliscorrect,whatisthemaximumprofitthatthefirmcould
generateyearly?Athowmanyunitsandatwhatsellingprice(s)perunitwouldthis
profitbegenerated?Assumethatcapacityisnotaproblemandtotalfixedexpenses
willbethesameregardlessofvolume.
(d)Whatwouldbethebreakevenpoint(s)inunitsandindollarsalesusingtheselling
price(s)youhavedetermined?
(adaptedfromCGACanada)
Calculatethe P645AAliceShoemakeristheadvertisingmanagerforValueShoeStore.Sheiscurrently
breakeven
workingonamajorpromotionalcampaign.Herideasincludetheinstallationofanew
pointand
lightingsystemandincreaseddisplayspacethatwilladd$34,000infixedcoststothe
marginof
$270,000currentlyspent.Inaddition,Aliceisproposingthata5%pricedecrease($40
safetyratio,
to$38)willproducea20%increaseinsalesvolume(20,000to24,000).Variablecosts
andprepare
willremainat$22perpairofshoes.ManagementareimpressedwithAlice'sideasbut
aCVP
areconcernedabouttheeffectsthatthesechangeswillhaveonthebreakevenpointand
income
themarginofsafety.
statement
Instructions
beforeand
after
(a)Calculatethecurrentbreakevenpointinunits,andcompareitwiththebreakeven
changesin
pointinunitsifAlice'sideasareused.
thebusiness
(b)CalculatethemarginofsafetyratioforcurrentoperationsandforafterAlice's
environment
changesareintroduced.(Roundtonearestfullpercent.)
.
(c)PrepareaCVPincomestatementforcurrentoperationsandforafterAlice'schanges
areintroduced.Wouldyoumakethechangessuggested?
Calculatethe P646APooleCorporationhascollectedthefollowinginformationafteritsfirstyearofsales.
breakeven
Netsaleswere$1.6millionon100,000units,sellingexpenseswere$240,000(40%
pointand
variableand60%fixed),directmaterialswere$511,000,directlabourwas$285,000,
marginof
administrativeexpenseswere$280,000(20%variableand80%fixed),and
safetyratio,
manufacturingoverheadwas$360,000(70%variableand30%fixed).Topmanagement
andprepare
hasaskedyoutodoaCVPanalysissothatitcanmakeplansforthecomingyear.
aCVP
Managementhasprojectedthatunitsaleswillincreaseby10%nextyear.
income
Instructions
statement
beforeand
(a)Calculate(1)thecontributionmarginforthecurrentyearandtheprojectedyear,and
after
(2)thefixedcostsforthecurrentyear.(Assumethatfixedcostswillremainthe
changesin
thebusiness
environment
.
sameintheprojectedyear.)
(b)Calculatethebreakevenpointinunitsandsalesdollarsforthefirstyear.
(c)Thecompanyhasatargetoperatingincomeof$310,000.Calculatetherequired
salesamountindollarsforthecompanytomeetitstarget.
(d)Assumingthecompanymeetsitstargetoperatingincomenumber,calculatebywhat
percentageitssalescouldfallbeforethecompanyoperatesataloss.Thatis,whatis
itsmarginofsafetyratio?
(e)Thecompanyisconsideringapurchaseofequipmentthatwouldreduceitsdirect
labourcostsby$104,000andwouldchangeitsmanufacturingoverheadcoststo
30%variableand70%fixed(assumethetotalmanufacturingoverheadcostis
$360,000,asabove).Itisalsoconsideringswitchingtoapurecommissionbasisfor
itssalesstaff.Thiswouldchangesellingexpensesto90%variableand10%fixed
(assumethetotalsellingexpenseis$240,000,asabove).Calculate(1)the
contributionmarginand(2)thecontributionmarginratio,and(3)recalculatethe
breakevenpointinsalesdollars.Commentontheeffecteachofmanagement's
proposedchangeshasonthebreakevenpoint.
Determine P647AKosinksiManufacturingcarriesnoinventories.Itsproductismanufacturedonlywhena
the
customer'sorderisreceived.Itisthenshippedimmediatelyafteritismade.Foritsfiscal
contribution
yearendedOctober31,2012,Kosinksi'sbreakevenpointwas$1,350,000.Onsalesof
marginratio.
$1.3million,itsfullcostincomestatementshowedagrossprofitof$200,000,direct
materialscostof$400,000,anddirectlabourcostsof$500,000.Thecontributionmargin
was$117,000,andvariablemanufacturingoverheadwas$100,000.
Instructions
(a)Calculatethefollowing:
1. Variablesellingandadministrativeexpenses
2. Fixedmanufacturingoverhead
3. Fixedsellingandadministrativeexpenses
(b)Ignoringyouranswertopart(a),assumethatfixedmanufacturingoverheadwas
$100,000andthefixedsellingandadministrativeexpenseswere$80,000.The
marketingvicepresidentfeelsthatifthecompanyincreaseditsadvertising,sales
couldbeincreasedby15%.Determinethemaximumincreasedadvertisingcostthe
companycanincurandstillreportthesameincomeasbeforetheadvertising
expenditure.
(adaptedfromCGACanada)
Determine P648ANewtonCellularLtd.manufacturesandsellstheTopLineCellphone.Forits2012
the
businessplan,NewtonCellularestimatedthefollowing:
contributio
Sellingprice
$750
nmargin,
breakeven
Variablecostpercellphone
$450
point,and
Annualfixedcosts
$180,000
target
operating
Net(aftertax)income
$360,000
income.
Taxrate
25%
TheMarchfinancialstatementsreportedthatsaleswerenotmeetingexpectations.For
thefirstthreemonthsoftheyear,only400unitshadbeensoldattheestablishedprice.
Withvariablecostsstayingasplanned,itwasclearthatthe2012aftertaxprofit
projectionwouldnotbereachedunlesssomeactionwastaken.Amanagement
committeepresentedthefollowingmutuallyexclusivealternativestothepresident:
1. Reducethesellingpriceby$60.Thesalesteamforecaststhat,withthe
significantlyreducedsellingprice,3,000unitscanbesoldduringtheremainder
oftheyear.Totalfixedandvariableunitcostswillstayasbudgeted.
2. Lowervariablecostsperunitby$20throughtheuseoflessexpensivedirect
materialsandslightlymodifiedmanufacturingtechniques.Thesellingpricewill
alsobereducedby$40,andsalesof2,800unitsfortheremainderoftheyearare
forecast.
3. Cutfixedcostsby$20,000andlowerthesellingpriceby5%.Variablecostsper
unitwillbeunchanged.Salesof2,500unitsareexpectedfortheremainderofthe
year.
Instructions
(a)Underthecurrentproductionpolicy,determinethenumberofunitsthatthe
companymustselltobreakevenandachieveitsdesiredoperatingincome.
(b)Determinewhichalternativethecompanyshouldselecttoachieveitsdesired
operatingincome.
(adaptedfromCMACanada)
Determine *P649AOlinBeautyCorporationmanufacturescosmeticproductsthataresoldthrougha
the
networkofsalesagents.Theagentsarepaidacommissionof18%ofsales.Theincome
contributio
statementfortheyearendingDecember31,2012,isasfollows:
nmargin,
breakeven
OLINBEAUTYCORPORATION
point,target
IncomeStatement
sales,and
YearEndingDecember31,2012
degreeof
operating
Sales
$78,000,000
leverage.
Costofgoodssold
Variable
Fixed
Grossmargin
Sellingandmarketingexpenses
Commissions
Fixedcosts
Operatingincome
$36,660,000
7,940,000
44,600,000
33,400,000
$14,040,000
10,260,000
24,300,000
$9,100,000
Thecompanyisconsideringhiringitsownsalesstafftoreplacethenetworkofagents.It
willpayitssalespeopleacommissionof10%andincurfixedcostsof$6,240,000.
Instructions
(a)Underthecurrentpolicyofusinganetworkofsalesagents,calculatetheOlin
BeautyCorporation'sbreakevenpointinsalesdollarsfortheyear2012.
(b)Calculatethecompany'sbreakevenpointinsalesdollarsfortheyear2012ifit
hiresitsownsalesforcetoreplacethenetworkofagents.
(c)Calculatethedegreeofoperatingleverageatsalesof$78millionifOlinBeauty(1)
usessalesagents,and(2)employsitsownsalesstaff.Describetheadvantagesand
disadvantagesofeachalternative.
(d)Calculatetheestimatedsalesvolumeinsalesdollarsthatwouldgeneratean
identicaloperatingincomefortheyearendingDecember31,2012,regardlessof
whetherOlinBeautyCorporationemploysitsownsalesstaffandpaysthema10%
commissionorcontinuestousetheindependentnetworkofagents.
(adaptedfromCMACanada)
Determine P650AMartinFootwearCo.produceshighqualityshoes.Topreparefornextyear'smarketing
the
campaign,thecompany'scontrollerhaspreparedthefollowinginformationforthe
contributio
currentyear,2012:
nmargin,
Variablecosts(perpairofshoes)
breakeven
pointin
Directmaterials
$40.00
units,and
Directmanufacturinglabour
19.00
target
income.
Variableoverhead(manufacturing,marketing,distribution,customer
21.00
service,andadministration)
Totalvariablecosts
Fixedcosts
Manufacturing
$80.00
$2,750,000
Marketing,distribution,andcustomerservice
500,000
Administrative
750,000
Totalfixedcosts
Sellingpriceperpairofshoes
$4,000,000
$180
Expectedrevenues,2012(50,000units)
$9,000,000
Incometaxrate
40%
Instructions
(a)Calculatetheprojectedoperatingincomebeforetaxfor2012.
(b)Calculatethebreakevenpointinunitsfor2012.
(c)Thecompanycontrollerhassettherevenuetargetfor2013at$9.9million(or
55,000pairs).Hebelievesanadditionalmarketingcostof$400,000foradvertising
in2013,withallothercostsremainingconstant,willbenecessarytoattainthe
revenuetarget.Calculatetheoperatingincomefor2013iftheadditional$400,000is
spentandtherevenuetargetismet.
(adaptedfromCMACanada)
Calculate *P651AThefollowingCVPincomestatementsareavailableforOldCompanyandNew
thebreak
Company:
evenpoint,
OldCompany
NewCompany
marginof
safety,and
Salesrevenue
$400,000
$400,000
thedegree
Variablecosts
180,000
80,000
ofoperating
leverage
Contributionmargin
220,000
320,000
and
Fixedcosts
170,000
270,000
evaluateits
impacton
Operatingincome
$50,000
$50,000
financial
results.
Instructions
(a)Calculatethebreakevenpointindollarsandthemarginofsafetyratioforeach
company.
(b)Calculatethedegreeofoperatingleverageforeachcompanyandinterpretyour
results.
(c)Assumingthatsalesrevenueincreasesby20%,prepareavariablecostincome
statementforeachcompany.
(d)Assumingthatsalesrevenuedecreasesby20%,prepareavariablecostincome
statementforeachcompany.
(e)Discusshowthecoststructureofthesetwocompaniesaffectstheiroperating
leverageandprofitability.
Determin P652ATheCreeksideInnisarestaurantthatspecializesinsouthwesternstylemealsinamoderate
ethesales
pricerange.TerryDucasse,themanagerofCreekside,hasdeterminedthatduringthelast
mixunder
twoyearsthesalesmixandcontributionmarginratioofitsofferingshavebeenasfollows:
different
PercentofTotalSales
ContributionMarginRatio
scenarios.
Appetizers
10%
60%
Mainentrees
60%
30%
Desserts
10%
50%
Beverages
20%
80%
Terryisconsideringavarietyofoptionstotrytoimprovetherestaurant'sprofitability.Her
goalistogenerateatargetoperatingincomeof$150,000.Thecompanyhasfixedcostsof
$1.2millionperyear.
Instructions
(a)Calculatethetotalrestaurantsalesandthesalesofeachproductlinethatwouldbe
necessaryinordertoachievethedesiredtargetoperatingincome.
(b)Terrybelievestherestaurantcouldgreatlyimproveitsprofitabilitybyreducingthe
complexityandsellingpricesofitsentreestoincreasethenumberofclientsthatit
serves,andbymoreheavilymarketingitsappetizersandbeverages.Sheisproposing
todropthecontributionmarginratioonthemainentreesto10%byreducingthe
averagesellingprice.Sheenvisionsanexpansionoftherestaurantthatwouldincrease
fixedcostsby50%.Atthesametime,sheisproposingtochangethesalesmixtothe
following:
PercentofTotalSales
ContributionMarginRatio
Appetizers
20%
60%
Mainentrees
30%
10%
Desserts
10%
50%
Beverages
40%
80%
Calculatethetotalrestaurantsalesandthesalesofeachproductlinethatwouldbe
necessaryinordertoachievethedesiredtargetoperatingincomeifTerry'schangesare
implemented.
(c)SupposethatTerrydropsthesellingpriceonentreesandincreasesfixedcostsas
proposedinpart(b),butcustomersarenotswayedbythemarketingeffortsandthe
productmixremainswhatitwasinpart(a).Calculatethetotalrestaurantsalesandthe
salesofeachproductlinethatwouldbenecessaryinordertoachievethedesiredtarget
operatingincome.Commentonthepotentialrisksandbenefitsofthisstrategy.
Problems:SetB
Determine P653BSeatonLtd.manufacturesandsellscomputerlaptops.Forits2012businessplan,Seaton
the
estimatedthefollowing:
contributio
Sellingprice
$600
nmargin,
breakeven
Variablecostperlaptop
$300
point,and
Annualfixedcosts
$150,000
targetsales
aftertaxes.
Net(aftertax)income
$360,000
Taxrate
25%
TheMarchfinancialstatementsreportedthatsaleswerenotmeetingexpectations.For
thefirstthreemonthsoftheyear,only400unitshadbeensoldattheestablishedprice.
Withvariablecostsstayingasplanned,itwasclearthatthe2012aftertaxprofit
projectionwouldnotbereachedunlesssomeactionwastaken.Amanagement
committeepresentedthefollowingmutuallyexclusivealternativestothepresident:
1. Reducethesellingpriceby$60.Thesalesteamforecaststhat,withthe
significantlyreducedsellingprice,2,700unitscanbesoldduringtheremainderof
theyear.Totalfixedandvariableunitcostswillstayasbudgeted.
2. Lowervariablecostsperunitby$20throughtheuseoflessexpensivedirect
materialsandslightlymodifiedmanufacturingtechniques.Thesellingpricewill
alsobereducedby$40,andsalesof2,500unitsfortheremainderoftheyearare
forecast.
3. Cutfixedcostsby$20,000andlowerthesellingpriceby5%.Variablecostsper
unitwillbeunchanged.Salesof2,200unitsareexpectedfortheremainderofthe
year.
Instructions
(a)Underthecurrentproductionpolicy,determinethenumberofunitsthatthecompany
mustselltobreakevenandtoachieveitsdesiredoperatingincome.
(b)Determinewhichalternativethecompanyshouldselecttoachieveitsdesired
operatingincome.
(adaptedfromCMACanada)
Determin P654BRichardCasperownstheFredoniaBarberShop.Heemploysfivebarbersandpayseacha
evariable
baserateof$1,000permonth.Oneofthebarbersservesasthemanagerandreceivesan
andfixed
extra$500permonth.Inadditiontothebaserate,eachbarberalsoreceivesacommission
costs,
of$5.50perhaircut:
calculate
Othercostsareasfollows:
thebreak
even
Advertising
$200permonth
point,
Rent
$900permonth
preparea
CVP
Barbersupplies
$0.30perhaircut
graph,
Utilities
$175permonthplus$0.20perhaircut
and
determine
Magazines
$25permonth
operating
Instructions
income.
(a)Determinethevariablecostperhaircutandthetotalmonthlyfixedcosts.
(b)Computethebreakevenpointinunitsanddollars.
(c)PrepareaCVPgraph,assumingamaximumof1,800haircutsinamonth.Use
incrementsof300haircutsonthehorizontalaxisand$3,000ontheverticalaxis.
(d)Determinenetincome,assuming1,900haircutsaregiveninamonth.
Determin P655BMaritimeManufacturingCompanyproducesandsellsahighqualityhandbag.During
evariable
2012,handbagsaleswere$600,000,thecontributionmarginratiowas40%,andthemargin
andfixed
ofsafetywas$300,000.
costsand
Instructions
operating
income.
(a)Calculatethebreakevensales.
(b)Calculatethevariablecosts.
(c)Calculatethefixedcosts.
(d)Calculatetheprofitsat$500,000ofsales.
(adaptedfromCGACanada)
Determine P656BYUXCorporationsellsasingleproductfor$40.Itsmanagementestimatesthefollowing
the
revenuesandcostsfortheyear2012:
contributio
Netsales
$500,000 Sellingexpensesvariable
$
nmargin
20,000
ratio,
breakeven
Directmaterials
150,000 Sellingexpensesfixed
30,000
pointin
Directlabour
90,000 Administrativeexpenses
10,000
dollars,
variable
marginof
safetyand
Manufacturingoverhead
30,000 Administrativeexpenses
20,000
sales
variable
fixed
requiredto
Manufacturingoverhead
40,000
earntarget
fixed
operating
income
Instructions
under
alternative
scenarios
(a)Assumingfixedcostsandnetsalesarespreadevenlythroughouttheyear,calculate
YUX'smonthlybreakevenpointin(1)unitsand(2)dollars.
(b)Calculatethecontributionmarginratio,theannualmarginofsafetyratio,andthe
annualprofit.
(c)AssumingYUXCorporationincreasesitssellingpriceby30%andallotherfactors
(includingdemand)remainconstant,determinebywhatpercentageannualprofits
willincrease.
(d)Assumethepriceremainsat$40perunitandvariablecostsremainthesameperunit,
butfixedcostsincreaseby30%annually.Calculatethepercentageincreaseinunit
salesrequiredtoachievethesamelevelofannualprofitcalculatedinpart(b).
(e)Determinethesalesrequiredtoearnanoperatingincomeof$360,000beforetax.
YUXCorporation'sincometaxis40%.
Calculate P657BDelgadoManufacturing'ssalesslumpedbadlyin2012.Forthefirsttimeinitshistory,it
thebreak
operatedataloss.Thecompany'sincomestatementshowedthefollowingresultsfrom
evenpoint
selling60,000unitsofproduct:netsales$1.5million,totalcostsandexpenses
under
$1,890,000,andnetloss$390,000.Costsandexpenseswereasfollows:
alternative
Total
Variable
Fixed
coursesof
action.
Costofgoodssold
$1,350,000
$930,000
$420,000
Sellingexpenses
420,000
65,000
355,000
Administrativeexpenses
120,000
55,000
65,000
$1,890,000
$1,050,000
$840,000
Managementisconsideringthefollowingindependentalternativesfor2013:
1.
2.
3.
Increasetheunitsellingpriceby40%withnochangeincostsandexpenses.
Changethecompensationofsalespersonsfromfixedannualsalariestotalling
$200,000tototalsalariesof$30,000plusa4%commissiononnetsales.
Purchasenewhightechfactorymachinerythatwillchangetheproportion
betweenvariableandfixedcostofgoodssoldto50:50.
(a)Calculatethebreakevenpointindollarsfor2012.
(b)Calculatethebreakevenpointindollarsundereachofthealternativecoursesof
action.(Roundtonearestfullpercent.)Whichcourseofactiondoyourecommend?
Determine P658BJohn,nowretired,ownstheCampusCutterBarberShop.Heemploysfivebarbersand
thebreak
payseachabasesalaryof$1,500permonth.Oneofthebarbersservesasthemanager
evenpointin
andreceivesanextra$500permonth.Inadditiontothebasesalary,eachbarber
dollarsand
receivesacommissionof$6perhaircut.Eachbarbercandoasmanyas20haircutsa
target
day,buttheaverageis14haircutseachday.TheCampusCutterBarberShopisopenan
income.
averageof24dayspermonthandcharges$15perhaircut.
Othercostsareincurredasfollows:
Advertising
$500permonth
Rent
$1,000permonth
Supplies
$1.50perhaircut
Utilities
$300permonth,plus$0.50perhaircut
Magazines
$50permonth
Cleaningsupplies
$0.25perhaircut
Instructions
(a)Calculatethemonthlybreakevenpointforthefollowing:
1. Numberofhaircuts
2. Totalsalesdollars
3. Asapercentageofmaximumcapacity
(b)InFebruary,1,500haircutsweregiven.Calculatetheoperatingincomefor
February.
(c)IfJohnwouldlikea$4,000monthlyprofit,calculatethenumberofhaircutsthat
mustbegivenpermonthtoachievethisprofit.
(d)InMarch,1,600haircutsweregiven.Assumingdemandissufficient,woulditbe
possibletogiveenoughhaircutsinApriltobringthetotalforthetwomonths
combinedtothetargetprofitof$4,000foreachmonth?
(adaptedfromCGACanada)
Calculatethe P659BBarbTsaiistheadvertisingmanagerforThriftyShoeStore.Sheiscurrentlyworkingon
breakeven
amajorpromotionalcampaign.Herideasincludetheinstallationofanewlighting
pointand
systemandincreaseddisplayspacethatwilladd$24,000infixedcoststothe$210,000
marginof
currentlyspent.Inaddition,Barbisproposingthata6.23%pricedecrease(from$30to
safetyratio,
$28)willproduceanincreaseinsalesvolumefrom16,000to20,000units.Variable
andprepare
costswillremainat$15perpairofshoes.ManagementisimpressedwithBarb'sideas
aCVP
butisconcernedabouttheeffectsthatthesechangeswillhaveonthebreakevenpoint
income
andthemarginofsafety.
statement
Instructions
beforeand
afterchanges
(a)Calculatethecurrentbreakevenpointinunits,andcompareitwiththebreakeven
inthe
pointinunitsifBarb'sideasareused.
business
(b)CalculatethemarginofsafetyratioforcurrentoperationsandafterBarb'schanges
environment.
areintroduced.(Roundtonearestfullpercent.)
(c)PrepareaCVPincomestatementforcurrentoperationsandafterBarb'schangesare
introduced.Wouldyoumakethechangessuggested?
Determine P660BReginaEnterprises,Ltd.hasestimatedthefollowingcostsforproducingandselling
thebreak
8,000unitsofitsproduct:
evenpoint
Directmaterials
$32,000
andtarget
income.
Directlabour
40,000
Variableoverhead
20,000
Fixedoverhead
30,000
Variablesellingandadministrativeexpenses
24,000
Fixedsellingandadministrativeexpenses
33,000
ReginaEnterprises'incometaxrateis30%.
Answerthefollowingquestions:
(a)Giventhatthesellingpriceofoneunitis$35,howmanyunitswouldRegina
Enterpriseshavetosellinordertobreakeven?
(b)Atasellingpriceof$37.50perunit,howmanyunitswouldReginaEnterpriseshave
tosellinordertoproduceaprofitof$22,000beforetaxes?
(c)If7,500unitswereproducedandsold,whatpricewouldReginaEnterpriseshaveto
chargeinordertoproduceaprofitof$28,000aftertaxes?
(d)If9,000unitswereproducedandsold,whatpricewouldReginaEnterpriseshaveto
chargeinordertoproduceabeforetaxprofitequalto30%ofsales?
Calculatethe P661BAxelleCorporationhascollectedthefollowinginformationafteritsfirstyearofsales.
breakeven
Netsaleswere$2millionon100,000units,sellingexpenseswere$400,000(30%
pointand
variableand70%fixed),directmaterialswere$600,000,directlabourwas$340,000,
marginof
administrativeexpenseswere$500,000(30%variableand70%fixed),and
safetyratio,
manufacturingoverheadwas$480,000(20%variableand80%fixed).Topmanagers
andprepare
haveaskedyoutodoaCVPanalysissothattheycanmakeplansforthecomingyear.
aCVP
Theyhaveprojectedthatunitsaleswillincreaseby20%nextyear.
income
Instructions
statement
beforeand
(a)Calculate(1)thecontributionmarginforthecurrentyearandtheprojectedyear,and
afterchanges
(2)thefixedcostsforthecurrentyear.(Assumethatfixedcostswillremainthe
inthe
sameintheprojectedyear.)
business
(b)Calculatethebreakevenpointinunitsandsalesdollars.
environment.
(c)Thecompanyhasatargetoperatingincomeof$374,000.Calculatetherequired
salesamountindollarsforthecompanytomeetitstarget.
(d)Assumethecompanymeetsitstargetoperatingincomenumber.Calculatebywhat
percentageitssalescouldfallbeforeitoperatesataloss.Thatis,whatisitsmargin
ofsafetyratio?
(e)Thecompanyisconsideringapurchaseofequipmentthatwouldreduceitsdirect
labourcostsby$140,000andwouldchangeitsmanufacturingoverheadcoststo
10%variableand90%fixed(assumethetotalmanufacturingoverheadcostis
$480,000,asabove).Itisalsoconsideringswitchingtoapurecommissionbasisfor
itssalesstaff.Thiswouldchangesellingexpensesto80%variableand20%fixed
(assumethetotalsellingexpenseis$400,000,asabove).Calculate(1)the
contributionmarginand(2)thecontributionmarginratio,and(3)recalculatethe
breakevenpointinsalesdollars.Commentontheeffecteachofmanagement's
proposedchangeshasonthebreakevenpoint.
Determine P662BThecompanythatyouworkforasamanagerialaccountantusesindependentagentsto
the
sellitsproducts.Theseagentsarecurrentlybeingpaidacommissionof15%ofthesales
contributio
pricebutareaskingforanincreaseto20%ofsalesmadeduringthecomingyear.You
nmargin
hadalreadypreparedthefollowingincomestatementforthecompanybasedonthe15%
ratio,
commission:
breakeven
IncomeStatement
pointin
YearEndingApril30,2012
dollars,and
targetsales.
Sales
$1,000,000
Costofgoodssold(allvariable)
600,000
Grossprofit
400,000
$150,000
10,000
160,000
Incomebeforetaxes
240,000
Incometaxexpense(25%)
60,000
Operatingincome
$180,000
Sellingandadministrativeexpenses(variablecommission
only)
Fixedcosts
Managementwantstoexaminethepossibilityofemployingthecompany'sown
salespeople.Thecompanywouldneedasalesmanageratanannualsalaryof$60,000and
threesalespeopleatanannualsalaryof$30,000each,plusacommissionof5%ofsales.
Allotherfixedcostsaswellasthevariablecostpercentageswouldremainthesameasin
theaboveproformaincomestatement.
Instructions
(a)Basedontheproformaincomestatementyouhavealreadyprepared,calculatethe
breakevenpointinsalesdollarsforthecompanyfortheyearendingApril30,2012.
(b)CalculatethebreakevenpointinsalesdollarsfortheyearendingApril30,2012,if
thecompanyusesitsownsalespeople.
(c)CalculatethevolumeofsalesdollarsrequiredfortheyearendingApril30,2012,to
havethesameoperatingincomeasprojectedintheproformaincomestatementifthe
companycontinuestousetheindependentsalesagentsandagreestotheirdemandfor
a20%salescommission.
(d)Calculatetheestimatedsalesvolumeinsalesdollarsthatwouldgenerateanidentical
operatingincomefortheyearendingApril30,2012,regardlessofwhetherthe
companyemploysitsownsalespeopleorcontinuestousetheindependentsales
agentsandpaysthema20%commission.
(adaptedfromCGACanada)
Determine P663BHighQualityToy'sprojectedoperatingincomefor2012is$1million,basedonasales
the
volumeof90,000units.HighQualitysellsTheToyfor$35perunit.Variablecosts
contributio
consistofthe$14purchasepriceanda$1shippingandhandlingcost.HighQuality's
nmargin,
annualfixedcostsare$800,000.
breakeven
Instructions
pointin
dollars,and
(a)Calculatethecompany'sbreakevenpointinunits.
sales.
(b)Calculatethecompany'soperatingincomein2012ifthereisa10%increasein
projectedunitsales.
(c)For2013,managementexpectsthattheunitpurchasepriceofTheToywillincrease
by30%.Calculatethesalesrevenuethecompanymustgeneratein2013tomaintain
thecurrentyear'soperatingincomeifthesellingpriceremainsunchanged.
(adaptedfromCMACanada)
Calculate *P664BThefollowingCVPincomestatementsareavailableforRetroCompanyandModern
the
Company:
break
RetroCompany
ModernCompany
even
point,the
Salesrevenue
$500,000
$500,000
marginof
Variablecosts
300,000
100,000
safety,
andthe
Contributionmargin
200,000
400,000
degreeof
Fixedcosts
140,000
340,000
operating
leverage
Operatingincome
$60,000
$60,000
under
(a)
Calculatethebreakevenpointindollarsandthe
various
marginofsafetyratioforeachcompany.
scenarios
.
(b)
Calculatethedegreeofoperatingleverageforeach
companyandinterpretyourresults.
(c)Assumingthatsalesrevenueincreasesby25%,prepareavariablecostincome
statementforeachcompany.
(d)Assumingthatsalesrevenuedecreasesby25%,prepareavariablecostincome
statementforeachcompany.
(e)Discusshowthecoststructureofthesetwocompaniesaffectstheiroperatingleverage
andprofitability.
Calculate *P665BComfortCraftmanufacturesswivelseatsforcustomizedvans.Itcurrentlymanufactures
the
10,000seatsperyear,whichitsellsfor$480perseat.Itincursvariablecostsof$180per
break
seatandfixedcostsof$2.2million.Itisconsideringautomatingtheupholsteryprocess,
even
whichisnowlargelymanual.Itestimatesthatifitdoesso,itsfixedcostswillbe$3.2
point,the
million,anditsvariablecostswilldeclineto$80perseat.
marginof
(a)PrepareaCVPincomestatementbasedoncurrentactivity.
safety,
(b)Calculatethecontributionmarginratio,breakevenpointindollars,marginofsafety
andthe
ratio,anddegreeofoperatingleveragebasedoncurrentactivity.
degreeof
(c)PrepareaCVPincomestatementassumingthatthecompanyinvestsintheautomated
operating
upholsterysystem.
leverage
(d)Calculatethecontributionmarginratio,breakevenpointindollars,marginofsafety
under
ratio,anddegreeofoperatingleverageassumingthenewupholsterysystemis
various
implemented.
scenarios
.
(e)Discusstheimplicationsofadoptingthenewsystem.
P666BTheBricktownPubisarestaurantthatspecializesinclassiceastcoastfareinamoderate
pricerange.DebbieMacNeil,themanagerofBricktown,hasdeterminedthatduringthe
Determin
lasttwoyearsthesalesmixandcontributionmarginofitsofferingsareasfollows:
ethesales
mixunder
PercentofTotalSales
ContributionMarginRatio
alternative
Appetizers
10%
50%
strategies
and
Mainentrees
55%
30%
evaluate.
Desserts
10%
60%
Beverages
25%
75%
Debbieisconsideringavarietyofoptionstotrytoimprovetherestaurant'sprofitability.
Hergoalistogenerateatargetoperatingincomeof$155,000.Thecompanyhasfixedcosts
of$400,000peryear.
Instructions
(a)Calculatethetotalrestaurantsalesandthesalesofeachproductlinethatwouldbe
necessaryinordertoachievethedesiredtargetoperatingincome.
(b)Debbiebelievestherestaurantcouldgreatlyimproveitsprofitabilitybyreducingthe
complexityandsellingpricesofitsentreestoincreasethenumberofclientsthatit
serves,andbymoreheavilymarketingitsappetizersandbeverages.Sheisproposing
toreducethecontributionmarginonthemainentreesto15%bydroppingtheaverage
sellingprice.Sheenvisionsanexpansionoftherestaurantthatwouldincreasefixed
costsby50%.Atthesametime,sheisproposingtochangethesalesmixtothe
following:
PercentofTotalSales
ContributionMarginRatio
Appetizers
15%
50%
Mainentrees
30%
15%
Desserts
15%
60%
Beverages
40%
75%
Calculatethetotalrestaurantsales,andthesalesofeachproductlinethatwouldbe
necessaryinordertoachievethedesiredtargetoperatingincome.
(c)SupposethatDebbiedropsthesellingpriceonentrees,andincreasesfixedcostsas
proposedinpart(b),butcustomersarenotswayedbyhermarketingefforts,andthe
productmixremainswhatitwasinpart(a).Calculatethetotalrestaurantsalesandthe
salesofeachproductlinethatwouldbenecessarytoachievethedesiredtarget
operatingincome.Commentonthepotentialrisksandbenefitsofthisstrategy