3-41

a. What is the break-even point for Suburban?

For Break even,

Total Revenue=T otal Costs

Price Unitsof output producedsold=( Variable cost per unit Units of output ) + Costs
PX=VX+ F PXVX =F X ( PV )=F X =

X=

F
PV

$ 200,000$ 250,000 $ 50,000

=
=100,000 Units of Output
$ 1.00$ 1.50
$ 0.50

b. Suburban expects 75,000 riders this year. Will it operate at a surplus or

deficit?

Total Revenue=T otal Costs

PX=VX+ F $ 1.00 X 75,000=( $ 1.50 X 75,000 ) + ( $ 200,000$ 250,000 )
$ 75,000=( $ 112,500 ) + ($ 50,000 ) $ 75,000=$ 62,000
Total Revenue $ 75,000>T otal Costs $ 62,000

Suburban Bus Lines will operate at a

surplus
3-43
a. Calculate the break-even point(s).
1 Lane
$6

X = F (P-V)
X = 5,500 meals

X = $33,000 ($10 - $4)

X= $33,000

2 Lanes
$6

X = F (P-V)
X = 6,500 meals

X = $39,000 ($10 - $4)

X= $39,000

3 Lanes
$6

X = F (P-V)
X = 8,750 meals

X = $52,500 ($10 - $4)

X= $52,500

b. If Sam can sell all the meals he can serve, should he operate at one, two, or
three lanes? Support your answer.
Profit (loss) = (P V) X F
1 Lane

($10 - $4) x 5,500 - $33,000 = ($3,000)

2 Lanes

($10 - $4) x 6,500 - $39,000 = $9,000

3 Lanes

($10 - $4) x 8,750 - $52,500 = $7,500

San should operate three lanes because he could generate a higher profit than
having one or two lines.
3-45
a. Compute Odd Wallow Drinks break-even point in units per year.
X = F (P-V)

X = $12,168,000 ($75 - $36)

X = $312,000

b. How many cases must Odd Wallow Drinks sell to earn $1,872,000 per year
after taxes on the juice?

Before tax profit=Target after taxincome ( 1t )

Before-tax profit = $1,872,000 (1 0.40)
Before-tax profit = $1,872,000 0.60 = $3,120,000

Target profit
1t
Target volume ( units )=
Unit Contribution Margin
Co sts+

Target volume ( units )=

$ 12,168,000+ $ 3,120,000 $ 15,288,000

=392,000
$ 75$ 36
$ 39

3-47
The company must sell 10,000 units annually in order to earn $234,000 un profit after taxes.
What is Lomas Electronicss tax rate?
$234,000 = [($260 - $140) 10,000 - $840,000] X (1 t)

$234,000 = [($120) 10,000 - $840,000] X (1 t)

$234,000 = [$1,200,000 - $840,000] X (1 t)
$234,000 = $360,000 $360,000t
$360,000t = $126,000
t = $126,000 / $360,000 = 0.30
3-50
a. What is the anticipated level of profits for the expected sales volumes?
Programmer
8,000 x $70
8,000 x $30
8,000 x $40

+
+
+
+

Executive
12,000 x $100
12,000 x $40
12,000 x $60

=
=
=

$1,760,000
$720,000
$1,040,000
$819,000
$221,000

PX
VX
(P-V)X
F
Profit

b. Assuming that the product mix is the same at the break-even point, compute the breakeven point.
Weights:
Programmer = (8,000) (8,000 + 12,000) = 0.40
Executive = (12,000) (8,000 + 12,000) = 0.60
Weighted-average contribution margin = (0.40 x $40) + (0.60 x $60)
Weighted-average contribution margin = $16 + $36 = $52
Breakeven point
Profit = (P V) X F
$0 = $52X - $819,000
$52X = $819,000

X = $819,000 $52 = 15,750 units

Programmer: 0.40 x 15,750 = 6,300 units
Executive: 0.60 x 15,750 = 9,450 units
c. If the product sales mix were to change to nine Programmer-style bags for each
Executive-style bag, what would be the new break-even volume for On-the-Go?
Weights:
Programmer = 0.9
Executive = 0.1
Weighted-average contribution margin = (0.90 x $40) + (0.10 x $60)
Weighted-average contribution margin = $36 + $6 = $42
Breakeven point
Profit = (P V) X F
$0 = $42X - $819,000
$42X = $819,000
X = $819,000 $42 = 19,500 units
Programmer: 0.90 x 19,500 = 17,550 units
Executive: 0.10 x 19,500 = 1,950 units
3-54
a. At what sales revenue per month does the company break even?
b. Suppose the company is subject to a 35 percent tax on income. At what sales revenue per
month will the company earn $40,950 after taxes assuming the same sales mix?

4-49
a. Should Ms. Nili take the order? Explain your answer.
Nili should take the order because she will be generating a higher profit than
what she was getting before this order.
b. What is the minimum price Ms. Nili should accept to take the special
order?
The minimum price that Ms. Nili should accept the order will be $24,000 $1,510 = $22,490 because at this price she would be having the same profit
than before to accept the special order, so she will not have a loss.
c. What are the other factors, if any, besides price that she should consider?
Other factor that she should consider are that taking this special order, she will
be missing some customer that will buy their dresses on other stores.
4-50
a. Assume SMARTs bid equals the total cost, including fixed costs allocated
to the job, plus the 25 percent markup on cost. What should SMART bid for
each of the three levels of activity?
b. Compute the differential cost (including setup cost) and the contribution
to profit for each of the three levels of activity. Note that fixed costs are
not differential costs.
c. Assume the prospective client gives three options. It is willing to accept
either of SMARTs bids for the one-seminar or four-seminar activity levels,
but the prospective client will pay only 85 percent of the bid price for the
eight-seminar package. SMARTs president responds, We cant make
money in this business by shaving our bids! Lets take the four-seminar
option because we make the most profit on it. Do you agree? What would
be the contribution to profit for each of the three options?
I disagree. Because even though that the prospective client is only paying 85%
for the eight seminars, this one is the one that is generating the higher profit.
So, we should take the eight seminars instead of the four seminars.

4-53
a. KCSB receives a proposal from an outside contractor who will assemble
800 of the 2,000 bicycles per month and ship them directly to KCSBs
customers as orders are received from KCSBs sales force. KCSB would
provide the materials for each bicycle, but the outside contractor would
assemble, box, and ship the bicycles. The variable manufacturing costs
would be reduced by 40 percent for the 800 bicycles assembled by the
outside contractor. KCSBs fixed nonmanufacturing costs would be
unaffected, but its variable nonmanufacturing costs would be cut by 60
percent for these 800 units produced by the outside contractor. KCSBs
plant would operate at 60 percent of its normal level, and total fixed
manufacturing costs would be cut by 20 percent. What in-house unit cost
should be compared with the quotation received from the outside
contractor? Should the proposal be accepted for a price (that is, payment
to the contractor) of $140 per unit?
b. Assume the same facts as in requirement (a) but assume that the idle
facilities would be used to produce 80 specialty racing bicycles per month.
These racing bicycles could be sold for $8,000 each, while the costs of
production would be $5,600 per unit variable manufacturing cost. Variable
marketing costs would be $200 per unit. Fixed nonmanufacturing and
manufacturing costs would be unchanged whether the original 2,000
regular bicycles were manufactured or the mix of 1,2000 regular bicycles
plus 80 racing bicycles was produced. Considering this opportunity to use
the freed-up space, what is the maximum purchase price per unit that
KCSB should be willing to pay the outside contractor to assemble regular
bicycles? Should the contractors proposal of $140 per unit be accepted?

4-55
What action do you recommend to Power Musics management? Write a short
report to management recommending whether or not to close the Fifth Avenue
store. Include the reasons for your recommendation.