Deck 5: Cost-Volume-Profit Relationships

Question 1

Preparing a Contribution Format Income Statement Wheeler Corporation's most recent income statement follows:
Required:
Prepare a new contribution format income statement under each of the following conditions(consider each case independently):
1. The sales volume increases by 50 units.
2. The sales volume declines by 50 units.
3. The sales volume is 7.000 units.

Answer 1

1)Contribution Format Income Statement
2)Contribution Format Income Statement
3)Contribution Format Income Statement

Question 2

What is meant by a product's contribution margin ratio How is this ratio useful in planning business operations

Answer 2

4205-6-1Q AID: 0544 | 21/08/2012
RID: 2035 | 30/08/2012
Product's contribution margin ratio is computed by diving contribution margin by sales in dollars. This ratio is presented as percentage of sales.
Contribution margin is calculated by deducting variable costs from sales revenue. This is used to meet the fixed costs and provide for profit. Thus it is useful in estimating the sales volume needed for estimated earnings target. It is useful to predict the net income at given sales revenue. Hence it is very useful in business planning.

Question 3

Prepare a Cost-Volume-Profit (CVP) Graph
Katara Enterprises distributes a single product whose selling price is $36 and whose variable expense is $24 per unit. The company's monthly fixed expense is $12.000
Required:
1. Prepare a cost-volume-profit graph for the company up to a sales level of 2,000 units.
2. Estimate the company's break-even point in unit sales using your cost-volume-profit graph

Answer 3

1)There are three steps to follow in order to plot a CVP graph:
First , to determine the fixed cost, draw a parallel line to the x-axis (volume) at its fixed dollar amount. In this case, $12,000
Second , determine the total cost. Total cost formula follows the cost formula:
Where "a"= fixed costs, "b"= variable costs, and "X"= number of units. Pick the relevant volume, in this case 2,000, and solve for the total cost.
Third , determine total sales revenue. Choose the maximum sales level, in this case 2000 units.
Now plot each line. Keep in mind the total sales revenue line starts at 0 on the graph while the total costs line starts at the same point the fixed cost line does. See graph below:
2)The break-even point is the point where the total sales revenue and the total expense lines intersect. As illustrated by the red line above, this is about the halfway point between 0 and 2,000 units, which we can estimate as 1,000 units. We can verify this using the CVP formula. The break-even point will yield $0 of profit:
Note: Unit contribution margin = selling price/unit - variable cost / unit
Q = Quantity sold

Question 4

Often the most direct route to a business decision is an incremental analysis. What is meant by an incremental analysis

Question 5

Prepare a Profit Graph
Capricio Enterprises distributes a single product whose selling price is $19 and whose variable expense is $15 per unit. The company's fixed expense is $12,000 per month.
Required:
1. Prepare a profit graph for the company up to a sales level of 4,000 units.
2. Estimate the company's break-even point in unit sales using your profit graph.

Question 6

In all respects, Company A and Company B are identical except that Company A's costs are mostly variable, whereas Company B's costs are mostly fixed. When sales increase, which company will tend to realize the greatest increase in profits Explain.

Question 7

Computing and Using the CM Ratio
Last month when Harrison Creations. Inc. sold 40.000 units. total were $300,000.total variable expenses $240,00 and fixed expenses were $45,000.
Required:
1 What is the company's contribution margin (CM) ratio
2 Estimate the change in the company's net operating income if it were to increase its total sales by $1,500.

Question 8

What is meant by the term operating leverage

Question 9

Changes in Variable Costs, Fixed Costs, Selling Price, and Volume
Data for Herron Corporation are shown below:
Fixed expenses are$75.000 per month and the company is selling 3,000 units per month.
Required:
1. The marketing manager believes that an $.8000 increase in the monthly advertising budget would increase monthly sales by.$15,000. Should the advertising budget be increased
2. Refer to the original data. Management is considering using higher-quality components that would increase the variable Cost by $3 per unit. The marketing manager believes that the higher-quality product would increase sales by 15 % per month. Should the higher-quality components be used

Question 10

What is meant by the term break-even point

Question 11

Compute the Level of Sales Required to Attain a Target Profit
Liman Corporation has a single product whose selling price is $140 and whose variable expense is $60 per unit The company's monthly fixed expense is $40,000.
Required:
1. Using the equation method. solve for the unit sales that are required to earn a target profit of $6,000.
2. Using the formula method. solve for the dollar sales that are required to earn a target profit of $8,000.

Question 12

In response to a request from your immediate supervisor, you have prepared a CVP graph portraying the cost and revenue characteristics of your company's product and operations. Explain how the lines on the graph and the break-even point would change if (a) the selling price per unit decreased, ( b ) fixed cost increased throughout the entire range of activity portrayed on the graph, and ( c ) variable cost per unit increased.

Question 13

Compute the Break-Even Point
Max son Products distributes a single product. a woven basket whose selling price is $8 and whose variable cost is $6 per unit. The company's monthly fixed expense is $5.500
Required
I. Solve for the company's break-even point in unit sales using the equation method.
2. Solve for the company's break-even point in sales dollars using the equation method and the CM ratio.
3. Solve for the company's break-even point in unit sales using the formula method.
4. Solve for the company's break-even point in sales dollars using formula method and the CM ratio.

Question 14

What is meant by the margin of safety

Question 15

Compute the Margin of Safety Mohan Corporation is a distributor of a sun umbrella used at resort hotels. Data concerning next month's budget appear below:
Required
1. Computer the company's margin of safety.
2. Compute the company', margin of safety a percentage of it, sales.

Question 16

What is meant by the term sales mix What assumption is usually made concerning sales mix in CVP analysis

Question 17

Compute and Use the Degree of Operating Leverage
Eneliko Company installs home theater systems. The company's most recent monthly contribution format income statement appears below:
Required:
1. Compute the company's, degree of operating leverage.
2. Using the degree of operating leverage, estimate the impact on net operating income of a 10% increase in sales.
3. Verify your estimate from part (2) above by constructing a new contribution format income statement for the company assuming a 10% increase in sales.

Question 18

Explain how a shift in the sales mix could result in both a higher break-even point and a lower net income.

Question 19

Compute the Break-Even Point for a Multiproduct Company
Lucky Products markets two computer games: Predator and Run way. A contribution form at
income statement for a recent month for the two games appears below:
Required:
1. Compute the overall contribution margin (CM) ratio for the company.
2. Compute the overall break-even point for the company in sales dollars.
3. Verify the overall break-even point for the company by constructing a contribution format income statement showing the appropriate levels of sales for the two products

Question 20

Break-Even Analysis; Target Profit; Margin of Safety; eM Ratio
Pringle Company distributes a single product. The company's sales and expenses for a recent month follow:
Required:
1. What the monthly break-even point in units sold and in sales dollars
2. without resorting to computations. what is the total contribution margin at the break-even point
3. How many units would have to be sold each month to cam a target profit of $18,000 Use the formula method. Verify your answer by preparing a contribution. format income statement at the target level of sales.
4. Refer to the original data. Compute the company's margin of safety in both dollar and percentage terms.
5. What is the company's CM ratio If monthly sales increase by $80.000 and there is no change
in fixed expenses. by how much would you expect monthly net operating income to increase

Question 21

Break-Even and Target Profit Analysis
Reveen Products sells camping equipment. One of the company's products. a camp lantern. Sells for $90 per unit. Variable expenses are $63 per lantern. and fixed expenses associated with the lantern total $135.000 per month.
Required:
1. Compute the company's break-even point in number of lanterns and in total sales dollars.
2. If the variable expense per lantern increase a percentage of the selling price, will it result in a
higher or a lower of break-even point Why (Assume that the fixed expenses remain unchanged.)3. At present. the company is selling 8,000 lanterns perm on the. The sales manager is convinced that a 10% reduction in the selling price will result in a 25% increase in the number of lanterns sold each month. Prepare two contribution format income statements. one under present operating conditions. and one a, operations would appear after the proposed changes. Show both total and per unit data on your statements,
4. Refer to the data in (3)1 above, How man, lanterns would have to be sold at the new selling a price to yield a minimum net operating income of $72.000 per month

Question 22

Break-Even Analysis and CVP Graphing
Chi Omega Sorority is planning its annual Riverboat Extravaganza. The Extravaganza committee has assembled the following expected costs for the event:
The committee members would like to charge $30 per person for the evening's activities,
Required:
1. Compute the break-even point for the Extravaganza (in terms of the number of persons that must attend).
2. Assume that only 250 persons attended the Extravaganza last year. If the same number attend this year. what price per ticket must be charged to break even
3. Refer to the original data ($30ticket price per person). Prepare a CVP graph for the Extravaganza from zero tickets up to 600 tickets sold.

Question 23

Multiproduct Break-Even Analysis ]
OKabee Enterpri ses is the distributor for two products. Model A100 and Model B900. Monthly, and the contribution margin ratio, for the two products follow:
The company's fixed expenses total $598,500 per month
Requried:
1. Prepare a contribution format income statement for the company as a whole.
2. Compute the break-even point for the company based on the current sales mix.
3. If sales increase by $50.000 per month, by how much would you expect net operating income to increase What are your assumptions

Question 24

Operating Leverage
Superior Door Company sells pre hung doors to home builders. The doors arc' sold for $60 each. Variable costs are $42 per door. and fixed costs total $450,000 per year The company is currently selling 30.000 doors per year.
Required:
1. Prepare a contribution format income statement for the company at the present level of sales and compute the degree of operating leverage.
2. Management is confident that the company can sell 37,500 doors next year (an increase of 7,500 doors, or 25%, over current sales). Compute the following:
a. The expected percentage increase in net operating income for next year.
b. The expected net operating income for next year. (Do not prepare an income statement: use the degree of operating leverage to compute your answer.)

Question 25

Break-Even and Target Profit Analysis
Super Sales Company is the exclusive distributor for a revolutionary book bag. The product sells for $60 per unit and has a CM ratio of 40%.The company's fixed expenses are $360.000 per year. The company plans to sell 17,000 book bags this year.
Required:
I. What are the variable expenses per unit
2. Using the equation method:
a. What is the break-even point in units and in sales dollars
b. What sales level in units and in sales dollars is required to earn an annual profit of $90,000
c. Assume that through negotiation with the manufacturer the Super Sales Company is able to reduce its variable expenses by $3 per unit. What is the company's new breakeven point in units and in sales dollars
3. Repeat (2) above using the formula method:

Question 26

Using a Contribution Format Income Statement
Porter Company's, most recent contribution format income statement is shown below:
Required
Prepare a new contribution format income statement under each of the following conditions (consider each case independently):
1. The number of units sold increases by 15%.
2. The selling price decreases by 50 cents per unit, and the number of units sold increases by 20%.
3. The selling price increases by 50 cents per unit, fixed expenses increase by $10,000, and the number of units sold decreases by 5%
4. Variable expenses increase by 20 cents per unit, the selling price increases by 12%, and the number of units sold decreases by 10%

Question 27

Missing Data; Basic CVP Concepts
Fill in the missing amounts in each of the eight case situations below. Each case is independent of the others. (Hint: One way to find the missing amounts would be to prepare a contribution format income statement for each case. enter the known data. and then compute the missing items.)a. Assume that only one product is being sold in each of the four following case situations
b. Assume that more than one product is being sold in each of the four following case situations:

Question 28

5-19 Basic CVP Analysis; Graphing uoig
Shirts Unlimited operates a chain of shirt stores that carry many styles of shirts that are all sold at the same price. To encourage sales personnel to be aggressive in their sales efforts. the company pays a substantial sales commission on each shirt sold. Sales personnel also receive a small basic salary.
The following worksheet contains cost and revenue data for Store 36. These data are typical of the company's many outlets:

The company has asked you. as a member of its planning group to assist in some basic analysis of its stores and company policies.
Required:
1. Calculate the annual break-even point in dollar sales and in unit sales for Store 36.
2. Prepare a CVP graph showing cost and revenue data for Store 36 fromzeroshirts up to 30.000 shirts sold each year. Clearly indicate the break-even point on the graph.
3. If 19.000 shirts are sold in a year, what would be Store 36's net operating income or loss'
4. The company is considering paying the store manager of Store 36 an incentive commission of $3 per shirt (in addition to the salespersons' commissions). If this change is made, what will be the new break-even point in dollar sales and in unit sales
5. Refer to the original data. As an alternative to (4) above, the company is considering paying the store manager a $3commissiononeach shirt sold in excess of the breakeven point. If this change is made what will be the store's net operating income or loss if 23.500 shirts are sold in a year
6. Refer to the original data. The company is considering eliminating sales commissions entirely in its stores and increasing fixed salaries by $107.000annually.
a. If this change is made what will be the new breakeven point in dollar sales and in unit sales in Store 36
b. Would you recommend that the change be made Explain.

Question 29

Basics of CVP Analysis; Cost Structure
Memo fax Inc produces memory enhancement kill for fax machine sales, have been very erratic. with some months showing a profit and some months showing a loss the company's contribution format income statement for the recent month is given below:
Required:
I. Compute the company's CM ratio and its break-even point in both units and dollars.
2. The sales manager feels that an $8,000 increase in the monthly advertising budget. combined with an intensified effort by the sales staff. will result in a $70,000 increase in monthly sales. If the sales manager is right what will be the effect on the company's monthly net operating income or loss (Use the incremental approach in preparing your answer.)3. Refer to the original data. The president is, convinced that a 10%, reduction in the selling price. combined with an increase of $35,000 in the monthly advertising budget. will double unit sales What will the new contribution format income statement look like if these changes arc adopted
4. Refer to the original data. The company' advertising agency thinks that a new package would help sales. The new package being proposed would increase packaging costs by $0.60 per unit Assuming no other changes how many units would haw to be sold each month to earn a profit of $4500
5. Refer to the original data. By automating the company could slash its variable expenses in half However fixed costs would increase by $118.000 per month.
a. Compute the new CM ratio and the new break-even point in both units and dollars.
b. Assume that the company expects to sell 20.000 units next month. Prepare two contribution format income statements one assuming that operations are not automated and one assuming that they are.
c. Would you recommend that the company automate its operations Explain.

Question 30

Basic CVP Analysis
Stratford Company distributes a lightweight lawn chair that sells for $15 per unit Variable expenses are $6 per unit and fixed expenses total $180.000 annually.
Required:
Answer the following independent questions:
I. What is the product's CM ratio
2. Use the CM ratio to determine the break-even point in sales dollars.
3. The company estimates that sales will increase by $45,000 during the coming year due to increased demand. By how much should net operating income increase
4. Assume that the operating results for last year were as follows:
a. Compute the degree of operating leverage at the current level of sales.
b. The president expects sales to increase by 15%next year. By how much should net operating income increase
5. Refer to the original data. Assume that the company sold 28.000 units last year The sales manager is convinced that a 10% reduction in the selling price, combined with a $70.000 increase in advertising expenditures, would increase annual unit sales by 50%. Prepare two contribution format income statements one showing the results of last year's operations and one showing what the results of operations would be if this changes were made. Would you recommend that the company do as the sales manager suggests
6. Refer to the original data Assume again that the company: sold 28.000 unit, last year. The president feel, that it would be unwise to change the selling price lnstead he wants to increase the sales commission by $2 per unit He think, that this move combined with some increase in advertising, would double annual unit sales. By how much could advertising be increased with profits remaining unchanged Do not prepare an income statement: use the incremental analysis approach.

Question 31

Sales Mix; Multiproduct Break-Even Analysis
Marlin Company, a wholesale distributor, has been operating for only a few months. The company sells three products-sinks, mirrors, and vanities, Budgeted sales by product and in total for the coming month are shown below:


As shown by these data net operating income is budgeted at $36.400 for the month and break-even sales at $430.000.
Assume that actual sales for the month total $500,000 as planned Actual sales by product are: sinks $160.000: mirrors. $200.000: and vanities $140.000.
Required:
1. Prepare a contribution form at income statement for the month based on actual sales data. Present the income statement in the format shown above.
2. Compute the break-even point in sales dollars for the month based on your actual data.
3. Considering the fact that the company met its $500.000 sales budget for the month the president is shocked at the results shown on your income statement in (1) above. Prepare a brief memo for the president explaining why both the operating results and the break-even point in sales dollars are different from what was budgeted

Question 32

Sales Mix; Break-Even Analysis; Margin of Safety
Puleva Milenario SA, a company located in Toledo, Spain, manufactures and sells two models of luxuriously finished cutlery - Alvaro and Bazan Present revenue, cost, and unit sales data for the two products appear below. All currency amounts are stated in terms of euros, which are indicated by the symbol €.
Fixed expenses are €660per month.
Required:
1. Assuming the sales mix above, do the following:
a. Prepare a contribution format income statement showing both euro and percent columns for each product and for the company as a whole.
b. Compute the break-even point in euros for the company as it whole and the margin of safety in both euros and percent of sales.
2. The company has developed another product Cano, that the company plans to seli for €8 each At this price the company expects to sell 40 units per month of the product The variable expense would be €6 per unit. The company's fixed expenses would not change.
a. Prepare another contribution format income statement including sales of Cano(sales-of the other two products would not change.
b. Compute the company's new break-even point in euros for the company as a whole and the new margin of safety in both euros and percent of sales.
3. The president of the company was puzzled by your analysis. He did not understand why the break-even point has gone up even though there has been no increase in fixed expenses and the addition of the new product has increased the total contribution margin Explain to the president what has happened.

Question 33

Sales Mix; Multiproduct Break-Even Analysis
Topper Sports, Inc., produces high-quality sports equipment. The company's Racket Division manufactures three tennis rackets-the Standard, the Deluxe, and the Pro - that are widely used in amateur play. Selected information on the rackets is given below:
All sales are made through the company's own retail outlets, The Racket Division has the following fixed costs:
Sales in units over the past two months have been as follows:
Required:
1. Prepare contribution format income statements for April and May Use the following headings
Place the fixed expenses only in the Total column Do not show percentages for the fixed expenses.
2. Upon seeing the income statements in (1) above, the president stated,"1can't believe this! We sold 50% more rackets in May than in April, yet profits went down. It's obvious that costs are out of control in that division "What other explanation can you give for the drop in net operating income
3. Compute the Racket Division's break-even point in dollar sales for April.
4. Without doing any calculations. explain whether the break-even point would be higher or lower with May's sales mix than with April's sales mix,
5. Assume that sales of the Standard racket increase by $20.000. What would be the effect on net operating income What would be the effect if Pro racket sales increased by $20,000) Do not prepare income statements: use the incremental analysis approach in determining your answer

Question 34

Break-Even Analysis: Pricing [L0l. L04, L06]
Detmer Holdings AG of Zurich. Switzerland has just introduced a new fashion watch for which the C0mpany is trying to find an optimal selling price, Marketing studies suggest that the company can increase sales by 5.000 units for each SFr 2 per unit reduction in the selling price (SFr2 denotes 2 Swiss francs.) The company's present selling price is SFr90 per unit. and variable expenses are SFr60 per unit. Fixed expenses are SFr840.000 per year. The present annual sales volume (at the SFr90 selling price) is 25.000 units,
Required:
1. What is the present yearly net operating income or loss
2. What is the present break-even point in units and in Swiss franc sales
3. Assuming that the marketing studies are correct, what is the maximum profit that the company can earn yearly At how many units and at what selling price per unit would the company generate this profit
4, What would be the break-even point in units and in Swiss franc sales using the selling price you determined in (3) above (i.e., the selling price at the level of maximum profits) Why is this break-even point different from the break-even point you computed in (2) above

Question 35

Changes in Cost Structure; Break-Even Analysis; Operating Leverage; Margin of Safety
Frieden Company's contribution format income statement for the most recent month is given below:
The industry in which Frieden Company operates is quite sensitive to cyclical movements in the economy. Thus profits vary considerably from year to year according to general economic conditions. The company has a large amount of unused capacity and is studying ways of improving profits.
Required:
1. New equipment has come on the market that would allow Frieden Company to automate a portion of its operations. Variable expenses would be reduced by $6 per unit. However fixed expenses would increase to a total of $432,000 each month. Prepare two contribution format income statements one showing present operations and one showing how operations would appear if the new equipment is purchased Show an Amount column, a Per Unit column, and a Percent column on each statement. Do not show percentages for the fixed expenses.
2. Refer to the income statements in (1) above. For both present operations and the proposed new operations compute ( a ) the degree of operating leverage, ( b ) the break-even point in dollars, and ( c ) the margin of safety in both dollar and percentage terms.
3. Refer again to the data in (1) above. As a manager, what factor would be paramount in your mind in deciding whether to purchase the new equipment (Assume that ample funds are available to make the purchase.)4. Refer to the original data. Rather than purchase new equipment the marketing manager argues that the company's marketing strategy should be changed Instead of paying sales commissions. which are included in variable expenses, the marketing manager suggests that salespersons be paid fixed salaries and that the company invest heavily in advertising. The marketing manager claims that this new approach would increase unit sales by 50%without any changei n selling price the company's new monthly fixed expenses would be $5240.000; and its net operating income would increase by 25%. Compute the break-even point in dollar sales for the company under the new marketing strategy. Do you agree with the marketing manager's proposal

Question 36

Interpretive Questions on the CVP Graph
A CVP graph, as illustrated on the next page. is a useful technique for showing relationships among an organization's costs, volume, and profits

Required :
1. Identify the numbered component- in the CVP graph.
2. State the effect of each of the following action- on line 3 line 9 and the break-even point. For line 3 and line 9), state whether the action will cause the line to:
Remain unchanged.
Shift upward.
Shift downward.
Hare a steeper slope (i.e., rotate upward I.
Have a flatter slope (i.e., rotate downward).
Shift upward and have a steeper slope.
Shift upward and have a flatter slope.
Shift downward and have a steeper slope.
Shift downward and have a flatter slope.
In the case of the break-even point state whether the action will cause the break-even point to:
Remain unchanged.
Increase.
Decrease.
Probably change. but the direction is uncertain.
Treat each case independently.
x. Example. Fixed costs are increased by$20,000 each period
Answer (see choices above): Line 3: Shift upward.
Line 9: Remain unchanged.
Break-even point: Increase.
a. The unit selling price is decreased from $30 to $27.
b. The per unit variable costs are increased from $12 to $15.
r. The total fixed costs are reduced by $40,000.
d. Five thousand fewer units are sold during the period than were budgeted.
e. Due to purchasing a robot to perform a task that was previously done by workers fixed costs are increased by $25,000 per period and variable costs are reduced by $8 per unit.
f. As a result of a decrease in the cost of materials both unit variable costs and the selling price are decreased by $3.
g. Advertising costs are increased by $50.000 per period resulting in a 10% increase in the number of units sold.
h. Due to paying sales persons a commission rather than a flat salary fixed costs are reduced by $21.000 per period and unit variable costs are increased by $6.

Question 37

Graphing; Incremental Analysis: Operating Leverage
Teri Hall has recently opened Sheer Elegance Inc., a store specializing in fashionble stockings. Ms.,Hall has just completed a course in managerial accounting and she believes that she can apply certain aspects of the course to her business. She is particularly interested ill adopting the cost volume-profit (CVP) approach to decision making. Thus she has prepared the following analysis:
Required:
1. How many pairs of stockins of must he sold to break even What does this represent in total dollar sales
2. Prepare a CVP graph or a profit graph for the store from zero pairs up to 70,000 pairs of stockings sold each year. Indicate the break-even point on the graph.
3. How many pairs of stockings must be sold to earn a $9,000 target profit for the first year
4. Ms. Hall now has one full-time and one part-time salesperson working in the store. It will cost her an additional $8,000 per year to convert the part-time position to a full-time position. Ms. Hall believes that the change would bring in an additional $20,000 in sales each year. Should she convert the position) Use the incremental approach, (Do not prepare an income statement.)5. Refer to the original data. Actual operating results for the first year are as follows:
a. What is the store's degree of operating leverage
b. Ms. Hall is confident that with some effort she can increase sales by 20% next year What would be the expected percentage increase in net operating income Use the degree of operating leverage concept to compute your answer

Question 38

Various CVP Questions: Break-Even Point; Cost Structure; Target Sales
Tyrene Products manufactures recreational equipment. One of the company's products, a skateboard, sells for $37.50. The skateboards are manufactured in an antiquated plant that relies heavily on direct labor workers. Thus, variable costs are high, totaling $22.50 per skateboard of which 60% is direct labor cost. Over the past year the company sold 40,000 skateboards, with the following operating results:
Management is anxious to maintain and perhaps even improve its improve its present level of the skateboards.
Required :
1. Compute ( a ) the CM ratio and the break-even point in skateboards. and ( b ) the degree of operating leverage at last year's level of sales.
2. Due to an increase in labor rates the company estimates that variable costs will increase by $3 per skateboard next year If this change takes place and the selling price per skateboard remains constant at $37.50 what will be the new CM ratio and the new break-even point in skateboards
3. Refer to the data in (2) above. If the expected change in variable costs takes place how many skateboards will have to be sold next year to earn the same net operating income, $1 20,000.as last year
4. Refer again to the data in (2) above. The president has decided that the company may have to raise the selling price of its skateboards. If Tyrene Products wants to maintain the same CM ratio as last year what selling price per skateboard must it charge next year to cover the increased labor costs'
5. Refer to the original data. The company is considering the construction of a new auto mated plant. The new plant would slash variable costs by 40%, but it would cause fixed costs; to increase by 90.If the new plant is built what would he the company's CM ratio and new breakeven point in skateboards
6. Refer to the data in (5) above.
a. If the new plant is built. how many skateboards will have to be sold next year to cam the same net operating income. $120.000 as last year
b. Assume that the new plant is constructed and that next year the company manufacture,and sells 40.000 skateboard(the same number as sold last year). Prepare a contribution format income statement and compute the degree of operating leverage.
c. If you were a member of top management would you have been in favor of constructing the new plan Explain.

Question 39

Break-Even and Target Profit Analysis
The Marbury Stein Shop sells steins from all parts of the world The owner of the shop, Clint Marbury is thinking of expanding his operations by hiring college students on a commission basis. to sell steins at the local college The steins will bear the school emblem.
These steins must be ordered from the manufacturer three months in advance and because of the unique emblem of each college they cannot be returned. The steins would cost Marbury $15 each with a minimum order of 200 steins.Any additional steins would have to be ordered in increments of 50.
Because Marbury's plan would not require any additional facilities the only costs associated with the project would be the cost of the steins and the cost of sales commissions. The selling price of the steins would be $30 each. Marbury would pay the students a commission of $6 for each stein sold.
Required:
1. To make the project worthwhile in terms of his own time, Marbury would require a $7,200 profit for the first six months of the venture What level of sales in units and dollars would be required to attain this target net operating income Show all computations.
2. Assume that the venture is undertaken and an order is placed for 200 steins. What would be Marbury's break-even point in units and in sales dollars Show computations, and explain the reasoning behind your answer.

Question 40

Changes in Fixed and Variable Costs; Break-Even and Target Profit Analysis
Novelties, Inc.,produces and sells highly faddish products directed toward the preteen market.A new product has come on to the market that the company is anxious to produce and sell. Enough capacity exists in the company's plant to produce 30,000 units each month. Variable expenses to manufacture and sell one unit would be $1.60 and fixed expenses would total $40.000 per month. The Marketing Department predicts that demand for the product will exceed the 30.006 units that the company is able to produce. Additional production capacity can be rented from another company at a fixed expense of $2.000 per month. Variable' expenses in the rented facility would. total $.75 per unit, due to somewhat less efficient operations than in the main plant. The product would sell for $2.50 per unit.
Required:
1. Compute the monthly break-even point for the new product in unit and in total dollar sales.
2. How many units must he sold each month to make' a monthly profit of $9,000
3. If the sales manager receives a bonus of i5 cents for each unit sold in excess of the break-even point how many units must be sold each month to can a return of 25% on the monthly investment in fixed expenses

Question 41

Cost Structure ; Break-Even Po int; Target Pro fits
Marston Corporation manufactures disposable thermometers that are sold to hospitals through a network of independent sales agents located in the United States and Canada. These sales agents sell a variety of products to hospitals in addition to Marston's disposable thermometer. The sales agents arc currently paid an l8% commission on sales. and this commission rate was used when Marston's management prepared the following budgeted absorption income statement for the upcoming year
Since the completion of the above statement. Marston's management has learned that the independent sales agents are demanding an increase in the commission rate to 20%of sales for the upcoming year. This would be the third increase in commissions demanded by the independent sales agents in five years. As a result, Marston's management has decided to investigate the possibility of hiring its own sales staff to replace the independent sales agents.
Marston's controller estimates that the company will have to hire eight sales people to cover the current market area. and the total annual payroll cost of these employees will be about $700,000, including fringe benefits. The salespeople will also be paid commissions of 10% of sales. Travel and entertainment expenses are expected to total about $400.000 for the year. The company will also have to hire a sales manager and support staff whose salaries and fringe benefits will come to $400,000per year. To make up for the promotions that the independent sales agents had been running on behalf of Marston. management believes that the company's budget for fixed advertising expenses should be increased by $500,000.
Required:
1. Assuming sales of $30,000.000, construct a budgeted contribution format income statement for the upcoming year for each of the following alternatives:
a. The independent sales agents' commission rate remains unchanged at 18%.
b. The independent sales agents' commission rate increases to 20%
c. The company employs its own sales force.
2. Calculate Marston Corporation's break-even point in sales dollars for the upcoming year assuming the following:
a. The independent sales agents' commission rate remains unchanged at 18%.
b. The independent sales agents' commission rate increases to 20%.
c. The company employs its own sales force.
3. Refer to your answer to (1) (b) above If the company its own sales force what hat volume of sales all, would be necessary to generate the net operating income in come the company would realize if sales are $30,000,000 and the company continues to sell through agents (at a 20% commission rate)4. Determine the volume of sales at which net operating income would be equal regardless of whether Marston Corporation sells through agents (at a 20% commission rate) or employs its own sales force.
5. Prepare a graph on which you plot the profits for both of the following alternatives.
a. The independent sales agents' commission rate increases to 20%.
b. The company employs is own sales force. On the graph. use total sales revenue as the measure of activity.
6. Write a memo to the president of Marston Corporation in which you make a recommendation as to whether the company should continue to use independent sales agents (at a 20% cornmission rate: or employ its own sales force. Fully explain the reasons for your recommendation in the memo.

Question 42

Break-Evens for Individual Products in a Multiproduct Company
Jasmine Park encountered her boss. Rick Gompers at II the pop machine in the lobhy Rick is the vice president of marketing at Down Smith Lures Corporation. Jasmine was puzzled by some calculations she had been doing so she asked him:
Jasmine : "Rick. I' am not sure how to go about answering the questions that came up at the meeting with the president yesterday:"
Rick : "what's the problem"
Jasmine: "The president wanted to know.the break even for each of the company's products. but I am haling trouble figuring themout"
Rick: "I'm sure you can handle it, Jasmine. And by the l way need your analysis tomorrow morning at 8:00 A.M sharp so I can look at it before the follow-up meeting at 9:00,"
Down South Lures makes three fishing lures in its manufacturing facility in Alabama. Data concerning these products appear below.
Total fixed expenses for the entire company are $282.000 per year. All three products are sold in highly competitive markets so the company is unable to raise its prices without losing unacceptable numbers of customers. The company has no work in process or finished goods inventories due to an extremely effective lean manufacturing system.
Required:
1. What is the company's overall break-even point in total sales dollars
2. of the total fixed costs of $282,000, $18,000 could be avoided if the Frog lure product were dropped. $96.000 if the Minnow lure product were dropped, and $60,000 if the Worm lure product were dropped. The remaining fixed expenses of $108,000 consist of common fixed costs such as administrative salaries and rent on the factory building that could be avoided only by going out of business entirely.
a. What is the break-even point in units for each product
b. If the company sells exactly the break-even quantity of each product what will be the overall profit of the company' Explain this result.