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xercise E 6-10: Break-Even Analysis (LO2, LO4, LO5) Chi Omega Sorority is planning i ts annual Riverboat Extravaganza. The E xtravaganza committee has assembled the following expected costs for t he event: D inner (per person) $ 7 Favors and program (per person) $ 3 Band $ 1,500 Tickets and advertising $ 700 Riverboat rental $ 4,800 Floorshow and strolling entertainers $ 1,000 The committee members would like to charge $30 per person for the evenings activities. Requi rement 1: Compute the break-even point for the Extravaganza (in terms of the n umber of persons who must attend). Break-even point persons Requi rement 2: Assume that last year only 250 persons attended the Extravaganza. If the same number attend this year, what price per ticket must be charged to b reak even? ( Omit the "$" sign in your response.) Ticket price $ E xercise 6-13: Break-Even Analysis; Ta rget P rofit; Ma rgin of S afety; C M Ratio (LO1, LO3, LO5, LO6, LO7) Pringle Company distributes a single product. The company's sales and expenses for a recent month follow: Total Per Unit Sales $ 600,000 $ 40 Variable expenses 420,000 28 Contribution margin 180,000 $ 12 F ixed expenses 150,000 Net operating income $ 30,000 R equi rement 1: What is the monthly break-even point in units sold and in sales dollars? ( Omit the "$" sign in your response.) B reak-even point in units sold u nits Break-even point in sales dollars $ R equi rement 2: Without resorting to computations, what is the total contribution margin a t the break-even point? ( Omit the "$" sign in your response.) Contribution margin $ R equi rement 3: (a) How many units would have to be sold each month to earn a target profit of $18,000? Use the contribution margin method. Sales level in units units (b) Verify your answer by preparing a contribution format income statement a t the target sales level. ( Omit the "$" sign in your response.) Total Sales $ Variable expenses Contribution margin F ixed expenses Net operating income $ R equi rement 4: Refer to the original data. Compute the company's margin of safety in both dollar and percentage terms. ( Round your answer Ma rgin of Safety P ercentage to 1 decimal place. Omit the "%" sign, which is p rovided for you. Omit the "$" sign in your response.) M argin of safety in dollars $ M argin of safety percentage % R equi rement 5: (a) What is the company's CM ratio? ( Omit the "%" sign, which is provided for you.) CM ratio % (b) If sales increase by $80,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to i ncrease? ( Omit the "$" sign in your response.) Net operating income $ Exercise 6-16: Operating Leverage (LO4, LO8) Superior Door Company sells prehung doors to home builders. The doors a re sold for $60 each. Variable costs are $42 per door, and fixed costs total $450,000 per year. The company is currently selling 30,000 doors per year. Requi rement 1: (a) P repare a contribution format income statement for the company at the p resent level of sales. ( Omit the "$" sign in your response.) Total Sales (30,000 doors) $ Variable expenses Contribution margin F ixed expenses Net operating income $ (b) Compute the degree of operating leverage. Operating leverage Requi rement 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). ( a) Compute the expected percentage increase in net operating income for next year. ( Omit the "%" sign, which is provided for you.) Expected percentage increase % (b) T he expected total dollar net operating income for year. next (Do not p repare an income statement; use the degree of operating leverage to compute your answer.) ( Omit the "$" sign in your response.) Total expected net operating income $ Exercise 6-17: I n te rp retive Questions on the CVP Graph (LO2, L O5) A CVP graph, as illustrated below, is a useful technique for showing relationships among an organization's costs, volume, and profits. R equi rement 1: Identify the numbered components in the CVP graph. (1) (2) (3) (4) (5) (6) (7) (8) (9) R equi rement 2: State the effect of each of the following actions on line 3, line 9, and the b reak-even point. For line 3 and line 9, state whether the action will cause t he line to: Remain unchanged. Shift upward. Shift downward. Have a steeper slope (i.e., rotate upward). Have a f lat ter slope (i.e., rotate downward). Shift upward a nd have a steeper slope. Shift upward a nd have a f latter slope. Shift downward a nd have a steeper slope. Shift downward a nd have a f lat ter slope. I n the case of the break-even point, state whether the action will cause the b reak-even point to: Remain unchanged. Increase. Decrease. Probably change, but the direction is uncertain. Treat each case independently. x. Example. F ixed costs are reduced by $20,000 per period. A nswer (see choices above): L ine 3: Shift upward. L ine 9: Remain unchanged. B reak-even point: Increase. a. The unit selling price is decreased from $30 to $27. L ine 3: L ine 9: B reak-even point: b. Unit variable costs are increased from $12 to $15. L ine 3: L ine 9: B reak-even point: c. The total fixed costs are reduced by $40,000. L ine 3: L ine 9: B reak-even point: d. Five thousand fewer units are sold during the period than were budgeted. L ine 3: L ine 9: B reak-even point: e. Due to automating a task that was previously done by workers, fixed costs a re increased by $25,000 per period, and variable costs are reduced by $8 per unit. L ine 3: L ine 9: B reak-even point: f. Due to a decrease in the cost of materials, both uni t variable costs and the selling price are decreased by $3. L ine 3: L ine 9: B reak-even point: g. Advertising costs are increased by $50,000 per period, resulting in a 10% i ncrease in the number of units sold. L ine 3: L ine 9: B reak-even point: h. Due to paying salespersons a commission rather than a f lat salary, fixed costs are reduced by $21,000 per period, and unit variable costs are i ncreased by $6. L ine 3: L ine 9: B reak-even point: P roblem 6-18A: M issing Data; Basic CVP Concepts (LO1, LO9) Fill in the missing amounts in each of the eight case situations below. E ach case is independent of the others. (Hint: One way to find the missing amounts would be to prepare a contribution format income statement for each case, enter the known data, and then compute the missing i tems.) Requi red: a. Assume that only one product is being sold in each of the four following case situations: ( Omit the "$" sign in your response) Case Units Sold Sales Variable Expenses Contribution Margin per Unit Fixed Expenses Net Operating Income (Loss) 1 12,000 $ 360,000 $ 144,000 $ $ 190,000 $ 2 $ 50,000 $ $ 6 $ 25,000 $ 5,000 3 2,000 $ $ 16,000 $ 12 $ $ (6,000) 4 7,000 $ 280,000 $ $ $ 120,000 $ 34,000 b. Assume that more than one product is being sold in each of the four following case situations: ( Omit the "%" sign, which is provided for you. Omit the "$" sign in your response) Case Sales Variable Expenses Average Contribution Margin (Percent) Fixed Expenses Net Operating Income (Loss) 1 $ 100,000 $ 40 % $ $ (2,000) 2 $ 300,000 $ 165,000 % $ 85,000 $ 3 $ $ 15 % $ 20,000 $ 10,000 4 $ 460,000 $ 138,000 % $ $ 62,000 ... View Full Document