ACC569 Ch12practicerev

# ACC569 Ch12practicerev - SOLUTIONS TO EXERCISES 12.30 (20...

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SOLUTIONS TO EXERCISES 12.30 (20 min) Basic CVP Analysis. Canyon Escape. a. Break-even point (in tours): Committed cost ÷ Unit Contribution Margin \$200,000 ÷ (\$75 - \$15) = 3,334 tours (rounded up) b. Number of tours: (Committed Cost + Target Operating Income)/Unit Contribution Margin (\$200,000 + \$42,000) ÷ (\$75 - \$15) = 4,034 (rounded up) 4,034 tours x \$75 = \$302,500 revenue c. Revised profit at 3,334 tours = 3,334 x (\$75 -\$20) – \$200,000 = (\$16,667) Therefore, committed costs must be reduced by \$16,667 to breakeven with higher variable costs d. A screen capture of an example spreadsheet model follows.

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12.31 (20 min) Basic CVP Analysis. Delta Safety Systems. a. Break-even point (in units): Committed cost ÷ Unit Contribution Margin \$3,000,000 ÷ (\$5,000 - \$3,000) = 1,500 components b. The company could raise selling price, decrease the variable cost per unit, and/or decrease committed costs. c. \$4,500 price: Profits = (\$4,500 - \$3,000) x 3,000 total contribution margin – \$3,000,000 committed cost = \$1,500,000 income \$5,000 price: Profits = (\$5,000 - \$3,000) x 2,000 total contribution margin – \$3,000,000 committed cost = \$1,000,000 income The price cut probably should be made, because projected operating income will increase. However, cutting prices could backfire if volume does not increase. d. A screen capture of an example spreadsheet model follows.
Spreadsheet shown on chapter SM opening screen 12.32 (15 min) CVP Relationships, Cost Analysis a. Break-even point (in gauges): Committed cost ÷ Unit Contribution Margin (\$200,000 + 180,000 + 600,000) ÷ [\$42 – (\$600,000 + 150,000) ÷ 50,000 gauges] = 36,296 gauges b. Sales (50,000 gauges x \$42) – \$750,000 variable costs – \$980,000 Committed costs = \$370,000 income c. The company has a theoretical capacity to produce 62,500 gauges (50,000 gauges ÷ 0.80). Thus, it must operate at 58 percent of capacity (36,926 ÷ 62,500, rounded) to achieve a break-even operation. d. A screen capture of an example spreadsheet follows:

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Spreadsheet shown on chapter SM opening screen 12.33 (10 min) CVP Analysis, Multiple Choice Question 1: a—The firm must convert the negative contribution margin to a positive figure. Of the choices listed, only “a” can accomplish this result. But, can the firm do so? Question 2: b—This result occurs because contribution margin minus Committed costs equals operating profit. Question 3: d—An increase in variable cost will reduce the contribution margin and thus raise the break-even point.
12.34 (20 min) CVP Analysis, Income Taxes a. Variable costs are 74 percent of revenue (\$740,000 ÷ \$1,000,000). Thus, to break even: Service Revenue – Variable Cost – Committed cost = 0 Service Revenue – (0.74 x Service Revenue) - \$200,000 = 0 Service Revenue x (1 - 0.74) = \$200,000 Service Revenue = \$200,000 ÷ (1 - 0.74) Service Revenue = \$769,231 (rounded) b. Before-tax income – Tax = After-tax Income Before-tax income – (Before-tax income x 0.35) = \$100,000 Before-tax income (1 - 0.35) = \$100,000

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## This note was uploaded on 12/29/2009 for the course ACC569 ACC569 taught by Professor Alicebergmann during the Spring '08 term at University of Phoenix.

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ACC569 Ch12practicerev - SOLUTIONS TO EXERCISES 12.30 (20...

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