Exercises: Set B
1
EXERCISES: SET B
E6-1B
The Santa Cruz Inn is trying to determine its break-even point. The inn has 75 rooms
that are rented at $50 a night. Operating costs are as follows.
Salaries
$10,000 per month
Utilities
2,000 per month
Depreciation
1,000 per month
Maintenance
500 per month
Maid service
5 per room
Other costs
30 per room
Instructions
(a)
Determine the inn’s break-even point in (1) number of rented rooms per month and (2) dollars.
(b)
If the inn plans on renting an average of 40 rooms per day (assuming a 30-day month), what
is (1) the monthly margin of safety in dollars and (2) the margin of safety ratio?
E6-2B
In the month of June, Valerie’s Beauty Salon gave 2,700 haircuts, shampoos, and per-
manents at an average price of $30. During the month, fixed costs were $26,000 and variable costs
were 60% of sales.
Instructions
(a)
Determine the contribution margin in dollars, per unit, and as a ratio.
(b)
Using the contribution margin technique, compute the break-even point in dollars and in units.
(c)
Compute the margin of safety in dollars and as a ratio.
E6-3B
Costa Company reports the following operating results for the month of August: Sales
$300,000 (units 5,000); variable costs $210,000; and fixed costs $70,000. Management is consider-
ing the following independent courses of action to increase net income.
1.
Increase selling price by 10% with no change in total variable costs.
2.
Reduce variable costs to 65% of sales.
3.
Reduce fixed costs by $10,000.
Instructions
Compute the net income to be earned under each alternative. Which course of action will pro-
duce the highest net income?
E6-4B
Puddle-Jumper Airways, Inc., a small two-plane passenger airline, has asked for your
assistance in some basic analysis of its operations. Both planes seat 10 passengers each, and they fly
commuters from Puddle-Jumper’s base airport to the major city in the state, Metropolis. Each
month 40 round-trip flights are made. Shown below is a recent month’s activity in the form of a
cost-volume-profit income statement.
Compute contribution margin,
break-even point, and margin
of safety.
(SO 2)
Compute net income under
different alternatives.
(SO 2)
Compute break-even point and
margin of safety.
(SO 2)
Fare revenues (300 fares)
$48,000
Variable costs
Fuel
$17,000
Snacks and drinks
1,400
Landing fees
2,000
Supplies and forms
1,200
21,600
Contribution margin
26,400
Fixed costs
Depreciation
3,000
Salaries
15,000
Advertising
2,250
Airport hanger fees
1,750
22,000
Net income
$ 4,400
Instructions
(a)
Calculate the break-even point in (1) dollars and (2) number of fares.
(b)
Without calculations, determine the contribution margin at the break-even point.
(c)
If fares were decreased by 10%, an additional 75 fares could be generated. However, total
variable costs would increase by 25%. Should the fare decrease be adopted?
Compute break-even point and
prepare CVP income statement.
(SO 2)