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Brewer_Chapter_6

# Brewer_Chapter_6 - PROBLEM 6-19B Basics of CVP Analysis(LO1...

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PROBLEM 6-19B Basics of CVP Analysis (LO1, LO3, LO4, LO6, LO8) CHECK FIGURE (2) Break-even: \$192,857 Bird Shelters, Inc., distributes a high-quality wooden birdhouse that sells for \$15.00 per unit. Variable costs are \$4.50 per unit, and fixed costs total \$135,000 per year. Required: Answer the following independent questions: 1. What is the product’s CM ratio? 2. Use the CM ratio to determine the break-even point in sales dollars. 3. Due to an increase in demand, the company estimates that sales will increase by \$56,250 during the next year. By how much should net operating income increase (or net operating loss decrease), assuming that fixed costs do not change? 4. Assume that the operating results for last year were: Sales \$300,000 Less variable expenses 90,000 Contribution margin 210,000 Less fixed expenses 135,000 Net operating income \$ 75,000 a. Compute the degree of operating leverage at the current level of sales. b. The president expects sales to increase by 25% next year. By what percentage should net operating income increase? 5. Refer to the original data. Assume that the company sold 16,500 units last year. The sales manager is convinced that a 5% reduction in the selling price, combined with a \$22,500 increase in advertising, would cause annual sales in units to increase by one-third. Prepare two contribution format income statements, one showing the results of last year’s operations and one showing the results of operations if these changes are 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 16,500 units last year. The president does not want to change the selling price. Instead, he wants to increase the sales commission by \$0.75 per unit. He thinks that this move, combined with some increase in advertising, would increase annual sales by 20%. By how much could advertising be increased with profits remaining unchanged? Do not prepare an income statement; use the incremental analysis approach.

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PROBLEM 6-20B Sales Mix; Multi-Product Break-Even Analysis (LO9) CHECK FIGURE (2) Break-even: B765,354 Organic Rice, Ltd., of Thailand exports Thai rice throughout Asia. The company grows three varieties of rice --Fragrant, White, and Loonzain. (The currency in Thailand is the baht, which is denoted by B.) Budgeted sales by product and in total for the coming month are shown below: Product White Fragrant Loonzain Total Percentage of total sales 25% 40% 35% 100% Sales B200,000 100% B320,000 100% B280,000 100% B800,000 100.0% Less variable expenses 160,000 80% 96,000 30% 112,000 40% 368,000 46.0% Contribution margin B 40,000 20% B224,000 70% B168,000 60% 432,000 54.0% Less fixed expenses 388,800 Net operating income B 43,200 Fixed expenses B388,800 Break-even point in sales dollars = = = B720,000 CM ratio 0.54 As shown by these data, net operating income is budgeted at B43,200 for the month and break-even sales at B720,000. Assume that actual sales for the month total B800,000 as planned. Actual sales by product are: White, B280,000; Fragrant, B384,000; and Loonzain, B136,000.
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