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Unformatted text preview: Eé—HA 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 followmg case situationsz ‘1 $162900? q]; 7 ' "$350,090 _ _ 7  r .' 4 .......... 4. 5,000" $160,000 ' 7 a. Case #1 Case #2
Number of units sold AQQQ * &
Sales ............................ $270,000 * $30 $350,000 * $25
Variable expenses ......... 1Q,000 * 18 1_4_0_,000 10
Contribution margin ..... _ . 108,000 g 210,000 g; *
Fixed expenses ............. 90 000 * 170,000 *
Net operating income w M * Case #3 Case #4 Number of units sold M * EM *
Sales ........................... _. $400,000 $20 $160,000 * $32
Variable expenses ......... 280.000 * _15 90,000 g
Contribution margin ...... 120,000 g * 70,000 $43
Fixed expenses ............. 85,000 82,000 * Net operating income m * M) * ”(p17A Chi Omega Sorority is planning its annual Riverboat Extravaganza. The Extravaganza committee has
assembled the following expected costs for the event: Dinner(perperson)............«.;._..'.,..;_.._. I $7
Favors and program (per person) .'i' . . . . .I'. . . $3
_Ban_d ...... . ................ $1500'
Tickets and advertising . _. . . . ; ,', . . . _..'. _. $700
I; Riverboat rental ....... '. . . '; . . ; . . $4, 800 ‘
, Floorshow and strolling entertainers . .'; .' . $1, 000'. The committee members would like to charge $30 per person for the evening‘s activities. Required:
1. Compute the breakeven 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 ($30 ticket price per person). Prepare a CVP graph for the Extravaganza
from zero tickets up to 600 tickets sold. ' 1. The contribution margin per person would be: 3 COSt'VO'Ume‘PFOﬁt graph: Price per ticket .................................... ' .............. $30
Variable expenses: $22,000
Dinner ............................................................ $7
Favors and program ........................................ _3 _9 $20,000
Contribution margin per person .......................... sag $18 000
The ﬁxed expenses of the Extravaganza total $8,000; therefore, the ’ _ Total Sales
breakeven point would be computed as follows: $15900 \
Sales = Variable expenses + Fixed expense + Proﬁts Breakeven point: 400 persons,
$141000 or $12,000 in sales
$30Q— — $10Q + $8,000 + $0 _ \
$20Q = $8 000 to $12,000 ~» .3 —» _
Q = $8, 000: $20 per person =°
Q— — 400 persons; or, at $30 per person, $12,000 a $10,000
Alternative solution: $8900
Break even point_ Fixed expenses $6,000
In unIt sales Unit contribution margin
$4,000
$8,000 400
= —— = ersons
_ $20 per person p $2,000
or, at $30 per person, $12,000.  $0
0 100 200 300 400 500 600
2. Variable cost per person ($7 + $3) ._. ..................... $10 Number of Persons
Fixed cost per person ($8,000 + 250 persons) ...... _3; TIcket price per person to break even ................... ﬁg Pia214 Memofax, Inc., produces memory ermancement kits for fax machines. Sales have been very erratic,
with some months showing a proﬁt and some months showing a 1088. The company 3 contribution fOrmat 1ncome statement for the moSt recent month is given below: '
/ . , Required: ,
1. Compute the company’s CM ratio and its breakeven point in both units and dollars. 2. The sales manager feels that an $8, 000 inerease in the monthly advertising budget combined
with an intensiﬁed effert by the sales staff will result 1n 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 13 convinced that a 10% reduction in the selling price, com
bined with an increase of $35,0001n the monthly advertising budget, will cause unit sales to double.
What will the new contribution format 1ncome statement look like if these changes are adopted? 4. Refer to the original data. The company’s 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 WOUId have to be sold each month to earn a preﬁt of $4,500? 5. Refer to the original data. By automating certain Operations, 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 breakj'eve'n' point in both units and dollars. b. Assume that the company expects. to sell 20, 000 Units next month. Prepare two contribution
fonnat 1ncome statements, one assuming that operations are not automated and one assum— ing that they are. .
c, ’ Would you recommend that the company automate its operations? Explain 1. The CM ratio is 30%.  4. Sales = Variable expenses + Fixed expenses + Proﬁts
Total Per Unit Percentage $ ZOQ = $1460Q* +. $901000 + $41500
Sales (13,500 units) ......... $270,000 $20 100% $54” = $94500
Variable expenses ............ 189 000 _13 ' 70% Q = $94500 + $540 per unit
Contribution margin ......... Lawn; L0 30% Q = ”'50" units
1116 breaksven point i5: *$14.00 + $0.60 = $14.60.
Sales: Variable expenses + Fixed expenses + Proﬁts
$20Q= $14Q + $90 000 + $0 Alternative solution:
$ 5Q : $90 000 . . Unlt sales to attain _ Fixed expenses + Target proﬁt
Q — $90, 000+ $6 per unit target proﬁt _ CM ' ’t
Q = 15,000 units per uni
15,000 units x $20 per'unit: $300,000 in sales = W
$5. 40 per unit**
Alternative solution:
= 17,500 units
Break—even point , FiXEd expenses
in unit sales  mm ”$690 ‘ $050 = $540
5. a. The newCM ratio would be:
— L000, = 15,000 units
$6 per unit Per Unit Pe/rentage
_ Sales ........................................... $20 100%
Breakeven int ___ Fixed expenses Variable expenses ........................ _7 3_5%
in sales do lars CM t   '
ra IO Contribution margin ..................... 5:; §§° 43
 $90,000 _ . '
030 — $300,000 in sales
2. Incremental contribution margin: .
$70,000 increased sales x 30% CM ratio ............ $21,000
Less increased ﬁxed costs:
Increased advertising cost ................................. 8 000
Increase in monthly net operating income ............. M Since the company presently has a loss of $9, 000 per month, if the changes are adopted, the loss will turn into a proﬁt of $4, 000 per
mon {3021A (60%) The new breakeven point would be: Breakeven int = Fixed expenses
in unit 53 es Unit contribution margin = ———$2°8'°°° = 16,000 units
$13 per unit Breakeven point = Fixed expenses
in sales dollars CM ratio w = $320,000 in sales
0.65 b. Comparative income statements follow: NotAutomated Automated '
Tota/ Per Unit % Total Per Unit % Sales (20,000 units).... $400,000 $20 100 $400,000 $20 12%
Variable expenses ....... 280,000 1‘4 _70 140,000 _7_ _ Contribution margin.... 120,000 Lg ,LQ 260,000 sg _§§ 000
Fixed ex enses ........... 90,000 208,
p £24101; Net operating income .. M c. Whether or not One would recommend that the company automate
its operations depends on how much risk he or she is willing to take,
and depends heavily on prospects for future sales. The proposed
changes would increase the company’s ﬁxed costs and its breakeven
point. However, the changeswould also increase the company’s CM
ratio (from 30% to 65%). The higher CM ratio means that once the
break—even point is reached, proﬁts will increase more rapidly than at
present. If 20,000 units are sold next month, for example, the higher
CM ratio will generate $22,000 more in proﬁts than if no changes are
made. ' The greatest risk of automating is that future sales may drop back
down to present levels (only 13,500 units per month), and as a re
sult, losses will be even larger than at present due to the company’s
greater ﬁxed costs. (Note the problem states that sales are erratic
from month to month.) In sum, the proposed changes will help the
company if sales continue to trend upward in future months; the
changes will hurt the company if sales drop back down to or near
present levels. ' Note to the Instructor: Although it is not asked for in the problem, if
time permits you may want to computethe point of indifference be—
tween the two alternatives in terms of units sold; i.e., the point
where proﬁts will be the'same under either alternative. At this point,
total revenue will be the same; hence, we include only costs in our
equation: Let Q = Point of indifference in units sold
$14Q + $90,000 = $7Q + $208,000
$7Q = $118,000
Q = $118,000 —:— $7 per unit
Q = 16,857 units (rounded) If more than 16,857 units are sold, the proposed plan will yield the
greatest proﬁt; if less than 16,857 units are Sold, the present plan will
yield the greateSt proﬁt (or the least loss). ...
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 Spring '08
 Larkin,R

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