Chapter 06 - Eé—HA Fill in the missing amounts in each...

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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 situations-z ‘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) * ”(p-17A 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 break-even 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 break-even point would be computed as follows: $15900 \ Sales = Variable expenses + Fixed expense + Profits Break-even 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- e-ven 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 Pia-214 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 break-even 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 = $14-60Q* +. $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 new-CM ratio would be: — L000, = 15,000 units $6 per unit Per Unit Pe/rentage _ Sales ........................................... $20 100% Break-even int ___ Fixed expenses Variable expenses ........................ _7 3_5% in sales do lars CM t - - ' ra IO Contribution margin ..................... 5:; §§° 43 - $90,000 _ . ' 0-30 — $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 break-even point would be: Break-even int = Fixed expenses in unit 53 es Unit contribution margin = ———$2°8'°°° = 16,000 units $13 per unit Break-even 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 break-even 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 compute-the 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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