Operating income 10000 20000 30000 40000 50000

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Operating income $ 0$10,000 $20,000 $30,000 $40,000 $50,000 Automated Units 2,000 3,000 4,000 5,000 6,000 7,000 CMU $ 12 $ 12 $ 12 $ 12 $ 12 $ 12 Contribution margin $20,000 $36,000 $48,000 $60,000 $72,000 $84,000 Fixed costs 30,000 30,000 30,000 30,000 30,000 30,000 Operating income $ (6,000)$ 6,000 $18,000 $30,000 $42,000 $54,000
3-33 Cut-n-Sew Operating Income: Manual vs. Automated Plant$(15,000)$(5,000)$5,000$15,000$25,000$35,000$45,000$55,0002,0003,0004,0005,0006,0007,000UnitsOperating IncomeAs seen from the above tables and graph, the two types of plants will result in the same operating income of $30,000 at a sales volume of 5,000 jackets. This can also be computed analytically: Let Q be the volume at which the operating incomes of both plants are equal. Equating operating income = (CMU Units) Fixed Costs for both plants, $10Q $20,000 = $12Q $30,000 $2Q = $10,000 Q = 5,000 units 3. If Cut-n-Sew anticipates sales of 4,000 jackets per year, it will earn an operating income of $20,000 from the manual plant, versus an operating income of $18,000 from the automated plant. So, it will choose the manual plant. However, note that the 4,000 jacket volume is only 1,000 short of the volume at which the automated plant becomes more profitable. If Cut-n-Sew anticipates a 25% or greater growth in sales volume in the near term, it should consider investing in the automated plant which will be more profitable at higher volumes. Also, competitive issues may suggest that Cut-n-Sew invest in the automated plant to benefit from other new technologies that may be available in the future.
Manual Automated
3-34 Revenues = ($400 350) + ($360a2,700) = $1,112,000 Variable costs = $200 3,050b= $610,000 Operating income = $1,112,000 $610,000 $100,000 = $402,000 Net income = $402,000 (1 0.40) = $241,200 a$400 $40; b350 units + 2,700 units. Alternative 2 Revenues = ($400 350) + ($370c2,200) = $954,000 Variable costs = ($200 350) + ($190d2,200) = $488,000 Operating income = $954,000 $488,000 $100,000 = $366,000 Net income = $366,000 (1 0.40) = $219,600 c$400 $30; d$200 $10. 3-42 (30 min.) CVP analysis, income taxes, sensitivity. 1a. To break even, Almo Company must sell 500 units. This amount represents the point where revenues equal total costs. Let Q denote the quantity of canopies sold. Revenue = Variable costs + Fixed costs $400Q = $200Q + $100,000 $200Q = $100,000 Q = 500 units Breakeven can also be calculated using contribution margin per unit. Contribution margin per unit = Selling price Variable cost per unit = $400 $200 = $200 Breakeven = Fixed Costs Contribution margin per unit = $100,000 $200 = 500 units 1b. To achieve its net income objective, Almo Company must sell 2,500 units. This amount represents the point where revenues equal total costs plus the corresponding operating income objective to achieve net income of $240,000. Revenue = Variable costs + Fixed costs + [Net income ÷ (1 Tax rate)] $400Q = $200Q + $100,000 + [$240,000 (1 0.4)] $400 Q = $200Q + $100,000 + $400,000 Q = 2,500 units 2. To achieve its net income objective, Almo Company should select the first alternative where the sales price is reduced by $40, and 2,700 units are sold during the remainder of the year. This alternative results in the highest net income and is the only alternative that equals or exceeds the company’s net income objective. Calculations for the three alternatives are shown below. Alternative 1 Revenues = ($400 350) + ($360a2,700) = $1,112,000 Variable costs = $200 3,050b= $610,000 Operating income = $1,112,000 $610,000 $100,000 = $402,000 Net income = $402,000 (1 0.40) = $241,200 a$400 $40; b350 units + 2,700 units. Alternative 2 Revenues = ($400 350) + ($370c2,200) = $954,000 Variable costs = ($200 350) + ($190d2,200) = $488,000 Operating income = $954,000 $488,000 $100,000 = $366,000 Net income = $366,000 (1 0.40) = $219,600 c$400 $30; d$200 $10.
3-35
Alternative 3 Revenues = ($400 350) + ($380e2,000) = $900,000 Variable costs = $200 2,350f= $470,000 Operating income = $900,000 $470,000 $90,000g= $340,000 Net income = $340,000 (1 0.40) = $204,000 e$400 (0.05 $400) = $400 $20; f350 units + 2,000 units; g$100,000 $10,000 3-43 (30 min.) Choosing between compensation plans, operating leverage. 1. We can recast Marston’s income statement to emphasize contribution margin, and then use it to compute the required CVP parameters.

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