15 18000 picture frames 3 Suppose Susan had 1000 shipments 45Q 30Q 1000 60

15 18000 picture frames 3 suppose susan had 1000

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3-18 3-30 (15 min.) Contribution margin, decision making. 1. Revenues $500,000 Deduct variable costs: Cost of goods sold $200,000 Sales commissions 50,000 Other operating costs 40,000 290,000 Contribution margin $210,000 2. Contribution margin percentage = $500,000 $210,000 = 42% 3. Incremental revenue (20% × $500,000) = $100,000 Incremental contribution margin (42% × $100,000) $42,000 Incremental fixed costs (advertising) 10,000 Incremental operating income $32,000 If Mr. Schmidt spends $10,000 more on advertising, the operating income will increase by $32,000, converting an operating loss of $10,000 to an operating income of $22,000. Proof (Optional): Revenues (120% × $500,000) $600,000 Cost of goods sold (40% of sales) 240,000 Gross margin 360,000 Operating costs: Salaries and wages $150,000 Sales commissions (10% of sales) 60,000 Depreciation of equipment and fixtures 12,000 Store rent 48,000 Advertising 10,000 Other operating costs: Variable ( $500,000 $40,000 × $600,000) 48,000 Fixed 10,000 338,000 Operating income $ 22,000
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3-19 3-31 (20 min.) Contribution margin, gross margin and margin of safety. 1. Mirabella Cosmetics Operating Income Statement, June 2008 Units sold 10,000 Revenues $100,000 Variable costs Variable manufacturing costs $ 55,000 Variable marketing costs 5,000 Total variable costs 60,000 Contribution margin 40,000 Fixed costs Fixed manufacturing costs $ 20,000 Fixed marketing & administration costs 10,000 Total fixed costs 30,000 Operating income $ 10,000 2. Contribution margin per unit = $40,000 $4 per unit 10,000 units = Breakeven quantity = Fixed costs $30,000 7,500 units Contribution margin per unit $4 per unit = = Selling price = Revenues $100,000 $10 per unit Units sold 10,000 units = = Breakeven revenues = 7,500 units × $10 per unit = $75,000 Alternatively, Contribution margin percentage = Contribution margin $40,000 40% Revenues $100,000 = = Breakeven revenues = Fixed costs $30,000 $75,000 Contribution margin percentage 0.40 = = 3. Margin of safety (in units) = Units sold – Breakeven quantity = 10,000 units – 7,500 units = 2,500 units 4. Units sold 8,000 Revenues (Units sold × Selling price = 8,000 × $10) $80,000 Contribution margin (Revenues × CM percentage = $80,000 × 40%) $32,000 Fixed costs 30,000 Operating income 2,000 Taxes (30% × $2,000) 600 Net income $ 1,400
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3-20 3-32 (30 min.) Uncertainty and expected costs. 1. Monthly Number of Orders Cost of Current System 300,000 $1,000,000 + $40(300,000) = $13,000,000 400,000 $1,000,000 + $40(400,000) = $17,000,000 500,000 $1,000,000 + $40(500,000) = $21,000,000 600,000 $1,000,000 + $40(600,000) = $25,000,000 700,000 $1,000,000 + $40(700,000) = $29,000,000 Monthly Number of Orders
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