240000 300000 1b income 0 30 240000 312000 2

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$240,000 = $300,000 1b. income Operating = ($45 × 40,000) - ($30 × 40,000) - ($60 × 800) - $240,000 = $312,000 2. Denote the number of picture frames sold by Q, then $45Q - $30Q – (500 × $60) - $240,000 = 0 $15Q = $30,000 + $240,000 = $270,000 Q = $270,000 ÷ $15 = 18,000 picture frames 3. Suppose Susan had 1,000 shipments. $45Q - $30Q - (1,000 × $60) - $240,000 = 0 15Q = $300,000 Q = 20,000 picture frames The breakeven point is not unique because there are two cost drivers—quantity of picture frames and number of shipments. Various combinations of the two cost drivers can yield zero operating income.
3-17 3-29 (25 mins) CVP, Not for profit. 1. Contributions $19,000,000 Fixed costs 1,000,000 Cash available to purchase land $18,000,000 Divided by cost per acre to purchase land ÷3,000 Acres of land SG can purchase 6,000 acres 2. Contributions ($19,000,000 – $5,000,000) $14,000,000 Fixed costs 1,000,000 Cash available to purchase land $13,000,000 Divided by cost per acre to purchase land ($3,000 – $1,000) ÷2,000 Acres of land SG can purchase 6,500 acres On financial considerations alone, SG should take the subsidy because it can purchase 500 more acres (6,500 acres – 6,000 acres). 3. Let the decrease in contributions be $ x . Cash available to purchase land = $19,000,000 – $ x – $1,000,000 Cost to purchase land = $3,000 – $1,000 = $2,000 To purchase 6,000 acres, we solve the following equation for x . 19,000,000 1,000,000 6,000 2,000 18,000,000 6,000 2,000 18,000,000 12,000,000 $6,000,000 x x x x - - = - = × - = = SG will be indifferent between taking the government subsidy or not if contributions decrease by $6,000,000.
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
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
3-20 3-32 (30 min.)

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