Contribution margin per unit of Washer: $240 x .25 =$ 60 Contribution margin per unit of Dryer: $120 x .75 = 90 Weighted-average contribution margin $150 c. Break-even point = Fixed cost ÷ Weighted-average contribution margin Break-even point = $78,000 / $150 = 520 units d. Required sales for Washer = 520 units x .25 = 130 units Required sales for Dryer = 520 units x .75 = 390 units Total 520 units Washer Dryer Total Sales price (a) $540 $300 Variable costs (b) $300 $180 Break-even units (c) 130 units 390 units 520 units Sales (a x c) $ 70,200 $117,000 $187,200 Variable costs (b x c) (39,000) (70,200) (109,200) Contribution margin 31,200 46,800 78,000 Fixed cost (34,000) (44,000) (78,000) Net income $ (2,800) $ 2,800 $ -0- 3-53 e.
Chapter 03 - Analysis of Cost, Volume, and Pricing to Increase Profitability f. Total budgeted sales – Total break-even sales Margin of safety = –––––––––––––––––––––––––––––––––––––––––––– –– Total budgeted sales $576,000 – $187,200 Margin of safety = ––––––––––––––––––––––– $576,000 Margin of safety = 67.5% ATC 3-1 a. Operating leverage is the concept that explains how the percentage change in net earnings can increase at a faster rate than the percentage increase in revenues. b. Operating leverage exists because of fixed costs. If all of a company’s costs are variable in nature, its percentage change in earnings will be exactly the same as its percentage change in revenue, and it will not experience operating leverage. c. Other things being equal, as a company’s revenues rise, its variable costs rise proportionately, but their fixed costs stay constant, within a relevant range. Thus, its variable costs become a larger proportion of its total costs and its fixed costs become a smaller proportion of total costs, which reduces its operating leverage. Obviously, when a company’s revenue grows from $5.41 billion to $8.34 billion the company’s fixed costs probably increase as well, but probably not as rapidly as the rise in its variable costs. 3-54
Chapter 03 - Analysis of Cost, Volume, and Pricing to Increase Profitability ATC 3-2 a. and b. Alternatives Original 1 2 3 Revenue $8,000 $12,800 $7,600 $7,200 Variable costs (4,800) (7,680) (3,040) (4,320) Contribution margin 3,200 5,120 4,560 2,880 Fixed cost (2,400) (4,000) (2,400) (1,600) Net income $ 800 $1,120 $2,160 $1,280 Answers can be determined rapidly by multiplying the contribution margin per unit by the number of units sold and subtracting fixed cost. c. The discussion will take many forms. However, it is likely that leadership will be decided by action. The people who aggressively step forward are usually given authority. In general, power is taken, not given. Also, division of labor should be discussed. In all likelihood the section that won divided the three tasks among different groups. Each group only did part of the total task. It is highly inefficient to have each group do all of the tasks. 3-55
Chapter 03 - Analysis of Cost, Volume, and Pricing to Increase Profitability ATC 3-3 a. Possible activity measures, shown under “Operating Data,” are: Revenue passengers carried Enplaned passengers Revenue passenger miles Trips flown b. Of the four activities listed in Item 6, Revenue passenger miles would probably be best activity measure because it considers the miles flown, and not just the number of trip or number of passengers flown. It cost more to fly a passenger 1,000 miles than it does 500 miles.
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