Supplemental Problem #2 Name __________________________________

ACG 3331 - Cost-Volume-Profit

The Alpine House, Inc. is a large retailer of winter sports equipment. An income statement for the company’s Snowboard Department from last year is presented below:

THE ALPINE HOUSE, INC.

Income Statement - Snowboard Department

For the Year Ended December 31, 2009

Sales ……………………………………... $150,000

Less: Cost of Goods Sold ……………….. 90,000

Gross margin……………………………… 60,000

Less operating expenses:

Selling expenses……………………….. $26,000

Administrative expenses………………. 10,000 36,000

Operating Income………………………… $24,000

Snowboards sell on the average, for $750. Variable selling expenses are $50 per snowboard sold.

The remaining selling expenses are fixed. The administrative expenses are 20% variable and 80% fixed. The company does not manufacture its own snowboards; it purchases them from a supplier for $450 each.

REQUIRED:

Answer the following independent questions. You must show and clearly label all of your work in order to receive any partial credit.

1. Prepare an income statement for the year using the contribution approach.

2. Compute the breakeven point in snowboards. ________________ snowboards

3. Calculate the revenue needed to earn a target operating income of $30,000. $________________________

4. Refer to the original data. How many snowboards must be sold to yield after-tax net income of $39,000, assuming the tax rate is 35%? ______________________ snowboards

5. Refer to the original data. If sales increase by 10% during the coming year due to increased demand, by how much should the Snowboard Department’s operating income increase? $______________ increase

Express your answer in dollars

6. Refer to the original data. An advertising campaign is being evaluated that costs an additional $6,000. How much would sales revenue have to increase for the Snowboard Department to be economically indifferent between doing the advertising campaign and not doing the advertising campaign? $___________________

7. Refer to the original data. The company’s supplier has told The Alpine House that the cost of the snowboards will increase by $34 per snowboard next year. The manager of the Snowboard Department has, therefore, decided that he will have to raise the selling price of its snowboards. If the manager wants to maintain the same CM ratio as last year, what selling price per snowboard must it charge next year to cover the increased costs? $ ___________________

8. The snowboards are currently sold by salespeople that earn a fixed salary. The company is considering a new pay plan that would be based totally on commissions. The new pay plan would increase variable costs by $75 per snowboard, but would cause fixed costs to decrease by $13,500. How many snowboards would have to be sold for the company to earn the same operating income under either option (i.e., keeping the current fixed salary or changing it to commission only)? _________________ snowboards

a. For what range of unit sales will the Department prefer keeping the pay plan as is, on fixed salary?

from __________ to ________ snowboards

b. For what range of unit sales will the Department prefer changing the pay plan to commission only?

from __________ to ________ snowboards

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