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Darringer Products.doc

Darringer Products manufactures recreational equipment. One of the companys products, a skateboard,
sells for $42.00. The skateboards are manufactured in an antiquated plant that relies heavily on direct
labor workers. Thus, variable costs are high, totaling $25.20 per skateboard of which 60% is direct labor
cost.
Over the past year the company sold 44,000 skateboards, with the following operating results:

Sales (44,000
skateboards)
Variable expenses

$

1,108,800

Contribution margin
Fixed expenses
Net operating income

1,848,000

739,200
470,400
$

268,800

Management is anxious to maintain and perhaps even improve its present level of income from the
skateboards.
Required:
1-a. Compute the CM ratio and the break-even point in skateboards.
Contribution margin
Unit sales to break-even
point

%
skateboards

1-b. Compute the degree of operating leverage at last year's level of sales. (Round your answer to 2
decimal places.)
Degree of operating leverage
2. Due to an increase in labor rates, the company estimates that variable costs will increase by $3.36
per skateboard next year. If this change takes place and the selling price per skateboard remains
constant at $42.00, what will be the new CM ratio and the new break-even point in skateboards?
Contribution margin
Unit sales to break-even
point

%
skateboards

3. Refer to the data in (2) above. If the expected change in variable costs takes place, how many
skateboards will have to be sold next year to earn the same net operating income, $268,800, as last
year?
Number of skateboards
4. Refer again to the data in (2) above. The president has decided that the company may have to raise
the selling price of its skateboards. If Darringer Products wants to maintain the same CM ratio as last
year,what selling price per skateboard must it charge next year to cover the increased labor
costs? (Round your answer to 2 decimal places.)
Selling price

$

5. Refer to the original data. The company is considering the construction of a new, automated plant.
The new plant would slash variable costs by 40%, but it would cause fixed costs to increase by 99%.
If the new plant is built, what would be the companys new CM ratio and new break-even point in
skateboards?
Contribution margin
Unit sales to break-even
point

%
skateboards

6. Refer to the data in (5) above.
a. If the new plant is built, how many skateboards will have to be sold next year to earn the same net
operating income, $268,800, as last year?
Number of skateboards
b-1. Assume that the new plant is constructed and that next year the company manufactures and
sells 44,000 skateboards (the same number as sold last year). Prepare a contribution format
income statement. (Input all amounts as positive values except losses which should be
indicated by minus sign.)
Contribution Income Statement.
$

$

b-2. Compute the degree of operating leverage. (Round your answer to 2 decimal places.)
Degree of operating
leverage

Deckyard Company.doc

Deckyard Company distributes a lightweight lawn chair that sells for $80 per unit. Variable expenses are $40.00 per unit, and fixed
expenses total $180,000 annually.
Required:
1. What is the product's CM ratio?

50

CM ratio

%

2. Use the CM ratio to determine the break-even point in sales dollars.

Break-even point in sales dollars

360000

$

3. The company estimates that sales will increase by $53,000 during the coming year due to increased demand. By how much
should net operating income increase?

Net operating income increases by

$

26500

4. Assume that the operating results for last year were as follows:

Sales
Variable
expenses

$

1,080,000

Contribution
margin
Fixed expenses
Net operating
income

2,160,000

1,080,000
180,000
$

900,000

a. Compute the degree of operating leverage at the current level of sales.

Degree of operating leverage

1.2

b. The president expects sales to increase by 14% next year. By how much should net operating income increase?

Net operating income increases by

$

151200

5. Refer to the original data. Assume that the company sold 37,500 units last year. The sales manager is convinced that a 11%
reduction in the selling price, combined with a $63,000 increase in advertising expenditures, would increase annual unit sales
by 50%.
a. Prepare two contribution format income statements, one showing the results of last years operations and one showing
what the results of operations would be if these changes were made. (Do not round intermediate calculations. Round
your "Per unit" answers to 2 decimal places. Input all amounts as positive values except losses which should be
indicated by minus sign.)

Proposed
Last Year
37,500 units
Total

(Click to select)

units
Per Unit

$

$

Total
$

(Click to select)
(Click to select)

$

(Click to select)
(Click to select)

$

$

b. Would you recommend that the company do as the sales manager suggests?
Yes
No

6. Refer to the original data. Assume again that the company sold 37,500 units last year. The president feels that it would be
unwise to change the selling price. Instead, he wants to increase the sales commission by $2.50 per unit. He thinks that this
move, combined with some increase in advertising, would double annual unit sales. By how much could advertising be
increased with profits remaining unchanged? Do not prepare an income statement; use the incremental analysis approach.

The amount by which advertising can be increased is

$

check my workreferencesebook & resources

©2013 McGraw-Hill Education. All rights reserved.

Textra Sports.doc

Textra Sports, Inc., produces high-quality sports equipment. The company's Racket Division
manufactures three tennis rackets the Standard, the Deluxe, and the Prothat are widely used in
amateur play. Selected information on the rackets is given below:

Selling price per racket
Variable expenses per racket:
Production
Selling (5% of selling price)

Standard
$47.00

Deluxe
$ 65.00

Pro
$86.00

$18.80
$ 2.35

$ 22.75
$ 3.25

$25.80
$ 4.30

All sales are made through the company's own retail outlets. The Racket Division has the following
fixed costs:
Per Month
Fixed
production
costs
Advertising
expense
Administrative
salaries

$

107,000
106,000
57,000

Total

$

270,000

Sales, in units, over the past two months have been as follows:

April
May

Standard
3,000
8,000

Deluxe
2,000
2,000

Pro
6,000
3,000

Total
11,000
13,000

Required:
1-a. Prepare contribution format income statements for April. (Round the "Total percent" answers to
one decimal place. Input all amounts as positive values except losses which should be
indicated by minus sign.)
Standard
Amount
(Click to select)

Deluxe
%

Amount

$

$

$

$

Variable expenses:
(Click to select)
(Click to select)

Total variable expenses
(Click to select)

Fixed expenses:

%

Total fixed expenses
(Click to select)

1-b.Prepare contribution format income statements for May. (Round the "Total percent" answers to
one decimal place. Input all amounts as positive values except losses which should be
indicated by minus sign.)
Standard
Amount
(Click to select)

Deluxe
%

Amount

$

$

$

$

Variable expenses:
(Click to select)
(Click to select)

Total variable expenses
(Click to select)

Fixed expenses:

Total fixed expenses
(Click to select)

3. Compute the Racket Division's break-even point in dollar sales for April. (Round your intermediate
calculations to 3 decimal places and final answer to the nearest dollar.)
Break-even point in dollar sales

$

4. Would the break-even point be higher or lower with May's sales mix than with April's sales mix?
Higher
Lower

%

5. Assume that sales of the Standard racket increase by $27,000. What would be the effect on net
operating income? What would be the effect if Pro racket sales increased by $27,000? Do not prepare
income statements; use the incremental analysis approach in determining your answer. (Input all
amounts as positive values.)
Tennis Rackets

Effect

Standard

Net operating income
by

Pro

Net operating income
by

Amounts

(Click to select)

$
(Click to select)

$

Tween Inc.doc
Windy City.doc

Windy City Company, a wholesale distributor, has been operating for only a few months. The company
sells three productssinks, mirrors, and vanities. Budgeted sales by product and in total for the coming
month are shown below:
Product
Sinks
Percentage
of total sales
Sales
Variable
expenses
Contribution
margin
Fixed
expenses

Mirrors
48%

$

20%

307,200
92,160

30%

215,040

$

100%

$

70%

128,000
102,400

80%

25,600

$

100%

20%

Net
operating
income

Dollar sales to break-even

=

Fixed expenses
CM ratio

=

$224,120
0.52

= $431,000

As shown by these data, net operating income is budgeted at $108,680 for the month, and breakeven sales at $431,000.
Assume that actual sales for the month total $640,000 as planned. Actual sales by product are: sinks,
$204,800; mirrors, $256,000; and vanities, $179,200.
Required:
1. Prepare a contribution format income statement for the month based on actual sales data. (Input all
amounts as positive values except losses which should be indicated by minus sign. Round
your final answers to nearest whole number.)

Sinks
%

Percentage of total sales
(Click to select)

$

(Click to select)

(Click to select)

Product
Mirrors
%
%

$

%
$

%

(Click to select)

(Click to select)

2. Compute the break-even point in sales dollars for the month, based on your actual data.

$

Break-even point in sales dollars

$

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Solution... View the full answer

Darringer Products.doc

Darringer Products manufactures recreational equipment. One of the companys products, a skateboard,
sells for $42.00. The skateboards are manufactured in an antiquated plant that relies heavily on...

Deckyard Company.doc

Deckyard Company distributes a lightweight lawn chair that sells for $80 per unit. Variable expenses are $40.00 per unit, and fixed
expenses total $180,000 annually.
Required:
1. What is the...

Textra Sports.doc

Textra Sports, Inc., produces high-quality sports equipment. The company's Racket Division
manufactures three tennis rackets the Standard, the Deluxe, and the Prothat are widely used in
amateur...

Tween Inc.doc

Tween, Inc., produces and sells highly faddish products directed toward the preteen market. A new
product has come onto the market that the company is anxious to produce and sell. Enough capacity...

Windy City.doc

Windy City Company, a wholesale distributor, has been operating for only a few months. The company
sells three productssinks, mirrors, and vanities. Budgeted sales by product and in total for the...

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