Chapter 7 Cost-Yolume-ProftAraysis A cost-volume-profit graph for AccuTime Company is displayed in Exhibit 7-11. Ae the graph shows, 20,000 units must be sold to achieve $30,000 in after-tax net income. The company’s break-even, point is 15,000 units. The break-even point is not affected by income taxes, because at the break-even Point, there is no income. Notice that AccuTime Company must sell 5,000 units beyond the break-even point in order to achieve after-tax net income of $30,000, Each unit sod beyond the break-even point contributes $10 toward before-iax income. However, ofthat $10 contribution margin, $4 will have o be paid in income taxes. This leaves an after-tax contriburion of $6 toward after-tax net income. Thus, selling 5,000 units ‘beyond the break-even point results in after-tax net income of $30,000 (5,000 units x $6 after-tax ‘contibution per nit Review Questions 74. 13. 14. 1. 16. 7. 18. 1. Briefly explain each of the following methods of ‘computing a break-even point in unis: (a) contibution- margin approach, (b) equation approach, and (© graphical approach, ‘What isthe meaning ofthe term unit contribution ‘margin? Contsibution to what? ‘What information is conveyed by a cost-volume- prot graph in addition toa company’s break-even point? ‘What does the term safry margin mean? ‘Suppose the fixed expences ofa travel agency increase. What will happen to its break-even point, measured in numberof clients served? Why? Delmarva Oyster Company has been able to decrease its vatible expenses per pound of oysters harvested, How will thie atfect the firm's break-even sales volume? Ina strategy mecting, a manufacturing company’s president sad, “If we raise the price of our product, the company's break-even point will be lower.” “The financial vice president responded by saying, “Then we should rate our price. The company will be less likely to incur a oss" Do you agree withthe president? Why? Do you agree with the financial vice president? Why? ‘What will happen to company’s break-even point if the sales price and unit variable cost ofits only product increase by the same dollar amount? ‘An art museum covers its operating expenses by charging a small admission fee, The objective ofthe nonprofit organization isto break even A local ars enlausast has just pledged an annual donation of $10,000 to the museum. Flow will the donation affect the museum's break-even atendance level? How can a profi-volume graph be used to predict ‘company’s profit for a particular sales volume? List the most important assumptions of cos-volume- profit analysis 72. 145. 76. a7. 720, ra. ra. Why do many operating managers prefer a contrib tion income statement instead of a traditional income statement? ‘What is the diference between a manufacturing ‘company’s gross margin and its foal contribution ‘margin? East Company manufactures VCRs using a completely ssulomated production process, West Company alo ‘manufactures VCRs, but is products are assembled ‘manually. How will hese two firms” cost structures difer? Which company will have higher operating leverage factor? ‘When sales volume increases, which company will experience a larger percentage increase in profit com- pany X, which has mostly fixed expenses, ot company YY, which has mostly variable expenses? ‘What does the term sales mix mean? How is a weighted-average writ contribution margin computed? ‘Acar rental agency rats subcompact, compact, and full-size automobiles, What assumptions would be ‘made about the agency’s sles mix fo te purpose of & cost-volume-profit analysis? How can a hotel's management use cost-volume-profit snalysi ( help in deciding on room rates? How could cost-volume-proft analysis be used in budgeting? In making a decision about advertising? ‘Two companies have identical fixed expenses, unit variable expenses. and profits, Yet one company has seta much lower price for it product. Explain how (bis can happen, Accompany with an advanced manufacturing envi= ronment typically will have a higher break-even point, greater operating leverage, and larger safety ‘margin than a labor-intensive firm, True or false? Explain. [Explain briefly how activity-bated costing (ABC) allects cost-volume-profit analysis.Exercises 1m Exorise 7-23 Fillin Blanks; Base CP Relationships 01,2) 1 Exorlso 7-24 Pizza Delvery Business; Basi CVP Anal (101,2,4) Exercise 7-25, Manufacturing; Using CWP oasis wo) 1 Bxorise 7-26 Sports Franchise; CVP Graph (03,4) om Bxoreise 7-27 Continuation of Preceding Execs; Prot-Volume Graph Saoty Maran (03,4) Chapter7 Cos-Voluma Prot Arabis {All appicable Exercises are available with McGraw-Hill Connect Acounting™®, 7 Ineo Fillin the missing data for each of the following independent cases, Ugnore income taxes) Sales Varlable etal Fed Net _Break-Even Revenue Expenses Contribulon Margin Expenses Income Sales Revenue 1 2 40000 a som 7 40,000 2 $som0 7 $15,000 > . 20000 2 : 0000 0900 2 $0000 + 4 rian 22,000 ” > 38000 + College Pizza delivers pizzas othe dormitories and apartments near a major state university. The com- ppany's annual fxed expenses are $40,000. The sales price of a pizza is $10, and it costs the company $5 ormake and deliver each pizza, (In the following requitements, ignore income taxes.) Required Using the contibation-margin approach, compute the company's break-even pint in unit (pizzas). 2. Whats the contibution-margin rato? 3. Compute the break-even sales revenue, Use the contibution-margin ratio in your ealculation, ‘How many pizzas must the company cello earn a argel net profit of $5,000? Use the equation, method, Rosario Company, whichis located in Buenos Aires, Argentina, manufactures a component used in farm machinery. The firm's fixed costs ste 4,000,000 p per year. The variable cost of each component ’s 2,000 p, and the components are solé for 3,000 p each. The company sold 5,000 components during the prior year. (p denotes the peso, Argentina's national currency. Several countries use the peso as their ‘monetary unit. On the day this exercise was written, Argentina's peso was worth 327 US. dolla Inthe following requirements, ignore income taxes) Required: Answer requirements (1) through (4) independently. J. Compste the break-even point in units, ‘What will the new break-even point be if fixed costs increase by 10 percent? ‘What was the company’s net income for the prior year? ‘The sales manager believes that a reduction in the sales price to 2,500 p will result in orders for 1,200 more components each year, What will the break-even point be ifthe price is changed? ‘5. Should the price change discussed in requirement (4) be made? ‘The Houston Armatkllos, a minor-league baseball team, play thei weekly games ina small stadium just ‘outside Houston, The stadium holds 10,000 people and tickets sell for $10 each, The franchise owner estimates that the team’s annual fixed expenses are $180,000, and the variable expense per ticket sold is S1. (ln the following requirements, ignore income taxes) Required 1. Draw a cost-volume-profit graph for the sports franchise. Label the axes, break-even point, profit and loss areas, fixed expenses, variable expenses, total-expense lin, and total-revenue lin. 2. Athe stadium is half full for each game, how many games must the team play to break even? Refer to the d Required 1. Prepare a fully labeled profit-volume graph for the Houston Armadillos 2. What is the safety margin for the baseball franchise ifthe team plays a 12-game season and the ‘earn owner expects the stadium tobe 30 percent fll foreach game? 3. Ihe stadium is haf full for each game, what ticket price would the team have to charge inorder to break even? given in the preceding exercise, (Ignore income taxes.)Chapter 7 CostYolume-Proft Araysis 309 ————_~_ = Eerie 7-28 ‘Buropa Publications, Inc. specializes in reference books that keep abreast ofthe rapidly changing Polit Pyplshing. Conon ‘al and economic issues in Europe. The results of the company’s operations during the prior Year @ noone Stlement iven in the following ‘able. All units produced dusing the year were sold. Ignore income taxes) (07.8) Sales revenue 2,000,000, Nanutatuing casts aed 00000 erable 1.00000 Saige: Fed 50.000 arable 100000 dasrevsrte cat: Fea 129000 Verale 0,000 Required: A, Prepare a traditional income statement and a contribution income statement forthe company. 2. What isthe fim’s operating leverage forthe sales volume generated dung the prior year? 3. Suppose sales revenue increases by 10 percent. What wll be the percentage increas in net income? 4. Which income statement would an operating manager use to answer requirement (3)? Why’ 1 Exercise 7-29 Tin's Bicycle Shop els 2-speed bicycles. For purposes of a costvolame-profit analy be abOP eas cP lee ih owner has divided sales into two categories, as follows: frei (01,2, 5) a sn wu tune eens British Airways -wwwbritishairways.com (og ci ee coe = Net come $50,000310 Chapter7 Cos-Voluma Prot Arabis Required: 1. Show the hotels cost structure by indicating the percentage ofthe hotel's revene represented by ‘each item on the income slatement 2. Suppose the hotels revenue declines by 15 percent. Use the conaibution-margin percentage to ‘calculate the resulting decrease in net income. 3. Whats the hotel's operating leverage factor when revenue is $500,000? 4. Use the operating leverage factor to calculate the increase in net income resulting from a 20 percent increase in sales revenue b er Refer to the tatement the i Pr eit aaa fer to the income satement given in the preceding exercise, Prepare a new contibution income Femsatin ofPrsadeg atement for the Nanfucket Inn in each ofthe following independent sitaation. (Ignore income oan a) 1. The hote’s volume of sctivity increases by 20 percent, and fxed expenses increase by 40 percent. 2. The rato of variable expenses to revenue doubles. There is nochange in the hotel's volume of activity: Fixed expenes decline by $25,000 1 eercise 7-93 ee CREF ee ee wie Sete ae or Fe eee Ease ae ars ee eee ee ee es en eT see screy a ee ee eee ee ae [Al applicable Problems are avaiable with McGraw’ Connect Accounting, #2. CONNECL Problems accouneing 1 Problem 7-34 Disk City, Inc. isa retailer for digital video disks. The projected net income for the curenl year is Basic CVP Rellonshps; $200,000 based on a sales volume of 200,000 video disks, Disk City has been selling the disks for $16 Paaler ‘ach. The variable costs consist ofthe $10 unit purchase price ofthe disks and a handling cost of S2 per (101,2,4) disk, Disk City's annual fixed costs are $600,000. ‘Management is planning forthe coming year, when it expects thatthe unit purchase price of the 7 Nemes SO go aks will nerease 30 percent. (Ignore income taxes) Required: 1. Calculate Disk city’s break-even point for the current year in number of video disks. 2, What willbe the company's net income forthe current year if there is #10 percent increase in pro- Jected unit sales volume? 3. What volume of sales (in dollars) must Disk City achieve in the coming year to maintain the same ‘et income as projected for the current year if the unt selling price remains at $16? 4. In order to cover a 30 percent increase inthe disk's purchase price for the coming year and still rmaintain the curtentcontsibution-margin ratio, what selling price per disk must Disk City establish for the coming year? 8. Build a spreadsheet: Construct an Excel spreadsheat o solve requirements (1), (2), and (3) above Show how the solution wll change if the following information changes: the selling price is $17 and the annual fixed costs are $640,000. (29 apeChapter 7 CostYolume-Proft Araysis a ————_ «= Problem 7-35 CCollegePak Company produced and sold 60,000 backpacks during the year just ended at an a¥Erage— Bas GyPComputone price of $20 per unit. Variable manufacturing costs were SB per unit, and variable marketing costs Were (19, 2,4) $4 per unit sol. Fixed costs amounted o $180,000 for manufacturing and $72,000 for marketing, There |S” ‘was no year-end work-in-process inventory. (Ignore income taxes.) 2. Sales units required for $180,000 income: 64,000, equled: nits 1. Compute CollegePk’s break-even point i sales dollar fr the year 2. Compute the numberof sales units required to earn a net income of $180,000 during the ye 13. CollegePak's variable manufacturing cost are expected to increase by 10 percent in the coming year, Compute the firm's break-even point in sale dollars forthe coming yeat. 4. 1fCollegePak’s variable manufacturing costs do increase by 10 percent, compute the selling price that would yield the same contribution-margin ratio in the coming year. (CMA, adapted) es Lee ee ee ee eel [Model na. 6754: (OK) ena elements Annual fixed costs, $985,600 4399: $1,004,400 ——— aoe rarer em ee seis er tases eee emer a = ae ae eee ee ene eee) Ear acresteena etc se aot eee eee 0, ee rare eee Pera aes Sire separa oT ETT Er eee ee re Ceo ae ee eee ee A reo Se a ny ay re ee SOS a ee onthe a (01,4) = ae Sit Mt acon 209 ‘Management is considering relocating its manufacturing facilities to northern Mexico to reduce costs. Variable costs are expected to average S18 per se; annual fined costs are anticipated tobe $1,984,000. Gh the following requirements, ignore income taxes.)2 1 Problem 7-38 Sales Mix and Employee Componsation; Operating Changes (04,5) 2). Commissions, ttl $535 600 = Problem 7-39 Leverage; Arabs of Operating Chango (101,4,8) 1. Plan B break-even point: 2,200 units 3. Operating beverage factor, Plan A 1.2 Chapter7 Cos-Voluma Prot Arabis Required: 1. Calculate the company's current income and determine the level of dollar sales needed to double that figure, assuming that manufacturing operations emain in the United States. 2, Determine the break-even point in speaker sets if operations are shifted to Menico, 3. Assume that management desires to achieve the Mexican break-even point; however, operations will remain ia the United States 44 If variable costs remain constant, what must management do to fixed costs? By how much must fixed costs change? 1b. If xed costs remin constant, what must management do to the variable cor per unit? By how mach must unit variable cat change? 4. Determine the impact (increase, decrease, or no ellect) ofthe following operating changes. 44 Effect ofan increase in direct material costs onthe break-even point Effect of an increase in fixed administrative costs on the unit contribution margin. Effect of an increase in the unit contribution margin on net income. fect of a decrease in the numberof units sold on the break-even pot aoe Lawrence Corporation sels two ceiling fans, Deluxe and Basic. Curent sales total 60,000 units, consist- {ng of 39,000 Deluxe units and 21,000 Basic units. Selling price and variable cost information follow. Deluxe Basle Salina pce sega etal cos 6 4 Salespeople currently receive flat salaries that (otal $400,000. Management is contemplating a change to compensation plan that is based on commissions in an effort to boost the company’s presence inthe ‘marketplace. Two plans are under consideration: Plan A: 10% commission computed on gross dollar sales. Deluxe sales are expected to total 45,500 units; Basic sales are anticipated to be 19,500 unit Plan B: 30% commission computed on the basis of production contribution margins, Deluxe sales are anticipated tobe 26,000 units; Basic sales ae expected to total 39,000 unis Required: 1. Deine the torm sales mix 2. Comparing Plan to the current compensation arrangement 4 Will Plan A achieve management's objective of an increased presence in the marketplace? Briefly explain ‘From a sales-mix perspective, will the salespeople be promoting the product that one would Iogically expect? Briefly discus. ‘Will the sales force likely be satisfied with the results of Plan A? Why? 4 Will Lawrence likely be salistied with the resulting impact of Plan A on company profitability?” Why? 3. Asiume that Plan B is under consideration. ‘Compare Plan A and Plan B with respect to total units sold and the sales mix. Comment onthe results, 1}. a comparison with at salaries, i Plan B more attractive tothe sale force? To the company? ‘Show calculations to support your answers ‘Consolidated Industries is studying the addition of a new valve to its product line. The valve would be ‘used by manufacturers of irrigation equipment. Tae company anticipates starting with a relatively low sales volume and then boosting demand over the next several yeats, A new salesperson must be hired ‘because Consolidated's current sales force is working at capacity. Two compensation plans are under consideration Plan A: An annual salary of $22,000 plus a 10% commission based on gross dollar sales. Plan B: An annual salary of $66,000 and no commission.Chapter 7 CostYolume-Proft Araysis 313 ‘Consolidated Industries will purchase the valve for $50 and sel it for $80, Anticipated demand during ‘thefts yea is 6,000 units. (in the following requirements, ignore income taxes.) Roquleé: 1. Comput the break-even point for Plan A and Plan B. 2. What is meant by the term operating leverage? 3 Analyze the cost structures of both plans at the anticipated demand of 6,000 units. Which ofthe {wo plans has higher operating leverage factor? 4, Assume that a general economic downturn occured dusing yea 2, with product demand falling from £6,000 to 5,000 units. Determine the percentage decrease in company net income if Consolidated had adopted Plan A, Repeat requirement (4) for Plan B. Compare Plan A and Plan B, and explain a majr factor that underies any resulting differences. (6. Briefly discuss the likely profitability impact of an economic recession for highly automated man- ‘facturers. What ean you say about the risk associated with these firms? ————_ i Probiem 7-40 Serendipity Sound, Ine. manufactures and sells compact diss, Price and cost data areas follows Basle CP Ralatonsips Stn pe per ust package oft 00) e509 (ONE 9) aril cots per unt 3. Sales units required for Direct mtr ‘$1050 —_‘etgt nel profi: 40,000 Direct abor sons ‘Manutactuting overhead 3.00 8. Old contibution-rmargin ae rat. 208 rg egenses 0 Teale costs pr unt 31980 Pal ed cose Marutactingovread $ 192000, Selig ad aint 276000 Teale cast $463.00 Forecased ena ss ole (120,000 unis) $300,000, Inthe following requirements, ignore income taxes Required: 1, Whats Serendipity Sound's break-even point in units? 2. What isthe company’s break-even point in sles dollars? 3. How many units would Serendipity Sound have to sel in oder to earn $260,0007 4, Whats the firm's margin of safety? 5, Management estimates that direc-labor cost wil increase by 8 percent next year, How many units will the company have to sell next year to reach its break-even point? {6 the company’s direct-abor costs do increase by 8 percent, what sellin price per unit of product ‘must it charge to maintain the same contibution-maygin ratio? (08a ‘= Problem 7-41 Alletico, Ine. manufactures warm-up suits. The company's projected income for the coming year, yp Graph Cost Sunt; ‘based on sales of 160,000 units, is as follows part Leverago subs sso0090 12% 848) ‘petra emerses 4. Margo sate ‘arate eens 2000000 $4,000,000 Fed epeses 2.000.000 Teal expenes 000009 Net ieome $8,000.00,34 = Problem 7-42 Broan Pain Ate-Tax Net income; Profi-olune Graph; Iomational suns ‘Aopen (101,2,3,4,11) 3. Bestcoven pon (unis) 80,500 unis 1 Problem 7=43, Breaker Paint Safely Nari Lan irr 1,9 1 Total thes expenses $1,491,980 2. Safety margin $1,167,000 Chapter7 Cos-Voluma Prot Arabis Required: In completing the following requirements, ignore income taxes, Prepare a CVP graph for Athletic, Inc. forthe coming year. Calculate the firm's break-even point for the year in sales dollars ‘What is the company's margin of safety forthe year? Compute Athletico’s operating leverage factor, based on the budgeted sales volume for the yeat 5. Compute Atbletco’s require sales in dollars in order to earn income of $4,500,000 in the ‘coming year. {6 Describe the firm’s cost structure, Calculate the percentage relationships between variable and fixed expenses and sales revenue. (2A, aapeg ‘The European Division of Worldwide Reference Corporation produces a pocket dictionary containing popular phrases in six European languages. Annual budget data forthe coming year follow. Projected sales are 100,000 books. Sales $1,00,000, ats Fixed Variable Dect mata $2 $300.00 Diet aor 200000 Marutating omens so0000 150000 Salog ard asrave sso000 __s0000 Total cots 10.000 Budget operating came $_ sn.000 Required 4, Calculate the break-even point in units and in sales dollars 2. Af the European Division i subject to an income-tax rate of 40 percent, compute the number of, units the company would have to sel o earn an after-tax profit of $90,000. 3. I fixed costs increased $31,500 with no ter cost or revenue factor changing, compute the firm's ‘break-even sles in unit, 4. Prepare a profit-volume graph for the European Division. $8. Dus to an unstable political situation inthe country in which the European Division is located, ‘management believes the county may spit nto two independent nations. I this happens, the tax tate could rise to 50 percent, Assuming all other data as inthe original problem, how many pocket dictionaries must be sold to earn $90,000 after taxes? 6. Build a spreadsheet: Construct an Excel spreadsheet to solve requirements (1), (2), (3), and (5) above. Show how the solution will change ifthe following information changes: sales amounted to $1,100,000 and fixed manufacturing overhead was $110,000, (OA ate ‘Terry Smith and two of his colleagues are considering opening a law office ina large metropolitan area that would make inexpensive legal services available to those who could not otherwise afford services. ‘The intent is to provide easy access for their elents by having the office open 360 days per year, 16, hours each day from 7:00 a.m. to 11:00 pum, The office would be stalfed by a lawyer, paralegal, legal secretary, and clerk-receptionist for each of the two eight-hour shifts In order to determine the feasibility ofthe project, Smith hired a marketing consultant to assist with ‘market projections. The results of this study show that if the firm spends $490,000 on advertising the first year, the number of new clients expected each day will be 50. Smith and his associates believe thisChapter 7 CostYolume-Proft Araysis 315 ‘number is reasonable and are prepared to spend the $490,000 on advertising. Other pertinent information about the operation ofthe office follows: + The only charge to each new client would be $30 forthe initial consultation. All cases that warrant further legal work willbe accepted on a contingency basis with the firm earning 30 percent of any favorable settlements or judgments. Smith estimates that 20 percent of new client consultations will ‘result in favorable setlements or judgments averaging $2,000 each, Itis not expected that there will ‘be repeat clients during the first year of operations. + The hourly wages ofthe staff are projected tobe $25 forthe lawyer. $20 for the paralegal, $15 for the legal secretary, and $10 forthe elerk-eceptionist, Fringe benefit expense will be 40 percent ofthe wages pad, A total of 400 hours of overtime is expected forthe year; this will be divided equally between the legal secretary and the clerk-receptionist postions. Overtime wil be paid at fone and one-half times the regular wage, andthe fringe benetit expense wil apply to the full wage, + Smith has located 6,000 square feet of suitable olficeepace that reals for $28 per aquaze foot sunvally, Asstociated expenses will be $27,000 for property insurance and $37,000 for utilities + Iti be necessary fo the group to purchase malpractice insurance, which ie expected to cost $180,000 annually, + The initial investment in the office equipment will be $60,000. This equipment has an estimated ‘useful life of four years + The cost of office supplies has been estimated tobe $4 pet expected new client consultation Requled: 1, Determine how many new clients must visit the law office being considered by Terry Smith and his colleagues in order for the venture to break even during is firs year of operations. 2. Comput the law firm's safety margin, (08 ste ——— = Pro Cotesia Prodi, In. as devia toned anew predict. which canbe mansfactsdyctheracom™ Sgt te anaes praised manafctrng sem or abordntnsive prediction system The manufcuring method will Genin oro Ne ot aot th quality of the pric. The etinated manufacturing cos by the wo ands ate asfolows: yoegatira recoment Computer Assisted Labortntensiye (1018; 10) Manufacturing System Production System 3), Coirp.te-asito Dress $500 $660 manufactutng system, Drectlaor BL denotes a-lba eurs) SOK@S12 600 -s0LN@Se 7.20 bYeakowen port 710000 arable overeat SoIK@ $6 300 amH@ds aan WS Fad oteas™ $2440.000 $1320.00 7 “Ths cos asa cae row ee They nol be rere toe ae el pad ‘The company’s marketing research department has recommended an introductory unit sles price ‘of $30. Selling expenses are estimated to be $500,000 annually plus $2 for each unit sold. ignore income taxes ) equlee: 4, Calculate the estimated break-even point in annual unt sales ofthe new product if the company uses the (a) computer-asssted manufacturing system; (6) labor-intensive production system. 2, Determine the annual nil sale volume al which the firm would be indifferent between the (wo ‘manufacturing methods. 3. Management must decide which manufacturing method to employ. One factor it should consider is operating leverage. Explain the concept af operating leverage, How is this concept related to (Celestial Products’ decision? 4. Describe the citcumstances under which the fiz should employ each ofthe two manufacturing maths. 5. Identify some business factors other than operating leverage tht management should consider before selecting the manufacturing method. (OMA, sd316 1 Problem 7=45 Braak-Evn Ana's Proft-Vlume Graph; Movie “Theaters (101,3,4) 1. Broak-oven sales volun, regular model 27 500 tubs 3. Nolune at wich oth Tachines produce same profit $7,500 tubs 1 Probtem 7-46 C¥P Analy of Chagas in Sales Pres and Costs (01,4) 3. Now reak-ven point 48,25 uns 5. New contbuten-narg rao: 40 founded) 1 Problem 747 Continuation of Preceding Problems Acty-Based Costing: Avancod anutactuig Stems; ical sues (104,3,10) 2 Bescon pont 17,000 is ey | Chapter7 Cos-Voluma Prot Arabis Silver Screen, Inc. owns and operates a nationwide chain of movie theaters. The S00 properties in the Silver Sereen chain vary from low-volume, small-own, single-screen theaters to high-volume, urban, ‘mulliscreen theaters, The firm's management is considering installing popeor machines, which would allow the theaters to sell feshly popped corn rather than prepopped corn, This new feature would be advertised to inereaze patronage athe company’s theaters. The fresh popcorn wil be sold for $1.75 per tub, The annual rental costs and the operating costs vary withthe size of the popcorn machines, The ‘machine capacities and costs are shown below: (Ignore incom taxes.) Popper Mods! Economy Regular ‘Super enualeapacty 4500s 900001s 40,000 ubs ct: ‘ama masi tl $3000 11.900 $20,000 Popeom eo par tib a3 13 13 Otte cats per tub 1 14 105 Coat een | 8 oe 8 Required A. Calculate each theater's break-even sales volume (measured in tubs af popcorn) for each model of popcorn popper: 2, Prepaze a profi-volume grap for one theater, atsuming thatthe Super Popper i purchased, 43. Calculate the volume (in tubs) at which the Economy Popper and the Regular Popper earn the same probit or loss in each movie theater (04a, ataeg Jupiter Game Company manufactures pocket electronic games. Last year Jupiter sold 25,000 games at ‘25 each, Total costs amounted to $525,000, of which $150,000 were considered fixed In an attempt to improve its product, the company is considering replacing « component part tat hha a cost of $2.50 with a new and better pat costing $4.50 per unit inthe coming year. Anew machine also would be needed to increase plant capacity. The machine would cost $18,000 with a useful life of six years and no salvage value, The company uses staight-line depreciation on al plant assets. (ignore income taxes.) Required 4. What was Jupiter's break-even point in numberof wait last year? 2. How many units of product would the company have had to sell in the last year to carn $140,000? 3. lmanagement holds the sales price constant and makes the suggested changes, how many unis of ‘product must be sold in the coming year to break even? 4. fhe firm holds the sales price constant and makes the suggested changes, how maay units of product will tke company have to sell to make the same ne income a last yeas? 5. lf Jupiter wishes to maintain the same contibution-margin ratio, what selling price per unit of product must it charge next year to cover the increased direct-materal cost? (2A atapeg Refer to the original data given for Jupiter Game Company in the preceding problem. An actvity-based costing study has revealed that Jupiter's $150,000 of fied costs include the following components: Stuy 4 stp t $40 per sets) $ 16000 Engineer 600 neu t $25 pe hou 12500 Inspection (1,00 inspects $80 per peter) e000 net actor overeat 61.500 Tox $120000 Fo slog ardadriisrate co's soon Toil ed ons 150000Chapter 7 CostYolume-Proft Araysis 317 Management is considering the installation of new, highly automated manufacturing equipment that would significantly alter the production process. In adition, management plans a move toward justin- ‘ime inventory and production management. Ifthe new equipment is installed, setups will be quicker and less expensive. Under the proposed JIT approach, there would be 300 setups per year at $50 per sup. Since a total quality conteol program would accompany the move toward JT, only 100 inspections Would be anticipated annually ata cost of $45 each After the installation ofthe new production system, 800 hours of engineering would be required at a cost of $28 per hour. General factory overhead would, increase to $166,100. However. he automated equipment would allow Jupiter to cut ts unit variable cost by 20 percent. Moreover, the more consistent product quality anticipated would allow management to raise the price of electronic games to $26 per unit (Ignore income taxes) Required: 1. Upon seeing the ABC analysis give in the problem, Jupiter's vice president for manufacturing exclaimed tothe controller, “I thought you told me thie $150,000 cost was fixed. These don't look ike fixed costs at all. What you're telling me now is that setup costs us $400 every time we set up production run, What gives?” ‘As Jupiter's controler, write a short memo explaining to the vice president what is going on. 2. Compute Jupiter's new break-even point ifthe proposed automated equipment is installed. 3. Determine how many units Jupiter will have to sell to show a profit of $140,000, assuming the new technology is adopted. 4, 1FTupiter adopts the new manufacturing technology, will its break-even point be higher or lower? Will the numberof sles units required to earn 2 profit of $140,000 be higher or lower? (Refer to your answers fr the first two requirements ofthe preceding problem.) Are the results in this case ‘consistent with what you would typically expect to find? Explain, 5. The decision as to whether to purchase the automated manufacturing equipment will be made by Jupiter's boacd of directors. In oder to support the proposed acquisition, te vice president for ‘manufacturing asked the controller to prepare a report on the financial implications ofthe decision ‘As pat of the report, the vice president asked the controller to compute the new break-even point, assuming the installation ofthe equipment. The controller complied, asin requiremeat (2) of this problem. ‘When the viee presideat for manufacturing saw thatthe break-even point would increase, he asked the controller to delete the break-even analysis from the eport. What should the controller ido? Which ethical standards for managerial accountanis ar involved here? ————_ « Problem 7-48, ‘Condensed monthly income data for Thurber Book Stores are presented in the following table for yp Reatanshine, Reta ‘November 20x1. (nore income taxes ) 01.4) Mal Store Downtown Store Total 7, Decrease n oporang Sales $80.00 sro gona n20 70 $i. 400) Les arbi egenses 32000 84000 _116000 conten marge 48.000 $3600 $ 24000 Les: Foe eenses 20000 40.000 60.000 Operating income $2000 Soo $4000 ‘Adana information: + Management estimates that closing the downtown store would result in a 10 percent decrease in ral store sales, while closing the mall store would not affect downtown store sles, + One-fourth of each store's fixed expenses would continue through December 31, 20x2, either store ware closed, ‘The operating tevuls for November 20x1 are representative ofall months. Required A. Calculate the increase or decrease in Thurber’s monthly operating income during 20x2 ifthe downtown store is closed. 2. The management of Thurber Book Stores is considering a promotional campaign atthe downtown, store that would not affect the mal store. Annual promotional expenses a the downtown store ‘would be increased by $60,000 in order to increase downtown store sales by 10 percent. What38 1 Problem 7-49 VP; Mutile Products: (Changs in Costs an Salas Mx (04,5) 2. Toa sales to breakeven: 162,500 units 3. Weighted-average unit ‘contbuton margin: $13.00 EE = Problem 7-50 (VP Relationships: International Business; ‘Automaton (101,4,10) 8. Variable cost per on: $275 perton 6. Dol sles rogue for target net prof: $1,140,000 Chapter7 Cos-Voluma Prot Arabis would be the effect of thi promotional campaign on the company's monthly operating income during 20x27 ‘3. One-half ofthe downtown store's dollar sales are from items sold at ther variable cost to attract ‘customers to the store, Thurber’s management is considering the deletion of these items, a move ‘that would reduce the downtown store's direct fixed expenses by 15 percent and result in the loss ‘of 20 percent ofthe remining downtown store’ sales volume, This change would not affect the ‘mall store. What would be the effect on Thurber’s monthly operating income i the items soldat ‘their variable costae eliminated? 4. Build a spreadsheet: Construct an Excel spreadsheet to solve all of the preceding requirements ‘Show how the solution will change ifthe following infermation changes: the downtown store's sales amounted to $126,000 und its variable expenses were $86,000, (2A, aapteg Cincinnati Tool Company (CTC) manufactures a line of electric garden tools that are sold in general hhardware stores. The corspany's controller, Will Flton, has just received the sales forecast forthe com- ing year for CTC’s three products: hedge clippers, weeders, and leaf blowers. CTC has experienced considerable vatiatons in sales volumes and variable costs over the pas wo yeass, and Fulton believes the forecast should be carefully evaluated from a cost-volume-profit viewpoint. The preliminary budget {information for 20x2 follows: Weeders Hodge Clippers Leat Blowers Unit sais sv 50000 100000 Unite rie $28 $86 8 Vata marwacturng ca ern 18 2 6 afl seing cost pert 5 4 6 For 20x2, CTC’s fixed manufacturing overhead is budgeted at $2,000,000, and the company’s fixed sell- ing and administrative expenses ae forecasted to be $600,000, CTC has a tax rate of 40 percent. Required: Determine CTC's budgeted net income for 20x2 2. Assuming the sales mix remains as budgeted, determine how many units of each product CTC ‘must sellin order to break even in 20x2 3. After preparing the original estimates, management determined that its varisble manufacturing ost of leaf blowers would increase by 20 percent, and the variable selling cost of hedge clippers ‘could be expected to increase by $1.00 per unit. However, management has decided not to change the selling price of ether product, In adition, management has learned that it leaf blower has been perceived asthe best value on the market, and it ean expect to sell three times as many leat blowers as each ofits other products. Under these circumstances, determine how many units of ‘each product CTC would have to sellin order to break even in 20x2 (DUA ate ‘Ohio Limestone Company produces thin limestone sheets used for cosmetic facing on buildings. The following income statement represents the operating results for the year just ended, The company had sales of 1,800 tons during the year. The manufacturing capacity of the firm's facilites i 3,000 tons per year. Ugnore income taxes )Chapter 7 CostYolume-Proft Araysis ‘0 LRtESTONE COMPANY Income Statement For the Year Ended December 31, 20x1, Sales 800.000 aca Marutseurng 815000 Saligeots 140000 Toalvrblecosss $485.000 oration margin 905.000 Faedeoes Marutseutng $100 00 Sali 107500 amrsetne 40.000 “tals cats 247500 Net ncome 157500 Require 4, Calculate the company’s break-even volume in tons for 20x1 2. Ifthe sales volume is estimated tobe 2,100 tons in the next year, and ifthe prices and costs stay at the same levels and amounts, what is the nel income that management can expect for 20527 ‘3. Ohio Limestone has been trying fr years to get afoethold inthe European market The company has potential German customer that has offered to buy 1,500 tons at $450 per ton, Assume that all ofthe firm's costs would be a the same levels and rates as in 20x1, What net income would the fim ear i sttook thie order and rejected some busines fom regular customers so as not to exceed capacity? 4. Ohio Limestone plans to market its product in a new terttory. Management estimates that an advertising and promotion program costing $61,500 annually would be needed for the next two or thee years In addition, a $25 per ton tales commission to the sales force inthe new teritory, over and above the current commission, would be required, How many tons would have to be sold inthe ew territory to mintain the firm's curtent net income? Assume that sales and costs will continue asin 20x in the firm's established territories 5, Management is considering replacing its labor-intensive process with an automated production system, This would result in an increase of $58,500 annually in fixed manufactuting costs, The variable manufacturing costs would decrease by $25 per ton, Compute the new break-even volume intone and in sale dollars, {6 Ignore the facts presented in requirement (5). Assume that management estimates thatthe selling price per ton would decline by 10 percent next year. Variable costs would increase by $40 per ton, and fixed costs would not change. What sales volume in dollars would be equired to earn a net income of $94,500 next year? (cs, adapt Alpine Thrills Ski Company recently expanded its manufacturing capacity. The frm will now be able to ‘rode up to 15,000 pairs of cross-country sis of either the mountaineering model or the touring model, ‘The sales department assures management tha it can sell between 9,000 and 13,000 units of ether prod uct this year. Because the models ate very simila, the company will produce only one of the two models. ‘The following information was compiled by the accounting department Model Mountaineer ‘Touring Sling pe pr at $88.00 $80.00 Varalecats per unit 5280 5280 Fixed costs will total $369,600 ifthe mountaineering model is produced but will be only $316,800 ifthe touring mode! is produced, Alpine Thrills Ski Company is subject to a 40 percent income tax rate (ound each answer tothe nearest whole number) 1 Problem 7-51 Costolune-Proft Anas with ome Taxes and Mute Prouats (Append) (10 1,2,4,5,11) 3.Breakceven pont ‘mountaineering modet 10,500 units1 Problem 7-52 VP Analysis Marketing Decisions; ncame Taras 2, Recurad sales dls to break even: $19,692,908 Chapter7 Cos-Voluma Prot Arabis Required: 1. Compute the contnbution-margin ratio for the touring model 2. If Alpine Thrills Ski Company desires an after-tax nt income of $22,080, how many pais of tour- ing skis will tue company have to sell? |3. How much would the variable cost per uni ofthe touring model have to change before it had the same break-even pot in units asthe mountaineering model? 4. Suppose the variable cost per unit of touring skis decreases by 10 percent, and the total fixed cost of touring skis increases by 10 percent. Compute the new break-even point, ‘5. Suppose management decided to produce both products. Ifthe two models are sold in equal pro- portions, and total fixed costs amount to $343,200, what isthe firm's break-even point in units? (A, aapteg Syracuse Telecom, Inc. manufactures telecommunications equipment, The company has always been production oriented and sll is products through agents. Agents are paid a commission of 15 percent of the selling price. Syracuse Telecom's budgeted income statement for 20x2 fellows: For the Year Ended December 31, 20:2 (thousands) Sas $18.00 Maat cos: abe $7,200 Fos overeat 2340 350 toss magn 8 6460 Seng ard anise arenes: Crnmisions $240 as ratrg expenses 40 Fhe anise expenses 4320 Netoperaing nome $2140 Lessa ces xp 540 hoe tet eames $1600 Less near aes 0%) 480 Netlocome $e After the profit plan was completed for the coming year, Syracuse Telecom's sales agents demanded thatthe commissions be increased (0 22% percent of the selling price. This demand was the latest in 4 series of actions that Vinnie McGraw, the company's president, believed had gone too fa. He asked ‘Maureen Elliot, the most sales-riented olfcer in his production-oriented company, to estimate the cost, to Syracuse Telecom of employing its own sales force. Eliot's estimate of the addtional annual cost, ‘of employing its own sales force, exclusive of commissions. follows. Sales personnel would receive a commission of 10 percent ofthe selling price in addition to their salary Estimated Annual Cost of Employing a Company SalesForce ‘in tousands) Sabres: Sales manager $ 100 Sales perce +000 Tread eeraoment +00 Foes artng cos 800 Tau. $2400Chapter 7 CostYolume-Proft Araysis 321 Required: 1, Calculate Syracuse Telecom's estimated break-even point in sales dollars for 20x2 ‘a. Ifthe events that are represented in the budgeted income statement take place. b, IFthe company employs its own sales force, 2. If Syracuse Telecom continues to sell through agents and pays the increased commission of 22% percent ofthe selling price, determine the estimated volume in sales dollars for 20x2 that would be required to generate the same net income as projected in the budgeted income statement 3. Determine the estimated volume in sales dollars tht would reeult in equal net income for 20x2 regardless of whether the company continues to sell through agents and pays a commission of, 22% percent ofthe selling price or employs its own sales force, (cn, agi Cases Delaware Medical Center operates a general hospital. The medical center also rents space and beds m Case 7-53 to separately owned entities rendering specialized services, such as Pediatrics and Paychatric Care. BreaicEven Arabs Hosoi Delawaze charges each separate enity for common services, such as patients’ meals and laundry, and CVPReltonshios for administatve services, such as billings and collections. Space and bed rentals ate fixed charges for (10 1,4) te year, based on bed capacity rented to each entity. Delaware Medical Center charged the following costs 0 forthe year ended June 30, 208 1. Contibutlon margin par ost to Pediatrics for the year ended June 30, 20x! Leen 2. Iorease in revenue: Palen Days (variable) Bed Capactty (Med) 56900 vei 3 emo - E toto * + moe a oe é Ly cay fst = a sont = are “ om com edahietoe = 1 ana ma = 1m Bi nce san val Samoa ono Dring the year ended June 30, 20x1, Pediatrics charged each patient an average of $300 per day, hhad a capacity of 60 beds, and had revenue of $6 million for 365 days. In addition, Pediatrics direcly ‘employed personnel with the following annual salary costs per employee: supervising nurses, $25,000; nurses, $20,000; and aides, $9,000. Delaware Medical Centr has the following minimum departmental personnel requirements, based ‘on total anaual patient days ‘Annual Patient Days ‘Aes Nurses Superdsing Nurses 1072000 2» 0 4 22,01 1926000 wo 5 75001 1929200 Fa 6 5 Pediatrics always employs only the minimum number of required personnel. Salaies of supervis- Ing nurses, nurses, and aides are therefore fixed within ranges of annual patient day. Pediatrics operated at 100 percent capacity on 90 days during the year ended June 30, 20x1. Admin- istrators estimate that on these 90 days, Pediaties could have filed another 20 beds above capacity. Delaware Medical Center has an additonal 20 beds available for ren fr the yeat ending June 30, 20x2, ‘Such additional rental would increase Pediatrics’ fxed charges bazed on bed capacity. (I the following ‘requirements, ignore income taxes.)1 Caso 7-54 (CP Anabss with Production and Marking Decision; Taxes (npendi) (101,411) 10) To achieve after-tax profit obectve, Daley must sal 2.500 units 2.Atematie (after-tax prof $204,000 sm Case 7-55 Sales Commissions ina \Whelesale Fm; Income Texas ‘Aopen (101,2,4,11) 1. Break-oven pint: ‘$500,000, 3. Now contibuton-margin rai: 15 Chapter7 Cos-Voluma Prot Arabis Require: 1. Calculate the minimum numberof patient days required for Pediatrics to break even for the year ‘ending June 30, 20x2, ithe additional 20 beds ae not rented Patient demand is unknown, but assume that revenue per patient day, cost per patient day, cost per bed, and salary rates will remain ‘the same as fr the year ended June 30, 20x] 2. Assume that patient demand, revenue per patient day cost per patient day, cost per bed, and salary "ates for the year ending June 30, 20x2, remain the same as forthe year ended June 30, 20x] Prepare a schedule of Pediatrics” increase in revenue and increase ia coats forthe year ending ‘Tune 30, 20x2, Determine the net increase or decrease in Pediatrics’ earnings from the additional 20 heds if Pediatrics rents this extra capacity from Delaware Medical Center, (0PA atte ‘Oakley Company manufactures and sells adjustable canopies that atch to motor homes and trailers. “The market covers both new units as wel a replacement canopies. Oakley developed is 20x2 business plan based on the assumption that canopies would sell at a price of $400 each, The variable cost of each canopy is projected at $200, and the annual fixed costs ate budgeted at $100,000. Oakley's atertax profit objective is $240,000; the company’s tax rate i 40 percent ‘While Oakley's sles usally rise during the second quarter, the May financial statements reported that sales were not meeting expectations, Fr the first five months of the year, only 350 unis had heen soldat the established price, with variable cost as planned. It was clear the 20x? after-tax profit projec tion would not be reached unless some actions were taken. Oakley's president, Melanie Grand, assigned a management committe to analyze the situation and develop several altemative courses of ation. The following mutually exclusive alternatives were presented tothe president. Reduce the sales price by $40. The sales organization forecasts that with the significantly reduced sales price, 2,700 units ean be sold during the remainder ofthe year. Total fixed and variable unit ‘costs will say as budgeted. + Lower variable costs per unit hy $25 through the use of les expensive raw materials and slightly ‘modified manufacturing techniques. The sales price also would be reduced by $30, and sales of 2,200 units fr the remainder of the year are forecast + Cut fixed costs by $10,000 and lower the sales price by 5 percent. Variable costs per unit will be ‘unchanged. Sales of 2,000 units are expected fo the remainder of the year Required 1. Ifno changes are made to the selling price or cost structure, determine the number of units that ‘Oakley Company must sll 4 Tnorder to beak even, 1B, To achieve its after-tax profit objective 2, ‘Determine which one of the alternatives Oakley Company should select to achieve its annual al tax profit objective (2A, atapteg ‘Ningra Falls Sporting Goods Company, a wholesale supply company, engages independent sales agents to market the company's products throughout New York and Ontario. These agents curently receive 4 commission of 20 percent of sales, but they are demanding an increase to 25 percent of sales made ating the year ending December 31, 20x2. The controller already prepared the 20x2 budget before learning of the agents’ demand for an increase in commissions, The budgeted 20x2 income statement is shown below, Assume that cost of goods sold is 100 percent variable cost.Chapter 7 CostYolume-Proft Araysis [MAGRA FALLS SPORTING GoODS COMPANY geted Income Statement Forte Year Ended December 81, 20:2 Sales ‘$10,000,000, Cos gods sol 6.00.000 Gross margin $400,000, Sling ar arise eens Conmisions $2,000,000, loner eperses hac), wooo _2.100.c00 Ircome bore as $ 1.900000, Ircome tax 60%) 70000 at ncome Sisso.000 ‘The company's management is considering the possibilty of employing fullime sales personnel. ‘Three individuals would be required, a an estimated annual salary of $30,000 each, plus commissions of 5 percent of sales. In addition, a sales manager would be employed at a fixed annual salary of $160,000. All other fixed cost, as well asthe variable cost percentages, would remain the same asthe estimates in the 20%2 budgeted income statement. Required: 1, Compute Niagra Falls Sporting Good’ estimated break-even point in sales dollars for te year ending December 31, 20x2, based on the budgeted income statement prepared by the controller 2. Compute the estimated break-even point in sales dollars forthe year ending December 31, 20x2, if the company employs is own sales personnel. 13. Compute the estimated volume in sales dollars that would be required forthe year ending December 31, 20x2, to yield the same net income as projected in the budgeted income statement, if management continues to use the independent sales agents and agrees to their demand for a 25 percent sales commission, 4. Compute the estimated volume in sles dollars that would generate an identical net income for the year ending December 31, 20x2, regardless of whether Niagra Falls Sporting Goods Company employs its own sales personnel or continues to use the independent sales agents and pays them a 25 percent commission. (CPA aa)