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Decrease in Mall Store's CM 0)
Important Information:
1. One half of dollar-sales items(which are sold at Variable costs;
CM=0) are to be deleted.
2. Reduce fixed expenses by 15%
3. 20% decrease in sales volume
4. This change would not affect Downtown Store.
3. Deletion of some items at Mall
Store
Sales
Volume
Graphs of cost functions of the two types of
manufacturing methods
labor-intensive
4. Continued
Fixed costs
Break - even point (in units)
Unit contribution margin
$350,000
$35
10,000 units
2. How many units of product would the company
have had to sell in the last year to earn $210,000?
New Unit contribution margin Sales Price - New Unit Variable cost replacing a
$1,115,000 - $350,000 component
$55 - part that has
40,000 units -6 a cost of $6
with a new
$29 per unit and better
part costing
new fixed costs $12 per unit
New break - even point (in units)
new unit contribution margin
New machine
$350,000 ($510,000/6) would cost
$51,000 with a
$29 useful life of six
years and no
15,000 units salvage value
P7-46
4. If the firm holds the sales price constant and makes the suggested
changes, how many units of product will the company have to sell to make
the same net income as last year?
$1,050,000
+$350,000
+$510,000/6
=
$29
= 51,207
units(nearest
wholenumber)
5. If Saturn Game Company wishes to maintain the same contribution-margin
ratio, what selling price per unit of product must it charge next year to cover
the increased direct-material cost?
$35
Old contribution - margin ratio
$55
7
11
5. Continued
Let P denote the price required to cover increased
direct-material cost and maintain the same
contribution margin ratio:
P - $20- 6 7
=
P 11
11P - 286=7P
P =$71.5
Problem 7-47
Refer to the original data given for Saturn Game Company
in the preceding problem. An activity-based costing study
has revealed that Saturns $300,000 of fixed costs include
the following components:
Setup (40 setups at $800 per setup) $32,000
Engineering (500 hours at $50 per hour) $25,000
Inspection (1,000 inspections at $60 per $60,000
inspection)
General factory overhead $123,000
Total $240,000
Fixed Selling and administrative costs $60,000
Total fixed cost $300,000
New Proposed Approach 1
Under the proposed JIT approach, there would be 300 setups per
year at $100 per setup. Since a total quality control program would
accompany the move toward JIT, only 100 inspections would be
anticipated annually, at a cost of $90 each. After the installation
2
3
of the new production system, 800 hours of engineering would
4
be required at a cost of $56 per hour. General factory
overhead would increase to $332,200.
5
However, the automated equipment would allow Saturn to cut its
unit variable cost by 20 percent. Moreover, the more consistent
product quality anticipated would allow management to raise the
6
price of computer games to $52 per unit. (Ignore income taxes.)
1. I thought you told me this $300,000
cost was fixed. These dont look like fixed
costs at all. What youre telling me now
is that setup costs us $800 every time we
set up a production run. What gives? As
Saturns controller, write a short memo
explaining to the vice president what is
going on.
The $300,000 cost that has been characterized as fixed
is fixed with respect to sales volume. This cost will not
increase with increases in sales volume.
It is recognized in ABC that costs vary with respect to a
variety of cost drivers, not just sales volume, as activity-
based costing analysis demonstrates, these costs are not
fixed with respect to other important cost drivers.
2. Compute Saturns new break-even point if the
proposed automated equipment is installed.
raise the price
Sales price $52 of computer
games to $52
Costs that are variable (with respect to sales volume):
per unit
Unit variable cost (0.8 $30) $24
cut its unit variable
cost by 20 percent.
Unit contribution margin $28
2. Continued
fixed costs
Break - even point (in units)
unit contribution margin
$476,000
$28
17,000 units
3. Determine how many units Saturn will have to sell to
show a profit of $280,000, assuming the new
technology is adopted.
(Theoretically)
If management adopts the new manufacturing technology:
Its break-even point will be higher
The number of sales units required to show the same amount of profit
will be lower
However, at higher levels of sales after fixed costs have been covered,
the larger unit contribution margin earns a profit at a faster rate. This
5. In order to support the proposed acquisition, the vice president for manufacturing asked the controller to prepare a report on the financial implications
of the decision. As part of the report, the vice president asked the controller to compute the new break-even point, assuming the installation of the
equipment. The controller complied, as in requirement (2) of this problem.
When the vice president for manufacturing saw that the break-even point would increase, he asked the controller to delete the break-even analysis from
the report.
What should the controller do? Which ethical standards for managerial accountants are involved here?
5. Continued