Test Review chapt 6 number 2 Flashcards
Brief Exercise 125
Holiday Company produces two models, Red and Green. Information regarding the products is summarized for the month of April in the following table:
Red Green Total
Number of units 700 300 1,000
Sales revenue $7,000 $4,500 $11,500
Variable costs 5,600 3,600 9,200
Fixed costs 1,000 700 1,700
Net Income $ 400 $ 200 $ 600
a. If Holiday sells 4 more red units, by how much will profit increase?
b. If Holiday sells 9 more green units, by how much will profit increase?
Solution Brief Exercise 125
a. CM per red units: ($7,000 - $5,600)/700 = $2 per unit
For 4 units: $2 x 4 units = $8. No change in fixed costs.
b. CM per green units: ($4,500 - $3,600)/300 = $3 per unit
For 9 units: $3 x 9 units = $27. No change in fixed costs.
Brief Exercise 126
MCL Inc. has fixed costs totalling $75,000. Its contribution margin per unit is $2.50, and the selling price is $7.00 per unit. What is the break-even point in units and in dollars?
Solution Brief Exercise 126
Break-even in units = Fixed costs ÷ Unit contribution margin
= $75,000 ÷ $2.50
= 30,000 units
Break-even in dollars = Break-even in units X Selling price per unit
= 30,000 units X $7.00
= $210,000
Brief Exercise 129
The following monthly data are available for Marketplace, Inc. which produces only one product which it sells for $22 each. Its unit variable costs are $9, and its total fixed expenses are $9,100. Actual sales for the month of May totalled 4,000 units. How much is the margin of safety for the company for May?
Solution Brief Exercise 129
BEP in units: $22 x - $9 x – $9,100 = 0
BEP in units = 700 units
Units at current sales level = 4,000
Margin of safety = (4,000 - 700) x $22 = $72,600
Sales can drop, or fixed costs can rise, by $72,600 before the company incurs a loss
Brief Exercise 132
Determine the missing amounts.
Unit Selling Price Unit Variable Costs Contribution Margin per Unit Contribution Margin Ratio
- $300 $200 a. b.
- $600 c. $100 d.
- e. f. $400 40%
Solution Brief Exercise 132
a. $300 - $200 = $100
b. $100/$300 = 33.3%
c. $600 – $100 = $500
d. $100/$600 = 16.7%
e. $400/40% = $1,000
f. If 40% = CM ratio, then 60% = variable cost percentage; $1,000 x 60% = $600
Or $1,000 - $400 = $600
*Brief Exercise 139
Sheldon Corporation is considering buying new equipment for its factory. The new equipment will reduce variable labour costs, but increase depreciation expense. Contribution margin is expected to increase from $200,000 to $300,000. Net income is expected to remain the same $100,000. Calculate the degree of operating leverage before and after the purchase of the new equipment and interpret your results
Solution Brief Exercise 139 (4–6 min.)
Contribution margin / Net income = Degree of operating leverage
Before: $200,000 / $100,000 = 2
After: $300,000 / $100,000 = 3
After the new equipment is purchased, Sheldon’s earnings would go up (or down) by 1.5 times (3/2) as much as it would have before the purchase, with an equal increase (or decrease) in sales.
Brief Exercise 140
Lo-Calorie Doughnuts operates a chain of coffee shops in southern Alberta. Its budgeted sales for the next year are $10,000,000 and its fixed and variable costs were $1,650,000 and $8.200,000 respectively. Management of the company wants to see what some changes in activity and costs could have on its operating income.
In each of the following scenarios, calculate the effect on budgeted operating income.
a. A 10% reduction in variable costs
b. A 10% increase in fixed costs
c. A 5% increase in sales
d. A 5% increase in fixed costs and a 5% increase in sales
e. A 5% increase in fixed costs and a 5% decrease in variable costs
Solution Brief Exercise 140 (4–6 min.) Current Budget Sales $10,000,000 Variable costs 8,200,000 Contribution margin 1,800,000 Fixed Costs 1,650,000 Operating income $150,000
a. Increase in CM: $1,800,000 x 10% = $180,000
New OI $150,000 + $180,000 = $330,000
b. Increase in fixed costs: $1,650,000 x 10% = $165,000
New OI $150,000 - $165,000 = ( $15,000 )
c. Increase in CM: $1,800,000 x 5% = $90,000
New OI $150,000 + $90,000 = $240,000
d. Increase in CM: $1,800,000 x 5% = $90,000
Increase in fixed costs: $1,650,000 x 5% = $82,500
New OI $150,000 + $90,000 - $82,500 = $157,500
e. New variable costs $8,200,000 x 95% = $7,790,000
New CM = $10,000,000 - $7,790,000 = $2,210,000
Increase in CM: $2,210,000 - $1,800,000 = $410,000
Increase in fixed costs: $1,650,000 x 5% = $82,500
New OI $150,000 + $410,000 - $82,500 = $477,500
Exercise 142
Ripple Company bottles and distributes Ripple Fizz, a flavoured wine beverage. The beverage is sold for $1.50 per 8-ounce bottle to retailers. Management estimates the following revenues and costs at 100% of capacity.
Net sales $3,000,000 Selling expenses-variable $35,000
Direct materials 700,000 Selling expenses-fixed 14,000
Direct labour 1,000,000 Administrative expenses-variable 15,000
Manufacturing overhead-variable 400,000 Administrative expenses-fixed 30,000
Manufacturing overhead-fixed 170,000
Instructions
a. How much is net income for the year using the CVP approach?
b. Calculate the break-even point units and dollars.
c. How much is the contribution margin ratio?
Solution Exercise 142 (6 -8 minutes)
a. $3,000,000 − [$70,000 + $1,000,000 + $40,000 + $35,000 + $15,000] − [$17,000 + $14,000 + $30,000] = $1,779,000
b. Number of units sold = $3,000,000/$1.50 = 2,000,000
Variable cost/unit =
[$70,000 + $1,000,000 + $40,000 + $35,000 + $15,000]/2,000,000 = $0.58
BEP in units: $1.50 x − $0.58 x − $61,000 = 0
Units = 66,304.345 or 66,305 units
BEP in dollars: 66,305 x $1.50 = $99,457.50
c. [$3,000,000 − $1,160,000]/$3,000,000 = 61%
Exercise 143
Jay Manufacturing’s sales slumped badly in 2011 due to so many people purchasing gifts online. The company’s income statement showed the following results from selling 375,000 units of product: Net sales, $1,781,250; total costs and expenses, $2,480,000; and net loss of $698,750. Costs and expenses consisted of the following:
Total Variable Fixed Cost of goods sold $1,500,000 $900,000 $600,000 Selling expenses 530,000 25,000 505,000 Administrative expenses 450,000 50,000 400,000 $2,480,000 $975,000 $1,505,000
Management is considering the following alternative for 2012:
Purchase new automated equipment that will change the proportion between variable and fixed costs to 23% variable and 77% fixed.
Instructions
a. Determine the selling price per unit.
b. Calculate the break-even point in dollars for 2011.
c. Calculate the break-even point in dollars under the alternative course of action for 2012.
d. Which course of action do you recommend? Justify your answer.
Solution Exercise 143 (8-10 minutes)
a. Selling price = $1,781,250/375,000 = $4.75 per unit
b. Variable cost per unit = $975,000/375,000 = $2.60 per unit
Sales − VC – FC = 0
$4.75 x − $2.60 x − $1,505,000 = 0
BEP in units = 700,000 units
BEP in dollars = 700,000 x $4,75 = $3,325,000
c. Current variable proportion = $975,000/$2,480,000 = 39%
New variable cost per unit = (23% x $2,480,000)/375,000 = $1.52 per unit
$4.75 x – $1.52 x − ($2,480,000 x 77%) = 0
New BEP in units = 591,207 units
New BEP in dollars = 591,207 x $4.75 = $2,808,235
d. Since the break-even point declines, the company should select the alternate option.
Exercise 144
Homer Company produces two models, Bart and Lisa. Information regarding these models is summarized for the month of March in the following table:
Bart Lisa Number of units 6,000 14,000 Sales revenue $90,000 $168,000 Fixed costs 23,000 27,000 Variable costs 60,000 126,000 Net Income $7,000 $15,000
Selling price per unit $15 $12
Contribution margin per unit $5 $3
Fixed costs of Bart will be avoided if only the Lisa model is produced.
Instructions
a. Show how the contribution margin per unit of the Bart model was calculated.
b. If Homer produces ONLY the Lisa model, how many units must it sell to earn operating income of $33,000?
Solution Exercise 144 (5-7 minutes)
a. Total contribution margin/units =
($90,000 - $60,000)/6,000 units = $5/unit
b. Selling price − variable costs − fixed costs = $33,000
$12x - $9*x - $27,000 = $33,000
x = 20,000 units
Exercise 145
Gloria Meehan is considering opening a window tinting business. She estimates that the following costs will be incurred during the first year of operations: Rent, $6,500; depreciation on equipment, $7,250; Wages, $4,250 (based on 625 windows tinted in the previous year); tinting, $4 per square foot. Each window tinted takes 5 square feet of tint. Gloria anticipates that she will tint each window for a retail price of $63 each.
Instructions
a. Determine variable costs per unit and total fixed costs.
b. Determine the break-even point in number of windows to be tinted.
c. How many windows need to be tinted to earn income of $21,000?
Solution Exercise 145 (6–8 min.) a. Variable cost: Wages, $4,250/625 $6.80 per window \+ Materials: (5 sf x $4/sf) 20.00 Total variable cost $26.80 per window Fixed costs: $6,500 + $7,250 = $13,750
b. $63 x − $26.80 x − $13,750 = $0
BEP in units = 380 units
c. $63x − $26.80 x − $13,750 = 21,000
Units to earn $21,000 = 960 units
