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6e Brewer CH05 B EOC
6e Brewer CH05 B EOC
Selling price
Variable expenses:
Invoice cost
Sales commission
Total variable expenses
Per
Shirt
$58.00
$27.00
10.60
$37.60
Annual
Fixed expenses:
Rent
Advertising
Salaries
Total fixed expenses
$200,940
105,470
95,470
$401,880
The company has asked you, as a member of its planning group, to assist in some
basic analysis of its stores and company policies.
Required:
1. Calculate the annual break-even point in dollar sales and in unit sales for Store
45.
2. Prepare a CVP graph showing cost and revenue data for Store 45 from zero shirts
up to 30,000 shirts sold each year. Clearly indicate the break-even point on the
graph.
3. If 18,200 shirts are sold in a year, what would be Store 45s net operating income
or loss?
4. The company is considering paying the store manager of Store 45 an incentive
commission of $0.70 per shirt (in addition to the salespersons commissions). If
this change is made, what will be the new break-even point in dollar sales and in
unit sales?
5. Refer to the original data. As an alternative to (4) above, the company is
considering paying the store manager a $0.70 commission on each shirt sold in
excess of the break-even point. If this change is made, what will be the stores
net operating income or loss if 23,140 shirts are sold in a year?
6. Refer to the original data. The company is considering eliminating sales
commissions entirely in its stores and increasing fixed salaries by $162,320
annually.
The McGraw-Hill Companies, Inc., 2013. All rights reserved.
Chapter 5 Alternate Problems
a. If this change is made, what will be the new break-even point in dollar sales
and in unit sales in Store 45?
b. Would you recommend that the change be made? Explain.
$270,00
0
162,00
0
108,000
120,00
0
$(12,00
0)
Required:
1. Compute the companys CM ratio and its break-even point in both units and
dollars.
2. The sales manager feels that a $6,400 increase in the monthly advertising
budget, combined with an intensified effort by the sales staff, will result in a
$86,000 increase in monthly sales. If the sales manager is right, what will be the
effect on the companys monthly net operating income or loss? (Use the
incremental approach in preparing your answer.)
3. Refer to the original data. The president is convinced that a 10% reduction in the
selling price, combined with an increase of $30,000 in the monthly advertising
budget, will double unit sales. What will the new contribution format income
statement look like if these changes are adopted?
4. Refer to the original data. The companys advertising agency thinks that a new
package would help sales. The new package being proposed would increase
packaging costs by $0.40 per unit. Assuming no other changes, how many units
would have to be sold each month to earn a profit of $4,400?
5. Refer to the original data. By automating, the company could slash its variable
expenses in half. However, fixed costs would increase by $117,000 per month.
a. Compute the new CM ratio and the new break-even point in both units and
dollars.
b. Assume that the company expects to sell 20,300 units next month. Prepare
two contribution format income statements, one assuming that operations are
not automated and one assuming that they are.
c. Would you recommend that the company automate its operations? Explain.
PROBLEM 521BA Basic CVP Analysis [LO1, LO3, LO4, LO6, LO8]
CHECK FIGURE
(2) Break even $360,000
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:
Answer the following independent questions:
1. What is the products CM ratio?
2. Use the CM ratio to determine the break-even point in sales dollars.
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?
4. Assume that the operating results for last year were as follows:
Sales
Variable expenses
Contribution margin
Fixed expenses
Net operating
income
$2,160,0
00
1,080,00
0
1,080,00
0
180,00
0
$
900,000
48%
$307,2
00
Mirrors
20%
$128,0
00
100
%
Product
Vanities
100
%
32%
$204,8
00
Total
100
%
100%
$640,0
00
100
%
92,16
0
30%
102,40
0
80%
112,60
0
55%
307,20
0
48%
$215,0
40
70%
$
25.600
20%
$
92,160
45%
332,80
0
224,12
0
52%
Fixed
expenses
Net operating
income
$108,6
80
=
Fixed
expenses
CM ratio
$224,12
0
0.52
$431,00
0
As shown by these data, net operating income is budgeted at $108,680 for the
month, and break-even 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. Present the income statement in the format shown above.
2. Compute the break-even point in sales dollars for the month, based on your
actual data.
3. Considering the fact that the company met its $500,000 sales budget for the
month, the president is shocked at the results shown on your income statement
in (1) above. Prepare a brief memo for the president explaining why both the
operating results and the break-even point in sales dollars are different from what
was budgeted.
Heritage
5.40
3.24
250 units
Gorham
8.10
1.62
100 units
Standar
d
$47.00
Deluxe
Pro
$65.00
$86.00
$18.80
$2.35
$22.75
$3.25
$25.80
$4.30
All sales are made through the companys own retail outlets. The Racket Division
has the following fixed costs:
Fixed production costs
Advertising expense
Administrative salaries
Total
Per Month
$107,000
106,000
57,000
$270,000
Sales, in units, over the past two months have been as follows:
April
May
Standar
d
3,000
8,000
Deluxe
2,000
2,000
Pro
Total
6,000
3,000
11,000
13,000
Required:
1. Prepare contribution format income statements for April and May. Use the
following headings:
Standard
Amount Percen
t
Deluxe
Amoun Percen
t
t
Pro
Total
Amoun Percen Amoun Perce
t
t
t
nt
Sales ..
Etc. .
Place the fixed expenses only in the Total column. Do not show percentages for
the fixed expenses.
2. Upon seeing the income statements in (1) above, the president stated, I cant
believe this! We sold more rackets in May than in April, yet profits went down. Its
The McGraw-Hill Companies, Inc., 2013. All rights reserved.
Chapter 5 Alternate Problems
obvious that costs are out of control in that division. What other explanation can
you give for the drop in net operating income?
3. Compute the Racket Divisions break-even point in dollar sales for April.
4. Without doing any calculations, explain whether the break-even point would be
higher or lower with Mays sales mix than with Aprils sales mix.
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.
$1,218,0
00
852,600
365,400
292,320
$ 73,080
Required:
1. Identify the numbered components in the CVP graph.
2. State the effect of each of the following actions on line 3, line 9, and the breakeven point. For line 3 and line 9, state whether the action will cause the line to:
Remain unchanged.
Shift upward.
Shift downward.
Have a steeper slope (i.e., rotate upward).
Have a flatter slope (i.e., rotate downward).
Shift upward and have a steeper slope.
Shift upward and have a flatter slope.
Shift downward and have a steeper slope.
Shift downward and have a flatter slope.
In the case of the break-even point, state whether the action will cause the
break-even point to:
Remain unchanged.
Increase.
Decrease.
Probably change, but the direction is uncertain.
Treat each case independently.
The McGraw-Hill Companies, Inc., 2013. All rights reserved.
5-12
$50.00
30.00
$20.00
$18,000
6,000
32,000
34,000
$90,000
Required:
1. How many pairs of sandals must be sold each year to break even? What does this
represent in total dollar sales?
2. Prepare a CVP graph for the store from a zero level of activity up to 7,000 pairs of
sandals sold each year. Indicate the break-even point on your graph.
3. Jim has decided that he must earn at least $25,000 the first year to justify his
time and effort. How many pairs of sandals must be sold to reach this target
profit?
4. Jim now has one salesperson working in the store -- one part time. It will cost him
an additional $12,000 per year to convert the part-time position to a full-time
position. Jim believes that the change would bring in an additional $80,000 in
sales each year. Should he convert the position? Use the incremental approach.
(Do not prepare an income statement).
5. Refer to the original data. During the first year, the store sold only 5,250 pairs of
sandals and reported the following operating results:
Sales (5,250 pairs)
Less variable expenses
Contribution margin
Less fixed expenses
Net operating income
$262,500
157,500
105,000
90,000
$ 15,000
the expected percentage increase in net operating income? Use the degree of
operating leverage to compute your answer.
$1,848,00
0
1,108,800
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. Compute (a ) the CM ratio and the break-even point in skateboards, and (b) the
degree of operating leverage at last years level of sales.
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?
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?
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?
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?
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?
b. 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, and compute the
degree of operating leverage.
c. If you were a member of top management, would you have been in favor of
constructing the new plant? Explain.
The McGraw-Hill Companies, Inc., 2013. All rights reserved.
5-16