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QUESTION 1

Bridal Shoppe sells wedding dresses. The cost of each dress is comprised of

the following: Selling price of $1,000 and variable (flexible) costs of $400.

Total fixed (capacity-related) costs for Bridal Shoppe are $90,000.

B. What is the Bridal Shoppe’s total profit when 200 dresses are sold?

C. How many dresses must Bridal Shoppe sell to reach the breakeven point?

X = $90,000/$600

X = 150 dresses

D. How many dresses must Bridal Shoppe sell to yield a profit of $60,000?

$600X = $150,000

X = $150,000/$600

X = 250 dresses

1

QUESTION 2

Northenscold Company sells several products. Information of average revenue and costs

are as follows:

Variable costs per unit:

Direct materials $4.00

Direct manufacturing labor $1.60

Manufacturing overhead $0.40

Selling costs $2.00

Annual fixed costs $96,000

2. Calculate the number of units Northenscold’s must sell each year to break even.

$144,000.

2

QUESTION 3

Berhannan’s Cellular sells phones for $100. The unit variable cost per phone is

$50 plus a selling commission of 10%. Fixed manufacturing costs total $1,250 per

month, while fixed selling and administrative costs total $2,500.

N = Breakeven in phones

$100N - $50N - $10N - $1,250 - $2,500 = 0

$40N - $3,750 = 0

N = $3,750 / $40 = 93.75 phones

Breakeven Point = 94 phones

N = Phones to be sold

$100N - $50N - $10N - $1,250 - $2,500 = $7,500

$40N = $11,250

N = $11,250 / $40 = 281.25 phones

To achieve target profit: Must sell 282 phones

3

Beta company sells blouses in Washington, USA. Blouses are imported from Pakistan and are

sold to customers in Washington at a profit. Salespersons are paid basic salary plus a decent

commission of $14 on each sale made by them. Selling price and expense data is given below:

Required:

1. Compute the break-even point in units and in dollars using the information given above.

2. Prepare a CVP graph (break-even chart) and show the break-even point on the graph.

3. What would be net operating income or loss if company sells 18,500 blouses in a year?

4. If the manage is paid a commission of $6 blouse (in addition to the salesperson’s

commission), what will be the effect on company’s break-even point?

5. As an alternative to (3) above, company is thinking to pay $6 commission to manager on

each blouse sold in excess of break-even point. What will be the effect of these changes

on the net operating income or loss of the Beta company if 23,500 blouses are sold in a

year?

6. Refer to the original data. What will be the break-even point of the company if commission

is entirely eliminated and salaries are increased by $214,000?

Solution:

a. Equation method:

SpQ = VeQ + Fe

$30Q = $600,000

4

Q = $600,000/$30

Q = 20,000 blouses

= $600,000/$30*

= 20,000 blouses

Alternatively;

= $600,000/0.375*

= $1,600,000

*$30/$80 = 0.375

5

(3). Net operating income or loss if 18,500 blouses are sold in a year

Net operating loss = Sales short of break-even × Contribution margin per unit

= $45,000

blouse sold:

The payment of a commission of $6 to manager will increase variable expenses and decrease

contribution margin. Now the variable expenses will be $56 ($50 + $6) per unit and contribution

margin will be $24 ($80 – $56) per unit.

a. Equation method:

SpQ = VeQ + Fe

$24Q = $600,000

Q = $600,000/$24

Q = 25,000 blouses

6

25,000 blouses × $80.00 per blouse = $2,000,000

$600,000/$24*

25,000 blouses

Alternatively;

= $600,000/0.30*

= $2,000,000

*$24/$80 = 0.30

of $6 on each blouse sold after break-even point:

Alternatively the net operating income of $84,000 may also be computed by using the

following simple approach:

7

3,500 shirts × $24 per shirt* = $84,000 profit

salaries:

The new variable expenses are $36 (invoice cost, no commission) and new fixed expenses are

$814,000 ($600,000 + $214,000).

a. Equation method:

SpQ = VeQ + Fe

$44Q = $814,000

Q = $814,000/$44

Q = 18,500 blouses

= $814,000/$44*

= 18,500 blouses

Alternatively;

= $814,000/0.55*

= $1,480,000

*$44/$80 = 0.55

8

The Digital World company sells three products – Product A, Product B and Product C. The

budgeted contribution margin income statement of the company for the coming month is given

below:

= $447,200/0.52

= $860,000

Product A: $320,000

Product B: $400,000

Product C: $280,000

Total: $320,000 + $400,000 + $280,000 = $1,000,000

Required:

Compute the break-even point of Digital World company based on the actual sales. Explain the

reason of difference (if any) between the break-even point computed on the basis of budgeted

sales and the break-even point computed on the basis of actual sales data.

Solution:

Before computing break-even point based on the actual sales, we need to prepare an income

statement based on the actual sales.

9

Actual break-even point = Fixed expenses/CM ratio

= $447,200/0.43

= $1,040,000

A shift in sales mix from the products generating high contribution margin to the products

generating low contribution margin decreased the overall contribution margin ratio of the

company from 52% to 43% and increased the dollar sales required to break-even from $860,000

to $1,040,000

10

ECG company sells lightweight tables. One table is sold for $45. Variable and fixed expenses

data is given below:

Fixed expenses per year: $540,000

Required:

2. Compute break-even point in dollars using CM ratio computed in part 1.

3. Using contribution margin ratio calculate increase in net operating income if sales are

increased by $135,000.

4. During the last year, ECG company sold 24,000 lightweight tables.

(a). Compute the degree of operating leverage at the last year’s level of sales.

(b). If ECG company manages to increase the sales by 15% next year, by how much

should net operating income increase? (Use degree of operating leverage for your

answer).

Solution:

= $45 – $18

= $27

= $27/$45

= 0.60 or 60%

= $540,000/0.60

= $900,000

$135,000 × 0.6

$81,000

11

(4) Degree of operating leverage:

= $648,000 / $108,000

=6

(b). The degree of operating leverage is 6. It means if sales are increased by 15%, there will be a

90% increase in net operating income as computed below:

15% × 6 = 90%

12

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