Q1. Furniture Inc. sells lamps for $30.The unit variable cost per lamp is $22.

Fixed costs
total $9,600.

Required: (a) what is the contribution margin per lamp?

Contribution margin per lamp = Selling price per lamp – Variable cost per lamp

= 30 – 22 = $8

(b) What is the breakeven point in lamps?

BEP = (Fixed cost / Contribution per lamp) = 9600/8 = 1200 units

(c) How many lamps must be sold to earn a pretax income of $8,000?

To earn a pretax income,

No. of lamps to be sold = (Fixed cost + Pretax income)/ contribution per lamp

= (9600 + 8000)/8

= 2125

(d) What is the margin of safety, assuming 1500 lamps are sold?

Margin of safety = Budgeted no. of units – BEP

= 1500 -1200 (as calculated in (b))

= 300 lamps

Q2. Karen Hefner, a florist, operates retail stores in several shopping malls. The average
selling price of an arrangement is $30 and average cost of each sale is $18. A new mall is
opening when Karen wants to locate a store, but the location manager is not sure about
the rent method to accept. The mall operator offers the following three options for its
retail store rentals:

1. Paying a fixed rent of $15,000 a month

2. Paying a base rent of $9,000 plus 10% revenue received
3. Paying a base rent of $4800 plus 20% of revenue received up to a maximum rent of
$25000.
Required:

(a) For each option, compute the breakeven sales and the monthly rent paid at break
even.

Here, the selling price = $30 and cost of each sale=$18 is given.

So Contribution = 30 -18 = $12

1. Paying a fixed rent of $15,000 a month

BEP = fixed cost / contribution = 15000/12 = 1250 units

Rent paid = $15,000 a month

2. Paying a base rent of $9,000 plus 10% revenue received

Here, fixed cost = base rent + 10% of revenue received

= $9000 + 10% of 30x
= $9000 + 3x

So to find out break-even point,

Total revenue = Total cost
30x = fixed cost + variable cost
30x = (9000+3x) +18x
9x = 9000 => x= 1000 units
Rent paid = $9000 + 3*1000 = $ 12000 a month

3. Paying a base rent of $4800 plus 20% of revenue received up to a maximum rent of
$25000.
For Break-even point,
Total revenue = Total cost
30x = fixed cost + variable cost
30x = (4800 + 20% of 30x) + 18x
30x = 4800 + 6x + 18x
6x = 4800 => x= 800 units.
If we produce 800 units, then total base rent would be
= $4800 + 20% of 30*800
= 4800 + 4800 = $ 9600 < $25000
So Karen will pay base rent of $9600 and so BEP would be 800 units.
(b) Beginning at zero sales, show the sales levels at which each option is preferable up
to 5000 units.
1. Paying a fixed rent of $15,000 a month
2. Paying a base rent of $9,000 plus 10% revenue received
3. Paying a base rent of $4800 plus 20% of revenue received up to a maximum rent
of $25000.

For this problem,

When evaluating 2nd and 3rd options,
$9000 + 10 % of 30x = $4800 + 20% of 30x
 9000 + 3x = 4800 + 6x
 x = 1400 units

Up to 1400 units, we will evaluate the fixed cost of each option and check which
the minimum cost is so contribution up to 1400 can be higher.

1. We are paying fixed rent of 15000 a month.

2. For this option ,
Fixed cost we pay is = 9000 + 10% of (30*1400) = 13200 a month
3. Fixed cost = 4800 + 20% of (30*1400) = 13200 a month.

If we go beyond the option 1400 units, option 2nd is better but we have to
check up to what number of unit, it will remain as a better option. Then we
have to evaluate between 1st and 2nd option: which is better option?
So comparing 15000 = 9000 + 10% of (30*x)
 3x=6000 => x= 2000 units
 So for sales from 1400 units to 2000 units, 2nd option is preferable and beyond
2000 units, 1st option is preferable.

Beginning at zero sales up to 1400 units, 3rd option is preferable from 1400 units
to 2000 units, 2nd option is preferable and from 2000 units to 5000 units, 1st
option is preferable.

Q3. Yurus Manufacturing Company produces two products, X and Y. The

following information is presented for both products:

  X Y
Selling price per unit $36 $24
Variable cost per unit 28 12
Total fixed costs are $234,000.
Required:

(a) Calculate the contribution margin for each product

For contribution of product X = selling price – variable cost

= 36 – 28 = $8

For contribution of product y = selling price – variable cost

= 24 – 12 = $12

(b) Calculate breakeven point in units of both X and Y if the sales mix is 3 units of
X for every unit of Y.
Here, x/y = 3/1 => x=3y (in units) is given.

For breakeven point, total revenue = total cost

 36x + 24y = fixed cost + variable cost
 36x + 24y = 234000 + (28x + 12y)
 8x + 12y = 234000
 Putting x=3y , 36y = 234000 => y=6500 units => x= 19500 units (as x=3y)

(c) Calculate breakeven volume in total dollars if the sales mix 2 units of x for
every 3 units of y.

Here, x/y = 2/3 => 3x = 2y

For breakeven point, total revenue = total cost
 36x + 24y = fixed cost + variable cost
 36x + 24y = 234000 + (28x + 12y)
 8x + 12y = 234000
 Putting y=(3/2)*x , 26x=234000 => x=9000 units => y = 13,500 units

So for sales of volume in dollars

For product x = 9000*36 = $324000 sales
For product y = 13500*24 = $324000 sales