X=4

Managerial Accounting
Homework 1

Comprehensive CVP analysis

Q- 1 Gary McKnight is evaluating a business opportunity to sell grooming kits at dog shows. Gary
can buy the grooming kits at a wholesale cost of $34 per set. He plans to sell the grooming kits for
$64 per set. He estimates fixed costs such as travel costs, booth rental cost, and lodging to be $600
per dog show. Requirements
1. Determine the number of grooming kits Gary must sell per show to break even.
2. Assume Gary wants to earn a profit of $900 per show.
a. Determine the sales volume in units necessary to earn the desired profit.
b. Determine the sales volume in dollars necessary to earn the desired profit.
c. Using the contribution margin format, prepare an income statement to confirm your
answers to parts a and b.
3. Determine the margin of safety between the sales volume at the breakeven point and the sales
volume required to earn the desired profit. Determine the margin of safety in both sales dollars,
units, and as a percentage.

1
X=4

Breakeven for a multiproduct firm

Q-2 Peppy Scooters plans to sell a motorized standard scooter for $65 and a motorized chrome scooter for
$85. Peppy Scooters purchases the standard scooter for $54 and the chrome scooter for $64. Peppy
Scooters expects to sell two chrome scooters for every three standard scooters. The company’s
monthly fixed expenses are $9,800. How many of each type of scooter must the company sell monthly to
breakeven? To earn $8,400?

2
X=4

Compute margin of safety and operating leverage

Q-3 Tom’s Repair Shop has a monthly target operating income of $34 ,000. Variable
expenses are 44% of sales, and monthly fixed expenses are $7,500.

Requirements
1. Compute the monthly margin of safety in dollars if the shop achieves its income goal.
2. Express Tom’s margin of safety as a percentage of target sales.
3. What is Tom’s operating leverage factor at the target level of operating income?
4. Assume that the company reaches its target. By what percentage will the company’s
operating income fall if sales volume declines by 12%?