Exercise 6 1
The Bonita Inn is trying to determine its break even point. The inn has 75 rooms that are rented at $56 a night. Operating costs are as follows.
Salaries $12,270 per month
Utilities 2,420 per month
Depreciation 1,300 per month
Maintenance 810 per month
Maid service 7 per room
Other costs 35 per room
Determine the inn’s break even point in (1) number of rented rooms per month and (2) dollars.
1. Break even point in rooms
2. Break even point $
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If the inn plans on renting an average of 50 rooms per day (assuming a 30 day month), what is (1) the monthly margin of safety in dollars and (2) the margin of safety ratio? (Round ratio to 1 decimal place, e.g. 10.5%.)
1. Margin of safety $
2. Margin of safety ratio
%
Exercise 6 3
Norton Company reports the following operating results for the month of August: Sales $310,000 (units 5,000); variable costs $223,700; and fixed costs $71,200.
Management is considering the following independent courses of action to increase net income.
Compute the net income to be earned under each alternative.
1. Increase selling price by 10% with no change in total variable costs or sales volume.
Net income $
2. Reduce variable costs to 51% of sales.
Net income $
3. Reduce fixed costs by $20,600.
Net income $
Which course of action will produce the highest net income?
Exercise 6 4
Comfi Airways, Inc., a small two plane passenger airline, has asked for your assistance in some basic analysis of its operations. Both planes seat 10 passengers each, and they fly commuters from Comfi’s base airport to the major city in the state, Metropolis. Each month 40 round trip flights are made. Shown below is a recent month’s activity in the form of a cost volume profit income statement.
Fare revenues (400 fares) $46,800
Variable costs
Fuel $14,780
Snacks and drinks 770
Landing fees 1,990
Supplies and forms 1,180 18,720
Contribution margin 28,080
Fixed costs
Depreciation 3,060
Salaries 15,470
Advertising 380
Airport hanger fees 1,790 20,700
Net income $7,380
(a) Calculate the break even point in (1) dollars and (2) number of fares. (Round answers to 0 decimal place, e.g. 1,225.)
1. Break even point $
2. Break even point
fares
(b) Without calculations, determine the contribution margin at the break even point.
Break even point $
(c) If fares were decreased by 10%, an additional 100 fares could be generated. However, total variable costs would increase by 20%. (Round answers to 0 decimal place, e.g. 1,225.)
(1) How much would net income be impacted by this change?
Net income to $
(2) Should the fare decrease be adopted?
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Exercise 6 6
Yard Tools manufactures lawnmowers, weed trimmers, and chainsaws. Its sales mix and contribution margin per unit are as follows.
Sales Mix Contribution
Margin per Unit
Lawnmowers 20 % $40
Weed trimmers 50 % $24
Chainsaws 30 % $60
Yard Tools has fixed costs of $6,476,720.
Compute the number of units of each product that Yard Tools must sell in order to break even under this product mix.
Lawnmowers
units
Weed trimmers
units
Chainsaws
units
xercise 6 8
Express Delivery is a rapidly growing delivery service. Last year, 85% of its revenue came from the delivery of mailing “pouches” and small, standardized delivery boxes (which provides a 13% contribution margin). The other 15% of its revenue came from delivering non standardized boxes (which provides a 62% contribution margin). With the rapid growth of Internet retail sales, Express believes that there are great opportunities for growth in the delivery of non standardized boxes. The company has fixed costs of $12,990,000.
(a) What is the company’s break even point in total sales dollars? At the break even point, how much of the company’s sales are provided by each type of service? (Use Weighted Average Contribution Margin Ratio rounded to 4 decimal places e.g. 0.2552 and round final answers to 0 decimal places, e.g. 2,510.)
Total break even sales $
Sale of mail pouches and small boxes $
Sale of non standard boxes $
(b) The company’s management would like to hold its fixed costs constant, but shift its sales mix so that 62% of its revenue comes from the delivery of non standardized boxes and the remainder from pouches and small boxes. If this were to occur, what would be the company’s break even sales, and what amount of sales would be provided by each service type? (Use Weighted Average Contribution Margin Ratio rounded to 4 decimal places e.g. 0.2552 and round final answers to 0 decimal places, e.g. 2,510.)
Total break even sales $
Sale of mail pouches and small boxes $
Sale of non standardized boxes $
Exercise 6 9
Palmer Golf Accessories sells golf shoes, gloves, and a laser guided range finder that measures distance. Shown below are unit cost and sales data.
Pairs of
Shoes Pairs of
Gloves Range
Finder
Unit sales price $103 $32 $240
Unit variable costs 59 13 205
Unit contribution margin $44 $19 $35
Sales mix 33 % 42 % 25 %
Fixed costs are $668,750.
Calculate weighted average unit contribution margin. (Round answer to 2 decimal places e.g. 10.25.)
Weighted average unit contribution margin $
Exercise 6 11
Spencer Company manufactures and sells three products. Relevant per unit data concerning each product are given below.
Product
A B C
Selling price $21 $13 $16
Variable costs and expenses $7 $11 $14
Machine hours to produce 2 1 2
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(1) Compute the contribution margin per unit of the limited resource (machine hours) for each product. (Round contribution margin per unit to 2 decimal places, e.g. 1.25.)
Product A Product B Product C
Contribution margin per unit of limited resource $
$
$
(2) Assuming 1,590 additional machine hours are available, which product should be manufactured?
xercise 6 12
Dalton Inc. produces and sells three products. Unit data concerning each product is shown below.
Product
D E F
Selling price $221.80 $360.50 $271.90
Direct labor costs 33.80 100.10 40.30
Other variable costs 110.00 91.00 151.00
The company has 2,200 hours of labor available to build inventory in anticipation of the company’s peak season. Management is trying to decide which product should be produced. The direct labor hourly rate is $13.
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Determine the number of direct labor hours per unit. (Round answers to 1 decimal place, e.g. 1.5.)
Direct labor
Product D
hours per unit
Product E
hours per unit
Product F
hours per unit
Exercise 6 18
Langdon Company produced 10,200 units during the past year, but only 8,770 of the units were sold. The following additional information is also available.
Direct materials used $108,580
Direct labor incurred $30,060
Variable manufacturing overhead $23,540
Fixed manufacturing overhead $61,200
Fixed selling and administrative expenses $71,370
Variable selling and administrative expenses $8,410
There was no work in process inventory at the beginning of the year, nor did Langdon have any beginning finished goods inventory.
(a) What would be Langdon Company’s finished goods inventory cost on December 31 under variable costing? (Round intermediate calculations to 2 decimal places e.g. 10.25 and final answer to 0 decimal places, e.g. 2,510.)
Finished goods inventory cost $
(b) Which costing method, absorption or variable costing, would show a higher net income for the year? By what amount? (Round intermediate calculations to 2 decimal places e.g. 10.25 and final answer to 0 decimal places, e.g. 2,510.)
method would show a higher net income by $
Exercise 6 19
Creative Crates Co. produces wooden crates used for shipping products by ocean liner. In 2014, Creative incurred the following costs.
Wood used in crate production $55,400
Nails (considered insignificant and a variable expense) $520
Direct labor $39,980
Utilities for the plant:
$2,400 each month,
plus $0.48 for each kilowatt hour used each month
Rent expense for the plant for the year $23,560
Assume Creative used an average 700 kilowatt hours each month over the past year.
(a) What is Creative’s total manufacturing cost if it uses a variable costing approach?
Total manufacturing costs $
(b) What is Creative’s total manufacturing cost if it uses an absorption costing approach?
Total manufacturing costs $
Problem 6 2A
Lorge Corporation has collected the following information after its first year of sales. Sales were $1,940,800 on 121,300 units; selling expenses $291,120 (40% variable and 60% fixed); direct materials $619,843; direct labor $345,705; administrative expenses $339,640 (20% variable and 80% fixed); manufacturing overhead $436,680 (70% variable and 30% fixed). Top management has asked you to do a CVP analysis so that it can make plans for the coming year. It has projected that unit sales will increase by 10% next year.
Compute (1) the contribution margin for the current year and the projected year, and (2) the fixed costs for the current year. (Assume that fixed costs will remain the same in the projected year.)
(1) Contribution margin for current year $
Contribution margin for projected year $
(2) Fixed costs for current year $
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Compute the break even point in units and sales dollars for the first year. (Round contribution margin ratio to 2 decimal places e.g. 0.15 and final answers to 0 decimal places, e.g. 2,510.)
Break even point units
Break even point $
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The company has a target net income of $376,030. What is the required sales in dollars for the company to meet its target?
Sales dollars required for target net income $
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If the company meets its target net income number, by what percentage could its sales fall before it is operating at a loss? That is, what is its margin of safety ratio? (Round answer to 1 decimal place, e.g. 10.5%.)
Margin of safety ratio %
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The company is considering a purchase of equipment that would reduce its direct labor costs by $126,152 and would change its manufacturing overhead costs to 30% variable and 70% fixed (assume total manufacturing overhead cost is $436,680, as above). It is also considering switching to a pure commission basis for its sales staff. This would change selling expenses to 90% variable and 10% fixed (assume total selling expense is $291,120, as above). Compute (1) the contribution margin and (2) the contribution margin ratio, and recompute (3) the break even point in sales dollars. (Round contribution margin ratio to 0 decimal places, e.g. 25% and all other answers to 0 decimal places, e.g. 2,520.)
1. Contribution margin $
2. Contribution margin ratio %
3. Break even point $
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Problem 6 8A
Dilithium Batteries is a division of Enterprise Corporation. The division manufactures and sells a long life battery used in a wide variety of applications. During the coming year, it expects to sell 55,625 units for $31 per unit. Nyota Uthura is the division manager. She is considering producing either 55,625 or 89,000 units during the period. Other information is presented in the schedule.
Division Information for 2014
Beginning inventory 0
Expected sales in units 55,625
Selling price per unit $31
Variable manufacturing costs per unit $13
Fixed manufacturing overhead costs (total) $445,000
Fixed manufacturing overhead costs per unit:
Based on 55,625 units $8 per unit ($445,000 ÷ 55,625)
Based on 89,000 units $5 per unit ($445,000 ÷ 89,000)
Manufacturing cost per unit:
Based on 55,625 units $21 per unit ($13 variable + $8 fixed)
Based on 89,000 units $18 per unit ($13 variable + $5 fixed)
Variable selling and administrative expenses $3
Fixed selling and administrative expenses (total) $48,100
Prepare an absorption costing income statement, with one column showing the results if 55,625 units are produced and one column showing the results if 89,000 units are produced.
DILITHIUM BATTERIES DIVISION
Income Statement
For the Year Ended December 31, 2014
Absorption Costing
55,625
Produced 89,000
Produced
$ $
$ $
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Prepare a variable costing income statement, with one column showing the results if 55,625 units are produced and one column showing the results if 89,000 units are produced.
DILITHIUM BATTERIES DIVISION
Income Statement
For the Year Ended December 31, 2014
Variable Costing
55,625
Produced 89,000
Produced
$
$
$
$
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Attachments:
Exercise 6.docx