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Question 1: Score 0/4

Your response Correct response

Exercise 5-1 Fixed and Variable Cost Behavior [LO1] Espresso Express operates a number of espresso coffee stands in busy suburban malls. The fixed weekly expense of a coffee stand is $1,200 and the variable cost per cup of coffee served is $0.22.

Requirement 1: Fill in the following table with your estimates of total costs and cost per cup of coffee at the indicated levels of activity for a coffee stand. (Round average cost per cup of coffee to 3 decimal places. Omit the "$" sign in your response.)

Cups of Coffee Served in a Week 2,000 2,100 2,200 Fixed cost $ 0.60 (0%) $ 0.571 (0%) $ 0.545 (0%) Variable cost 0.22 (0%) 0.22 (0%) 0.22 (0%) Total cost $ 0.82 (0%) $ 0.791 (0%) $ 0.765 (0%) Average cost per cup of coffee served $ 0.792 (0%) $ 0.792 (0%) $ 0.792 (0%)

Exercise 5-1 Fixed and Variable Cost Behavior [LO1] Espresso Express operates a number of espresso coffee stands in busy suburban malls. The fixed weekly expense of a coffee stand is $1,200 and the variable cost per cup of coffee served is $0.22.

Requirement 1: Fill in the following table with your estimates of total costs and cost per cup of coffee at the indicated levels of activity for a coffee stand. (Round average cost per cup of coffee to 3 decimal places. Omit the "$" sign in your response.)

Cups of Coffee Served in a Week 2,000 2,100 2,200 Fixed cost $ 1,200 $ 1,200 $ 1,200 Variable cost 440 462 484 Total cost $ 1,640 $ 1,662 $ 1,684 Average cost per cup of coffee served $ 0.82 $ 0.791 $ 0.765

Total grade: 0.0×1/12 + 0.0×1/12 + 0.0×1/12 + 0.0×1/12 + 0.0×1/12 + 0.0×1/12 + 0.0×1/12 + 0.0×1/12 + 0.0×1/12 + 0.0×1/12 + 0.0×1/12 + 0.0×1/12 = 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0%

Feedback:

Average cost per cup of coffee served = Total cost ÷ cups of coffee served in a week

Requirement 2: Does the average cost per cup of coffee served increase, decrease, or remain the same as the number of cups of coffee served in a week increases?

Your Answer:

Choice Selected Correct

Increases

Decreases

Remains the same

Feedback: The average cost of a cup of coffee declines as the number of cups of coffee served increases because the fixed cost is spread over more cups of coffee.



Exercise 6-2 Prepare a Cost-Volume-Profit (CVP) Graph [LO2] Karlik Enterprises distributes a single product whose selling price is $24 and whose variable expense is $18 per unit. The company's monthly fixed expense is $24,000. Requirement 1: Offline: Prepare a cost-volume-profit graph for the company up to a sales level of 8,000 units.

Requirement 2: Estimate the company's break-even point in unit sales using your cost-volume-profit graph analysis.

Break-even point in sales 16.67 (0%) units

Exercise 6-2 Prepare a Cost-Volume-Profit (CVP) Graph [LO2] Karlik Enterprises distributes a single product whose selling price is $24 and whose variable expense is $18 per unit. The company's monthly fixed expense is $24,000. Requirement 1: Offline: Prepare a cost-volume-profit graph for the company up to a sales level of 8,000 units.

Requirement 2: Estimate the company's break-even point in unit sales using your cost-volume-profit graph analysis.

Break-even point in sales 4,000 units

Total grade: 0.0×1/1 = 0% Feedback:

The break-even point is the point where the total sales revenue and the total expense lines intersect. This occurs at sales of 4,000 units. This can be verified as follows:

Question 3: Score 2.6/4


Exercise 5-3 High-Low Method [LO3] The Cheyenne Hotel in Big Sky, Montana, has accumulated records of the total electrical costs of the hotel and the number of occupancy-days over the last year. An occupancy-day represents a room rented out for one day. The hotel's business is highly seasonal, with peaks occurring during the ski season and in the summer.

Month Occupancy-

Days Electrical

Costs January 1,736 $ 4,127 February 1,904 $ 4,207 March 2,356 $ 5,083 April 960 $ 2,857 May 360 $ 1,871 June 744 $ 2,696 July 2,108 $ 4,670 August 2,406 $ 5,148 September 840 $ 2,691

Exercise 5-3 High-Low Method [LO3] The Cheyenne Hotel in Big Sky, Montana, has accumulated records of the total electrical costs of the hotel and the number of occupancy-days over the last year. An occupancy-day represents a room rented out for one day. The hotel's business is highly seasonal, with peaks occurring during the ski season and in the summer.

Month Occupancy-

Days Electrical

Costs January 1,736 $ 4,127 February 1,904 $ 4,207 March 2,356 $ 5,083 April 960 $ 2,857 May 360 $ 1,871 June 744 $ 2,696 July 2,108 $ 4,670 August 2,406 $ 5,148 September 840 $ 2,691

October 124 $ 1,588 November 720 $ 2,454 December 1,364 $ 3,529

Requirement 1: Using the high-low method, estimate the variable cost of electricity per occupancy-day and the fixed cost of electricity per month. (Round the fixed cost to the nearest whole dollar and the variable cost to the nearest whole cent. Omit the "$" sign in your response.)

Variable cost $ 1.56 (50%) per occupancy day

Fixed cost $ 1394 (0%) per month

October 124 $ 1,588 November 720 $ 2,454 December 1,364 $ 3,529

Requirement 1: Using the high-low method, estimate the variable cost of electricity per occupancy-day and the fixed cost of electricity per month. (Round the fixed cost to the nearest whole dollar and the variable cost to the nearest whole cent. Omit the "$" sign in your response.)

Variable cost $ 1.56 per occupancy day Fixed cost $ 1,395 per month

Total grade: 1.0×1/2 + 0.0×1/2 = 50% + 0% Feedback:

Occupancy-

Days Electrical

Costs High activity level (August) 2,406 $ 5,148

Low activity level (October) 124 1,588

Change 2,282 $ 3,560

Variable cost = Change in cost ÷ Change in activity

= $3,560 ÷ 2,282 occupancy-days = $1.56 per occupancy-day

Total cost (August) $ 5,148 Variable cost element

($1.56 per occupancy-day × 2,406 occupancy-days)

3,753

Fixed cost element $ 1,395

Requirement 2: Which of the following statement(s) is true? (Select all that apply.)

Choice Selected

Points

Electrical cost may reflect seasonal factors other than just the variation in occupancy days Yes

+1

Fixed cost will not be affected by the number of days in a month No

Less systematic factors such as frugality of individual guests may also affect electrical costs Yes

+1

Total correct answers: 2 Partial Grading Explained

Feedback: Electrical costs may reflect seasonal factors other than just the variation in occupancy days. For example, common areas such as the reception area must be lighted for longer

periods during the winter than in the summer. This will result in seasonal fluctuations in the fixed electrical costs.

Additionally, fixed costs will be affected by the number of days in a month. In other words, costs like the costs of lighting common areas are variable with respect to the number of days in the month, but are fixed with respect to how many rooms are occupied during the month.

Other, less systematic, factors may also affect electrical costs such as the frugality of individual guests. Some guests will turn off lights when they leave a room. Others will not.



Exercise 5-4 Contribution Format Income Statement [LO4] The Alpine House, Inc., is a large retailer of winter sports equipment. An income statement for the company's Ski Department for a recent quarter is presented below:

The Alpine House, Inc.

Income Statement—Ski Department For the Quarter Ended March 31

Sales $ 150,000 Cost of goods sold 90,000 Gross margin 60,000 Selling and administrative expenses:

Selling expenses $ 30,000 Administrative expenses 10,000 40,000

Net operating income $ 20,000

Skis sell, on the average, for $750 per pair. Variable selling expenses are $50 per pair

of skis sold. The remaining selling expenses are fixed. The administrative expenses are 20% variable and 80% fixed. The company does not manufacture its own skis; it purchases them from a supplier for $450 per pair.

Requirement 1: Prepare a contribution format income statement for the quarter. (Omit the "$" sign in your response.)



Sales (6%) $ 150000 (6%) Variable expenses: Cost of goods sold (6%) $ 90000 (6%) Selling expenses (6%) 10000 (6%) Administrative expenses (6%) 2000 (6%) 102000 (6%)

Contribution margin (6%) 48000 (6%)

Exercise 5-4 Contribution Format Income Statement [LO4] The Alpine House, Inc., is a large retailer of winter sports equipment. An income statement for the company's Ski Department for a recent quarter is presented below:



Sales $ 150,000 Cost of goods sold 90,000 Gross margin 60,000 Selling and administrative expenses:

Selling expenses $ 30,000 Administrative expenses 10,000 40,000


Skis sell, on the average, for $750 per pair. Variable selling expenses are $50 per pair

of skis sold. The remaining selling expenses are fixed. The administrative expenses are 20% variable and 80% fixed. The company does not manufacture its own skis; it purchases them from a supplier for $450 per pair.

Requirement 1: Prepare a contribution format income statement for the quarter. (Omit the "$" sign in your response.)



Sales $ 150000 Variable expenses: Cost of goods sold $ 90000 Selling expenses 10000 Administrative expenses 2000 102000

Contribution margin 48000

Fixed expenses: Advertising expenses (0%) 90000 (0%) Administrative expenses (6%) 8000 (6%) 98000 (0%)

Net operating income (6%) $ -

50000 (0%)

Fixed expenses: Selling expenses 20,000 Administrative expenses 8000 28,000


Total grade: 1.0×1/18 + 1.0×1/18 + 1.0×1/18 + 1.0×1/18 + 1.0×1/18 + 1.0×1/18 + 1.0×1/18 + 1.0×1/18 + 1.0×1/18 + 1.0×1/18 + 1.0×1/18 + 0.0×1/18 + 0.0×1/18 + 1.0×1/18 + 1.0×1/18 + 0.0×1/18 + 1.0×1/18 + 0.0×1/18 = 6% + 6% + 6% + 6% + 6% + 6% + 6% + 6% + 6% + 6% + 6% + 0% + 0% + 6% + 6% + 0% + 6% + 0%

Feedback:

Cost of goods sold (200 pairs* × $450 per pair) $ 90,000 Variable selling expenses (200 pairs × $50 per pair) 10,000 Variable administrative expenses (20% × $10,000) 2,000 Fixed selling expenses [$30,000 – (200 pairs × $50 per pair)] 20,000

Fixed administrative expenses (80% × $10,000) 8,000

*$150,000 ÷ $750 per pair = 200 pairs


Requirement 2: For every pair of skis sold during the quarter, what was the contribution toward covering fixed expenses and toward earning profits? (Omit the "$" sign in your response.)

Contribution margin per pair $ 50 (0%)

E5_4_id4

E5_4_id6

E5_4_id8

E5_4_id13

E5_4_id15

Requirement 2: For every pair of skis sold during the quarter, what was the contribution toward covering fixed expenses and toward earning profits? (Omit the "$" sign in your response.)

Contribution margin per pair $ 240

E5_4_id4

E5_4_id6

E5_4_id8

E5_4_id13

E5_4_id15


Since 200 pairs of skis were sold and the contribution margin totaled $48,000 for the quarter, the contribution of each pair of skis toward covering fixed costs and toward earning of profits was $240 ($48,000 ÷ 200 pairs = $240 per pair). Another way to compute the $240 is:

Selling price per pair $ 750 Variable expenses:

Cost per pair $ 450 Selling expenses 50

Administrative expenses

($2,000 ÷ 200 pairs) 10 510 Contribution margin per pair $ 240



Exercise 5-5 Cost Behavior; Contribution Format Income Statement [LO1, LO4] Harris Company manufactures and sells a single product.

Requirement 1: A partially completed schedule of the company's total and per unit costs over the relevant range of 30,000 to 50,000 units produced and sold annually is given. Complete the schedule of the company's total and unit costs below (Round the "total costs" to the nearest dollar amount and the "cost per unit" to 2 decimal places. Omit the "$" sign in your response) :

Units Produced and Sold 30,000 40,000 50,000 Total costs:

Variable costs $ 180,000 $ 190000 (0%) $ 200000 (0%)

Fixed costs 300,000 310000 (0%) 320000 (0%)

Total costs $ 480,000 $ 500000 (0%) $ 520000 (0%)

Cost per unit:

Variable cost $ 3.6 (0%) $ 3.8 (0%) $ 4 (0%)

Fixed cost 6 (0%) 6.2 (0%) 6.4 (0%)

Total cost per unit $ 9.6 (0%) $ 10.0 (0%) $ 6.8 (0%)

Exercise 5-5 Cost Behavior; Contribution Format Income Statement [LO1, LO4] Harris Company manufactures and sells a single product.

Requirement 1: A partially completed schedule of the company's total and per unit costs over the relevant range of 30,000 to 50,000 units produced and sold annually is given. Complete the schedule of the company's total and unit costs below (Round the "total costs" to the nearest dollar amount and the "cost per unit" to 2 decimal places. Omit the "$" sign in your response) :

Units Produced and Sold 30,000 40,000 50,000 Total costs:

Variable costs $ 180,000 $ 240,000 $ 300,000 Fixed costs 300,000 300,000 300,000

Total costs $ 480,000 $ 540,000 $ 600,000 Cost per unit:

Variable cost $ 6 $ 6 $ 6 Fixed cost 10 7.5 6

Total cost per unit $ 16 $ 13.5 $ 12

Total grade: 0.0×1/15 + 0.0×1/15 + 0.0×1/15 + 0.0×1/15 + 0.0×1/15 + 0.0×1/15 + 0.0×1/15 + 0.0×1/15 + 0.0×1/15 + 0.0×1/15 + 0.0×1/15 + 0.0×1/15 + 0.0×1/15 + 0.0×1/15 + 0.0×1/15 = 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0%

Feedback:

The company's variable cost per unit is:


Requirement 2: Assume that the company produces and sells 45,000 units during the year at a selling price of $16 per unit. Prepare a contribution format income statement for the year. (Input all amounts as positive values. Omit the "$" sign in your response.)

Income Statement

For the Year Ended Sales (10%) $ 720000 (10%) Variable expenses (10%) 513000 (0%) Contribution margin (10%) 207000 (0%)

Fixed expense (10%) 279000 (0%) Net operating income (10%) $ -70000 (0%)

Requirement 2: Assume that the company produces and sells 45,000 units during the year at a selling price of $16 per unit. Prepare a contribution format income statement for the year. (Input all amounts as positive values. Omit the "$" sign in your response.)

Income Statement

For the Year Ended Sales $ 720000 Variable expenses 270,000 Contribution margin 450,000 Fixed expense 300,000 Net operating income $ 150,000

Total grade: 1.0×1/10 + 1.0×1/10 + 1.0×1/10 + 0.0×1/10 + 1.0×1/10 + 0.0×1/10 + 1.0×1/10 + 0.0×1/10 + 1.0×1/10 + 0.0×1/10 = 10% + 10% + 10% + 0% + 10% + 0% + 10% + 0% + 10% + 0% Feedback:

Sales (45,000 units × $16 per unit) = $720,000 Variable expenses (45,000 units × $6 per unit) = $270,000



Exercise 5-6 High-Low Method [LO2, LO3] The following data relating to units shipped and total shipping expense have been assembled by Archer Company, a wholesaler of large, custom-built air-conditioning units for commercial buildings:

Month Units

Shipped

Total Shipping Expense

January 3 $ 1,800 February 6 $ 2,300 March 4 $ 1,700 April 5 $ 2,000 May 7 $ 2,300 June 8 $ 2,700 July 2 $ 1,200

Requirement 1: Using the high-low method, estimate the cost formula for shipping expense where X is the number of units shipped. (Omit the "$" sign in your response.)

Y = $ 5 (0%) + $ 5 (0%) X

Exercise 5-6 High-Low Method [LO2, LO3] The following data relating to units shipped and total shipping expense have been assembled by Archer Company, a wholesaler of large, custom-built air-conditioning units for commercial buildings:

Month Units

Shipped

Total Shipping Expense

January 3 $ 1,800 February 6 $ 2,300 March 4 $ 1,700 April 5 $ 2,000 May 7 $ 2,300 June 8 $ 2,700 July 2 $ 1,200

Requirement 1: Using the high-low method, estimate the cost formula for shipping expense where X is the number of units shipped. (Omit the "$" sign in your response.)

Y = $ 700 + $ 250 X


Units Shipped

Shipping Expense

High activity level (June) 8 $ 2,700

Low activity level (July) 2 1,200

Change 6 $ 1,500

Variable cost element:

Fixed cost element:

Shipping expense at the high activity level $ 2,700 Less variable cost element ($250 per unit × 8 units) 2,000

Total fixed cost $ 700

The cost formula is $700 per month plus $250 per unit shipped or Y = $700 + $250X,

where X is the number of units shipped.

Requirement 2: What factors, other than the number of units shipped, are likely to affect the company's total shipping expense? (Select all that apply.)

Choice Selected

Points

Weight of the units shipped No

Distance travelled Yes

+1

Size of the units shipped Yes

+1

Fixed cost Yes

-1

Variable cost No

Total correct answers: 3 Partial Grading Explained

Feedback: The cost of shipping units is likely to depend on the weight and volume of the units and the distance traveled, as well as on the number of units shipped. In addition, higher cost shipping might be necessary to meet a deadline.



Exercise 5-7 Cost Behavior; High-Low Method [LO1, LO3] Hoi Chong Transport, Ltd., operates a fleet of delivery trucks in Singapore. The company has determined that if a truck is driven 105,000 kilometers during a year, the average operating cost is 11.4 cents per kilometer. If a truck is driven only 70,000 kilometers during a year, the average operating cost increases to 13.4 cents per kilometer.(The Singapore dollar is the currency used in Singapore.) Requirement 1: Using the high-low method, estimate the variable and fixed cost elements of the annual cost of the truck operation. (Round the variable cost per kilometer to 3 decimal places. Omit the "$" sign in your response.)

Variable cost per kilometer $ 5 (0%)

Fixed cost per year $ 5 (0%)

Exercise 5-7 Cost Behavior; High-Low Method [LO1, LO3] Hoi Chong Transport, Ltd., operates a fleet of delivery trucks in Singapore. The company has determined that if a truck is driven 105,000 kilometers during a year, the average operating cost is 11.4 cents per kilometer. If a truck is driven only 70,000 kilometers during a year, the average operating cost increases to 13.4 cents per kilometer.(The Singapore dollar is the currency used in Singapore.) Requirement 1: Using the high-low method, estimate the variable and fixed cost elements of the annual cost of the truck operation. (Round the variable cost per kilometer to 3 decimal places. Omit the "$" sign in your response.)

Variable cost per kilometer $ 0.074 Fixed cost per year $ 4,200


Kilometers Driven

Total Annual Cost*

High level of activity 105,000 $ 11,970

Low level of activity 70,000 9,380 Change 35,000 $ 2,590

* 105,000 kilometers × $0.114 per kilometer = $11,970 70,000 kilometers × $0.134 per kilometer = $9,380

Variable cost per kilometer:

Fixed cost per year:

Total cost at 105,000 kilometers $ 11,970 Less variable portion:

105,000 kilometers × $0.074 per kilometer

7,770

Fixed cost per year $ 4,200


Requirement 2: Express the variable and fixed costs in the form Y = a + bX. (Round the variable cost per kilometer to 3 decimal places. Omit the "$" sign in your response.)

Y = $ 5 (0%) + $ 5 (0%) X

Requirement 2: Express the variable and fixed costs in the form Y = a + bX. (Round the variable cost per kilometer to 3 decimal places. Omit the "$" sign in your response.)

Y = $ 4,200 + $ 0.074 X

Total grade: 0.0×1/2 + 0.0×1/2 = 0% + 0%


Requirement 3: If a truck were driven 80,000 kilometers during a year, what total cost would you expect to be incurred? (Omit the "$" sign in your response.)

Total annual cost $ 400000 (0%)

Requirement 3: If a truck were driven 80,000 kilometers during a year, what total cost would you expect to be incurred? (Omit the "$" sign in your response.)

Total annual cost $ 10,120


Fixed cost $ 4,200 Variable cost:

80,000 kilometers × $0.074 per kilometer

5,920

Total annual cost $ 10,120



Exercise 5-8 High-Low Method; Predicting Cost [LO1, LO3] The Lakeshore Hotel's guest-days of occupancy and custodial supplies expense over the last seven months were:

Month

Guest-Days of

Occupancy

Custodial Supplies Expense

March 4,000 $ 7,500 April 6,500 $ 8,250 May 8,000 $ 10,500 June 10,500 $ 12,000 July 12,000 $ 13,500 August 9,000 $ 10,750 September 7,500 $ 9,750

Guest-days is a measure of the overall activity at the hotel. For example, a guest who

stays at the hotel for three days is counted as three guest-days.

Exercise 5-8 High-Low Method; Predicting Cost [LO1, LO3] The Lakeshore Hotel's guest-days of occupancy and custodial supplies expense over the last seven months were:

Month

Guest-Days of

Occupancy


March 4,000 $ 7,500 April 6,500 $ 8,250 May 8,000 $ 10,500 June 10,500 $ 12,000 July 12,000 $ 13,500 August 9,000 $ 10,750 September 7,500 $ 9,750

Guest-days is a measure of the overall activity at the hotel. For example, a guest who

stays at the hotel for three days is counted as three guest-days.

Requirement 1: Using the high-low method, estimate a cost formula for custodial supplies expense where X is the number of guest-days. (Round your answer to 2 decimal places. Omit the "$" sign in your response.)

Y = $ 5 (0%) + $ 5 (0%) X

Requirement 1: Using the high-low method, estimate a cost formula for custodial supplies expense where X is the number of guest-days. (Round your answer to 2 decimal places. Omit the "$" sign in your response.)

Y = $ 4,500 + $ 0.75 X


Guest-Days


High activity level (July) 12,000 $ 13,500 Low activity level (March) 4,000 7,500

Change 8,000 $ 6,000

Variable cost element:

Fixed cost element:

Custodial supplies expense at high activity level $ 13,500

Less variable cost element:

12,000 guest-days × $0.75 per guest-day

9,000 Total fixed cost $ 4,500

The cost formula is $4,500 per month plus $0.75 per guest-day or

Y = $4,500 + $0.75X


Requirement 2: Using the cost formula you derived above, what amount of custodial supplies expense would you expect to be incurred at an occupancy level of 11,000 guest-days? (Omit the "$" sign in your response.)

Variable cost $ 50 (0%) Fixed cost 100 (0%) Total cost $ 150 (0%)

Requirement 2: Using the cost formula you derived above, what amount of custodial supplies expense would you expect to be incurred at an occupancy level of 11,000 guest-days? (Omit the "$" sign in your response.)

Variable cost $ 8,250 Fixed cost 4,500 Total cost $ 12,750

Total grade: 0.0×1/3 + 0.0×1/3 + 0.0×1/3 = 0% + 0% + 0% Feedback:

Variable cost (11,000 guest-days × $0.75 per guest-day) = $8,250



Exercise 5-10 High-Low Method; Predicting Cost [LO1, LO3] St. Mark's Hospital contains 450 beds. The average occupancy rate is 80% per month. In other words, on average, 80% of the hospital's beds are occupied by patients. At this level of occupancy, the hospital's operating costs are $32 per occupied bed per day, assuming a 30-day month. This $32 figure contains both variable and fixed cost elements.

During June, the hospital's occupancy rate was only 60%. A total of $326,700 in operating cost was incurred during the month.

Requirement 1: (a) Estimate the variable cost per occupied bed on a daily basis using the high-low method.

(Omit the "$" sign in your response.) Variable cost per bed-

day $ 50 (0%)

Exercise 5-10 High-Low Method; Predicting Cost [LO1, LO3] St. Mark's Hospital contains 450 beds. The average occupancy rate is 80% per month. In other words, on average, 80% of the hospital's beds are occupied by patients. At this level of occupancy, the hospital's operating costs are $32 per occupied bed per day, assuming a 30-day month. This $32 figure contains both variable and fixed cost elements.

During June, the hospital's occupancy rate was only 60%. A total of $326,700 in operating cost was incurred during the month.

Requirement 1: (a) Estimate the variable cost per occupied bed on a daily basis using the high-low method.

(Omit the "$" sign in your response.) Variable cost per bed-day $ 7


Difference in cost:

Monthly operating costs at 80% occupancy: 450 beds × 80% = 360 beds; 360 beds × 30 days × $32 per bed-day $ 345,600

Monthly operating costs at 60% occupancy (given) 326,700

Difference in cost $ 18,900

Difference in activity: 80% occupancy (450 beds × 80% × 30 days) 10,800

60% occupancy (450 beds × 60% × 30 days) 8,100

Difference in activity 2,700


(b) Estimate the total fixed operating costs per month using the high-low method. (Omit the "$" sign in your response.)

Fixed operating costs per month $ 50000 (0%)

(b) Estimate the total fixed operating costs per month using the high-low method. (Omit the "$" sign in your response.)

Fixed operating costs per month $ 270,000


Monthly operating costs at 80% occupancy (above) $ 345,600 Less variable costs:

360 beds × 30 days × $7 per bed-day

75,600 Fixed operating costs per month $ 270,000


Requirement 2: Assume an occupancy rate of 70% per month. What amount of total operating cost would you expect the hospital to incur? (Omit the "$" sign in your response.)

Fixed costs $ 500 (0%) Variable costs 50 (0%) Total expected costs $ 550 (0%)

Requirement 2: Assume an occupancy rate of 70% per month. What amount of total operating cost would you expect the hospital to incur? (Omit the "$" sign in your response.)

Fixed costs $ 270,000 Variable costs 66,150 Total expected costs $ 336,150

Total grade: 0.0×1/3 + 0.0×1/3 + 0.0×1/3 = 0% + 0% + 0% Feedback:

450 beds × 70% = 315 beds occupied: Variable costs: 315 beds × 30 days × $7 per bed-day = 66,150



Exercise 6-1 Preparing a Contribution Format Income Statement [LO1] Whirly Corporation's most recent income statement is shown below:

Total Per Unit Sales (10,000 units) $ 350,000 $ 35.00

Variable expenses 200,000 20.00 Contribution margin 150,000 $ 15.00

Fixed expenses 135,000

Exercise 6-1 Preparing a Contribution Format Income Statement [LO1] Whirly Corporation's most recent income statement is shown below:

Total Per Unit Sales (10,000 units) $ 350,000 $ 35.00

Variable expenses 200,000 20.00 Contribution margin 150,000 $ 15.00

Fixed expenses 135,000


Prepare a new contribution format income statement under each of the following conditions (consider each case independently): Requirement 1: The sales volume increases by 100 units. (Omit the "$" sign in your response.)

Total Sales $ 350000 (0%) Variable expenses 200000 (0%)

Contribution margin 150000 (0%)

Fixed expenses 135000 (20%)

Net operating income $ 15000 (0%)


Prepare a new contribution format income statement under each of the following conditions (consider each case independently): Requirement 1: The sales volume increases by 100 units. (Omit the "$" sign in your response.)

Total Sales $ 353,500 Variable expenses 202,000 Contribution margin 151,500 Fixed expenses 135000 Net operating income $ 16,500

Total grade: 0.0×1/5 + 0.0×1/5 + 0.0×1/5 + 1.0×1/5 + 0.0×1/5 = 0% + 0% + 0% + 20% + 0% Feedback:

Sales (10,100 × $35.00) = $353,500

Variable expenses (10,100 × $20.00) = $202,000 You can get the same net operating income using the following approach.

Original net operating income $ 15,000

Change in contribution margin

(100 units × $15.00 per unit) 1,500

New net operating income $ 16,500


Requirement 2: The sales volume decreases by 100 units. (Omit the "$" sign in your response.)




Requirement 2: The sales volume decreases by 100 units. (Omit the "$" sign in your response.)

Total Sales $ 346,500 Variable expenses 198,000 Contribution margin 148,500 Fixed expenses 135000 Net operating income $ 13,500



Sales (9,900 × $35.00) = $346,500

Sales (9,900 × $20.00) = $198,000 You can get the same net operating income using the following approach.

Original net operating income $ 15,000

Change in contribution margin

(-100 units × $15.00 per unit) (1,500)

New net operating income $ 13,500


Requirement 3: The sales volume is 9,000 units. (Leave no cells blank - be certain to enter "0" wherever required. Omit the "$" sign in your response.)





Requirement 3: The sales volume is 9,000 units. (Leave no cells blank - be certain to enter "0" wherever required. Omit the "$" sign in your response.)

Total Sales $ 315,000 Variable expenses 180,000 Contribution margin 135,000 Fixed expenses 135000 Net operating income $ 0


Sales (9,000 × $35.00) = $315,000

Variable expenses (9,000 × $20.00) = $180,000 Note: This is the company's break-even point



Exercise 6-4 Computing and Using the CM Ratio [LO3] Last month when Holiday Creations, Inc., sold 50,000 units, total sales were $200,000, total variable expenses were $120,000, and fixed expenses were $65,000. Requirement 1: What is the company's contribution margin (CM) ratio? (Omit the "%" sign in your response.) Contribution margin ratio 5 (0%) %

Exercise 6-4 Computing and Using the CM Ratio [LO3] Last month when Holiday Creations, Inc., sold 50,000 units, total sales were $200,000, total variable expenses were $120,000, and fixed expenses were $65,000. Requirement 1: What is the company's contribution margin (CM) ratio? (Omit the "%" sign in your response.) Contribution margin ratio 40 %


The company's contribution margin (CM) ratio is: Total sales $ 200,000 Total variable expenses 120,000 = Total contribution margin 80,000

÷ Total sales $ 200,000 = CM ratio 40%


Requirement 2: Estimate the change in the company's net operating income if it were to increase its total sales by $1,000.(Omit the "$" sign in your response.). Estimated change in net operating income $ 500 (0%)

Requirement 2: Estimate the change in the company's net operating income if it were to increase its total sales by $1,000.(Omit the "$" sign in your response.). Estimated change in net operating income $ 400


The change in net operating income from an increase in total sales of $1,000 can be estimated by using the CM ratio as follows: Change in total sales $ 1,000 × CM ratio 40 % = Estimated change in net operating income $ 400



Exercise 6-5 Changes in Variable Costs, Fixed Costs, Selling Price, and Volume [LO4] Data for Hermann Corporation are shown below:

Per unit Percent of Sales

Selling price $ 90 100 % Variable expenses 63 70 % Contribution margin $ 27 30 %

Fixed expenses are $30,000 per month and the company is selling 2,000 units per month.

Requirement 1: (a) Calculate the change in net operating income if a $5,000 increase in the monthly

advertising budget would increase monthly sales by $9,000. (Negative amount should be indicated by a minus sign. Omit the "$" sign in your response.)

Change in net operating income $ 500 (0%)

Exercise 6-5 Changes in Variable Costs, Fixed Costs, Selling Price, and Volume [LO4] Data for Hermann Corporation are shown below:

Per unit Percent of Sales


Fixed expenses are $30,000 per month and the company is selling 2,000 units per month.

Requirement 1: (a) Calculate the change in net operating income if a $5,000 increase in the monthly

advertising budget would increase monthly sales by $9,000. (Negative amount should be indicated by a minus sign. Omit the "$" sign in your response.)

Change in net operating income $ -2,300


The following table shows the effect of the proposed change in monthly advertising budget:

Current sales

Sales with Additional Advertising

Budget Difference Sales $ 180,000 $ 189,000 $ 9,000 Variable expenses 126,000 132,300 6,300

Contribution margin 54,000 56,700 2,700

Fixed expenses 30,000 35,000 5,000

Net operating income $ 24,000 $ 21,700 ($ 2,300 )

(b) Should the advertising budget be increased as suggested in requirement 1(a) above?

Your Answer:

Choice

Selected

Yes

No

Feedback: Assuming no other important factors need to be considered, the increase in the

advertising budget should not be approved because it would lead to a decrease in net operating income of $2,300.

Requirement 2: Refer to the original data. Management is considering using higher-quality components that would increase the variable cost by $2 per unit. The marketing manager believes the higher-quality product would increase sales by 10% per month. Should the higher-quality components be used?

Your Answer:

Choice

Selected

Yes

No

Feedback: The $2 increase in variable cost will cause the unit contribution margin to decrease from $27 to $25 with the following impact on net operating income:

Expected total contribution margin

with the higher-quality components: 2,200 units × $25 per unit $ 55,000

Present total contribution margin: 2,000 units × $27 per unit 54,000

Change in total contribution margin $ 1,000

Assuming no change in fixed costs and all other factors remain the same, the higher-quality components should be used.



Exercise 6-6 Compute the Level of Sales Required to Attain a Target Profit [LO5] Lin Corporation has a single product whose selling price is $120 and whose variable expense is $80 per unit. The company's monthly fixed expense is $50,000.

Requirement 1: Using the equation method, solve for the unit sales that are required to earn a target profit of $10,000.

Unit sales to earn target profit 5 (0%) units

Exercise 6-6 Compute the Level of Sales Required to Attain a Target Profit [LO5] Lin Corporation has a single product whose selling price is $120 and whose variable expense is $80 per unit. The company's monthly fixed expense is $50,000.

Requirement 1: Using the equation method, solve for the unit sales that are required to earn a target profit of $10,000.

Unit sales to earn target profit 1,500 units


The equation method yields the required unit sales, Q, as follows:

Profit = [Unit CM × Q] − Fixed expenses $10,000 = [($120 − $80) × Q] − $50,000

$10,000 = [($40) × Q] − $50,000 $40 ×

Q = $10,000 + $50,000

Q = $60,000 ÷ $40 Q = 1,500 units


Requirement 2: Using the formula method, solve for the unit sales that are required to earn a target profit of $15,000.

Unit sales to earn target profit 50 (0%) units

Requirement 2: Using the formula method, solve for the unit sales that are required to earn a target profit of $15,000.

Unit sales to earn target profit 1,625 units


The formula approach yields the required unit sales as follows:



Exercise 6-7 Compute the Break-Even Point [LO6] Mauro Products distributes a single product, a woven basket whose selling price is $15 and whose variable expense is $12 per unit. The company's monthly fixed expense is $4,200.

Requirement 1: Solve for the company's break-even point in unit sales using the equation method.

Break-even point in unit sales 500 (0%) baskets

Exercise 6-7 Compute the Break-Even Point [LO6] Mauro Products distributes a single product, a woven basket whose selling price is $15 and whose variable expense is $12 per unit. The company's monthly fixed expense is $4,200.

Requirement 1: Solve for the company's break-even point in unit sales using the equation method.

Break-even point in unit sales 1,400 baskets


The equation method yields the break-even point in unit sales, Q, as follows: Profit = [Unit CM × Q] − Fixed expenses

$0 = [($15 − $12) × Q] − $4,200 $0 = [($3) × Q] − $4,200

$3Q = $4,200 Q = $4,200 ÷ $3 Q = 1,400 baskets

The formula method gives an answer that is identical to the equation method for the break-even point in unit sales:

Unit sales to break even = Fixed

expenses Unit CM

= $4,200 = 1,400 baskets $3


Requirement 2: Solve for the company's break-even point in sales dollars using the equation method and the CM ratio. (Omit the "$" sign in your response.)

Break-even point in sales $ 500 (0%)

Requirement 2: Solve for the company's break-even point in sales dollars using the equation method and the CM ratio. (Omit the "$" sign in your response.)

Break-even point in sales $ 21,000


The equation method can be used to compute the break-even point in sales dollars as follows:

CM ratio = Unit contribution

margin Unit selling price

= $3 = 0.20 $15 Profit = [CM ratio × Sales] − Fixed expenses

$0 = [0.20 × Sales] − $4,200 0.20 × Sales = $4,200

Sales = $4,200 ÷ 0.20 Sales = $21,000

The formula method also gives an answer that is identical to the equation method for the break-even point in dollar sales:

Dollar sales to break even = Fixed

expenses CM ratio

= $4,200 = $21,000 0.20



Exercise 6-8 Compute the Margin of Safety [LO7] Molander Corporation is a distributor of a sun umbrella used at resort hotels. Data concerning the next month's budget appear below:

Selling price $ 30 per unit Variable expenses $ 20 per unit Fixed expenses $ 7,500 per month

Unit sales 1,000 units per month

Requirement 1: Compute the company's margin of safety. (Omit the "$" sign in your response.)

Margin of safety $ 500 (0%)

Exercise 6-8 Compute the Margin of Safety [LO7] Molander Corporation is a distributor of a sun umbrella used at resort hotels. Data concerning the next month's budget appear below:

Selling price $ 30 per unit Variable expenses $ 20 per unit Fixed expenses $ 7,500 per month

Unit sales 1,000 units per month

Requirement 1: Compute the company's margin of safety. (Omit the "$" sign in your response.)

Margin of safety $ 7,500


To compute the margin of safety, we must first compute the break-even unit sales. Profit = [Unit CM × Q] − Fixed expenses

$0 = [($30 − $20) × Q] − $7,500 $0 = [($10) × Q] − $7,500

$10Q = $7,500 Q = $7,500 ÷ $10 Q = 750 units

Sales (at the budgeted volume of 1,000 units) $ 30,000

Less break-even sales (at 750 units) 22,500 Margin of safety (in dollars) $ 7,500


Requirement 2: Compute the company's margin of safety as a percentage of its sales. (Omit the "%" sign in your response.)

Margin of safety as a percentage of sales 5 (0%) %

Requirement 2: Compute the company's margin of safety as a percentage of its sales. (Omit the "%" sign in your response.)

Margin of safety as a percentage of sales 25 %


The margin of safety as a percentage of sales is as follows:

Margin of safety (in dollars) $ 7,500 ÷ Sales $ 30,000 Margin of safety percentage 25%



Exercise 6-9 Compute and Use the Degree of Operating Leverage [LO8] Engberg Company installs lawn sod in home yards. The company's most recent monthly contribution format income statement follows:

Amount Percent of Sales

Sales $ 80,000 100 % Variable expenses 32,000 40 % Contribution margin 48,000 60 %

Fixed expenses 38,000 Net operating income $ 10,000

Requirement 1: Compute the company's degree of operating leverage. (Round your answer to 1 decimal place.)

Degree of operating leverage 1000 (0%)

Exercise 6-9 Compute and Use the Degree of Operating Leverage [LO8] Engberg Company installs lawn sod in home yards. The company's most recent monthly contribution format income statement follows:

Amount Percent of Sales

Sales $ 80,000 100 % Variable expenses 32,000 40 % Contribution margin 48,000 60 %


Requirement 1: Compute the company's degree of operating leverage. (Round your answer to 1 decimal place.)

Degree of operating leverage 4.8


The company's degree of operating leverage would be computed as follows:

Contribution margin $ 48,000 ÷ Net operating income $ 10,000 Degree of operating leverage 4.8


Requirement 2: Using the degree of operating leverage, estimate the impact on net operating income of a 5% increase in sales. (Omit the "%" sign in your response.)

Estimated percent change in net operating income 5 (0%) %

Requirement 2: Using the degree of operating leverage, estimate the impact on net operating income of a 5% increase in sales. (Omit the "%" sign in your response.)

Estimated percent change in net operating income

24 %


A 5% increase in sales should result in a 24% increase in net operating income, computed as follows:

Degree of operating leverage 4.8 × Percent increase in sales 5 % Estimated percent increase in net operating income 24 %


Requirement 3: Verify your estimate from requirement (2) above by constructing a new contribution format income statement for the company assuming a 5% increase in sales. (Omit the "$" and "%" sign in your response.)

Amount Sales $ 80000 (0%) Variable expenses 32000 (0%) Contribution margin 48000 (0%) Fixed expenses 38000 (14%) Net operating income $ 10000 (0%) Original net operating income $ 5000 (0%) Percent change in net operating income 100 (0%) %

Requirement 3: Verify your estimate from requirement (2) above by constructing a new contribution format income statement for the company assuming a 5% increase in sales. (Omit the "$" and "%" sign in your response.)

Amount Sales $ 84,000 Variable expenses 33,600 Contribution margin 50,400 Fixed expenses 38000 Net operating income $ 12,400 Original net operating income $ 10,000 Percent change in net operating income 24 %

Total grade: 0.0×1/7 + 0.0×1/7 + 0.0×1/7 + 1.0×1/7 + 0.0×1/7 + 0.0×1/7 + 0.0×1/7 = 0% + 0% + 0% + 14% + 0% + 0% + 0%



Exercise 6-10 Compute the Break-Even Point for a Multiproduct Company [LO9] Lucido Products markets two computer games: Claimjumper and Makeover. A contribution format income statement for a recent month for the two games appears on the following page:

Claimjumper Makeover Total Sales $ 30,000 $ 70,000 $ 100,000 Variable expenses 20,000 50,000 70,000 Contribution margin $ 10,000 $ 20,000 30,000


Requirement 1: Compute the overall contribution margin (CM) ratio for the company. (Omit the "%"

Exercise 6-10 Compute the Break-Even Point for a Multiproduct Company [LO9] Lucido Products markets two computer games: Claimjumper and Makeover. A contribution format income statement for a recent month for the two games appears on the following page:

Claimjumper Makeover Total Sales $ 30,000 $ 70,000 $ 100,000 Variable expenses 20,000 50,000 70,000 Contribution margin $ 10,000 $ 20,000 30,000


Requirement 1: Compute the overall contribution margin (CM) ratio for the company. (Omit the "%"

sign in your response.)

Overall CM ratio 5 (0%) %


Overall CM ratio 30 %


The overall contribution margin ratio can be computed as follows:


Requirement 2: Compute the overall break-even point for the company in sales dollars. (Omit the "$" sign in your response.)

Overall break-even $ 500 (0%)

Requirement 2: Compute the overall break-even point for the company in sales dollars. (Omit the "$" sign in your response.)

Overall break-even $ 80,000


The overall break-even point in sales dollars can be computed as follows:


Requirement 3: Verify the overall break-even point for the company by constructing a contribution format income statement showing the appropriate levels of sales for the two products. (Round your answers to the nearest dollar amount. Do not round your interim calculation. Leave no cells blank - be certain to enter "0" wherever required. Omit the "$" and "%" sign in your response.)

Claimjumper Makeover Total Original dollar sales $ 50 (0%) $ 500 (0%) $ 5000 (0%)

Sales at break-even $ 2 (0%) $ 10 (0%) $ 100 (0%)

Claimjumper Makeover Total

Requirement 3: Verify the overall break-even point for the company by constructing a contribution format income statement showing the appropriate levels of sales for the two products. (Round your answers to the nearest dollar amount. Do not round your interim calculation. Leave no cells blank - be certain to enter "0" wherever required. Omit the "$" and "%" sign in your response.)

Claimjumper Makeover Total Original dollar sales $ 30,000 $ 70,000 $ 100,000 Sales at break-even $ 24,000 $ 56,000 $ 80,000

Claimjumper Makeover Total Sales $ 24,000 $ 56,000 $ 80,000 Variable expenses 16,000 40,000 56,000

Sales $ 50 (0%) $ 500 (0%) $ 5000 (0%) Variable expenses 20 (0%) 30 (0%) 400 (0%)

Contribution margin $ 30 (0%) $ 470 (0%) 4600 (0%)



Contribution margin $ 8,000 $ 16,000 24,000 Fixed expenses 24,000 Net operating income $ 0

Total grade: 0.0×1/17 + 0.0×1/17 + 0.0×1/17 + 0.0×1/17 + 0.0×1/17 + 0.0×1/17 + 0.0×1/17 + 0.0×1/17 + 0.0×1/17 + 0.0×1/17 + 0.0×1/17 + 0.0×1/17 + 0.0×1/17 + 0.0×1/17 + 0.0×1/17 + 0.0×1/17 + 0.0×1/17 = 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0%

Feedback:

Claimjumper variable expenses: ($24,000/$30,000) × $20,000 = $16,000 Makeover variable expenses: ($56,000/$70,000) × $50,000 = $40,000



Exercise 6-11 Using a Contribution Format Income Statement [LO1, LO4] Miller Company's most recent contribution format income statement is shown below:

Total Per Unit Sales (20,000 units) $ 300,000 $ 15.00 Variable expenses 180,000 9.00 Contribution margin 120,000 $ 6.00 Fixed expenses 70,000 Net operating income $ 50,000

Required: Prepare a new contribution format income statement under each of the following conditions (consider each case independently): (Round your per unit values to 2 decimal places. Omit the "$" sign in your response.)

(a) The number of units sold increases by 15%.

Total Per Unit Sales $ 300000 (0%) $ 15 (13%) Variable expenses 180000 (0%) 9 (13%) Contribution margin 120000 (0%) $ 6 (13%) Fixed expenses 70000 (13%) Net operating income $ 50000 (0%)

Exercise 6-11 Using a Contribution Format Income Statement [LO1, LO4] Miller Company's most recent contribution format income statement is shown below:

Total Per Unit Sales (20,000 units) $ 300,000 $ 15.00 Variable expenses 180,000 9.00 Contribution margin 120,000 $ 6.00 Fixed expenses 70,000 Net operating income $ 50,000

Required: Prepare a new contribution format income statement under each of the following conditions (consider each case independently): (Round your per unit values to 2 decimal places. Omit the "$" sign in your response.)

(a) The number of units sold increases by 15%.

Total Per Unit Sales $ 345,000 $ 15 Variable expenses 207,000 9 Contribution margin 138,000 $ 6 Fixed expenses 70000 Net operating income $ 68,000

Total grade: 0.0×1/8 + 1.0×1/8 + 0.0×1/8 + 1.0×1/8 + 0.0×1/8 + 1.0×1/8 + 1.0×1/8 + 0.0×1/8 = 0% + 13% + 0% + 13% + 0% + 13% + 13% + 0%

Feedback:

Sales (20,000 units × 1.15 = 23,000 units)


(b) The selling price decreases by $1.50 per unit, and the number of units sold increases by 25%.

Total Per Unit Sales $ 300000 (0%) $ 15 (0%) Variable expenses 180000 (0%) 9 (13%) Contribution margin 120000 (0%) $ 6 (0%)

Fixed expenses 70000 (13%) Net operating income $ 50000 (0%)

(b) The selling price decreases by $1.50 per unit, and the number of units sold increases by 25%.

Total Per Unit Sales $ 337,500 $ 13.5 Variable expenses 225,000 9 Contribution margin 112,500 $ 4.5 Fixed expenses 70000 Net operating income $ 42,500

Total grade: 0.0×1/8 + 0.0×1/8 + 0.0×1/8 + 1.0×1/8 + 0.0×1/8 + 0.0×1/8 + 1.0×1/8 + 0.0×1/8 = 0% + 0% + 0% + 13% + 0% + 0% + 13% + 0% Feedback:



(c) The selling price increases by $1.50 per unit, fixed expenses increase by $20,000, and the number of units sold decreases by 5%.



(c) The selling price increases by $1.50 per unit, fixed expenses increase by $20,000, and the number of units sold decreases by 5%.

Total Per Unit Sales $ 313,500 $ 16.5 Variable expenses 171,000 9 Contribution margin 142,500 $ 7.5 Fixed expenses 90,000 Net operating income $ 52,500




(d) The selling price increases by 12%, variable expenses increase by 60 cents per unit, and the number of units sold decreases by 10%.


(d) The selling price increases by 12%, variable expenses increase by 60 cents per unit, and the number of units sold decreases by 10%.

Total Per Unit Sales $ 302,400 $ 16.8 Variable expenses 172,800 9.6 Contribution margin 129,600 $ 7.2 Fixed expenses 70000







Exercise 6-12 Target Profit and Break-Even Analysis; Margin of Safety; CM Ratio [LO1, LO3, LO5, LO6, LO7] Menlo Company distributes a single product. The company's sales and expenses for last month follow:

Total Per Unit

Sales $ 450,000 $ 30 Variable expenses 180,000 12 Contribution margin 270,000 $ 18 Fixed expenses 216,000 Net operating income $ 54,000

Requirement 1: What is the monthly break-even point in units sold and in sales dollars? (Omit the "$" sign in your response.)

Monthly break-even point 5 (0%) units

Sales $ 50000 (0%)

Exercise 6-12 Target Profit and Break-Even Analysis; Margin of Safety; CM Ratio [LO1, LO3, LO5, LO6, LO7] Menlo Company distributes a single product. The company's sales and expenses for last month follow:

Total Per Unit

Sales $ 450,000 $ 30 Variable expenses 180,000 12 Contribution margin 270,000 $ 18 Fixed expenses 216,000 Net operating income $ 54,000

Requirement 1: What is the monthly break-even point in units sold and in sales dollars? (Omit the "$" sign in your response.)

Monthly break-even point 12,000 units Sales $ 360,000


Profit = Unit CM × Q − Fixed expenses $0Q = ($30 − $12) × Q − $216,000 $0Q = ($18) × Q − $216,000

$18Q = $216,000 Q = $216,000 ÷ $18 Q = 12,000 units, or at $30 per unit, $360,000


Requirement 2: Without resorting to computations, what is the total contribution margin at the break-even point? (Omit the "$" sign in your response.)

Total contribution margin at the break-even point $ 500 (0%)

Requirement 2: Without resorting to computations, what is the total contribution margin at the break-even point? (Omit the "$" sign in your response.)

Total contribution margin at the break-even point $ 216,000


The contribution margin is $216,000 because the contribution margin is equal to the fixed expenses at the break-even point.


Requirement 3: How many units would have to be sold each month to earn a target profit of $90,000? Use the formula method.

Units sold 500 (0%) units

Requirement 3: How many units would have to be sold each month to earn a target profit of $90,000? Use the formula method.

Units sold 17,000 units



Requirement 4: Refer to the original data. Compute the company's margin of safety in both dollar and percentage terms. (Omit the "$" and "%" signs in your response.)

Dollars Percentage Margin of safety $ 50 (0%) 5 (0%) %

Requirement 4: Refer to the original data. Compute the company's margin of safety in both dollar and percentage terms. (Omit the "$" and "%" signs in your response.)

Dollars Percentage Margin of safety $ 90,000 20 %


Margin of safety in dollar terms:

Margin of safety in percentage terms:


Requirement 5: What is the company's CM ratio? If sales increase by $50,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase? (Omit the "$" and "%" signs in your response.)

CM ratio 5 (0%) % Increase in net operating income $ 500 (0%)

Requirement 5: What is the company's CM ratio? If sales increase by $50,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase? (Omit the "$" and "%" signs in your response.)

CM ratio 60 % Increase in net operating income $ 30,000


The CM ratio is 60%.

Expected total contribution margin: ($500,000 × 60%) $ 300,000

Present total contribution margin: ($450,000 × 60%) 270,000

Increase in contribution margin $ 30,000

Given that the company's fixed expenses will not change, monthly net operating income will also increase by $30,000. Alternative solution:

$50,000 incremental sales × 60% CM ratio = $30,000



Exercise 6-13 Target Profit and Break-Even Analysis [LO3, LO4, LO5, LO6] Lindon Company is the exclusive distributor for an automotive product that sells for $40 per unit and has a CM ratio of 30%. The company's fixed expenses are $180,000 per year. The company plans to sell 16,000 units this year.

Requirement 1: What are the variable expenses per unit? (Omit the "$" sign in your response.)

Exercise 6-13 Target Profit and Break-Even Analysis [LO3, LO4, LO5, LO6] Lindon Company is the exclusive distributor for an automotive product that sells for $40 per unit and has a CM ratio of 30%. The company's fixed expenses are $180,000 per year. The company plans to sell 16,000 units this year.

Requirement 1: What are the variable expenses per unit? (Omit the "$" sign in your response.)

Variable expenses per unit $ 40 (0%)

Variable expenses per unit $ 28


Variable expenses: $40 × (100% – 30%) = $28.


Requirement 2: Use the equation method for the following:

(a) What is the break-even point in units and sales dollars? (Omit the "$" sign in your

response.) Break-even point in units 40 (0%) units

Break-even point in sales dollars $ 400 (0%)

Requirement 2: Use the equation method for the following:

(a) What is the break-even point in units and sales dollars? (Omit the "$" sign in your

response.) Break-even point in units 15,000 units

Break-even point in sales dollars $ 600,000



Profit = Unit CM × Q − Fixed expenses

$0 = $12 × Q − $180,000 $12Q = $180,000

Q = $180,000 ÷ $12 Q = 15,000 units

In sales dollars: 15,000 units × $40 per unit = $600,000


(b) What sales level in units and in sales dollars is required to earn an annual profit of $60,000? (Omit the "$" sign in your response.)

Sales level in units 50 (0%) units Sales level in dollars $ 5000 (0%)

(b) What sales level in units and in sales dollars is required to earn an annual profit of $60,000? (Omit the "$" sign in your response.)

Sales level in units 20,000 units Sales level in dollars $ 800,000


Profit = [Unit CM × Q] − Fixed expenses $60,000 = [$12 × Q] − $180,000

$12Q = $60,000 + $180,000 $12Q = $240,000

Q = $240,000 ÷ $12 Q = 20,000 units



(c) Assume that by using a more efficient shipper, the company is able to reduce its variable expenses by $4 per unit. What is the company's new break-even point in units and sales dollars? (Omit the "$" sign in your response.)

New break-even point in units 50 (0%) units New break-even point in sales dollars $ 5000 (0%)

(c) Assume that by using a more efficient shipper, the company is able to reduce its variable expenses by $4 per unit. What is the company's new break-even point in units and sales dollars? (Omit the "$" sign in your response.)

New break-even point in units 11,250 units New break-even point in sales dollars $ 450,000


The company's new cost/revenue relation will be:

Selling price $ 40 100 % Variable expenses ($28 – $4) 24 60 %

Contribution margin $ 16 40 %

Profit = [Unit CM × Q] − Fixed expenses $0 = [($40 − $24) × Q] − $180,000

$16Q = $180,000 Q = $180,000 ÷ $16 Q = 11,250 units




Exercise 6-14 Missing Data; Basic CVP Concepts [LO1, LO9] Fill in the missing amounts in each of the eight case situations below. Each case is independent of the others. (Hint: One way to find the missing amounts would be to prepare a contribution format income statement for each case, enter the known data, and then compute the missing items.)

Requirement 1: Assume that only one product is being sold in each of the four following case situations: (Omit the "$" sign in your response.)

Case #1 Case #2 Case #3 Case #4 Units Sold 15,000 12000 (0%) 10,000 6,000

Sales $ 180,000 $ 100,000 $ 250000 (0%) $ 300,000

Variable Expenses 120,000 110000 (0%

) 70,000 50000 (0%)

Contribution Margin 60,000 40,000 130,000 90,000

Fixed 50,000 32,000 25000 (0%) 100,000

Exercise 6-14 Missing Data; Basic CVP Concepts [LO1, LO9] Fill in the missing amounts in each of the eight case situations below. Each case is independent of the others. (Hint: One way to find the missing amounts would be to prepare a contribution format income statement for each case, enter the known data, and then compute the missing items.)

Requirement 1: Assume that only one product is being sold in each of the four following case situations: (Omit the "$" sign in your response.)

Case #1 Case #2 Case #3 Case #4 Units Sold 15,000 4,000 10,000 6,000 Sales $ 180,000 $ 100,000 $ 200,000 $ 300,000 Variable Expenses 120,000 60,000 70,000 210,000 Contribution Margin 60,000 40,000 130,000 90,000 Fixed expenses 50,000 32,000 118,000 100,000 Net Operating Income (Loss) 10,000 8,000 12,000 (10,000) Contribution Margin per Unit $ 4 $ 10 $ 13 $ 15

expenses Net Operating Income (Loss)

5000 (0%) 8,000 12,000 (10,000)

Contribution Margin per Unit

$ 5 (0%) $ 10 $ 13 $ 15 (13%)


Case #1 Case #2 Number of units sold 15,000 * 4,000

Sales $ 180,000 * $ 12 $ 100,000 * $ 25 Variable Expenses 120,000 * 8 60,000 15 Contribution margin 60,000 $ 4 40,000 $ 10 *

Fixed Expenses 50,000 * 32,000 * Net operating income $ 10,000 $ 8,000 *

Case #3 Case #4 Number of units sold 10,000 * 6,000 * Sales $ 200,000 $ 20 $ 300,000 * $ 50 Variable Expenses 70,000 * 7 210,000 35 Contribution margin 130,000 $ 13 * 90,000 $ 15 Fixed Expenses 118,000 100,000 * Net operating income $ 12,000 * $ (10,000 )*

* Given


Requirement 2: Assume that more than one product is being sold in each of the four following case situations: (Omit the "$" and "%" signs in your response.)

Case #1 Case #2 Case #3 Case #4 Sales $ 500,000 $ 400,000 $ 300000 (0%) 600,000 Variable Expenses 200000 (0%) 260,000 320000 (0%) 420,000

Contribution Margin 100,000 140,000 150,000 180,000

Fixed expenses 70000 (0%) 100,000 130,000 160000 (0%)

Requirement 2: Assume that more than one product is being sold in each of the four following case situations: (Omit the "$" and "%" signs in your response.)

Case #1 Case #2 Case #3 Case #4 Sales $ 500,000 $ 400,000 $ 250,000 600,000 Variable Expenses 400,000 260,000 100,000 420,000 Contribution Margin 100,000 140,000 150,000 180,000 Fixed expenses 93,000 100,000 130,000 185,000 Net Operating Income (Loss) $ 7,000 $ 40,000 $ 20,000 $ (5,000) Average Contribution Margin Ratio 20 % 35 % 60 % 30 %

Net Operating Income (Loss)

$ 7,000 $ 13500 (0%) $ 20,000 $ (5,000)

Average Contribution Margin Ratio

20 % 40 (0%) % 60 % 80 (0%) %


Case #1 Case #2 Sales $ 500,000 * 100 % $ 400,000 * 100 % Variable Expenses 400,000 80 260,000 * 65 Contribution margin 100,000 20 %* 140,000 35 %

Fixed Expenses 93,000 100,000 * Net operating income $ 7,000 * $ 40,000

Case #3 Case #4 Sales $ 250,000 100 % $ 600,000 * 100 % Variable Expenses 100,000 40 420,000 * 70 Contribution margin 150,000 60 %* 180,000 30 %

Fixed Expenses 130,000 * 185,000 Net operating income $ 20,000 * $ (5,000 )*

* Given



Exercise 6-15 Operating Leverage [LO4, LO8] Magic Realm, Inc., has developed a new fantasy board game. The company sold 15,000 games last year at a selling price of $20 per game. Fixed costs associated with the game total $182,000 per year, and variable costs are $6 per game. Production of the game is entrusted to a printing contractor. Variable costs consist mostly of payments to this contractor.

Requirement 1: (a) Prepare a contribution format income statement for the game last year. (Omit the "$"


Exercise 6-15 Operating Leverage [LO4, LO8] Magic Realm, Inc., has developed a new fantasy board game. The company sold 15,000 games last year at a selling price of $20 per game. Fixed costs associated with the game total $182,000 per year, and variable costs are $6 per game. Production of the game is entrusted to a printing contractor. Variable costs consist mostly of payments to this contractor.

Requirement 1: (a) Prepare a contribution format income statement for the game last year. (Omit the "$"


Total Sales $ 300000 (20%) Variable expenses 90000 (20%) Contribution margin 210000 (20%) Fixed expenses 182000 (20%) Net operating income(loss) $ 28000 (20%)

Total Sales $ 300000 Variable expenses 90000 Contribution margin 210000 Fixed expenses 182000 Net operating income(loss) $ 28000


(b) Compute the degree of operating leverage. (Round your answer to 1 decimal place.) Degree of operating

leverage 50 (0%)

(b) Compute the degree of operating leverage. (Round your answer to 1 decimal place.) Degree of operating leverage 7.5


The degree of operating leverage is:


Requirement 2: Management is confident that the company can sell 18,000 games next year (an increase of 3,000 games, or 20%, over last year).

(a) Compute the expected percentage increase in net operating income for next year.

(Omit the "%" sign in your response.) Expected percentage increase in net operating

income 5 (0%) %

Requirement 2: Management is confident that the company can sell 18,000 games next year (an increase of 3,000 games, or 20%, over last year).

(a) Compute the expected percentage increase in net operating income for next year.

(Omit the "%" sign in your response.) Expected percentage increase in net operating

income 150 %


Sales of 18,000 games represent a 20% increase over last year's sales. Because the degree of operating leverage is 7.5, net operating income should increase by 7.5 times as much, or by 150% (7.5 × 20%).


(b) Compute the expected total dollar net operating income(loss) for next year. (Do not prepare an income statement; use the degree of operating leverage to compute your answer. Omit the "$" sign in your response.)

Total expected net operating income(loss) $ 50000 (0%)

(b) Compute the expected total dollar net operating income(loss) for next year. (Do not prepare an income statement; use the degree of operating leverage to compute your answer. Omit the "$" sign in your response.)

Total expected net operating income(loss) $ 70,000

Total grade: 0.0×1/1 = 0%

Feedback:

The expected total dollar amount of net operating income for next year would be:

Last year's net operating income(loss) $ 28,000 Expected increase in net operating income next year (150% × $28,000) 42,000

Total expected net operating income(loss) $ 70,000



Exercise 6-16 Target Profit and Break-Even Analysis [LO4, LO5, LO6] Outback Outfitters sells recreational equipment. One of the company's products, a small camp stove, sells for $50 per unit. Variable expenses are $32 per stove, and fixed expenses associated with the stove total $108,000 per month.

Requirement 1: Compute the break-even point in number of stoves and in total sales dollars. (Omit the "$" sign in your response.)

Number of stoves 50 (0%)

Total sales $ 50000 (0%)

Exercise 6-16 Target Profit and Break-Even Analysis [LO4, LO5, LO6] Outback Outfitters sells recreational equipment. One of the company's products, a small camp stove, sells for $50 per unit. Variable expenses are $32 per stove, and fixed expenses associated with the stove total $108,000 per month.

Requirement 1: Compute the break-even point in number of stoves and in total sales dollars. (Omit the "$" sign in your response.)

Number of stoves 6,000 Total sales $ 300,000


Profit = [Unit CM × Q] − Fixed expenses

$0 = [($50 − $32) × Q] − $108,000 $0 = [($18) × Q] − $108,000

$18Q = $180,000 Q = $180,000 ÷ $18

Q = 6,000 stoves, or at $50 per stove, $300,000 in sales

Requirement 2: If the variable expenses per stove increase as a percentage of the selling price, will it result in a higher or a lower break-even point? (Assume that the fixed expenses remain unchanged.)

Your Answer: Choic Selecte Correc

e d t

Lower

Higher

Feedback: An increase in variable expenses as a percentage of the selling price would result in a higher break-even point. If variable expenses increase as a percentage of sales, then the contribution margin will decrease as a percentage of sales. With a lower CM ratio, more stoves would have to be sold to generate enough contribution margin to cover the fixed costs.


Requirement 3: At present, the company is selling 8,000 stoves per month. The sales manager is convinced that a 10% reduction in the selling price would result in a 25% increase in monthly sales of stoves. Prepare two contribution format income statements, one under present operating conditions, and one as operations would appear after the proposed changes. Show both total and per unit data on your statements. (Omit the "$" sign in your response.)

Present: 8,000 stoves Proposed: 50 (0%) stoves Total Per Unit Total Per Unit Sales $ 500000 (0%) $ 500 (0%) $ 50000 (0%) $ 50 (0%) Variable expenses 30000 (0%) 30 (0%) 3000 (0%) 30 (0%)

Contribution margin 470000 (0%) $ 470 (0%) 470000 (0%) $ 470 (0%)

Fixed expenses 5000 (0%) 5000 (0%)

Net operating income

$ 465000 (0%) $ 465000 (0%)

Requirement 3: At present, the company is selling 8,000 stoves per month. The sales manager is convinced that a 10% reduction in the selling price would result in a 25% increase in monthly sales of stoves. Prepare two contribution format income statements, one under present operating conditions, and one as operations would appear after the proposed changes. Show both total and per unit data on your statements. (Omit the "$" sign in your response.)

Present: 8,000 stoves Proposed: 10,000 stoves Total Per Unit Total Per Unit Sales $ 400,000 $ 50 $ 450,000 $ 45

Variable expenses 256,000 32 320,000 32 Contribution margin 144,000 $ 18 130,000 $ 13 Fixed expenses 108,000 108,000 Net operating income $ 36,000 $ 22,000

Total grade: 0.0×1/17 + 0.0×1/17 + 0.0×1/17 + 0.0×1/17 + 0.0×1/17 + 0.0×1/17 + 0.0×1/17 + 0.0×1/17 + 0.0×1/17 + 0.0×1/17 + 0.0×1/17 + 0.0×1/17 + 0.0×1/17 + 0.0×1/17 + 0.0×1/17 + 0.0×1/17 + 0.0×1/17 = 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0%

Feedback:

Proposed: 8,000 stoves × 1.25 = 10,000 stoves Sales: $50 × 0.9 = $45 As shown above, a 25% increase in volume is not enough to offset a 10% reduction in the selling price; thus, net operating income decreases.


Requirement 4: At present, the company is selling 8,000 stoves per month. The sales manager is convinced that a 10% reduction in the selling price would result in a 25% increase in monthly sales of stoves. How many stoves would have to be sold at the new selling price to yield a minimum net operating income of $35,000 per month?

Number of Stoves 50 (0%)

Requirement 4: At present, the company is selling 8,000 stoves per month. The sales manager is convinced that a 10% reduction in the selling price would result in a 25% increase in monthly sales of stoves. How many stoves would have to be sold at the new selling price to yield a minimum net operating income of $35,000 per month?

Number of Stoves 11,000


Profit = Unit CM × Q − Fixed expenses

$35,000 = ($45 − $32) × Q − $108,000 $35,000 = ($13) × Q − $108,000

$13 × Q = $143,000

Q = $143,000 ÷ $13 Q = $11,000 stoves



Exercise 6-18 Multiproduct Break-Even Analysis [LO9] Olongapo Sports Corporation is the distributor in the Philippines of two premium golf balls—the Flight Dynamic and the Sure Shot. Monthly sales, expressed in pesos (P), and the contribution margin ratios for the two products follow:

Product

Flight Dynamic Sure Shot Total

Sales P 150,000 P 250,000 P 400,000 CM ratio 80% 36% ?

Fixed expenses total P183,750 per month.

Requirement 1: Prepare a contribution format income statement for the company as a whole. (Round your percentage values to one decimal place, e.g., .1234 as 12.3. Omit the "P" and "%" signs in your response.)

Flight Dynamic Sure Shot Total Company Amount % Amount % Amount %

Sales P 500000 (0%)

50 (0%) P 500000 (0

%) 50 (0

%) P 1000000 (0%)

50 (0%)

Variable expenses 250000 (0

%) 50 (0

%) 250000 (0%)

50 (0%) 500000 (0%

) 50 (0

%) Contribution margin P 250000 (0

%) 50 (0

%) P 250000 (0%)

50 (0%) 500000 (0%

) 50 (0

%) Fixed expenses 5000 (0%)

Net operating income

P 450000 (0%)

Exercise 6-18 Multiproduct Break-Even Analysis [LO9] Olongapo Sports Corporation is the distributor in the Philippines of two premium golf balls—the Flight Dynamic and the Sure Shot. Monthly sales, expressed in pesos (P), and the contribution margin ratios for the two products follow:

Product

Flight Dynamic Sure Shot Total

Sales P 150,000 P 250,000 P 400,000 CM ratio 80% 36% ?

Fixed expenses total P183,750 per month.

Requirement 1: Prepare a contribution format income statement for the company as a whole. (Round your percentage values to one decimal place, e.g., .1234 as 12.3. Omit the "P" and "%" signs in your response.)

Flight Dynamic Sure Shot Total Company Amount % Amount % Amount % Sales P 150,000 100 P 250,000 100 P 400,000 100 Variable expenses 30,000 20 160,000 64 190,000 47.5 Contribution margin P 120,000 80 P 90,000 36 210,000 52.5 Fixed expenses 183,750 Net operating income P 26,250

Total grade: 0.0×1/20 + 0.0×1/20 + 0.0×1/20 + 0.0×1/20 + 0.0×1/20 + 0.0×1/20 + 0.0×1/20 + 0.0×1/20 + 0.0×1/20 + 0.0×1/20 + 0.0×1/20 + 0.0×1/20 + 0.0×1/20 + 0.0×1/20 + 0.0×1/20 + 0.0×1/20 + 0.0×1/20 + 0.0×1/20 + 0.0×1/20 + 0.0×1/20 = 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0%

Feedback:

Total contribution margin percentage: (P210,000 ÷ P400,000) = 52.5%.


Requirement 2: Compute the break-even point for the company based on the current sales mix. (Round your answer to the nearest peso amount. Omit the "P" sign in your response.)

Break-even point P 50 (0%)

Requirement 2: Compute the break-even point for the company based on the current sales mix. (Round your answer to the nearest peso amount. Omit the "P" sign in your response.)

Break-even point P 350,000


The break-even point for the company as a whole be:


Requirement 3: If sales increase by P100,000 a month, by how much would you expect net operating income to increase? (Round your answer to the nearest peso amount. Omit the "P" sign in your response.)

Expected increase in net operating income P 500 (0%)

Requirement 3: If sales increase by P100,000 a month, by how much would you expect net operating income to increase? (Round your answer to the nearest peso amount. Omit the "P" sign in your response.)

Expected increase in net operating income P 52,500


The additional contribution margin from the additional sales is computed as follows: P100,000 × 52.5% CM ratio = P52,500 Assuming no change in fixed expenses, all of this additional contribution margin of P52,500 should drop to the bottom line as increased net operating income.

This answer assumes no change in selling prices, variable costs per unit, fixed expense, or sales mix.



Problem 6-19 Basics of CVP Analysis [LO1, LO3, LO4, LO6, LO8] Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $20 per unit. Variable costs are $8 per unit, and fixed costs total $180,000 per year.

Requirement 1: What is the product's CM ratio? (Omit the "%" sign in your response.)

CM ratio 5 (0%) %

Problem 6-19 Basics of CVP Analysis [LO1, LO3, LO4, LO6, LO8] Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $20 per unit. Variable costs are $8 per unit, and fixed costs total $180,000 per year.

Requirement 1: What is the product's CM ratio? (Omit the "%" sign in your response.)

CM ratio 60 %


Sales price $ 20 100 % Variable expenses 8 40 % Contribution margin $ 12 60 %


Requirement 2: Use the CM ratio to determine the break-even point in sales dollars. (Omit the "$" sign in your response.)

Break-even point in sales $ 50 (0%)

Requirement 2: Use the CM ratio to determine the break-even point in sales dollars. (Omit the "$" sign in your response.)

Break-even point in sales $ 300,000



Requirement 3: Due to an increase in demand, the company estimates that sales will increase by $75,000 during the next year. By how much should net operating income increase (or net loss decrease) assuming that fixed costs do not change? (Omit the "$" sign in your response.)

Increase in net operating income $ 5000 (0%)

Requirement 3: Due to an increase in demand, the company estimates that sales will increase by $75,000 during the next year. By how much should net operating income increase (or net loss decrease) assuming that fixed costs do not change? (Omit the "$" sign in your response.)

Increase in net operating income $ 45,000


$75,000 increased sales × 0.60 CM ratio = $45,000 increased contribution margin. Because the fixed costs will not change, net operating income should also increase by $45,000.


Requirement 4: Assume that the operating results for last year were:

Sales $ 400,000 Variable expenses 160,000 Contribution margin 240,000 Fixed expenses 180,000 Net operating income $ 60,000

(a) Compute the degree of operating leverage at the current level of sales. Degree of operating

leverage 50 (0%)

Requirement 4: Assume that the operating results for last year were:

Sales $ 400,000 Variable expenses 160,000 Contribution margin 240,000 Fixed expenses 180,000 Net operating income $ 60,000

(a) Compute the degree of operating leverage at the current level of sales. Degree of operating leverage 4



(b) The president expects sales to increase by 20% next year. By what percentage should net operating income increase? (Omit the "%" sign in your response.)

Increase in net operating income 5 (0%) %

(b) The president expects sales to increase by 20% next year. By what percentage should net operating income increase? (Omit the "%" sign in your response.)

Increase in net operating income 80 %


4 × 20% = 80% increase in net operating income. In dollars, this increase would be 80% × $60,000 = $48,000.


Requirement 5: Refer to the original data. Assume that the company sold 18,000 units last year. The sales manager is convinced that a 10% reduction in the selling price, combined with a $30,000 increase in advertising, would cause annual sales in units to increase by one-third.

(a) Prepare two contribution format income statements, one showing the results of last

year's operations and one showing the results of operations if these changes are made. Show both total and per unit data on your statements. (Omit the "$" sign in your response.)

Last Year:

18,000 units Proposed:

24,000 units Amount Per Unit Amount Per Unit

Requirement 5: Refer to the original data. Assume that the company sold 18,000 units last year. The sales manager is convinced that a 10% reduction in the selling price, combined with a $30,000 increase in advertising, would cause annual sales in units to increase by one-third.

(a) Prepare two contribution format income statements, one showing the results of last

year's operations and one showing the results of operations if these changes are made. Show both total and per unit data on your statements. (Omit the "$" sign in your response.)

Last Year:

18,000 units Proposed:

24,000 units Amount Per Unit Amount Per Unit

Sales $ 500000 (0%) $ 50 (0%) $ 50000 (0%) $ 5 (0%) Variable expenses 200000 (0%) 20 (0%) 20000 (0%) 2 (0%)

Contribution margin 300000 (0%) $ 30 (0%) 30000 (0%) $ 3 (0%)

Fixed expenses 50000 (0%) 5000 (0%) Net operating income $ 295000 (0%) $ 25000 (0%)

Sales $ 360,000 $ 20 $ 432,000 $ 18 Variable expenses 144,000 8 192,000 8 Contribution margin 216,000 $ 12 240,000 $ 10 Fixed expenses 180,000 210,000 Net operating income $ 36,000 $ 30,000

Total grade: 0.0×1/16 + 0.0×1/16 + 0.0×1/16 + 0.0×1/16 + 0.0×1/16 + 0.0×1/16 + 0.0×1/16 + 0.0×1/16 + 0.0×1/16 + 0.0×1/16 + 0.0×1/16 + 0.0×1/16 + 0.0×1/16 + 0.0×1/16 + 0.0×1/16 + 0.0×1/16 = 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0% + 0%

Feedback:

18,000 units + 6,000 units = 24,000 units $20 × 0.9 = $18

(b) Would you recommend that the company do as the sales manager suggests?

Your Answer: Choic

e Selecte

d Correc

t

Yes

No

Feedback: No, the changes should not be made.


Requirement 6: Refer to the original data. Assume again that the company sold 18,000 units last year. The president does not want to change the selling price. Instead, he wants to increase the sales commission by $1 per unit. He thinks that this move, combined with some increase in advertising, would increase annual sales by 25%. By how much could advertising be increased with profits remaining unchanged? (Do not prepare an income statement; use the incremental analysis approach. Omit the "$" sign in your response.)

The amount by which advertising can be increased $ 50000 (0%)

Requirement 6: Refer to the original data. Assume again that the company sold 18,000 units last year. The president does not want to change the selling price. Instead, he wants to increase the sales commission by $1 per unit. He thinks that this move, combined with some increase in advertising, would increase annual sales by 25%. By how much could advertising be increased with profits remaining unchanged? (Do not prepare an income statement; use the incremental analysis approach. Omit the "$" sign in your response.)

The amount by which advertising can be increased $ 31,500


Expected total contribution margin:

18,000 units × 1.25 × $11 per unit* $ 247,500 Present total contribution margin:

18,000 units × $12 per unit 216,000 Incremental contribution margin, and the amount by which

advertising can be increased with net operating income $ 31,500

remaining unchanged

*$20 – ($8 + $1) = $11

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