272 6 Cost-Volume-Profit Analysis: Additional Issues | Using the contribution margin technique, compute the break-even point in units and dollars | and margin of safety in dollars: | (a) Assuming no changes to selling price or costs, and (b) Assuming changes to sales price and volume as described above. Comment on your findings. Compute sales mix, weighted- CENTE €-3 Snow Cap Springs produces and sells water filtration systems for homeowners. ‘average contribution mergin, (Information regarding its three models is shown below. ‘and brakeven pointe 103), a» Basle Basie Pius = Preauicae : Teal Units sold 750 450 300 1,500 Selling price $250 $400 $800, Variable costs $195 $288 $416 (a) Determine the sales mix as a finction of units sold fer the three products. (b) Determine the weighted average unit conteibution margin. (6) Determine the total number of units that the company mast produce to break even, | ‘The company's total fixed costs to produce the filtration systems are $165,480, | (4) Determine the number of units of each model that the company must produce to break even. | Deterine selects with EXMTBN o-4 Eye Spy Corporation manufactures oud ella thcon different pes of Eitoes: | tinted resources lars. They are referred to as Good, Better, and Best binoculars. Grinding and polishing | dos, ae time is limited. More time is required to grind and polish the lenses usad in the Better and Best binoculars. Additional information is provided below. Product Good Better _Best Selling price $90.00 $330.00 $900.00, Variable costs and expenses 50.00 180.00 480.00 Contribution margin ‘$40.00 $150.00, $420.00 Grinding and polishing time required OS hrs 1.5 bre 6 hrs (a) Ignoring the time constraint, what strategy would appear to be optimal? (6) What isthe contribution margin per unttof limited resource for each ype ofbinccular? (6) additional grinding and polishing time could be obtained, how should the additional capacity be used? Compute break-eves point EGA The Bonita Inn is trying to determine iis break-even point. The inn has 75 rooms cared margin of fey. that are rented at $60 a night. Operating costs are as fellows. (oa Salaries $8800 per month ‘ Utilities 2,400 per month ce & Depreciation 1,500 per month E= ] Maintenance ‘800 per month Maid service 8 per room Other costs 3 per room Instructions (a) Determine the inn’s break-even point in (1) number of rented rooms per month and ©) dollars (b) Ifthe 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?E62 In the month of June, Jose Hebert's Beauty Salon eave 4,000 haircuts, shampoos, ‘and permanents at an average price of $30. Daring the month, fixed costs were $16,800 and variable costs were 75% of sales, Instructions (a) Determine the contribution margin in dollars, per unit and as a ratio. (b) Using the contribution margin technique, compute the break even point in dollars and (©) Compute the margin of safety in dollars and as a ratio. 6-3 Norton Company reports the following operating results for the month of August: sales $310,000 (units $,000); variable costs $210,000: and fixed costs $75,000. Manage ‘ment is considering the following independent courses of action to increase net income. 1, Increase selling price by 10° with no change in total variable costs or sales volume. 2. Reduce variable costs to 58% of sales. 3. Reduce fixed costs by $20,000. Instructions Compute the net income to be earned undler each alternative. Which course of action willl produce the highest net income? 6-4 Comfi Airways, Inc, 2 small two-plane passenger airline, has asked for your assis tance in some basic analysis ofits operations. Both planes seat 10 passengers cach, ond they fly commuters from Comfis base airport 10 the major clty inthe state, Metropolis. Each month, 40 round-trip flights are made, Shown below is recent month’s activity in the form of ¢ cos-volume-proit income statement. Fare revenues (400 fares) $48,000 Variable costs Fad $14,000 Snacks and drinks 800 Landing fees 2,000 Supplies and forms 1200 _18,000 Contribution margin 30,000 Fixed costs Depreciation 3,000 Salaries 15,000 Advertising 500 Airport hangar fees 1.750 _20,250 Net income $9,750 Instructions (a) Calculate the breakeven point in (1) dollars and (2) number of fares. (b) Without calculations, determine the contribution margin at the break-even point. () If fares were decreased by 10%, an additional 100 fares could be generated. However, total variable costs would increase by 20%, Should the fare decrease be adopted? 6-5 Hall Company had sales in 2014 of $1,560,000 on 60,000 units. Variable costs totaled $720,000, and fixed costs totaled $500,000, ‘A now raw material is available that will decrease the variable costs per unit by 259% (or $3.00). However, to process the new raw material, fixed operating costs will increase by $150,000, Management feels that one-half of the decline in the variable costs per unit should be passed on to customers in the form of a sales price reduction. The marketing department expects that this sales price reduction will result in a 5% increase in the nuin~ ber of units sold. Instructions Prepare a projected CVP income statement for 2014 (a) assuming the changes have not been made, and (b) assuming that changes are made as described. Exercises 273 Compute conorbusion margé, break-even point, and margin of safety. (to, aP f Compute net income under diferent altemtives uae xs] Compute break-even point ‘and prepare CVP income (02, 1 e th Prepare a CVP income stareruen before and “after changes tx business environment. (02,00274 6 Cost-Volume-Profit Analysis: Additional Issues Compute breakeven pein imuunies fr a company wih ‘more than one product. (0.3), a Compute service line break. ‘even point and target net ‘come in dollars fora company with more hare 103), aN Compute break-even point in dollars fora company with more than one service 03), a Compute break-even point in urats fora company with rutiple products. 003, 0 6-6 Yard Tools manufactures lawnmowers, weed trimmers, and chainsaws. Its sales mix and contribution margin per unit are as follows, Contribution Sales Mix Margin per Unit Lawnmowers: 20% $30 Weed-trimmers 309% $20 Chainsaws: 30% $40, Yard Tools has fixed costs of $4,200,000. Instructions Compute the number of units of each product that Yard Tools must sell in order to breale ‘even under this product mix. 6-7. Quik Repairs has over 200 auto-maintenance service outlets nationwide. It provides primarily two lines of service: oil changes and brake repair. Oil change-related services represent 70% of lis sales and provide a contribution margin ratio of 20%. Brake repair represents 30% of its sales and provides a 60% contribution margin ratio, The company’s fixed costs are $16,000,000 (that is, $80,000 per service outlet). Instructions (a) Calculate the dollaramount of each type of service that the company must provide in order to break even. (b) The company has desired net income of $60,000 per service outlet, What Is the dollar amount of each type of service that must be provided by each service outlet to meet its target net income per outlet? E6-8 Express Delivery is a rapidly growing delivery service. Last year. 80% of its reve- nue came from the delivery of mailing “pouches” and small, standardized delivery boxes (which provides a 20% contribution margin). The othe: 20% of its revenue came from dativering non-standarcized boxes (which provides 2 70% contribution margin). Wit 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 af $12,000,000. Instructions (a) Whar is the company’s break even point in total sales dollars? At the break even point, iow much of the company’s sales are provided by each type of service? (b) The company’s management would like to hold its Gxed costs constant but shift its sales mix so that 60% 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? 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, Pairsof Pairsof —-Range- Shoes Cloves Unit sales price $100 $30 Unit variable costs 60 10 Unit contribution margin $40 $20 Salee mie 30% 50% Fixed costs are $630,000, Instructions (a) Compute the break-even point in units for the company. (b) Determine the number of units to be sold at the break-even point for each product line. (c) Verity that the mix of sales units determined in (b) will generate a zero net income.6-10 Personal Electronix sells iPads and iPods. The business ie divided into two divisions along product lines. CVP income statements for a recent quarter’s activity are presented below. iPad Division Pod Division Total Sales ‘$600,000 ‘$400,000 $1,000,000 Variable costs 420,000 260,000 ‘680,000 Coniribution margin $180,000 $140,000 320,000 Fixed costs Net income Instructions (2) Determine sales mix percentage and contribution margin ratio for each division. (b) Calculate the company’s weighted average contribution margin ratio. (c) Caleulate the company’s break-even point in dollars. (@) Determine the sales level in dollars for each division at the breakeven point. 6-11 Spencer Company manulactures and sells three products. Relevant per unit data concerning each product are given below: Product “ s. Selling price 88 81285 Variable costs and expenses $3 $10. $12 Machine hours to produce 2 1 2 Instructions (a) Compute the contribution margin per unit of the limited resource (machine hours) for each product, (b) Assuming 1,500 additional machine hours are available, which product should be manufactured? (c) Prepare on analysis showing the total contribution margin If the additional hours are (1) divided equally among the products, and (2) allocated entirely to the product iden- tified in (>) above, 6-42 Dalton Inc. produces and sells three products, Unit date concerning each product is shown below. Product DO Be selling price 20 00 S50 Direct hbor costs 30 as Othervariablecoste = 9884S The company has 2,000 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 $10. Instructions (a) Determine the number of direct labor hours per unit, (b) Determine the contribution margin per direct labor hour, (©) Determine which product should be produced and the total contribution margin for that product, 6-13 Billings Company manufactures and sells two products. Relevant per unit data concerning each product follow. Product Basic Deluxe Selling price $40 $52 Variable costs 320 $22 Machine hours 5 ‘8 Exercises 275 Determine break-even point in dolas for two divisions, 03), 47 Compute contribution margin cand determine the product 0 be manufactured, (04, aw ‘Compute contribution margin and determine the produets to be manufactured (104), a0 Compute contribution margin ‘and determine the products 10 be manufacuured, 00,4N276 6 Cost-Volume-Profit Analysis: Additional Issues Compute degree of operating leverage and evaluate impact of altemative cow structures Instructions @) Compute the contribution margin per machine hour for each product, (6) 1f1,000additional machine hours are available, which product should Billings manu- faciure? (©) Frepare an analysis showing the total contribution margin ifthe additional hours are: (1) Divided equally between the products @) Allocated emtirely o the product identified in par: (6), 6-14 The CVP income statements shown below are available for Armstrong Company and Contador Company. Armstrong Co. Contador Co, (09), aH Sales $500,000 $500,000 Variable costs 50,000 Contribution margin 450,000 Fixed costs 350,000 Net income $100,000 ‘$100,000, Instructions Compute degree of operating leverage and evaluate impact of alternative cost structures fon net income and margin of safe, (L0 5), aN Compute degree of operating leverage and impact on ne! income of ctemativecost (05), an (2) Compate the degree of operating leverage for each company and interpret your results. (b) Assuming that sales revenue increases by 10%, prepare a variable costing income statement for each company. (© Discuss how the cost structure of these 1wo companies affects their operating lever age and profitability. 6-48 Arquitecton Interiores of Juarez, Mexico, 1s contemplating a major change in its cost structure. Currently all ofits drafting works performed by skilled draftemen. Alfonso iminez, Arquitestos’ owner, is considering replacing the drafismen with a computerized drafting system. However, before making the change, Alfonso would lik to know the con sequences of the change, since the volume of business varies significantly from year to ‘year. Shown below are CVP income statements for each alternative. Manual Computerized System __Systom Sales $31,500,000 1,500,000) ‘Variable costs “1,200,000 ‘600,000 Contribution margin 300,000 900,000 Fixed costs 000 650,000 Net income $250,000 $250,000 Instructions (a) Determine the degree of operating leverage for each alternative, (b) Which alternative would produce the higher net income if sales increased by $150,000? {c) Using the margin of safety ratio, determine which alternative could sustain the greater decline in sales before operating at a loss 6-16 An investment banker is analyzing two companies that specialize in the produc- tion and sale of candied yams. Traditional Yams uses a labor-intensive approach, and Auto-Yame ses a mechanized system. CVP income statements for the wo companies are shown below. Sales Variable costs Con:ribution margin Fixed costs Net income The investment banker is interested in acquiring one of these companies, However, she 4s concerned about the impact that each company's cost structure might have on its profitability