6.14: Chapter 5- Exercises
- Page ID
- 65718
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Short-Answer Questions, Exercises, and Problems
| Volume (number of tests) | Total cost |
| 4,800 | $6,000 |
| 19,200 | 9,600 |
Exercise C Compute the break-even point in sales dollars if fixed costs are $200,000 and the total contribution margin is 20% of revenue.
Exercise D Barney Company makes and sells stuffed animals. One product, Michael Bears, sells for $28 per bear. Michael Bears have fixed costs of $100,000 per month and a variable cost of $12 per bear. How many Michael Bears must be produced and sold each month to break even?
Exercise E Peter Garcia Meza is considering buying a company if it will break even or earn net income on revenues of $80,000 per month. The company that Peter is considering sells each unit it produces for $5. Use the following cost data to compute the variable cost per unit and the fixed cost for the period. Calculate the break-even point in sales dollars. Should Peter buy this company?
| Volume (units) | Cost |
| 8,000 | $70,000 |
| 68,000 | 190,000 |
Exercise F Never Late Delivery currently delivers packages for $9 each. The variable cost is $3 per package, and fixed costs are $60,000 per month. Compute the break-even point in both sales dollars and units under each of the following independent assumptions. Comment on why the break-even points are different.
- Exercise G Best Eastern Motel is a regional motel chain. Its rooms rent for $100 per night, on average. The variable cost is $40 a room per night. Fixed costs are $5,000,000 per year. The company currently rents 200,000 units per year, with each unit defined as one room for one night. Should this company undertake an advertising campaign resulting in a $500,000 increase in fixed costs per year, no change in variable cost per unit, and a 10% increase in revenue (resulting from an increase in the number of rooms rented)? What is the margin of safety before and after the campaign?
Exercise H Fall-For-Fun Company sells three products. Last year’s sales were $600,000 for parachutes, $800,000 for hang gliders, and $200,000 for bungee jumping harnesses. Variable costs were: parachutes, $400,000; hang gliders, $700,000; and bungee jumping harnesses, $100,000. Fixed costs were $240,000. Find (a) the break-even point in sales dollars and (b) the margin of safety.
Problems
Problem A Assume the local franchise of Togorio Sandwich Company assigns you the task of estimating total maintenance cost on its delivery vehicles. This cost is a mixed cost. You receive the following data from past months:
Month Units Costs March 8,000 $14,000 April 10,000 14,960 May 9,000 15,200 June 11,000 15,920 July 10,000 15,920 August 13,000 16,880 September 14,000 18,080 October 18,000 19,280 November 20,000 21,200 - Problem B
- Problem C The management of Bootleg Company wants to know the break-even point for its new line hiking boots under each of the following independent assumptions. The selling price is $50 pair of boots unless otherwise stated. (Each pair of boots is one unit.)
- Compute the break-even point in units and sales dollars for each of the four independent case.
Problem D Refer to the previous problem. Bootleg Company’s sales are $1,100,000. Determine the margin (safety in dollars for cases (a) through (d).
Problem F Bikes Unlimited, Inc., sells three types of bicycles. It has fixed costs of $258,000 per month. The sales and variable costs of these products for April follow:
Bikes Racing Mountain Touring Sales $1,00,000 $1,500,000 $2,500,000 Variable costs 700,000 900,000 1,250,000 Compute the break-even point in sales dollars.
Problem G a. Assume that fixed costs of Celtics Company are $180,000 per year, variable cost is $12 per unit, and selling price is $30 per unit. Determine the break-even point in sales dollars.
- Answer each of the preceding questions.
Problem H After graduating from college, M. J. Orth started a company that produced cookbooks. After three years, Orth decided to analyze how well the company was doing. He discovered the company has fixed costs of $1,200,000 per year, variable cost of $14.40 per cookbook (on average), and a selling price of $26.90 per cookbook (on average).
Problem I The operating results for two companies follow:
Sierra Olympias Sales (20,000) units $1,920,000 $1,920,000 Variable costs 480,000 1,056,000 Contribution margin 1,440,000 864,000 Fixed costs 960,000 384,00 Net income 480,000 480,000 - Problem J Soundoff, Inc., a leading manufacturer of electronic equipment, decided to analyze the profitability of its new portable compact disc (CD) players. On the CD player line, the company incurred $2,520,000 of fixed costs per month while selling 20,000 units at $600 each. Variable cost was $240 per unit.
Recently, a new machine used in the production of CD players has become available; it is more efficient than the machine currently being used. The new machine would reduce the company’s variable costs by 20%, and leasing it would increase fixed costs by $96,000 per year.
- Problem K Surething CD Company reports sales of $720,000, variable costs of $432,000, and fixed costs of $108,000. If the company spends $72,000 on a sales promotion campaign, it estimates that sales will be increased by $270,000.
Determine whether the sales promotion campaign should be undertaken. Provide calculations.
Alternate problem A Hear Right Company has identified certain variable and fixed costs in its production of hearing aids. Management wants you to divide one of its mixed costs into its fixed and variable portions. Here are the data for this cost:
Month Units Costs January 20,800 $57,600 February 20,000 54,000 March 22,000 58,500 April 25,600 57,600 May 28,400 58,500 June 30,000 62,100 July 32,800 63,900 August 35,600 68,400 September 37,600 72,000 October 40,000 77,400 - Alternate problem B
- Alternate problem C Jefferson Company has a plant capacity of 100,000 units, at which level variable costs are $720,000. Fixed costs are expected to be $432,000. Each unit of product sells for $12.
- Alternate problem D a. Determine the break-even point in sales dollars and units for Cowboys Company that has fixed costs of $63,000, variable cost of $24.50 per unit, and a selling price of $35.00 per unit.
- Answer each of the preceding questions.
Alternate problem E See Right Company makes contact lenses. The company has a plant capacity of 200,000 units. Variable costs are $4,000,000 at 100% capacity. Fixed costs are $2,000,000 per year, but this is true only between 50,000 and 200,000 units.
- Alternate problem F Mr Feelds Cookies has fixed costs of $360,000 per year. It sells three types of cookies. The cost and revenue data for these products follow:
Cookies Cream cake Goo fill Sweet tooth Sales $64,000 $95,0000 $131,000 Variable costs 38,400 55,100 66,000 Beyond the numbers—Critical thinking
Business decision case A Quality Furniture Company is operating at almost 100% of capacity. The company expects sales to increase by 25% in 2011. To satisfy the demand for its product, the company is considering two alternatives: The first alternative would increase fixed costs by 15% but not affect variable costs. The second alternative would not affect fixed costs but increase variable costs to 60% of the selling price of the company’s product.
This is Quality Furniture Company’s condensed income statement for 2010:
Sales $3,600,000 Costs: Variable $1,620,000 Fixed 330,000 1,950,000 Income before taxes $1,650,000 - Business decision case B When the Weidkamp Company’s plant is completely idle, fixed costs amount to $720,000. When the plant operates at levels of 50% of capacity or less, its fixed costs are $840,000; at levels more than 50% of capacity, its fixed costs are $1,200,000. The company’s variable costs at full capacity (100,000 units) amount to $1,800,000.
- Business decision case C Monroe Company has recently been awarded a contract to sell 25,000 units of its product to the federal government. Monroe manufactures the components of the product rather than purchasing them. When the news of the contract was released to the public, President Mary Monroe, received a call from the president of the McLean Corporation, Carl Cahn. Cahn offered to sell Monroe 25,000 units of a needed component, Part J, for $15.00 each. After receiving the offer, Monroe calls you into her office and asks you to recommend whether to accept or reject Cahn’s offer.
You go to the company’s records and obtain the following information concerning the production of Part J.
level (200,000 units)
Direct labor $1,248,000 Direct materials 576,000 Manufacturing overhead 600,000 Total cost $2,424,000 You calculate the unit cost of Part J to be $12.12 or ($2,424,000/200,000). But you suspect that this unit cost may not hold true at all production levels. To find out, you consult the production manager. She tells you that to meet the increased production needs, equipment would have to be rented and the production workers would work some overtime. She estimates the machine rental to be $60,000 and the total overtime premiums to be $108,000. She provides you with the following information:
Costs at current production
level (225,000 units)
Direct labor $1,404,000 Direct materials 648,000 Manufacturing overhead
(including equipmental rental and overtime premiums)
828,000 Total cost $2,880,000 The production manager advises you to reject Cahn’s offer, since the unit cost of Part J would be only $12.80 or ($2,880,000/225,000 units) with the additional costs of equipment rental and overtime premiums. This amount still is less than the $15.00 that Cahn would charge. Undecided, you return to your office to consider the matter further.
- Business decision case D Refer to the “A broader perspective: Major television networks are finding it harder to break even” discussion of cost-volume-profit analysis for television networks. Write a memo to your instructor describing how the networks can reduce their break-even points.
Group project E In teams of two or three students, develop a cost-volume-profit equation for a new business that you might start. Examples of such businesses are a portable espresso bar, a pizza stand, a campus movie theater, a package delivery service, a campus-to-airport limousine service, and a T-shirt printing business.
Group project F Refer to “A broader perspective: Even colleges use CVP” discussion of how cost-volume-profit analysis is used by colleges. In teams of two or three students, write a memo to your instructor defining step costs and explain why the step costs identified in the case are classified as such. Also include in your memo how the school might lower its break-even point.
Group project G In teams of two or three students, address the following questions:
- Write a memo to your instructor that addresses both questions. Be sure to explain your answers.
Using the Internet—A view of the real world
Go to the company’s most recent financial statements and review the consolidated statement of income. What additional information, if any, would you need to perform cost-volume-profit analysis? Why is this information excluded from Intel’s income statement?
Visit the website for Wal-Mart Corporation, a retail company.
Go to the company’s most recent financial statements and review the statement of income. What additional information, if any, would you need to perform cost-volume-profit analysis? Why is this information excluded from Wal-Mart Corporation’s income statement?
- Write a memo to your instructor that addresses both questions. Be sure to explain your answers.
- Business decision case D Refer to the “A broader perspective: Major television networks are finding it harder to break even” discussion of cost-volume-profit analysis for television networks. Write a memo to your instructor describing how the networks can reduce their break-even points.
- Business decision case C Monroe Company has recently been awarded a contract to sell 25,000 units of its product to the federal government. Monroe manufactures the components of the product rather than purchasing them. When the news of the contract was released to the public, President Mary Monroe, received a call from the president of the McLean Corporation, Carl Cahn. Cahn offered to sell Monroe 25,000 units of a needed component, Part J, for $15.00 each. After receiving the offer, Monroe calls you into her office and asks you to recommend whether to accept or reject Cahn’s offer.
- Business decision case B When the Weidkamp Company’s plant is completely idle, fixed costs amount to $720,000. When the plant operates at levels of 50% of capacity or less, its fixed costs are $840,000; at levels more than 50% of capacity, its fixed costs are $1,200,000. The company’s variable costs at full capacity (100,000 units) amount to $1,800,000.
- Alternate problem F Mr Feelds Cookies has fixed costs of $360,000 per year. It sells three types of cookies. The cost and revenue data for these products follow:
- Answer each of the preceding questions.
- Alternate problem D a. Determine the break-even point in sales dollars and units for Cowboys Company that has fixed costs of $63,000, variable cost of $24.50 per unit, and a selling price of $35.00 per unit.
- Alternate problem C Jefferson Company has a plant capacity of 100,000 units, at which level variable costs are $720,000. Fixed costs are expected to be $432,000. Each unit of product sells for $12.
- Alternate problem B
- Problem K Surething CD Company reports sales of $720,000, variable costs of $432,000, and fixed costs of $108,000. If the company spends $72,000 on a sales promotion campaign, it estimates that sales will be increased by $270,000.
- Problem J Soundoff, Inc., a leading manufacturer of electronic equipment, decided to analyze the profitability of its new portable compact disc (CD) players. On the CD player line, the company incurred $2,520,000 of fixed costs per month while selling 20,000 units at $600 each. Variable cost was $240 per unit.
- Answer each of the preceding questions.
- Compute the break-even point in units and sales dollars for each of the four independent case.
- Problem C The management of Bootleg Company wants to know the break-even point for its new line hiking boots under each of the following independent assumptions. The selling price is $50 pair of boots unless otherwise stated. (Each pair of boots is one unit.)
- Problem B
level (225,000 units)Direct labor$1,404,000Direct materials648,000
Manufacturing overhead
(including equipmental rental and overtime premiums)
828,000Total cost$2,880,000
The production manager advises you to reject Cahn’s offer, since the unit cost of Part J would be only $12.80 or ($2,880,000/225,000 units) with the additional costs of equipment rental and overtime premiums. This amount still is less than the $15.00 that Cahn would charge. Undecided, you return to your office to consider the matter further.
- Using the high-low method, compute the variable cost portion of manufacturing overhead. (Remember that the costs of equipment rental and overtime premiums are included in manufacturing overhead. Subtract these amounts before performing the calculation).
- Compute the total costs to manufacture the additional units of Part J. (Note: include overtime premiums as a part of direct labor.)
- Compute the unit cost to manufacture the additional units of Part J.
- Write a report recommending that Monroe accept or reject Cahn’s offer.
Contributors and Attributions
- Accounting Principles: A Business Perspective. Authored by: James Don Edwards, University of Georgia & Roger H. Hermanson, Georgia State University. Provided by: Endeavour International Corporation. Project: The Global Text Project. License: CC BY: Attribution