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Apr 16, 2019

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Cost management exercises

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Cost management exercises

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Given:

McCarthy Men's Clothing's revenues and cost data for 2014 are as

follows:

Revenues $500,000

Cost of Goods Sold (50% of Sales) 0.50 250,000

Gross Margin $250,000 50%

Operating Costs:

Salaries (fixed) $160,000

Sales Commission (11% of Sales) 55,000

Depreciation of Equipment and Fixtures 15,000

Store Rent ($4,000 per month) 48,000

Other Operating Costs 40,000 318,000

Operating Income (Loss) ($68,000)

Mr. McCarthy, the owner of the store, is unhappy with the operating results.

An analysis of "Other Operating Costs" reveals that it includes $35,000 of

variable costs, which vary with sales volume, and $5,000 of fixed costs.

Sales $500,000

Less: Variable Costs

Cost of Goods Sold 0.500 $250,000

Sales Commissions 0.110 55,000

Other Operating Costs 0.070 35,000 340,000 0.680

Total Contribution Margin 0.320 $160,000 0.320

% of Sales $160,000

2. Compute the C/M %.

Sales Revenue $500,000

advertising costs of $12,000. Calculate the impact of the additional advertising

costs on operating income.

Short Way:

Sales increase $100,000

Contribution margin ratio 0.32

Positive change in contribution margin $32,000

Less: increase in fixed advertising cost (12,000)

Positive change in operating income $20,000

Long Way:

Sales $600,000

Cost of Goods Sold 300,000 $300,000

Gross Margin $300,000

Operating Costs

Salaries (fixed) $160,000

Sales Commissions 66,000 66,000

Depreciation 15,000

Store Rent 48,000

Other Operating Costs

Fixed Portion 5,000

Variable Portion 42,000 42,000

Advertising 12,000

Total Operating Costs $348,000

New Operating Income ($48,000)

Less: Old Operating Income (68,000)

Positive change in operating income $20,000

4. What other actions can Mr. McCarthy take to improve operating income?

To improve operating income, Mr. McCarthy must find ways to decrease variable

costs, decrease fixed costs, or increase selling prices.

Problem 3-24: CVP analysis, margin of safety

Given data: Suppose Lattin Corp.'s breakeven point is revenues of $1,500,000. Fixed

costs are $720,000.

Breakeven dollars $1,500,000

At breakeven: Let X = CM % (720,000) TFC

Sales = TVC + TFC $1,500,000 = $720,000 / X $780,000 TVC

Sales - TVC = TFC Multiply both sides of the equation by X $720,000 TCM

TCM = TFC $1,500,000 X = $720,000 48% CM %

(Sales)(CM%) = TFC X = $720,000 / $1,500,000 52% VC %

BE Sales = TFC/CM% X= 48% 100% CM% +VC%

2. Compute the selling price if variable costs are $13 per unit.

CM % = 48%

Therefore, VC % = 52%

VC% = TVC/Sales = [(VC/Unit) X (Units)] / [SP X Units] = (VC/Unit) / SP

.52 = $13 / SP

.52(SP) = $13 Alt. Solution 60,000 BE Units

SP = $13 / .52 = $25.00 $25

3. Suppose 90,000 units are sold. Compute the margin of safety in units and dollars (M/S).

BE $ = $1,500,000

BE units = $1,500,000 / $25

BE units = 60,000

MS = 90,000-60,000 = 30,000 margin of safety in units

X $25 selling price

$750,000 margin of safety in sales $

33.333% margin of safety as a %

33.333% margin of safety as a %

4. What does this tell you about the risk of Lattin operating at a loss? What are the most likely

reasons for this risk to increase?

The risk of operating at a loss is low. Sales would need to decrease by 30,000 units (M/S) before

Lattin Corp. will operate at a loss.

1. Increase in competition,

2. Weakness in the economy,

3. Bad management

Problem 3-25: Operating leverage.

Jean's Club, a local warehouse store. Carmel Rugs plans to sell carpets

for $1,000 each. The company will purchase the carpets from a local

distributor for $400 each, with the priviledge of returning any unsold units

for a full refund. Jean's Club has offered Carmel Rugs two payment

alternatives for the use of space.

Option 2: Floor space charge -- 20% of revenues ?

Selling price expected per carpet = $1,000

Variable cost per carpet = $400

(SP)(Units) = (VC/Unit)(Units) + $17,400 + 0

$1,000(X) - $400(X) = $17,400

$600(X) = $17,400

X = $17,400/$600 = 29.00 29

(SP)(Units) = (VC/Unit)(Units) + $0 + $0

(SP)(Units) = (VC/Unit)(Units)

$1,000(X) = $400(X) + (.20)($1,000)(X)

$1,000(X) = $400(X) + $200(X)

$1,000(X) = $600(X)

$1,000(X) - $600(X) = $0

$400(X) = $0

X=0

operating income under either option?

(Point of Indifference)

Sales(1) = TVC(1) + TFC(1) + P(1)

Sales(2) = TVC(2) + TFC(2) + P(2)

Option 1: $1,000(X) - $400(X) - $17,400 = P(1) = P

$600(X) - $17,400 = P

$400(X) = P

are equal to each other.

Therefore,

$600(X) - $17,400 = $400(X)

$200(X) = $17,400

X = $17,400/$200

X = 87 87 Carpets

Sales = 87 X $1,000 = $87,000 Sales Dollars

Option 1? Option 2?

Proof

Option 1 Option 2

Range Preferred Units Units

From To Option 1 or 200 1 or 200

0 87 2 ($16,800) $400 1 unit falls in range of 0-87

87 87+ 1 $102,600 $80,000 200 units fall in range of more than 87 units

87 units for each option.

Option 1 Option 2

Units Units

87 87

Contribution Margin $52,200 $34,800

Operating Income $34,800 $34,800

Operating Leverage 1.50 1.00

managers calculate the effect of fluctuations in sales on operating

income.

Number in Sales Leverage in OI

1 10% 1.50 15%

2 10% 1.00 10%

ge of more than 87 units

Problem 3-22: CVP analysis, income taxes.

Given: The Swift Meal has two restaurants that are open 24-hours a day.

Fixed costs for the two restaurants together total $456,000 per year.

Service varies from a cup of coffee to full meals. The average sales check

per customer is $9.50. The average cost of food and other variable costs for

each customer is $3.80. The income tax rate is 30%. Target NI is $159,600.

Average variable cost $3.80

Average sales check $9.50

Income tax rate 30%

Target net income $159,600

Since:

Target Sales - Target Variable Costs - Target Fixed Costs -Target Taxes = Target NI

And:

Target NI = Target OI - Target Taxes

Then:

Target Sales - Target Variable Costs - Target Fixed Costs -Target Taxes = Target OI - Target Taxes

Since both sides of the equal sign include "-Target Taxes", then we arrive at our basic BE equation of

Target Sales - Target Variable Costs - Target Fixed Costs = Target OI

Combining terms yields:

Target CM - Target Fixed Costs = Target OI

Target CM - $456,000 = Target OI

Target Taxes = Target Tax Rate X Target OI

Target Taxes = (.3) X Target OI = (.3)Target OI

$159,600 = Target OI - (.3) Target OI

$159,600 = (.7) Target OI

Target OI = $159,600 / .7 = $228,000

Target CM - $456,000 = $228,000

Target CM = $456,000 + $228,000

Target CM = $684,000 $684,000

$684,000 = CM% X Target Sales

Calculate CM%:

VC % = VC/Unit / SP/Unit

VC % = $3.80 / $9.50 = 40%

CM% = 1 - VC% = 1 - .4 = 60% 60%

$684,000 = CM% X Target Sales

$684,000 = (.60) X Target Sales

$684,000/.60 = Target sales = $1,140,000

Shorter Way

Target Sales - Target Variable Costs - Target Fixed Costs -Target Taxes = Target NI

$9.5X - $3.8X - $456,000 - Target Taxes = $159,600

$9.5X - $3.8X - $456,000 - (.3)(Target NOI) = $159,600

$159,600 = Target NOI - .3(Target NOI)

$159,600 = .7(Target NOI)

Target NOI = $159,600 / .7 = $228,000

Then

$9.5X - $3.8 X - $456,000 - (.3)(Target NOI) = $159,600

$9.5X - $3.8 X - $456,000 - (.3)($228,000) = $159,600

$9.5X - $3.8 X - $456,000 - $68,400 = $159,600

$5.70X - $456,000 - $68,400 = $159,600

$5.70X - $524,400 = $159,600

$5.70X = $159,600 + $524,400 = $684,000

$5.70X = $159,600 + $524,400 = $684,000

X = $684,000/$5.70 = 120,000 sales units

Selling price per unit $9.50

Sales Revenue $1,140,000

Let X = BE units

Sales - TVC - TFC = 0

$9.5(X) - $3.80(X) - $456,000 = 0

$5.7(X) = $456,000

X = $456,000 / $5.7 = 80,000 customers needed to BE

From Q1 above: Target Sales = $1,140,000

Target Sales Revenue / SP = Units

Target Sales Revenue / SP = $1,140,000 / $9.5 = 120,000

Proof 120,000

Proof 120,000

Less fixed costs (456,000)

Operating Income $370,500

Less taxes at 30% (111,150)

Net Income $259,350

Proof $259,350

OI - Target Taxes

basic BE equation of

Problem 3-36 (CMA adapted)

Given data:

J. T. Brooks, a manufacturer of quality handmade walnut bowls, has

had a steady growth in sales for the past five years. However, increased

competition has led Mr. Brooks, the president, to believe that an aggressive

marketing campaign will be necessary next year to maintain the company's

present growth. To prepare for next year's marketing campaign, the

company's controller has prepared and presented Mr. Brooks with the

following data for the current year, 2014:

Direct materials $3.00

Direct Manufacturing labor 8.00

Variable overhead (manufacturing, marketing, distribution,

and customer services) 7.50

Total variable cost per bowl $18.50

Fixed costs

Manufacturing $20,000

Marketing, distribution, and customer service 194,500

Total fixed costs $214,500

Expected sales

Units 22,000

Dollars $770,000

Income tax rate 40%

$770,000 - ($18.50)(22,000) - $214,500 = OI

$770,000 - $407,000 - $214,500 = OI

OI = $148,500 Before tax value

NI = OI - Taxes = $148,500 - (.4)($148,500)

NI = $148,500 - $59,400 = $89,100

Let X = BE units

Sales - TVC - TFC = 0

$35(X) - $18.50(X) - $214,500 = 0 16.50

$16.50(X) = $214,500

X = $214,500 / $16.50 = 13,000 units

3. Mr. Brooks has set the revenue target for 2015 at a level of $875,000

(or 25,000 bowls). He believes an additional marketing cost of

$16,500 for advertising in 2015, with all other costs remaining

constant, will be necessary to attain the revenue target. What is

the net income for 2015 if the additional $16,500 is spent and the

revenue target is met?

CM per bowl $16.50 Proof

Change in total CM $49,500 Sales $875,000

Change in fixed costs (16,500) Variable Costs 462,500

Change in operating income $33,000 Contribution $412,500 $412,500

Less change in income taxes (40%) 13,200 Fixed Costs 231,000

Change in NI $19,800 NOI $181,500

Old net income 89,100 Taxes (40%) 72,600

New net income $108,900 Net Income $108,900

is spent on advertising?

BE Dollars = ($214,500 + $16,500) / ($16.50/$35.00)

BE Dollars = $231,000 0.47142857 $490,000

Alternative solution: extra sales units needed to cover extra $16,500 of advertising

1,000 $490,000

5. If the additional $16,500 is spent, what are the required 2015 revenues

for 2015 net income to equal 2014 net income?

OI for 2014 (22,000 units) = $148,500 See #1 above

Sales - TVC -TFC = $148,500

(SP)(Units) - (VC/Unit)(Units) - ($214,500 + $16,500) = $148,500

$35X - $18.50X - $231,000 = $148,500

$16.50X = $148,500 + $231,000

X = $379,500/$16.50 = 23,000 units

Sales Dollars = ($35)(23,000) = $805,000

Alternative solution:

OI 2015 = OI 2014

Therefore the change in TCM must = the change in total advertising dollars of $16,500

Since CM per unit = $16.50, then ($16,500/$16.50) = 1,000 additional units must be sold.

Since 22,000 units were sold in 2014, then 22,000 + 1,000 = 23,000 units must be sold in 2015.

Therefore the required revenue for 2015 = 23,000 X $35 = $805,000

advertising if a 2015 net income of $108,450 is desired?

$108,450 = .6X

X = $108,450/.6

X= $180,750 Operating income

$35(25,000) = $18.50(25,000) + ($214,500 + X) + $180,750

$16.50(25,000) = ($214,500 + X) + $180,750

$412,500 = $395,250 + X

X= $17,250

Problem 3-42 (CMA adapted)

Given data:

Carlisle Engine Company manufactures and sells diesel engines for use in

small farming equipment. For its 2014 budget, Carlisle Engine Company

estimates the following:

Selling price expected per engine = $4,000

Variable cost per engine = $1,000

Annual fixed costs = $4,800,000

Estimated NI $1,200,000 $1,500,000 NOI

Income tax rate expected = 20%

The first quarter income statement, as of March 31, reported that sales were

not meeting expectations. During the first quarter, only 400 units had been

sold at the current price of $4,000. The income statement showed that

variable and fixed costs were as planned, which meant that the 2014 annual

net income projection would not be met unless management took action. A

management committee was formed and presented the following mutually

exclusive alternatives to the president:

significantly reduced price, 2,100 units can be sold during the

remainder of the year. Total fixed costs and variable costs per unit

will stay as budgeted.

materials. The SP will also be reduced by $400, and sales of 1,750

units are expected for the remainder of the year.

c. Reduce fixed costs by 10% and lower the selling price by 30%. Variable

cost per unit will be unchanged. Sales of 2,200 units are expected for

the remainder of the year.

the number of units that Carlisle Engine Company must sell (a) to break

even and (b) to achieve its net income objective.

$4,000(X) - $1,000(X) - $4,800,000 = 0

$3,000(X) = $4,800,000

X = $4,800,000/$3,000 =

X= 1,600

NI = IBT - (Tax Rate X IBT)

$1,200,000 = IBT - (.20)(IBT)

$1,200,000 = .80(IBT)

IBT = $1,200,000 / .80 = $1,500,000

Sales - TVC - TFC = $1,500,000

$4,000(X) - $1,000(X) - $4,800,000 = $1,500,000

$3,000(X) = $6,300,000

X = $6,300,000 / $3,000 = 2,100

2. Determine which alternative Carlise Engine should select to achieve the net

income objective.

TFC = 4,800,000

Unrecovered fixed costs ($3,600,000)

Alternative #a: Reduce the selling price by 15% to yield additional sales

of 2,100. $600 Change in selling price

Sales - TVC - TFC = IBT Sales - TVC - TFC = IBT

($4,000 - $600)(2,100) - $1,000(2,100) - $3,600,000 = IBT $4,000(400) + ($4,000 - $600)(

$3,400(2,100) - $1,000(2,100) - $3,600,000 = IBT $1,600,000 +$3,400(2,100

$2,400(2,100) - $3,600,000 = IBT $1,600,000 + $7,140,000 - $2,500,000 -

$5,040,000 - $3,600,000 = IBT $8,740,000 - $7,300,000 = IBT

IBT = $1,440,000 IBT =

NI = .80(IBT) $1,152,000 NI = .80(IBT)

Shortage ($48,000) Shortage

Net income objective of $1,200,000 is not achieved. Net income objective of $1,200,000 is not achieved

variable cost per unit by $300 to yield additional sales of 1,750.

Sales - TVC - TFC = IBT CM - TFC = IBT

($4,000-$400)(1,750) - ($1,000-$300)(1,750) - $3,600,000 = IBT $3,000(400) + [($4,000 - $400

$3,600(1,750) - $700(1,750) - $3,600,000 = IBT $1,200,000 + [$3,600(1,750

$2,900 (1,750) - $3,600,000 = IBT $1,200,000 + $2,900(1,750

$5,075,000 - $3,600,000 = IBT $1,200,000 +$5,075,000 -

IBT = $1,475,000 IBT =

NI = .80(IBT) $1,180,000 NI = .80(IBT)

Shortage ($20,000) Shortage

Net income objective of $1,200,000 is not achieved. Net income objective of $1,200,000 is not achieved

fixed cost by 10% to yield additional sales of 2,200.

Sales - TVC - TFC = IBT CM - TFC = IBT

$2,800(2,200) - $1,000(2,200) - ($3,600,000-(.10*$4,800,000)) = IBT $3,000(400) + $2,800(2,200)

$1,800(2,200) - ($3,600,000 - $480,000) = IBT $1,200,000 + $1,800(2,200

$3,960,000 - $3,120,000 = IBT $1,200,000 + $3,960,000 - $4,320,000 = IBT

IBT = $840,000 IBT =

NI = .80(IBT) $672,000 NI = .80(IBT)

Shortage ($528,000) Shortage

Net income objective of $1,200,000 is not achieved. Net income objective of $1,200,000 is not achieved

Selecting Alternative #b comes closest. Maybe it can be marginally modified

to make up the shortage of $20,000.

- TFC = IBT

+ ($4,000 - $600)(2,100) - $1,000(400+2,100) - $4,800,000 = IBT

+$3,400(2,100) - $1,000(400+2,100) - $4,800,000 = IBT

+ $7,140,000 - $2,500,000 - $4,800,000 = IBT

$7,300,000 = IBT

$1,440,000

$1,152,000

($48,000)

objective of $1,200,000 is not achieved.

+ [$3,600(1,750) - $700(1,750)] - $4,800,000 = IBT

+ $2,900(1,750) - $4,800,000 = IBT

+$5,075,000 - $4,800,000 = IBT

$1,475,000

$1,180,000

($20,000)

objective of $1,200,000 is not achieved.

+ $1,800(2,200) - ($4,800,000 - $480,000) = IBT

+ $3,960,000 - $4,320,000 = IBT

$840,000

$672,000

($528,000)

objective of $1,200,000 is not achieved.

Problem 3-44: Sales mix; three products

Given data:

The Ronowski Company has three product lines of belts - A, B, and C -

with contribution margins of $3, $2, and $1, respectively. The president

foresees sales of 200,000 units in the coming period, consisting of

20,000 units of A, 100,000 units of B, and 80,000 units of C. The

company's fixed costs for the period are $255,000.

Summary

Product CM/Unit Volume Mix TCM

A $3 20,000 10% $60,000

B $2 100,000 50% $200,000

C $1 80,000 40% $80,000

200,000 100% $340,000 $1.70

given sales mix is maintained?

At breakeven: P = 0 and therefore

TCM = TFC

$3(.1)(X) + $2(.5)(X) + $1(.4)(X) = $255,000

$.3X + $1X + $.4(X) = $255,000

$1.7(X) = $255,000

X = $255,000/$1.7 = 150,000 Total units

A 10% 150,000 15,000

B 50% 150,000 75,000

C 40% 150,000 60,000

100% 150,000

when 200,000 units are sold? What is operating income?

A 10% 200,000 20,000 $3 $60,000 $0.30

B 50% 200,000 100,000 $2 $200,000 $1.00

C 40% 200,000 80,000 $1 $80,000 $0.40

100% 200,000 $340,000 $1.70

$340,000 $1.70

Operating income = TCM - Fixed Costs

OI = $340,000 - $255,000 $85,000

OI = $85,000

of B, and 100,000 units of C were sold? What is the new BE point

in units if these relationships persist in the next period?

Mix Total Units Units CM/Unit TCM

A 10% 200,000 20,000 $3 $60,000

B 40% 200,000 80,000 $2 $160,000

C 50% 200,000 100,000 $1 $100,000

100% 200,000 $320,000 $1.60

$320,000

Operating income = TCM - Fixed Costs

OI = $320,000 - $255,000

OI = $65,000

At breakeven: P = 0 and therefore

TCM = TFC

$3(.1)(X) + $2(.4)(X) + $1(.5)(X) = $255,000

$.3X + $.8X + $.5(X) = $255,000

$1.6(X) = $255,000

X = $255,000/$1.6 = 159,375.00 Total units

A 10% 159,375 15,937.50 $3 $47,812.50

B 40% 159,375 63,750.00 $2 $127,500.00

C 50% 159,375 79,687.50 $1 $79,687.50

100% 159,375.00 $255,000.00

Answer Proof

Problem 3-32: Uncertainty and expected costs.

Given data:

Hillmart Corp., an international retail giant, is considering implementing a new business to business (B2B) information syste

processing purchase orders. The current system costs Hillmart $1,000,000 per month and $45 per order. Hillmart has two

a partially automated B2B and a fully automated B2B system. The partially automated B2B system will have a fixed cost o

per month and a variable cost of $35 per order. The fully automated B2B system has a fixed cost of $11,000,000

per order.

Monthly Variable Costs

Summary: Fixed Costs Per Order

Current system $1,000,000 $45

Partially automated B2B system $5,000,000 $35

Fully Automated B2B system $11,000,000 $20

Based on data from the last two years, Hillmart has determined the following distribution of monthly orders:

Monthly # Expected

of Orders Probability # of Orders

300,000 0.15 45,000

400,000 0.20 80,000

500,000 0.40 200,000

600,000 0.15 90,000

700,000 0.10 70,000

1.00 485,000

1. Prepare a table showing the cost of each plan for each quantity of monthly orders.

Current System: 300,000 400,000 500,000 600,000

Fixed amount $1,000,000 $1,000,000 $1,000,000 $1,000,000

Variable amount 13,500,000 18,000,000 22,500,000 27,000,000

Total anticipated cost $14,500,000 $19,000,000 $23,500,000 $28,000,000

Fixed amount $5,000,000 $5,000,000 $5,000,000 $5,000,000

Variable amount 10,500,000 14,000,000 17,500,000 21,000,000

Total anticipated cost $15,500,000 $19,000,000 $22,500,000 $26,000,000

Fixed amount $11,000,000 $11,000,000 $11,000,000 $11,000,000

Variable amount 6,000,000 8,000,000 10,000,000 12,000,000

Total anticipated cost $17,000,000 $19,000,000 $21,000,000 $23,000,000

Probability 0.15 0.20 0.40 0.15

Short Way Long Way

Current System: $22,825,000 $22,825,000

Fully Automated B2B System: $20,700,000 $20,700,000

3. In addition to the information systems costs, what other factors should Hillmart consider before deciding to implem

a new B2B system?

Hillmart should consider the impact of the different systems on its relationships with suppliers:

The interface with Hillmart's system may require that suppliers also update their systems. This could cause some suppl

the cost of their merchandise, or

It could force some suppliers to drop out of Hillmart's supply chain because the cost of the system change would be pro

Hillmart may also want to consider the reliability of the different systems.

Hillmart may also want to consider the effect on employee morale if employees have to be laid off as Hillmart

automates its systems.

siness (B2B) information system for

45 per order. Hillmart has two options,

ystem will have a fixed cost of $5,000,000

cost of $11,000,000 per month and $20

onthly orders:

Orders

700,000

$1,000,000

31,500,000

$32,500,000

700,000

$5,000,000

24,500,000

$29,500,000

700,000

$11,000,000

14,000,000

$25,000,000

0.10

er before deciding to implement

Problem 3-40: Alternate cost structures, uncertainty, and sensitivity analysis.

Given data:

Stylewise Printing Company currently leases its only copy machine for $1,000 a month. The

company is considering replacing this leasing agreement with a new contract that is entirely

commission based. Under the new agreement Stylewise would pay a commission for its printing

at a rate of $10 for every 500 pages printed. The company currently charges $0.15 per page to

its customers. The paper used in printing costs the company $.03 per page and other variable

costs, including hourly labor amounts to $.04 per page.

1. What is the company's breakeven point in units under the current leasing agreement?

What is it under the new commission based agreement?

Sales = TVC + TFC

$.15(X) = ($.03 + $.04)(X) + $1,000

$.08(X) = $1,000

X = $1,000/$.08 = 12,500 pages per month

New commission based agreement -- $10 per 500 pages, $10/500 = $.02 per page

Sales = TVC + TFC

$.15(X) = ($.03 + $.04 + $.02)(X) + $0

$.06(X) = $0

X = $0/$.06 = 0 pages per month

What if comission is a true step fixed cost of $10 per step?

TCM = TFC B/E in pages Range

.08X = $10 125 1 500

.08X = $20 250 501 1,000

.08X = $30 375 1001 1,500

.08X = $40 500 1501 2,000

BE depends on the number of copies.

Every step increase of $10 (500 copies) requires an additional 125 pages to break even.

Note: In this case BE units is essentially 125. Why?

(a) the current fixed lease agreement

(b) the new commission agreement

Lease agreement -- fixed cost of $1,000 per month

Sales -TVC - TFC = P1

$.15(X) - ($.03 + $.04)(X) - $1,000 = P1

$.08X - $1,000 = P1

Commission based agreement -- $10 per 500 pages, $10/500 = $.02 per page

Sales -TVC - TFC = P2

$.15(X) - ($.03 + $.04 + $.02)(X) - $0 = P2

$.15X - $.09X - $0 = P2

$.06X = P2

Lease agreement: $.08X - $1,000 = P

Commission agreement: $.06X - 0 =P

$.08X - $1,000 = $.06X - 0

$.02X -$1,000 = 0

$.02X = $1,000

X = $1,000/$.02 = 50,000 pages/month

and lease agreement above 50,000. Stylewise is indifferent at 50,000 units.

What if comission is a true step fixed cost of $10 for every 500 pages printed?

Outside Range Range of Indifference is 49,501 - 50,000

Units Sold 49,500 49,501 49,502 49,999 50,000

Steps required= 99 100 100 100 100

Maximum Units 49,500 50,000 50,000 50,000 50,000

Profit

Lease Option $2,960.00 $2,960.08 $2,960.16 $2,999.92 $3,000.00

Commission Opt. $2,970.00 $2,960.08 $2,960.16 $2,999.92 $3,000.00

Difference $10 $0 $0 $0 $0

Preferred Option Commission Indifferent Indifferent Indifferent Indifferent

Preferred Option < than 49,501 49,501 to 50,000

3. Stylewise estimates that the company is equally likely to sell 20,000; 40,000; 60,000;

80,000; or 100,000 pages of print. Prepare a table that shows the expected profit at

each sales level under the lease agreement and under the commission agreement.

What is the expected value of each agreement? Which agreement should Stylewise

choose?

Possible Most Likely Expected Profit from Profit from

Sales Amt. Probability Sales Leasing Commission

20,000 0.20 4,000 $120 $240

40,000 0.20 8,000 $440 $480

60,000 0.20 12,000 $760 $720

80,000 0.20 16,000 $1,080 $960

100,000 0.20 20,000 $1,400 $1,200

1.00 60,000 $3,800 $3,600 Long way

$3,800 $3,600 Easy way

Alternatively, since the expected sales is greater than 50,000, the lease agreement is preferred.

ed?

Outside Range

50,001

101

50,500

$3,000.08

$2,990.08

$10

Lease

> than 50,000

Problem 3-22

Given data:

Fixed costs of $300,000

Variable costs % of 80%

Net income earned in 2002 was $84,000

Income tax rate is 40%

NI = OI - Taxes

Taxes = Tax Rate X OI

NI = OI - (Taxes Rate X OI)

$84,000 = OI - (.4 X OI)

$84,000 = .6 X OI

OI = $84,000/.6 = $140,000

Sales - TVC = TFC + OI

TCM = $300,000 + $140,000 = $440,000

TCM = C/M % X Sales

C/M % = 1- V/C%

C/M % = 1- .80

C/M % = .20 = 20%

TCM = C/M% X Sales

$440,000 = .2 X Sales

Sales = $440,000 /.2 =

Sales = $2,200,000

B/E = FC / C/M %

FC = $300,000 / .2 = $1,500,000

Problem 3-29

Given:

Annual athletic budget $5,000,000

Size of an individual athletic scholarship $20,000

Annual operating costs

Fixed portion $600,000

Variable portion per scholarship $2,000

can offer each year.

Operating Costs -- Fixed portion 600,000

Annual scholarship money available $4,400,000

Cost to the University per scholarship

Variable operating costs per scholarship $2,000

Scholarship amount 20,000 22,000

Maximum number of scholarships possible 200

2. Suppose that the total budget for next year is reduced by 22%.

Fixed costs are to remain the same. Calculate the number of

athletic scholarships that Midwest can offer next year.

Less: 22% budget reduction (1,100,000)

Adjusted budget for next year $3,900,000

Operating Costs -- Fixed portion 600,000

Annual scholarship money available $3,300,000

Cost to the University per scholarship

Variable operating costs per scholarship $2,000

Scholarship amount 20,000 22,000

Maximum number of scholarships possible 150

3. Suppose that the total budget for next year is reduced by 22%.

Fixed costs are to remain the same. If Midwest wanted to offer

the same number of scholarships as it did in requirement 1,

calculate the amount that will be paid to each scholarship student.

Operating Costs -- Fixed portion 600,000

Annual scholarship money available $3,300,000

Maximum number of scholarships possible 200

Cost to the University per scholarship $16,500

Variable operating costs per scholarship (2,000)

Scholarship amount distributable per scholarship student $14,500

Problem 3-37

Given data:

Annual Capacity

Currently available 50,000

Currently used 40,000

Variable cost per radio:

Manufacturing $45

Marketing & Distribution 10 $55

Fixed costs:

Manufacturing $800,000

Marketing & Distribution 600,000 $1,400,000

price to $99 would increase sales to 50,000 units. This strategy

would require Tocchet to increase its fixed marketing and

distribution costs. Calculate the maximum increase in fixed

M & D costs that will allow Tocchet to reduce the SP to $99 and

maintain its operating income.

$105(40,000) - $55(40,000) - $1,400,000 = P

P= $600,000

New situation:

Let X = the maximum increase in marketing & distribution costs

Sales - TVC - TFC = P

$99(50,000) - $55(50,000) - $1,400,000 - X = $600,000

$44(50,000) - $2,000,000 = X

X= $200,000

manufacturing process to add new features to the CB1 radio

These changes will increase fixed manufacturing costs by

$100,000 and variable manufacturing cost per unit by $2.

At its current sales level of 40,000 units, compute the minimum

selling price that will allow Tocchet to add these new features

and maintain its operating income.

(X)(40,000) - $57(40,000) - $1,500,000 = $600,000

40,000(X) - $2,280,000 - $1,500,000 = $600,000

40,000 (X) = $2,280,000 + $1,500,000 + $600,000

X = $4,380,000 / 40,000

X= $109.50

Problem 3-45

Given data:

Evenkeel Corporation manufactures and sells one product - an infant car seat

called Plumar - at a price of $50. Variable costs equal $20 per car seat. Fixed

costs are $495,000. Evenkeel manufactures Plumar upon the receipt of orders

from its customers. In 2005, it sold 30,000 units of Plumar. One of Evenkeel's

customers, Glaston Corporation, has asked if in 2006 Evenkeel will produce

a different style of car seat called Ridex. Glaston will pay $25 for each unit of

Ridex. The variable cost for Ridex is estimated to be $15 per seat. Evenkeel

has enough capacity to manufacture all the units of Plumar it can sell as well as

the units of Ridex that Glaston wants without incurring any additional fixed

costs. Evenkeel estimates that in 2006 it will sell 30,000 units of Plumar

(assuming the same SP and VC as in 2005) and 20,000 units of Ridex.

Andy Minton, the president of Evenkeel, checks the effect of accepting Glaston's

offer on the BE revenues for 2006. Using the planned sales mix for 2006, he is

surprised to find that the revenues required to break even appear to increase.

he is not sure that his numbers are correct, but if they are, Andy feels inclined to

reject Glaston's offer. He asks for your advice.

Summary of Data:

Selling price per Plumar (infant car seat) = $50

Variable cost per Plumar = $20

Annual fixed costs = $495,000

Expected sales volume of Plumar = 30,000

Selling price per Ridex = $25

Variable cost per Ridex = $15

Expected sales volume of Ridex = 20,000

Plenty of excess capacity to sell both products

Let X = the number of units sold to breakeven.

$50(X) - $20(X) - $495,000 = 0

$30(X) = $495,000

X = $495,000 / $30 = 16,500 Units of Plumar

Sales = 16,500 X $50 = $825,000

the planned sales mix (30,000 units of Plumar and 20,000 units

Ridex).

Sales - TVC - TFC = IBT = 0

$50(P) - $20(P) + $25(R) - $15(R) - $495,000 = 0

$30(P) + $10(R) - $495,000 = 0

Let X = the total number of units sold.

$30(3/5)(X) + $10(2/5)(X) - $495,000 = 0

($90/5)(X) + ($20/5)(X) - $495,000 = 0

$18X + $4X - $495,000 = 0

$22X - $495,000 = 0

$22X = $495,000

X= 22,500 Total units

Plumar = 3/5(X) = 13,500 $675,000 $405,000 60%

Ridex = 2/5(X)= 9,000 225,000 90,000 40%

22,500 $900,000 $495,000 55%

and requirement 2 are different.

Sales mix differs.

Sales Mix

Requirement #

Product 1 2 CM/Unit

Plumar 100% 60% $30

Ridex 0% 40% $10

In requirement 2 less sales from higher C/M generator, so more sales are

needed to generate $495,000 of TCM.

Plumar 13,500 $30 $405,000

Plumar 3,000 $30 $90,000

Total 16,500 $30 $495,000

Plumar 13,500 $30 $405,000

Ridex 9,000 $10 $90,000

Total 22,500 $22 $495,000

In requirement 2 less sales from higher C/M % generator, so more total sales

dollars are needed to generate $495,000 of TCM.

Plumar $675,000 60% $405,000

Plumar 150,000 60% $90,000

Total $825,000 60% $495,000

Plumar $675,000 60% $405,000

Ridex 225,000 40% $90,000

Total $900,000 55% $495,000

Only Plumar:

$30(30,000) -$495,000 = IBT = $405,000

Both:

Plumar $30(30,000) -$495,000 = IBT = $405,000

Ridex $10(20,000) - 0 = IBT = 200,000

$605,000

Sell both.

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