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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 %.
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.
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
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.
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
Units Units
87 87
Contribution Margin $52,200 $34,800
Operating Income $34,800 $34,800
Operating Leverage 1.50 1.00
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.
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
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
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:
Fixed costs
Manufacturing $20,000
Marketing, distribution, and customer service 194,500
Total fixed costs $214,500
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?
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?
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
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:
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.
2. Determine which alternative Carlise Engine should select to achieve the net
income objective.
Alternative #a: Reduce the selling price by 15% to yield additional sales
of 2,100. $600 Change in selling price
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 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.
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
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?
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
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
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?
$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
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
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.
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.
Given data:
Annual Capacity
Currently available 50,000
Currently used 40,000
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
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
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.
In requirement 2 less sales from higher C/M % generator, so more total sales
dollars are needed to generate $495,000 of TCM.
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.