Wednesday, January 25, 2012

Engage with your readers through threaded commenting

You may have noticed that we’ve rolled out a number of improvements to Blogger recently. The folks over at Technorati referred to it as a “rampage”. Call it what you like, we’re definitely having fun giving Blogger the makeover it’s long deserved, and we appreciate all the positive feedback we received at the recent BlogWorld expo.

If you follow us on our Buzz blog, you’re aware that we publish surveys from time to time. They are one of several methods that we use to collect your feedback about what we can do to make your blogging experience better. A top request on the wishlist is improving Blogger’s commenting system, so we’re happy to announce that we’ve done just that.

Blogger now supports threaded commenting, which means that it is now much easier to differentiate between whether someone is making a general comment on the thread, or responding to another comment on the thread.



What do you have to do to enable this on your blog? Nothing! If you have Blogger’s commenting feature enabled, “Blog Feed” set to “Full”, and are using “Embedded” comments, then you’re ready to start a discussion with your readers. To check, or change your feed settings, select: “Settings > Other >, and then “Full” from the “Allow Blog Feed” dropdown:


To check your current form setting, select: “Settings > Posts and Comments, and select “Embedded” from the “Comment Location” dropdown:


Visit the Blogger Help Center for additional information.

Happy blogging!
 
copying from blogger buzz

Blogger’s Brand New Google+ Page

  Earlier this week, the Google+ team launched Pages, a new way for you to keep up-to-date with your interests and build relationships with the people who share them. Today, the Blogger team is launching our own Google+ Page, and we’d like to invite you to add us to one of your circles.
By adding Blogger's Page in one of your circles, you'll start seeing updates from the Blogger team in your Google+ stream. You’ll also have the opportunity to engage with other bloggers by writing comments on the posts. Here's a quick list of what to expect:
  • Product news and announcements
  • Video Hangouts with the Blogger team
  • Spotlights on Blogger users and their blogs
  • Pro tips from the Blogger team and other users
Lastly, be sure to mention +Blogger when you share your own tips -- if we come across something particularly helpful, we may reshare it. See you on Google+! Posted by Lisa Ding, Community Manager

(Cross posted from the Blogger Buzz Blog)

Get a pulse for the posts your readers like most with the +1 counter

As we mentioned in our Connect to Google+ post a few weeks ago, we’ve been hard at work to bring you new ways to grow your blog and engage with your readers using Google+.

Today we’re happy to introduce the +1 counter, which allows you to quickly scan your dashboard to see which posts are most popular on your blog. Each time a reader clicks the +1 button on a post, a +1 gets added to that post's counter and their profile photo and name will appear.

The +1 button is available on all Dynamic Views posts by default, and can be enabled on most other template types by clicking on the Layout tab in your dashboard, clicking Edit in the Blog posts section, and checking the Show Share Buttons box.

If you don't have a Google+ account yet, don't fret. It's easy to join Google+ here.

Happy blogging!

copying from Blogger Buzz

Thursday, January 19, 2012

COST-VOLUME-PROFIT ANALYSIS





NOTATION USED IN CHAPTER 3 SOLUTIONS

     SP: Selling price
VCU: Variable cost per unit
CMU: Contribution margin per unit
     FC: Fixed costs
   TOI: Target operating income

3-1       Cost-volume-profit (CVP) analysis examines the behavior of total revenues, total costs, and operating income as changes occur in the output level, selling price, variable cost per unit, or fixed costs of a product.

3-2       The assumptions underlying the CVP analysis outlined in Chapter 3 are

1.         Changes in the level of revenues and costs arise only because of changes in the number of product (or service) units produced and sold.
2.         Total costs can be separated into a fixed component that does not vary with the output level and a component that is variable with respect to the output level.
3.         When represented graphically, the behavior of total revenues and total costs are linear (represented as a straight line) in relation to output level within a relevant range and time period.
4.         The selling price, variable cost per unit, and fixed costs are known and constant.
5.         The analysis either covers a single product or assumes that the sales mix, when multiple products are sold, will remain constant as the level of total units sold changes.
6.         All revenues and costs can be added and compared without taking into account the time value of money.

3-3              Operating income is total revenues from operations for the accounting period minus cost of goods sold and operating costs (excluding income taxes):     

Operating income = Total revenues from operations –

Net income is operating income plus nonoperating revenues (such as interest revenue) minus nonoperating costs (such as interest cost) minus income taxes. Chapter 3 assumes nonoperating revenues and nonoperating costs are zero. Thus, Chapter 3 computes net income as:
         Net income = Operating income – Income taxes

3-4       Contribution margin is the difference between total revenues and total variable costs. Contribution margin per unit is the difference between selling price and variable cost per unit. Contribution-margin percentage is the contribution margin per unit divided by selling price.

3-5       Three methods to express CVP relationships are the equation method, the contribution margin method, and the graph method. The first two methods are most useful for analyzing operating income at a few specific levels of sales. The graph method is useful for visualizing the effect of sales on operating income over a wide range of quantities sold.

3-6       Breakeven analysis denotes the study of the breakeven point, which is often only an incidental part of the relationship between cost, volume, and profit. Cost-volume-profit relationship is a more comprehensive term than breakeven analysis.

3-7       CVP certainly is simple, with its assumption of output as the only revenue and cost driver, and linear revenue and cost relationships. Whether these assumptions make it simplistic depends on the decision context. In some cases, these assumptions may be sufficiently accurate for CVP to provide useful insights. The examples in Chapter 3 (the software package context in the text and the travel agency example in the Problem for Self-Study) illustrate how CVP can provide such insights. In more complex cases, the basic ideas of simple CVP analysis can be expanded.

3-8         An increase in the income tax rate does not affect the breakeven point.  Operating income at the breakeven point is zero, and no income taxes are paid at this point.

3-9       Sensitivity analysis is a “what-if” technique that managers use to examine how a result will change if the original predicted data are not achieved or if an underlying assumption changes. The advent of the electronic spreadsheet has greatly increased the ability to explore the effect of alternative assumptions at minimal cost. CVP is one of the most widely used software applications in the management accounting area.

3-10     Examples include:
Manufacturing––substituting a robotic machine for hourly wage workers.
Marketing––changing a sales force compensation plan from a percent of sales dollars to a fixed salary.
Customer service––hiring a subcontractor to do customer repair visits on an annual retainer basis rather than a per-visit basis.

3-11     Examples include:
Manufacturing––subcontracting a component to a supplier on a per-unit basis to avoid purchasing a machine with a high fixed depreciation cost.
Marketing––changing a sales compensation plan from a fixed salary to percent of sales dollars basis.
Customer service––hiring a subcontractor to do customer service on a per-visit basis rather than an annual retainer basis.

3-12     Operating leverage describes the effects that fixed costs have on changes in operating income as changes occur in units sold, and hence, in contribution margin. Knowing the degree of operating leverage at a given level of sales helps managers calculate the effect of fluctuations in sales on operating incomes.



3-13     CVP analysis is always conducted for a specified time horizon. One extreme is a very short-time horizon. For example, some vacation cruises offer deep price discounts for people who offer to take any cruise on a day’s notice. One day prior to a cruise, most costs are fixed.  The other extreme is several years. Here, a much higher percentage of total costs typically is variable.
                CVP itself is not made any less relevant when the time horizon lengthens. What happens is that many items classified as fixed in the short run may become variable costs with a longer time horizon.

3-14     A company with multiple products can compute a breakeven point by assuming there is a constant sales mix of products at different levels of total revenue.

3-15     Yes, gross margin calculations emphasize the distinction between manufacturing and nonmanufacturing costs (gross margins are calculated after subtracting fixed manufacturing costs). Contribution margin calculations emphasize the distinction between fixed and variable costs. Hence, contribution margin is a more useful concept than gross margin in CVP analysis.

3-16     (10 min.)    CVP computations.



Variable
Fixed
Total
Operating
Contribution
Contribution

Revenues
Costs
Costs
Costs
Income
Margin
Margin %
a.
$2,000
$   500
$300
$   800
$1,200
$1,500
75.0%
b.
2,000
1,500
300
1,800
200
500
25.0%
c.
1,000
700
300
1,000
0
300
30.0%
d.
1,500
900
300
1,200
300
600
40.0%



3-17     (10–15 min.)    CVP computations.

         1a.          Sales ($25 per unit × 180,000 units)                           $4,500,000
                        Variable costs ($20 per unit × 180,000 units)               3,600,000
                        Contribution margin                                                    $   900,000

         1b.          Contribution margin (from above)                              $   900,000
                        Fixed costs                                                                       800,000
                        Operating income                                                        $   100,000

         2a.          Sales (from above)                                                      $4,500,000
                        Variable costs ($10 per unit × 180,000 units)               1,800,000
                        Contribution margin                                                    $2,700,000

         2b.          Contribution margin                                                    $2,700,000
                        Fixed costs                                                                    2,500,000
                        Operating income                                                        $   200,000

3.                  Operating income is expected to increase by $100,000 if Ms. Schoenen’s proposal is accepted.
            The management would consider other factors before making the final decision. It is likely that product quality would improve as a result of using state of the art equipment. Due to increased automation, probably many workers will have to be laid off. Patel’s management will have to consider the impact of such an action on employee morale. In addition, the proposal increases the company’s fixed costs dramatically. This will increase the company’s operating leverage and risk.




3-18     (35–40 min.)    CVP analysis, changing revenues and costs.

1a.       SP        = 8% × $1,000 = $80 per ticket
            VCU   = $35 per ticket
            CMU   = $80 – $35 = $45 per ticket
            FC       = $22,000 a month

      












2a.       SP        = $80 per ticket
            VCU   = $29 per ticket
            CMU   = $80 – $29 = $51 per ticket
            FC       = $22,000 a month

           











3a.       SP        = $48 per ticket
            VCU   = $29 per ticket
            CMU   = $48 – $29 = $19 per ticket
            FC       = $22,000 a month

          












The reduced commission sizably increases the breakeven point and the number of tickets required to yield a target operating income of $10,000:

                                                                        8%     
                                                                    Commission                          Fixed
                                                               (Requirement 2)        Commission of $48

         Breakeven point                                     432                              1,158

         Attain OI of $10,000                                628                              1,685

4a.       The $5 delivery fee can be treated as either an extra source of revenue (as done below) or as a cost offset. Either approach increases CMU $5:

            SP        = $53 ($48 + $5) per ticket
            VCU   = $29 per ticket
            CMU   = $53 – $29 = $24 per ticket
            FC       = $22,000 a month

          












The $5 delivery fee results in a higher contribution margin which reduces both the breakeven point and the tickets sold to attain operating income of $10,000.




3-19     (20 min.)    CVP exercises.





Revenues

Variable
Costs

Contribution
Margin

Fixed
Costs
Budgeted
Operating
Income
Orig.
$10,000,000G
$8,200,000G
$1,800,000
$1,700,000G
$100,000
1.
10,000,000
8,020,000
1,980,000a
1,700,000
280,000
2.
10,000,000
8,380,000
1,620,000b
1,700,000
(80,000)
3.
10,000,000
8,200,000
1,800,000
1,785,000c
15,000
4.
10,000,000
8,200,000
1,800,000
1,615,000d
185,000
5.
10,800,000e
8,856,000f
1,944,000
1,700,000
244,000
6.
9,200,000g
7,544,000h
1,656,000
1,700,000
(44,000)
7.
11,000,000i
9,020,000j
1,980,000
1,870,000k
110,000
8.
10,000,000
7,790,000l
2,210,000
1,785,000m
425,000

Gstands for given.
a$1,800,000 × 1.10; b$1,800,000 × 0.90; c$1,700,000 × 1.05; d$1,700,000 × 0.95; e$10,000,000 × 1.08;
f$8,200,000 × 1.08; g$10,000,000 × 0.92; h$8,200,000 × 0.92; i$10,000,000 × 1.10; j$8,200,000 × 1.10;  
k$1,700,000 × 1.10; l$8,200,000 × 0.95; m$1,700,000 × 1.05



3-20     (20 min.)    CVP exercises.

1a.       [Units sold (Selling price – Variable costs)] – Fixed costs     = Operating income
                                         [5,000,000 ($0.50 – $0.30)] – $900,000    = $100,000

1b.       Fixed costs ÷ Contribution margin per unit    = Breakeven units
                                    $900,000 ÷ [($0.50 – $0.30)] = 4,500,000 units
                                 Breakeven units × Selling price = Breakeven revenues
                              4,500,000 units × $0.50 per unit   = $2,250,000
                        or,
                                        
                  Fixed costs ÷ Contribution margin ratio   = Breakeven revenues
                                                       $900,000 ÷ 0.40   = $2,250,000
                                                                                               

2.

5,000,000 ($0.50 – $0.34) – $900,000
=
$  (100,000)





3.

[5,000,000 (1.1) ($0.50 – $0.30)] – [$900,000 (1.1)]
=
$   110,000





4.

[5,000,000 (1.4) ($0.40 – $0.27)] – [$900,000 (0.8)]
=
$   190,000





5.

$900,000 (1.1) ÷ ($0.50 – $0.30)
=
4,950,000 units





6.

($900,000 + $20,000) ÷ ($0.55 – $0.30)
=
3,680,000 units
3-21     (10 min.)    CVP analysis, income taxes.

1.   Monthly fixed costs = $50,000 + $60,000 + $10,000 =                                              $120,000 
      Contribution margin per unit = $25,000 – $22,000 – $500 =                                      $    2,500 
  
3-22     (20–25 min.)    CVP analysis, income taxes.

  1.    Variable cost percentage is $3.20 ¸ $8.00 = 40%

                                           Let R   = Revenues needed to obtain target net income
                


=
 



            Proof:      Revenues                                        $1,000,000
                            Variable costs (at 40%)                       400,000
                            Contribution margin                            600,000
                            Fixed costs                                          450,000
                            Operating income                                150,000
                            Income taxes (at 30%)                          45,000
                            Net income                                     $   105,000

2.a.      Customers needed to earn net income of $105,000:
                  Total revenues ¸ Sales check per customer
                        $1,000,000 ¸ $8 = 125,000 customers
 
   b.      Customers needed to break even:
                 
                  Contribution margin per customer = $8.00 – $3.20 = $4.80
                  Breakeven number of customers = Fixed costs ¸ Contribution margin per customer
                                                                       = $450,000 ¸ $4.80 per customer
                                                                       = 93,750 customers

3.      Using the shortcut approach:    
             Change in net income      =  ´ ´  (1 – Tax rate)
                                                                                                  
                                                      =    (150,000 – 125,000) ´ $4.80 ´ (1 – 0.30)
                                                      =    $120,000 ´ 0.7 = $84,000
                      New net income      =    $84,000 + $105,000 = $189,000

The alternative approach is:

                            Revenues, 150,000 ´ $8.00            $1,200,000
                            Variable costs at 40%                         480,000
                            Contribution margin                           720,000
                            Fixed costs                                          450,000
                            Operating income                                270,000
                            Income tax at 30%                                81,000
                            Net income                                     $   189,000




3-23     (30 min.)    CVP analysis, sensitivity analysis.

1.         SP  = $30.00 ´ (1 – 0.30 margin to bookstore)
                  = $30.00 ´ 0.70  =  $21.00

         VCU = $  4.00 variable production and marketing cost
                          3.15 variable author royalty cost (0.15 ´ $21.00)
                      $  7.15

         CMU = $21.00 – $7.15 = $13.85 per copy
         FC     = $   500,000 fixed production and marketing cost
                        3,000,000 up-front payment to Washington
                      $3,500,000

Solution Exhibit 3-23A shows the PV graph.
Solution Exhibit 3-23A
PV Graph for Media Publishers


 










3a.    Decreasing the normal bookstore margin to 20% of the listed bookstore price of $30 has the following effects:

                        SP      = $30.00 ´ (1  – 0.20)
                                  = $30.00 ´ 0.80 = $24.00
                        VCU  = $  4.00 variable production and marketing cost
                                +  3.60 variable author royalty cost (0.15 ´ $24.00)
                                 $  7.60

                        CMU = $24.00 – $7.60  = $16.40 per copy


     


The breakeven point decreases from 252,708 copies in requirement 2 to 213,415 copies.



3b.       Increasing the listed bookstore price to $40 while keeping the bookstore margin at 30% has the following effects:


                        SP     = $40.00 ´ (1 – 0.30)
                                 = $40.00 ´ 0.70 = $28.00
                        VCU = $  4.00          variable production and marketing cost
                               +  4.20               variable author royalty cost (0.15 ´ $28.00)
                               $  8.20

                        CMU= $28.00 – $8.20  = $19.80 per copy

    

         The breakeven point decreases from 252,708 copies in requirement 2 to 176,768 copies.

3c.    The answers to requirements 3a and 3b decrease the breakeven point relative to that in requirement 2 because in each case fixed costs remain the same at $3,500,000 while the contribution margin per unit increases.


3-24     (10 min.)    CVP analysis, margin of safety.

                                                                     0.40 SP = SP – $12
                                                                     0.60 SP = $12
                                                                          SP = $20

3.                     Revenues, 80,000 units ´ $20             $1,600,000
                        Breakeven revenues                              1,000,000
                        Margin of safety                                 $   600,000




3-25     (25 min.)    Operating leverage.

1a.       Let Q denote the quantity of carpets sold
        
                  Breakeven point under Option 1
                                        $500Q - $350Q      =    $5,000
                                                       $150Q      =    $5,000
                                                               Q      =    $5,000 ¸ $150 = 34 carpets (rounded up)

1b.             Breakeven point under Option 2
                        $500Q - $350Q - (0.10 ´ $500Q)     =     0
                                                                       100Q     =     0
                                                                             Q     =     0

2.                     Operating income under Option 1 = $150Q - $5,000
                        Operating income under Option 2 = $100Q

                        Find Q such that $150Q - $5,000 = $100Q

                                                                     $50Q = $5,000
                                                  Q = $5,000 ¸ $50 = 100 carpets

            For Q = 100 carpets, operating income under both Option 1 and Option 2 = $10,000

3a.       For Q > 100, say, 101 carpets,
            Option 1 gives operating income        =  ($150 ´ 101) - $5,000  =    $10,150
            Option 2 gives operating income        =  $100 ´ 101                   =    $10,100
            So Color Rugs will prefer Option 1.

3b.       For Q < 100, say, 99 carpets,
            Option 1 gives operating income        =  ($150 ´ 99) - $5,000    =    $9,850
            Option 2 gives operating income        =  $100 ´ 99                     =    $9,900
            So Color Rugs will prefer Option 2.



5.      The calculations in requirement 4 indicate that when sales are 100 units, a percentage change in sales and contribution margin will result in 1.5 times that percentage change in operating income for Option 1, but the same percentage change in operating income for Option 2.  The degree of operating leverage at a given level of sales helps managers calculate the effect of fluctuations in sales on operating incomes.



3-26          (15 min.)    CVP analysis, international cost structure differences.



Thailand has the lowest breakeven point since it has both the lowest fixed costs ($4,500,000) and the lowest variable cost per unit ($17.00). Hence, for a given selling price, Thailand will always have a higher operating income (or a lower operating loss) than Singapore or the U.S.
         The U.S. breakeven point is 1,200,000 units. Hence, with sales of only 800,000 units, it has an operating loss of $4,000,000.



3-27     (30 min.)    Sales mix, new and upgrade customers.

1.

New
Customers
Upgrade
Customers
SP
VCU
CMU
$210
90
120
$120
40
80

Let S   = Number of units sold to upgrade customers
           1.5S   = Number of units sold to new customers
         Revenues – Variable costs – Fixed costs = Operating income
         [$210 (1.5S) + $120S] – [$90 (1.5S) + $40S] – $14,000,000 = OI
         $435S – $175S – $14,000,000 = OI
         Breakeven point is 134,616 units when OI = 0 because

        $260S   =                   $14,000,000
                S   =                     53,846 units sold to upgrade customers (rounded)
           1.5S   =                     80,770 units sold to new customers (rounded)
           BEP   =                   134,616 units

Check

Revenues ($210 ´ 80,770) + ($120 ´ 53,846)                                 $23,423,220
Variable costs ($90 ´ 80,770) + ($40 ´ 53,846)                                  9,423,140
Contribution margin                                                                           14,000,080
Fixed costs                                                                                         14,000,000
Operating income (caused by rounding)                                       $               80

2.      When 200,000 units are sold, mix is:

                        Units sold to new customers (60% ´ 200,000)                 120,000
                        Units sold to upgrade customers (40% ´ 200,000)            80,000

Revenues ($210 ´ 120,000) + ($120 ´ 80,000)                               $34,800,000
Variable costs ($90 ´ 120,000) + ($40 ´ 80,000)                              14,000,000
Contribution margin                                                                           20,800,000
Fixed costs                                                                                         14,000,000
Operating income                                                                             $  6,800,000



3a.    Let S    =    Number of units sold to upgrade customers
         then S  =    Number of units sold to new customers     

         [$210S + $120S] – [$90S + $40S] – $14,000,000  =  OI
                330S – 130S      =                   $14,000,000
                            200S      =                   $14,000,000
                                  S      =                     70,000 units sold to upgrade customers
                                  S      =                     70,000 units sold to new customers
                             BEP      =                   140,000 units
Check
Revenues ($210 ´ 70,000) + ($120 ´ 70,000)                                 $23,100,000
Variable costs ($90 ´ 70,000) + ($40 ´ 70,000)                                  9,100,000
Contribution margin                                                                           14,000,000
Fixed costs                                                                                         14,000,000
Operating income                                                               $                0

3b.    Let         S   = Number of units sold to upgrade customers
         then      9S   = Number of units sold to new customers
         [$210 (9S) + $120S] – [$90 (9S) + $40S] – $14,000,000  =  OI
             2,010S – 850S      =                   $14,000,000
                         1,160S      =                   $14,000,000
                                  S      =                     12,069 units sold to upgrade customers (rounded up)
                                9S      =                   108,621 units sold to new customers (rounded up)
                                                               120,690 units

Check
Revenues ($210 ´ 108,621) + ($120 ´ 12,069)                               $24,258,690
Variable costs ($90 ´ 108,621) + ($40 ´ 12,069)                              10,258,650
Contribution margin                                                                           14,000,040
Fixed costs                                                                                         14,000,000
Operating income (caused by rounding)                            $              40

3c.    As Zapo increases its percentage of new customers, which have a higher contribution margin per unit than upgrade customers, the number of units required to break even decreases:


New
Customers
Upgrade Customers
Breakeven Point
Requirement 3(a)
Requirement 1
Requirement  3(b)
50%
60
90
50%
40
10
140,000
134,616
120,690



3-28     (20 min.)    CVP analysis, multiple cost drivers.


                                      =    ($45 ´ 40,000) - ($30 ´ 40,000) - ($60 ´ 1,000) - $240,000
                                      =    $1,800,000 - $1,200,000 - $60,000 - $240,000 = $300,000

1b.    Operating income       =    ($45 ´ 40,000) - ($30 ´ 40,000) - ($60 ´ 800) - $240,000 = $312,000

2.      Denote the number of picture frames sold by Q, then
                        $45Q - $30Q – (500 ´ $60) - $240,000 = 0
                        $15Q   =    $30,000 + $240,000  =  $270,000
                              Q   =    $270,000 ¸ $15 = 18,000 picture frames

3.      Suppose Susan had 1,000 shipments.
                        $45Q - $30Q - (1,000 ´ $60) - $240,000 = 0
                        15Q = $300,000
                            Q = 20,000 picture frames

            The breakeven point is not unique because there are two cost drivers—quantity of picture frames and number of shipments. Various combinations of the two cost drivers can yield zero operating income.




3-29     (25–30 min.)    Athletic scholarships, CVP analysis.

1.            Variable costs per scholarship offer:
                 Scholarship amount                                    $20,000
                 Operating costs                                               2,000
                 Total variable costs                                     $22,000

         Let the number of scholarships be denoted by Q

                 $22,000 Q = $5,000,000 – $600,000
                 $22,000 Q = $4,400,000
                               Q = $4,400,000 ÷ $22,000 = 200 scholarships

2.            Total budget for next year = $5,000,000 × (1.00 – 0.22) = $3,900,000

Then $22,000 Q = $3,900,000 – $600,000 = $3,300,000
                       Q = $3,300,000 ÷ $22,000 = 150 scholarships

3.            Total budget for next year from above = $3,900,000
Fixed costs                                                    600,000

        Variable costs for scholarships                 $3,300,000


         If the total number of scholarships is to remain at 200:
                 Variable cost per scholarship $3,300,000 ÷ 200                 $16,500
                 Variable operating cost per scholarship                                  2,000
                 Amount per scholarship                                                      $14,500




3-30     (15 min.)    Contribution margin, decision making.

1.         Revenues                                                                                 $500,000
            Deduct variable costs:
                        Cost of goods sold                              $200,000
                          Sales commissions                                   50,000
                        Other operating costs                              40,000           290,000
Contribution margin                                                                $210,000

                                  



3.         Incremental revenue (20% × $500,000) = $100,000
            Incremental contribution margin
                  (42% × $100,000)                                                               $42,000
            Incremental fixed costs (advertising)                                         10,000
            Incremental operating income                                                   $32,000

            If Mr. Schmidt spends $10,000 more on advertising, the operating income will increase by $32,000, converting an operating loss of $10,000 to an operating income of $22,000.

Proof (Optional):
Revenues (120% × $500,000)                                                             $600,000
Cost of goods sold (40% of sales)                                                        240,000
Gross margin                                                                                         360,000

Operating costs:
            Salaries and wages                                          $150,000
            Sales commissions (10% of sales)                      60,000
            Depreciation of equipment and fixtures             12,000
            Store rent                                                            48,000
            Advertising                                                         10,000
             Other operating costs:
     
    
                 Fixed                                                              10,000           338,000
Operating income                                                                                $  22,000


3-31     (20 min.)    Contribution margin, gross margin and margin of safety.

1.



Mirabella Cosmetics
Operating Income Statement, June 2005
Units sold

      10,000

Revenues

  $100,000

Variable costs



  Variable manufacturing costs
 $   55,000


  Variable marketing costs
        5,000


    Total variable costs

      60,000

Contribution margin

      40,000

Fixed costs



  Fixed manufacturing costs
 $   20,000


  Fixed marketing & administration costs
      10,000


    Total fixed costs

      30,000

Operating income

 $   10,000


  
                                                                                                                                  
3.      Margin of safety (in units)  = Units sold – Breakeven quantity       
                                                  = 10,000 units – 7,500 units = 2,500 units
                                                                                                                                  
4.         Units sold                                                                                                                 8,000     
            Revenues (Units sold X Selling price = 8,000 X $10)                                         $80,000
            Contribution margin (Revenues XCM percentage = $80,000 X40%)                 $32,000      Fixed costs                    30,000
            Operating income                                                                                                    2,000
            Taxes (30% x $2,000)                                                                                                600
            Net income                                                                                                           $  1,400



 3-32    (15–20 min.)       Uncertainty, CVP analysis (chapter appendix).

1.



Pay-per-view Audience (number of homes subscribing to the event)
Probability
Expected
Audience
Expected Payment
to Foreman
(1)
(2)
(3) = (1)x(2)
(4) = (3)x(25%x$16)
   100,000
0.05
    5,000
$     20,000
   200,000
0.10
  20,000
       80,000
   300,000
0.30
  90,000
     360,000
   400,000
0.35
140,000
     560,000
   500,000
0.15
  75,000
     300,000
1,000,000
0.05
  50,000
     200,000
Total

380,000
  1,520,000




Fixed payment


  2,000,000
Total expected payment to Foreman

$3,520,000




2.
Selling price                                                                                                           $            16
Variable cost per subscribing home ($4 to Foreman + $2 to cable company)                      6
Contribution margin per subscribing home                                                           $            10
Fixed costs (Foreman, $2,000,000 + other costs, $1,000,000)                             $3,000,000

                                                                                                               
3.         Brady’s expected audience size of 380,000 homes is more than 25% bigger than the breakeven audience size of 300,000 homes. So, if she is confident of the assumed probability distribution, she has a good margin of safety, and should proceed with her plans for the fight. She will only lose money if the pay-per-view audience is 100,000 or 200,000, which together have a 0.15 probability of occurring.




3-33     (15–20 min.)    CVP analysis, service firm.

1.         Revenue per package                            $4,000
            Variable cost per package                       3,600
            Contribution margin per package         $   400

Breakeven (units) = Fixed costs ÷ Contribution margin per package

                     


Desired variable cost per tour package = $4,000 – $420 = $3,580

Because the current variable cost per unit is $3,600, the unit variable cost will need to be reduced by $20 to achieve the breakeven point calculated in requirement 1.

Alternate Method:  If fixed cost increases by $24,000, then total variable costs must be reduced by $24,000 to keep the breakeven point of 1,200 tour packages.

Therefore, the variable cost per unit reduction = $24,000 ÷ 1,200 = $20 per tour package.

3-34           (30 min.)   CVP, target income, service firm.

1.         Revenue per child                                           $600
            Variable costs per child                                     200
            Contribution margin per child                         $400

           


3.         Increase in rent ($3,000 – $2,000)                                          $1,000
            Field trips                                                                                  1,000
            Total increase in fixed costs                                                    $2,000
            Divide by the number of children enrolled                               ÷   40
            Increase in fee per child                                                          $     50

Therefore, the fee per child will increase from $600 to $650.

Alternatively,



New fee per child = Variable costs per child + New contribution margin per child
                              = $200 + $450 = $650



3-35          (20–25 min.)    CVP analysis.

1.         Selling price                                                                $16.00
   Variable costs per unit:
        Purchase price                               $10.00
        Shipping and handling                     2.00                 12.00
   Contribution margin per unit (CMU)                          $  4.00

  



  Margin of safety (units) = 200,000 – 150,000 = 50,000 units

2.         Since Galaxy is operating above the breakeven point, any incremental contribution margin will increase operating income dollar for dollar.

   Increase in units sales = 10% × 200,000 = 20,000
   Incremental contribution margin = $4 × 20,000 = $80,000

   Therefore, the increase in operating income will be equal to $80,000.
   Galaxy’s operating income in 2005 would be $200,000 + $80,000 = $280,000.

3.         Selling price                                                                                 $16.00
   Variable costs:
        Purchase price $10 × 130%             $13.00
        Shipping and handling                         2.00                              15.00
   Contribution margin per unit                                                       $  1.00

  

    

Target sales in dollars = $16 × 800,000 = $12,800,000



3-36     (30–40 min.)    CVP analysis, income taxes.


                                                    $300,000 – $165,000 – $81,000 = X
                                                                                                 X = $54,000
Alternatively,
Operating income = Revenues – Variable costs – Fixed costs
                              = $500,000 – $275,000 – $135,000 = $90,000
        Income taxes = 0.40 × $90,000 = $36,000
           Net income = Operating income – Income taxes
                              = $90,000 $36,000 = $54,000
2.         Let Q = Number of units to break even
            $25.00Q – $13.75Q – $135,000 = 0
            Q = $135,000 ¸ $11.25 = 12,000 units
3.         Let X = Net income for 2006
                 

                                                                                                            X  = $60,750
4.         Let Q = Number of units to break even with new fixed costs of $146,250
                               $25.00Q – $13.75Q – $146,250    =   0
                                            Q = $146,250 ¸ $11.25    =   13,000 units
                   Breakeven revenues = 13,000 ´ $25.00    =   $325,000



5.         Let S = Required sales units to equal 2005 net income
                     $25.00S – $13.75S – $146,250 =     
                       $11.25S  =   $236,250
                                  S  =   21,000 units
                     Revenues  =   21,000 units ´ $25 = $525,000
6.         Let A = Amount spent for advertising in 2006
             $550,000 – $302,500 – ($135,000 + A) =
               $550,000 – $302,500 – $135,000 – A = $100,000
                                         $550,000 – $537,500 = A
                                                                        A = $12,500
3-37     (20 min.)    CVP analysis, decision making.

1.            Tocchet’s current operating income is as follows:
Revenues, $105 × 40,000             $4,200,000
Variable costs, $55 × 40,000          2,200,000
Contribution margin                        2,000,000
Fixed costs                                      1,400,000
Operating income                          $   600,000

Let the fixed marketing and distribution costs be F. We calculate F when operating income is $600,000 and the selling price is $99.

($99 × 50,000) – ($55 × 50,000) –  F = $600,000
    $4,950,000   –    $2,750,000    –  F = $600,000
                                                         F = $4,950,000 – $2,750,000 – $600,000
                                                         F = $1,600,000

Hence, the maximum increase in fixed marketing and distribution costs that will allow Tocchet to reduce the selling price and maintain $600,000 in operating income is $200,000 ($1,600,000 – $1,400,000).

2.         Let the selling price be P. We calculate P for which, after increasing fixed manufacturing costs by $100,000 to $900,000 and variable manufacturing cost per unit by $2 to $47, operating income is $600,000.
   $40,000 P – ($47 × 40,000) – ($10 × 40,000) – $900,000 – $600,000 = $600,000
   $40,000 P – $1,880,000 – $400,000 – $900,000 – $600,000 = $600,000
   $40,000 P = $600,000 + $1,880,000 + $400,000 + $900,000 + $600,000
   $40,000 P = $4,380,000
                 P = $4,380,000 ÷ 40,000 = $109.50
Tocchet will consider adding the new features provided the selling price is at least $109.50 per unit.



3-38          (20–30 min.)    CVP analysis, shoe stores.

1. CMU (SP – VCU = $30 – $21)                                                                          $         9.00
    a. Breakeven units (FCxCMU = $360,000 x$9 per unit)                                                                      40,000
    b. Breakeven revenues (Breakeven units xSP = 40,000 units x$30 per unit)   $1,200,000
                                                                                                                                   
2.  Pairs sold                                                                                                                 35,000
     Revenues, 35,000 x$30                                                                                   $1,050,000
     Total cost of shoes, 35,000 x$19.50                                                                     682,500
     Total sales commissions, 35,000 x$1.50                                                                 52,500
     Total variable costs                                                                                                735,000
     Contribution margin                                                                                               315,000
     Fixed costs                                                                                                             360,000
     Operating income (loss)                                                                                   $    (45,000)
                                                                                                                                   
3.  Unit variable data (per pair of shoes)                                                                     
     Selling price                                                                                                      $       30.00
     Cost of shoes                                                                                                             19.50
     Sales commissions                                                                                                            0 
     Variable cost per unit                                                                                        $       19.50
     Annual fixed costs                                                                                                             
     Rent                                                                                                                  $     60,000
     Salaries, $200,000 + $81,000                                                                                 281,000
     Advertising                                                                                                               80,000
     Other fixed costs                                                                                                      20,000
     Total fixed costs                                                                                                $   441,000
                                                                                                                                               
     CMU, $30 – $19.50                                                                                          $       10.50
     a. Breakeven units, $441,000x$10.50 per unit                                                       42,000
     b. Breakeven revenues, 42,000 units x$30 per unit                                         $1,260,000
                                                                                                                                   
4.  Unit variable data (per pair of shoes)                                                                     
     Selling price                                                                                                      $       30.00
     Cost of shoes                                                                                                              19.50
     Sales commissions                                                                                                       1.80
     Variable cost per unit                                                                                        $       21.30
     Total fixed costs                                                                                                $   360,000
                                                                                                  
      CMU, $30 – $21.30                                                                                         $         8.70
      a. Break even units = $360,000x$8.70 per unit                                                            41,380 (rounded up)
      b. Break even revenues = 41,380 units x$30 per unit                                                   $1,241,400
                                                                                                      
5.  Pairs sold                                                                                                                  50,000
     Revenues (50,000 pairs x $30 per pair)                                                          $1,500,000
     Total cost of shoes (50,000 pairs x $19.50 per pair)                                        $   975,000
     Sales commissions on first 40,000 pairs (40,000 pairs x $1.50 per pair)                   60,000
     Sales commissions on additional 10,000 pairs
        [10,000 pairs x ($1.50 + $0.30 per pair)]                                                             18,000
     Total variable costs                                                                                          $1,053,000
     Contribution margin                                                                                          $   447,000
     Fixed costs                                                                                                              360,000
     Operating income                                                                                              $     87,000

Alternative approach:

Breakeven point in units = 40,000 pairs
Store manager receives commission of $0.30 on 10,000 (50,000 – 40,000) pairs.
Contribution margin per pair beyond breakeven point of 10,000 pairs equals $8.70 ($30 – $21 –$0.30) per pair.
Operating income = 10,000 pairs x$8.70 contribution margin per pair = $87,000.


3-39          (30 min.)    CVP analysis, shoe stores (continuation of 3-38).



1.         See table above. The new store will have the same operating income under either compensation plan when the volume of sales is 54,000 pairs of shoes. This can also be calculated as the unit sales level at which both compensation plans result in the same total costs:
            Let Q = unit sales level at which total costs are same forboth plans

              $19.50Q + $360,000  + $ $81,000 = $21Q + $360,000
                                                        $1.50 Q = $81,000
                                                                  Q = 54,000 pairs

2.            When sales volume is above 54,000 pairs, the higher-fixed-salaries plan results in lower costs and higher operating incomes than the salary-plus-commission plan. So, for an expected volume of 55,000 pairs, the owner would be inclined to choose the higher-fixed-salaries-only plan. But it is likely that sales volume itself is determined by the nature of the compensation plan. The salary-plus-commission plan provides a greater motivation to the salespeople, and it may well be that for the same amount of money paid to salespeople, the salary-plus-commission plan generates a higher volume of sales than the fixed-salary plan.

3.                Let TQ = Target number of units
                          
            For the salary-only plan,
          $30.00TQ –  $19.50TQ – $441,000     = $168,000
                                                  $10.50TQ     = $609,000
                                                             TQ     = $609,000 ÷ $10.50
                                                             TQ     = 58,000 units     
   For the salary-plus-commission plan,
          $30.00TQ –  $21.00TQ – $360,000     = $168,000
                                                    $9.00TQ     = $528,000
                                                             TQ     = $528,000 ÷ $9.00
                                                             TQ     = 58,667 units (rounded up)

         The decision regarding the salary plan depends heavily on predictions of demand. For instance, the salary plan offers the same operating income at 58,000 units as the commission plan offers at 58,667 units.

4.                                                      WalkRite Shoe Company
Operating Income Statement, 2005
                 
                  Revenues (48,000 pairs x$30) + (2,000 pairs x$18)                         $1,476,000
                  Cost of shoes, 50,000 pairs x $19.50                                                      975,000
                  Commissions = Revenues x5% = $1,476,000 x 0.05                               73,800
                  Contribution margin                                                                                 427,200
                  Fixed costs                                                                                               360,000
                  Operating income                                                                                $     67,200

       


3-40          (20 min.)    Alternative cost structures, sensitivity analysis.


1.         See section of table labeled Requirement 1 above. If Mary pays a fixed fee of $2,000 to rent the booth, she should sell the Do-All packages at $200 each in order to maximize operating income.
            Contribution margin can also be calculated as contribution margin per unit x demand. For example, when selling price is $230, contribution margin per unit is $110 ($230 – $120) and contribution margin is $3,300 ($110 per unit x 30 units)

2.         See section of table labeled Requirement 2 above. If Mary pays a fixed fee of $800 plus 15% of revenues to rent the booth, she should sell the Do-All packages at $275 each in order to maximize operating income.
            Contribution margin can also be calculated as contribution margin per unit x demand. For example, when selling price is $230, contribution margin per unit is $75.50 ($230 – $120 – 15% x $230) and contribution margin is $2,265 ($75.50 per unit x 30 units)
                       


3-41          (30 min.)    Alternative fixed-cost/variable-cost structures.

1. 

Manual
Automated
Annual fixed costs (FC)
$20,000
$30,000
Selling price
$      20
$       20
Variable cost per unit
        10
           8
Contribution margin per unit (CMU)
$      10
$       12
Annual breakeven units = FCCMU =
   2,000
     2,500

2.
Manual






Units
     2,000
     3,000
     4,000
     5,000
     6,000
     7,000
CMU
 $       10
 $       10
 $       10
 $       10
 $       10
 $       10
Contribution margin
 $20,000
 $30,000
 $40,000
 $50,000
 $60,000
 $70,000
Fixed costs
   20,000
   20,000
   20,000
   20,000
   20,000
   20,000
Operating income
 $         0  
 $10,000
 $20,000
 $30,000
 $40,000
 $50,000







Automated






Units
     2,000
     3,000
     4,000
     5,000
     6,000
     7,000
CMU
 $       12
 $       12
 $       12
 $       12
 $       12
 $       12
Contribution margin
 $20,000
 $36,000
 $48,000
 $60,000
 $72,000
 $84,000
Fixed costs
   30,000
   30,000
   30,000
   30,000
   30,000
   30,000
Operating income
 $ (6,000)
 $  6,000
 $18,000
 $30,000
 $42,000
 $54,000






 


As seen from the above tables and graph, the two types of plants will result in the same operating income of $30,000 at a sales volume of 5,000 jackets. This can also be computed analytically: Let Q be the volume at which the operating incomes of both plants are equal.  Equating operating income = (CMU  Units) – Fixed Costs for both plants,

$10Q – $20,000 = $12Q – $30,000
$2Q = $10,000
Q = 5,000 units

3.         If Cut-n-Sew anticipates sales of 4,000 jackets per year, it will earn an operating income of $20,000 from the manual plant, versus an operating income of $18,000 from the automated plant. So, it will choose the manual plant. However, note that the 4,000 jacket volume is only 1,000 short of the volume at which the automated plant becomes more profitable. If Cut-n-Sew anticipates a 25% or greater growth in sales volume in the near term, it should consider investing in the automated plant which will be more profitable at higher volumes. Also, competitive issues may suggest that Cut-n-Sew invest in the automated plant to benefit from other new technologies that may be available in the future.




3-42     (30 min.)    CVP analysis, income taxes, sensitivity.

1a.       To break even, Almo Company must sell 500 units. This amount represents the point where revenues equal total costs.

Let Q denote the quantity of canopies sold.
                                  Revenue      =    Variable costs + Fixed costs
                                     $400Q      =    $200Q + $100,000
                                     $200Q      =    $100,000
                                             Q      =    500 units

Breakeven can also be calculated using contribution margin per unit.

       Contribution margin per unit = Selling price – Variable cost per unit = $400 $200 = $200
                               Breakeven      = Fixed Costs ¸ Contribution margin per unit
                                                      = $100,000 ¸ $200
                                                      = 500 units

1b.       To achieve its net income objective, Almo Company must sell 2,500 units.  This amount represents the point where revenues equal total costs plus the corresponding operating income objective to achieve net income of $240,000.

                         Revenue = Variable costs + Fixed costs + [Net income ÷ (1 Tax rate)]
                            $400Q = $200Q + $100,000 + [$240,000 ¸ (1 - 0.4)]
                           $400 Q = $200Q + $100,000 + $400,000

                                    Q = 2,500 units

                                               
2.         To achieve its net income objective, Almo Company should select the first alternative where the sales price is reduced by $40, and 2,700 units are sold during the remainder of the year.  This alternative results in the highest net income and is the only alternative that equals or exceeds the company’s net income objective.  Calculations for the three alternatives are shown below.

Alternative 1
                                 Revenues      =    ($400 ´ 350) + ($360a ´ 2,700) = $1,112,000
                          Variable costs      =    $200 ´ 3,050b = $610,000
                    Operating income      =    $1,112,000 - $610,000 - $100,000 = $402,000
                              Net income      =    $402,000 ´ (1 - 0.40) = $241,200
     a$400 – $40; b350 units + 2,700 units.

Alternative 2
                                 Revenues      =    ($400 ´ 350) + ($370c ´ 2,200) = $954,000
                          Variable costs      =    ($200 ´ 350) + ($190d ´ 2,200) = $488,000
                    Operating income      =    $954,000 - $488,000 - $100,000 = $366,000
                              Net income      =    $366,000 ´ (1 - 0.40) = $219,600
     c$400 – $30; d$200 – $10.



Alternative 3
                                 Revenues      =    ($400 ´ 350) + ($380e´ 2,000) = $900,000
                          Variable costs      =    $200 ´ 2,350f = $470,000
                    Operating income      =    $900,000 - $470,000 - $90,000g = $340,000
                              Net income      =    $340,000 ´ (1 - 0.40) = $204,000
     e$400 – (0.05 ´ $400) = $400 – $20; f350 units + 2,000 units; g$100,000 – $10,000


3-43     (30 min.)    Choosing between compensation plans, operating leverage.

1. We can recast Marston’s income statement to emphasize contribution margin, and then use it to compute the required CVP parameters.

Marston Corporation
Income Statement
For the Year Ended December 31, 2005


Using Sales Agents
Using Own Sales Force
Revenues

$26,000,000

$26,000,000
Variable Costs




  Cost of goods sold—variable
$11,700,000

$11,700,000

  Marketing commissions
   4,680,000
  16,380,000
   2,600,000
  14,300,000
Contribution margin

$9,620,000

$11,700,000
Fixed Costs




  Cost of goods sold—fixed
2,870,000

2,870,000

  Marketing—fixed
   3,420,000
  6,290,000
   5,500,000
   8,370,000
Operating income

$3,330,000

$ 3,330,000





Contribution margin percentage ($9,620,000x26,000,000; $11,700,000x$26,000,000)

37%

45%
Breakeven revenues
($6,290,000x0.37; $8,370,000x0.45)

$17,000,000

$18,600,000
Degree of operating leverage
($9,620,000x$3,330,000; $11,700,000x$3,330,000)

                2.89

                3.51

2.            The calculations indicate that at sales of $26,000,000, a percentage change in sales and contribution margin will result in 2.89 times that percentage change in operating income if Marston continues to use sales agents and 3.51 times that percentage change in operating income if Marston employs its own sales staff. The higher contribution margin per dollar of sales and higher fixed costs gives Marston more operating leverage, that is, greater benefits (increases in operating income) if revenues increase but greater risks (decreases in operating income) if revenues decrease. Marston also needs to consider the skill levels and incentives under the two alternatives. Sales agents have more incentive compensation and hence may be more motivated to increase sales. On the other hand, Marston’s own sales force may be more knowledgeable and skilled in selling the company’s products. That is, the sales volume itself will be affected by who sells and by the nature of the compensation plan.

3.         Variable costs of marketing       = 15% of Revenues
            Fixed marketing costs                = $5,500,000

Denote the revenues required to earn $3,330,000 of operating income by R, then

R - 0.45R - $2,870,000 - 0.15R - $5,500,000 = $3,330,000

                                            R - 0.45R - 0.15R = $3,330,000 + $2,870,000 + $5,500,000

                                                                 0.40R = $11,700,000

                                                                  R = $11,700,000 ¸ 0.40 = $29,250,000



3-44     (15–25 min.)    Sales mix, three products.

1.            Sales of A, B, and C are in ratio 20,000 : 100,000 : 80,000. So for every 1 unit of A, 5 (100,000 ÷ 20,000) units of B are sold, and 4 (80,000 ÷ 20,000) units of C are sold.

         Let Q   = Number of units of A to break even
             5Q   = Number of units of B to break even
             4Q   = Number of units of C to break even

         Contribution margin – Fixed costs = Zero operating income

         $3Q + $2(5Q) + $1(4Q) – $255,000    =   0
                                                         $17Q    =   $255,000
                                                               Q    =              15,000 ($255,000 ÷ $17) units of A
                                                             5Q    =              75,000 units of B
                                                             4Q    =              60,000 units of C
                                                          Total    =            150,000 units

2.      Contribution margin:
               A:          20,000 ´ $3                               $  60,000
               B:        100,000 ´ $2                                 200,000
               C:          80,000 ´ $1                                   80,000
                  Contribution margin                                                    $340,000
         Fixed costs                                                                             255,000
         Operating income                                                                 $  85,000

3.      Contribution margin
               A:    20,000 ´ $3                                     $  60,000
               B:    80,000 ´ $2                                       160,000
               C:  100,000 ´ $1                                       100,000
                     Contribution margin                                                 $320,000
         Fixed costs                                                                             255,000
         Operating income                                                                 $  65,000

         Let Q    =    Number of units of A to break even
             4Q    =    Number of units of B to break even
             5Q    =    Number of units of C to break even

                Contribution margin – Fixed costs   =   Breakeven point

            $3Q + $2(4Q) + $1(5Q) – $255,000   =  0
                                                            $16Q   =  $255,000
                                                                  Q   =             15,938 ($255,000 ÷ $16) units of A (rounded up)
                                                                4Q   =             63,752 units of B
                                                                5Q   =             79,690 units of C
                                                             Total   =           159,380 units

         Breakeven point increases because the new mix contains less of the higher contribution margin per unit, product B, and more of the lower contribution margin per unit, product C.


3-45     (30 min.)    Multiproduct  breakeven, decision making.



        Breakeven point in 2005 (in revenues) = 16,500 units × $50 = $825,000 in sales revenues


2.   Breakeven point in 2006 (in units)
Evenkeel expects to sell 3 units of Plumar for every 2 units of Ridex in 2006, so consider a bundle consisting of 3 units of Plumar and 2 units of Ridex.

Unit contribution Margin from Plumar  = $50 – $20 = $30
Unit contribution Margin from Ridex    = $25 – $15 = $10

The contribution margin for the bundle is

            $30 × 3 units of Plumar + $10 × 2 units of Ridex = $110

            So bundles to be sold to break even = $495,000= 4,500 bundles
                                                                           $110    


Breakeven point in 2006 (in units)
Plumar, 4,500 × 3 = 13,500 units
Ridex,   4,500 × 2 =  9,000 units

Breakeven point in revenues:

            Plumar 13,500 units  × $50 per unit    = $675,000
            Ridex     9,000 units × $25 per unit    =   225,000
            Total                                                       $900,000
 

The breakeven point in 2006 increases because fixed costs are the same in both years but the contribution margin generated by each dollar of sales revenue at the given product mix decreases in 2006 relative to 2005.

4.  Despite the breakeven sales revenue being higher, Evenkeel should accept Glaston’s offer. The breakeven points are irrelevant because Evenkeel is already above the breakeven sales volume in 2005. By accepting Glaston’s offer, Evenkeel has the ability to sell all the 30,000 units of Plumar in 2006 and make more sales of Ridex to Glaston without incurring any more fixed costs.

Operating income in 2006 with and without Ridex are expected to be as follows:

                                                                            2006                 2006
                                                                     without Ridex   with Ridex
Sales                                        $1,500,0001     $2,000,0002
Variable costs                               600,0003          900,0004
Contribution margin                     900,000        1,100,000
Fixed costs                                   495,000           495,000
Operating income                    $   405,000      $   605,000

1$50 × 30,000 units
2($50 × 30,000 units) + ($25 × 20,000 units)
3$20 × 30,000 units
4($20 × 30,000 units) + ($15 × 20,000 units)



3-46     (20–25 min.)    Sales mix, two products.

1.      Let Q      =  Number of units of Deluxe carrier to break even
             3Q      =  Number of units of Standard carrier to break even

         Revenues – Variable costs – Fixed costs = Zero operating income

         $20(3Q) + $30Q – $14(3Q) – $18Q – $1,200,000   =    0
                                        $60Q + $30Q – $42Q – $18Q     =    $1,200,000
                                                                                $30Q     =    $1,200,000
                                                                                      Q     =    40,000 units of Deluxe
                                                                                    3Q     =    120,000 units of Standard

         The breakeven point is 120,000 Standard units plus 40,000 Deluxe units, a total of 160,000 units.

2a.     Unit contribution margins are: Standard: $20 – $14 = $6; Deluxe: $30 – $18 = $12
         If only Standard carriers were sold, the breakeven point would be:
         $1,200,000 ¸ $6 = 200,000 units.
2b.     If only Deluxe carriers were sold, the breakeven point would be:
                  $1,200,000 ¸  $12 = 100,000 units

3.       Operating income = Contribution margin of Standard + Contribution margin of Deluxe – Fixed costs
                                           = 180,000($6) + 20,000($12) – $1,200,000
                                           = $1,080,000 + $240,000 – $1,200,000
                                           = $120,000

         Let Q     =     Number of units of Deluxe product to break even
             9Q     =     Number of units of Standard product to break even

           $20(9Q) + $30Q – $14(9Q) – $18Q – $1,200,000   =    0
                                      $180Q + $30Q – $126Q – $18Q   =    $1,200,000
                                                                                 $66Q   =    $1,200,000
                                                                                       Q   =    18,182 units of Deluxe (rounded up)
                                                                                     9Q   =    163,638 units of Standard

The breakeven point is 163,638 Standard + 18,182 Deluxe, a total of 181,820 units.

         The major lesson of this problem is that changes in the sales mix change breakeven points and operating incomes. In this example, the budgeted and actual total sales in number of units were identical, but the propor­tion of the product having the higher contribution margin declined.  Operating income suffered, falling from $300,000 to $120,000. Moreover, the breakeven point rose from 160,000 to 181,820 units.



3-47     (20 min.)    Gross margin and contribution margin.

1a.    Cost of goods sold                                                                             $1,600,000
         Fixed manufacturing costs                                                               500,000
         Variable manufacturing costs                                                            $1,100,000

         Variable manufacturing costs per unit = $1,100,000 ¸ 200,000 = $5.50 per unit

1b.    Total marketing and distribution costs                                              $1,150,000
         Variable marketing and distribution (200,000 ´ $4)                       800,000
         Fixed marketing and distribution costs                                      $   350,000
        
      


         Foreman has confused gross margin with contribution margin. He has interpreted gross margin as if it were all variable, and interpreted marketing and distribution costs as all fixed. In fact, both the manufacturing costs (subtracted from sales to calculate gross margin) and the marketing and distribution costs, contain fixed and variable components.




3.         Revenues                                                                       $5,000,000
            Variable costs (0.52 ´ $5,000,000)                                 2,600,000
            Fixed costs                                                                      2,160,000
            Operating income                                                   $   240,000

4.         Incorrect reporting of environmental costs with the goal of continuing operations is unethical. In assessing the situation, the specific “Standards of Ethical Conduct for Management Accountants” (described in Exhibit 1-7) that the management accountant should consider are listed below.

Competence

Clear reports using relevant and reliable information should be prepared. Preparing reports on the basis of incorrect environmental costs to make the company’s performance look better than it is violates competence standards. It is unethical for Bush not to report environmental costs to make the plant’s performance look good.

Integrity

The management accountant has a responsibility to avoid actual or apparent conflicts of interest and advise all appropriate parties of any potential conflict. Bush may be tempted to report lower environmental costs to please Lemond and Woodall and save the jobs of his colleagues. This action, however, violates the responsibility for integrity. The Standards of Ethical Conduct require the management accountant to communicate favorable as well as unfavorable information.

Objectivity

The management accountant’s Standards of Ethical Conduct require that information should be fairly and objectively communicated and that all relevant information should be disclosed. From a management accountant’s standpoint, underreporting environmental costs to make performance look good would violate the standard of objectivity.
        
            Bush should indicate to Lemond that estimates of environmental costs and liabilities should be included in the analysis. If Lemond still insists on modifying the numbers and reporting lower environmental costs, Bush should raise the matter with one of Lemond’s superiors. If after taking all these steps, there is continued pressure to understate environmental costs, Bush should consider resigning from the company and not engage in unethical behavior.

3-49     (35 min.)    Deciding where to produce.


Peoria
Moline
Selling price

$150.00

$150.00
Variable cost per unit




  Manufacturing
$72.00

$88.00

  Marketing and distribution
  14.00
    86.00
  14.00
  102.00
Contribution margin per unit (CMU)

64.00

48.00
Fixed costs per unit




  Manufacturing
30.00

15.00

  Marketing and distribution
  19.00
    49.00
  14.50
    29.50
Operating income per unit

$  15.00

$  18.50





CMU of normal production (as shown above)

$64

$48
CMU of overtime production
($64 – $3; $48 – $8)

61

40





1.




Annual fixed costs = Fixed cost per unit x Daily production rate x Normal annual capacity
($49 x400 units x 240 days;
$29.50 x 320 units x 240 days)
$4,704,000

$2,265,600

Breakeven volume = FCxCMU of normal production ($4,704,000 x$64; $2,265,600 x48)
            73,500
units
            47,200
Units





2.




Units produced and sold
96,000

96,000

Normal annual volume (units)
       96,000

       76,800

Units over normal volume (needing overtime)
                0

       19,200

CM from normal production units (normal annual volume x CMU normal production)
$6,144,000

$3,686,400

CM from overtime production units
(0; 19,200 x $40)
                0

     768,000

Total contribution margin
6,144,000

4,454,400

Total fixed costs
4,704,000

2,265,600

Operating income
$1,440,000

$2,188,800

Total operating income

$3,628,800



3.         The optimal production plan is to produce 120,000 units at the Peoria plant and 72,000 units at the Moline plant. The full capacity of the Peoria plant, 120,000 units (400 units × 300 days), should be used because the contribution from these units is higher at all levels of production than is the contribution from units produced at the Moline plant.

Contribution margin per plant:
            Peoria, 96,000 × $64                           $  6,144,000
            Peoria 24,000 × $64 – $3                        1,464,000
            Moline, 72,000 × $48                              3,456,000
Total contribution margin                               $11,064,000
         Deduct total fixed costs                                     6,969,600
Operating income                                            $  4,094,400

The contribution margin is higher when 120,000 units are produced at the Peoria plant and 72,000 units at the Moline plant. As a result, operating income will also be higher in this case since total fixed costs for the division remain unchanged regardless of the quantity produced at each plant.



Chapter 3 Video Case

The video case can be discussed using only the case writeup in the chapter. Alternatively, instructors can have students view the videotape of the company that is the subject of the case. The videotape can be obtained by contacting your Prentice Hall representative. The case questions challenge students to apply the concepts learned in the chapter to a specific business situation.

STORE 24: Cost-Volume-Profit Analysis


1.                  Customers who might be attracted to money order services include those new to the location who don’t have a bank checking account, or those who do not wish to establish a relationship with a bank for financial services. In the Northeast, Store 24 operates in neighborhoods with large immigrant populations whose members have yet to open bank checking accounts. These customers are also likely to buy Store 24’s other products once they are in the store.

2.                  Contribution margin per unit:

      Selling price:               79.0 cents
      Deduct:
      Direct labor                 22.5 cents ($9.00 per hour/60 minutes) × 1.5 minutes
      Processing fee               6.0 cents
            Contribution margin    50.5 cents per unit

3.         Equation method formula:

            Revenues – Variable costs – Fixed costs (FC) = Operating income (OI)
            Where
            (Unit selling price × quantity (Q)) – (Unit variable costs × Q) – Fixed costs = OI

                        (0.79Q) – ((0.225 +0.06)Q) – $30.00 = $0
                                                        0.505Q – $30.00 = $0
                                                                       0.505Q = $30.00
            Q = $30.00/0.505 = 59.41 money orders (approximately 2 per day)

Contribution margin method:  $30.00/0.505 cents per unit = 59.41 units per month

4.         Revenues – Variable costs – Fixed costs (FC) = Operating income (OI)


                        (0.79Q) – ((0.225 +.06)Q) – $30.00 = $140
                                                      0.505Q – $30.00 = $140
                                                                     0.505Q = $140 + 30.00 = $170
            Q = $170.00/0.505 = 336.6 money orders per month (approximately 11 per day)



5.         Since it takes three times as long for a clerk to complete a money order transaction versus a typical product sale (90 seconds versus 30 seconds), customers who are not purchasing money orders will have to wait three times longer while the money order transaction is being completed. Some customers may choose not to wait, thereby costing the store those sales. It is difficult to calculate the exact cost since the number of customers who might leave and the contribution margin for the average $3.00 sale is not known. Students may try to calculate the cost using the gross margin percentage of 30%, and an estimate of the variable operating costs such as the labor of the store clerk. In June 2004, the Canadian convenience store industry released a report conducted by Moneris Solutions Group (Toronto) that revealed 40% of Canadian shoppers walked out of a convenience store in 2003 due to long checkout lines. They estimated this behavior cost the industry $1.7 billion that year. Store 24 may want to track customers coming to the store each hour to determine peak traffic times that could be used to justify additional staffing to cover those busy hours.


( Cost Accounting 12e by SM Horngren)