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 = FC
 CMU = |
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,
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.
0 comments
Post a Comment