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Problem A-4 (continued)
4. If the postal service wants to maximize the contribution margin and
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1+(-1.2163)
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= 5.6232 × $1.00 = $5.62
Note that a $0.20 increase in cost has led to a $1.12 ($5.62 – $4.50) in-
Problem A-5 (45 minutes)
1. a. Number of pads manufactured each year:
38,400 labor-hours ÷ 2.4 labor-hours per pad = 16,000 pads.
Selling and administrative expenses:
Variable (16,000 pads × $9 per pad) ....
$144,000
Fixed ..................................................
732,000
Total ...................................................
$876,000
Problem A-5 (continued)
c. The income statement is:
Sales (16,000 pads × $135 per pad) ..............
$2,160,000
Cost of goods sold
(16,000 pads × $60 per pad) ......................
960,000
Gross margin ................................................
1,200,000
Selling and administrative expenses:
Sales commissions ......................................
$144,000
Salaries ......................................................
82,000
Warehouse rent ..........................................
50,000
Advertising and other .................................
600,000
Total selling and administrative expense .........
876,000
Net operating income ....................................
$ 324,000
The company’s ROI computation for the pads will be:
Net Operating Income Sales
ROI = ×
Sales Average Operating Assets
$324,000 $2,160,000
= ×
$2,160,000 $1,350,000
= 15% × 1.6 = 24%
2. Variable cost per unit:
Direct materials ..............................................
$10.80
Direct labor ....................................................
19.20
Variable manufacturing overhead (1/5 × $30) ..
6.00
Sales commissions ..........................................
9.00
Total ..............................................................
$45.00
If the company has idle capacity and sales to the retail outlet would not
affect regular sales, any price above the variable cost of $45 per pad
would add to profits. The company should aggressively bargain for more
than this price; $45 is simply the rock-bottom floor below which the
company should not go in its pricing.
Problem A-6 (60 minutes)
1. Supporting computations:
Number of hours worked per year:
20 workers × 40 hours per week × 50 weeks = 40,000 hours.
Number of surfboards produced per year:
Problem A-6 (continued)
2. a.
( )
( )
Required ROI Selling and administrative
+
× Investment expenses
Markup percentage =
on absorption cost Unit sales × Unit product cost
18% × $1,500,000 + $1,130,000
= 20,000 units × $80 per unit
$1,400,000
= $1,60 = 87.5%
0,000
b.
Direct materials ...................
$ 27
Direct labor .........................
18
Manufacturing overhead ......
35
Total cost to manufacture ....
80
Add markup: 87.5% ............
70
Selling price ........................
$150
c.
Sales (20,000 boards × $150 per board) ............
$3,000,000
Cost of goods sold
(20,000 boards × $80 per board) ....................
1,600,000
Gross margin ....................................................
1,400,000
Selling and administrative expenses ...................
1,130,000
Net operating income ........................................
$ 270,000
Net Operating Income Sales
ROI = ×
Sales Average Operating Assets
$270,000 $3,000,000
= ×
$3,000,000 $1,500,000
= 9% × 2
= 18%
Problem A-6 (continued)
3. Total fixed costs:
Manufacturing overhead .........................................
$ 600,000
Selling and administrative
[$1,130,000 – (20,000 boards × $10 per board)] ..
930,000
Total fixed costs .....................................................
$1,530,000
Variable costs per board:
Direct materials .................................
$27
Direct labor .......................................
18
Variable manufacturing overhead ........
5
Variable selling ..................................
10
Variable cost per board ......................
$60
To achieve the 18% ROI, the company would have to sell at least the
20,000 units assumed in part (2) above. The break-even volume can be
computed as follows:
Fixed expenses
Break-even point =
in units sold Unit contribution margin
$1,530,000
= $150 per board - $60 per board
= 17,000 boards
Problem A-7 (60 minutes)
1. The complete, filled-in table appears below:
Selling
Price
Estimated
Unit Sales
Sales
Variable
Cost
Fixed
Expenses
Net
Operating
Income
$25.00
50,000
$1,250,000
$300,000
$960,000
-$10,000
$23.75
54,000
$1,282,500
$324,000
$960,000
-$1,500
$22.56
58,320
$1,315,699
$349,920
$960,000
$5,779
$21.43
62,986
$1,349,790
$377,916
$960,000
$11,874
$20.36
68,025
$1,384,989
$408,150
$960,000
$16,839
$19.34
73,467
$1,420,852
$440,802
$960,000
$20,050
$18.37
79,344
$1,457,549
$476,064
$960,000
$21,485
$17.45
85,692
$1,495,325
$514,152
$960,000
$21,173
$16.58
92,547
$1,534,429
$555,282
$960,000
$19,147
$15.75
99,951
$1,574,228
$599,706
$960,000
$14,522
