59. During the months of April through September, the following total utility costs were paid
at various production volumes:
a. Use the high-low method to calculate the cost formula utility costs.
b. If the production volume were expected to be 22,000 units for the month of November, what
amount of total costs would be expected?
60. Preppy Co. makes and sells a single product. The current selling price is $30 per unit.
Variable costs are $21 per unit, and fixed expenses total $90,000 per month. Sales volume for
July totaled 12,000 units.
a. Calculate the operating income for July.
b. Calculate the break-even point in units sold and total revenues.
c. Management is considering the use of automated production equipment. If this were done,
variable costs would drop to $15.00 per unit, but fixed expenses would increase to $100,000 per
month.
(1.) Calculate operating income at a volume of 12,000 units per month with the new cost
structure.
(2.) Calculate the break-even point in units with the new cost structure.
61. Presented below is the income statement for Ackee Food Center for the month of July:
Based on an analysis of cost behavior patterns, it has been determined that the company’s
contribution margin ratio is 15 percent.
(a.) Rearrange the above income statement to the contribution margin format.
(b.) If sales increase by 10 percent, what will be the firm’s operating income?
(c.) Calculate the amount of revenue required for Ackee’s Food Center to break even.
62. Presented below is the income statement for Kettridge’s Farm for the month of April:
Based on an analysis of cost behavior patterns, it has been determined that the company’s
contribution margin ratio is 40%.
(a.) Rearrange the income statement to the contribution margin format.
(b.) If sales increase by 10 percent, what will be the firm’s operating income?
(c.) Calculate the amount of revenue required for Kettridge’s Farm to break even.
63. Krultz Corp. has annual revenues of $760,000, an average contribution margin ratio of 30
percent, and fixed expenses of $75,000.
(a.) Management is considering adding a new product to the company’s product line. The new
item will have $21 of variable costs per unit. Calculate the selling price that will be required if this
product is not to affect the average contribution margin ratio.
(b.) If the new product adds an additional $36,000 to Krultz’s fixed expenses, how many units of
the new product must be sold to break even on the new product?
(c.) If 12,000 units of the new product could be sold at a price of $32 per unit, and the company’s
other business did not change, calculate Krultz’s total operating income and average contribution
margin ratio.
64. Brazen, Inc. produces sound amplifiers for electric guitars. The firm’s income statement
showed the following:
An automated machine has been developed that can produce several components of the
amplifiers. If the machine is purchased, fixed expenses will increase to $315,000 per year. The
firm’s production capacity will increase, which is expected to result in a 25 percent increase in
sales volume. It is also estimated that the variable expense ratio will be reduced to half of what it
is now.
(a.) Calculate the firm’s current contribution margin per unit and break-even point in units.
(b.) Calculate the firm’s contribution margin per unit and break-even point in terms of units if the
new machine is purchased.
(c.) Calculate the firm’s operating income assuming that the new machine is purchased.
(d.) Do you believe that management of Brazen, Inc. should purchase the new machine? Explain
your answer.
65. Obed Corp., makes three models of high performance cross country ski machines.
Current operating data are summarized below:
Fixed expenses per month total $185,820
(a) Calculate the contribution margin ratio for each product.
(b) Calculate the firm’s overall contribution margin ratio.
(c) Calculate the firm’s break-even point in sales dollar.
(d) Calculate the firm’s operating income.
(e) Management is considering the elimination of the OurSki model due to low sales volume. As a
result, total fixed expenses can be reduced by $60,000 per month. Assuming that this change
would not affect the other models, would you recommend the elimination of the OurSki model?
66. Management of ABC Company is considering new production robotics to replace some
current manual labor operations for one of their product lines. ABC’s current cost structure for
this product line consists of variable expenses of $40 per unit and fixed expenses totaling
$86,400 per month. If the robotics were installed, variable expenses would drop to $28 per unit,
but fixed expenses would increase to $135,600 per month.
(a.) Define the term indifference point.
(b.) Calculate the indifference point between the alternative cost structures for ABC Company’s
product line.
(c.) Explain how ABC’s management would use the indifference point in the decision to replace
the manual operations with the new production robotics.
