67.
During the months of January through June, the following total utility costs were paid at
various production volumes:
Month
Total
Utility
Costs
Total
Production
Volume
January
$10,000
32,000 units
February
14,000
52,000 units
March
16,000
64,000 units
April
12,000
40,000 units
May
8,000
24,000 units
June
20,000
72,000 units
a. Use the high-low method to calculate the cost formula utility costs.
b. If the production volume were expected to be 50,000 units for the month of July, what
amount of total costs would be expected?
rate
=
=
$2,000
(or)
units)
=
$2,000
formula
68.
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.
69.
Presented below is the income statement for Ackee Food Center for the month of July:
Sales
$1,280,000
Cost of goods sold
1,180,000
Gross profit
$100,000
Operating expenses
64,000
Operating income
$36,000
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.
Variable expenses
Contribution margin
Fixed expenses
Operating income
in sales =
contribution margin
70.
Presented below is the income statement for Breckenridge Farms for the month of
October:
Sales
$220,000
Cost of goods sold
(114,000)
Gross profit
$106,000
Operating expenses
(76,000)
Operating income
$30,000
Based on an analysis of cost behavior patterns, it has been determined that the
company’s contribution margin ratio is 30%.
(a.) Rearrange the income statement to the contribution margin format.
(b.) If sales increase by 20 percent, what will be the firm’s operating income?
(c.) Calculate the amount of revenue required for Breckenridge Farms to break even.
ratio
71
.
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.
72.
SoundPro, Inc. produces amplifiers for electric guitars. The firm’s income statement
showed the following:
Revenues (16,000 units)
$960,000
100%
Variable expenses
(672,000)
70%
Contribution margin
$288,000
30%
Fixed expenses
(225,000)
Operating income
$63,000
An automated machine has been developed that can produce several components of the
amplifiers. If the machine is purchased, fixed expenses will increase to $526,500 per year.
The firm’s production capacity will increase, which is expected to result in a 10 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 SoundPro, Inc. should purchase the new
machine? Explain your answer.
73.
Obed Corp. makes three models of high performance cross country ski machines. Current
operating data are summarized below:
MySki
YourSki
OurSki
Selling Price/Unit
$400
$500
$250
Variable
Cost/Unit
$100
$200
$150
Monthly Sales
Volume
600
400
500
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?
Selling
Price/Unit
Variable
Cost/Unit
Contrib.
60%
74.
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.
75.
Pineapple Corp. has annual revenues of $600,000, fixed expenses of $200,000, and an
average contribution margin ratio of 30%.
(a) Management is considering adding a new product to the company’s product line. The
new item will have $14.00 of variable costs per unit. Calculate the selling price that will be
required for this product to maintain the 30% average contribution margin ratio on current
sales
(b) If the new product adds an additional $63,000 to Pineapple’s fixed expenses, how
many units of the new product must be sold at the price calculated in part (a) in order to
break even on the new product?
(c) If 25,000 units of the new product could be sold at a price of $18.00 per unit, and the
company’s other business did not change, calculate Pineapple’s total operating income
and average contribution margin ratio.
