18) Karen Hefner, a florist, operates retail stores in several shopping malls. The average selling price of an
arrangement is $30 and the average cost of each sale is $18. A new mall is opening where Karen wants to
locate a store, but the location manager is not sure about the rent method to accept. The mall operator
offers the following three options for its retail store rentals:
1. paying a fixed rent of $15,000 a month, or
2. paying a base rent of $9,000 plus 10% of revenue received, or
3. paying a base rent of $4,800 plus 20% of revenue received up to a maximum rent of $25,000.
Required:
a. For each option, compute the breakeven sales and the monthly rent paid at break-even.
b. Beginning at zero sales, show the sales levels at which each option is preferable up to 5,000 units.
19) Craylon Manufacturing Company produces two products, X and Y. The following information is
presented for both products:
X Y
Selling price per unit $40 $25
Variable cost per unit 25 15
Total fixed costs are $275,000.
Required:
a. Calculate the contribution margin for each product.
b. Calculate breakeven point in units of both X and Y if the sales mix is 3 units of X for every unit of Y.
c. Calculate breakeven volume in total dollars if the sales mix is 2 units of X for every 3 units of Y.
20) Ballpark Concessions currently sells hot dogs. During a typical month, the stand reports a profit of
$9,000 with sales of $50,000, fixed costs of $21,000, and variable costs of $0.64 per hot dog.
Next year, the company plans to start selling nachos for $3 per unit. Nachos will have a variable cost of
$0.72 and new equipment and personnel to produce nachos will increase monthly fixed costs by $8,808.
Initial sales of nachos should total 5,000 units. Most of the nacho sales are anticipated to come from
current hot dog purchasers, therefore, monthly sales of hot dogs are expected to decline to $20,000.
After the first year of nacho sales, the company president believes that hot dog sales will increase to
$33,750 a month and nacho sales will increase to 7,500 units a month.
Required:
a. Determine the monthly breakeven sales in dollars before adding nachos.
b. Determine the monthly breakeven sales during the first year of nachos sales, assuming a constant
sales mix of 1 hotdog and 2 units of nachos.
21) Fine Suiting Company sells shirts for men and boys. The average selling price and variable cost for
each product are as follows:
Men’s Boys’
Selling Price $25.00 Selling Price $24.00
Variable Cost $15.40 Variable Cost $16.00
Fixed costs are $35,200.
Required:
a. What is the breakeven point in units for each type of shirt, assuming the sales mix is 1:1?
b. What is the operating leverage, assuming the sales mix is 2:1 in favor of men’s shirts, and sales total
5,000 shirts?
22) Mount Carmel Company sells only two products, Product A and Product B.
Product A
Product B
Total
Selling price
$40
$50
Variable cost per unit
$24
$40
Total fixed costs
$840,000
Mount Carmel sells two units of Product A for each unit it sells of Product B. Mount Carmel faces a tax
rate of 30%.
Required:
a. What is the breakeven point in units for each product assuming the sales mix is 2 units of Product A
for each unit of Product B?
b. What is the breakeven point if Mount Carmel’s tax rate is reduced to 25%, assuming the sales mix is 2
units of Product A for each unit of Product B?
c. How many units of each product would be sold if Mount Carmel desired an after-tax net income of
$73,500, facing a tax rate of 30%?
23) Atlanta Radio Supply sells only two products, Product X and Product Y.
Product X
Product Y
Total
Selling price
$25
$45
Variable cost per unit
$20
$35
Total fixed costs
$350,000
Atlanta Radio Supply sells three units of Product X for each two units it sells of Product Y. Atlanta Radio
Supply has a tax rate of 25%.
Required:
a. What is the breakeven point in units for each product, assuming the sales mix is 3 units of Product X
for each two units of Product Y?
b. How many units of each product would be sold if Atlanta Radio Supply desired an after-tax net
income of $210,000, using its tax rate of 25%?
24) What is sales mix? How do companies choose their sales mix?
25) Stella Company sells only two products, Product A and Product B.
Product A
Product B
Selling price
$40
$50
Variable cost per unit
$24
$40
Total fixed costs
Stella sells two units of Product A for each unit it sells of Product B. Stella faces a tax rate of 30%. Stella
desires a net after-tax income of $73,500. The breakeven point in units would be ________.
A) 21,750 units of Product A and 43,500 units of Product B
B) 22,500 units of Product A and 45,000 units of product B
C) 43,500 units of Product A and 21,750 units of Product B
D) 45,000 units of Product A and 22,500 units of Product B
Objective 3.8
1) Multiple cost drivers ________.
A) have only one revenue driver
B) can utilize the simple CVP formula
C) have no unique breakeven point
D) are the result of multiple products
2) A nonprofit organization aids the unemployed by supplementing their incomes by $5,000 annually,
while they seek new employment skills. The organization has fixed costs of $200,000 and the budgeted
appropriation for the year totals $700,000. How many individuals can receive financial assistance this
year?
A) 115 people
B) 110 people
C) 100 people
D) 95 people
3) Helping Hands is a nonprofit organization that supplies electric fans during summer for individuals in
need. Fixed costs are $225,000. The fans cost $25.00 each. The organization has a budgeted appropriation
of $675,000. How many people can receive a fan during summer?
A) 15,000 people
B) 18,000 people
C) 22,000 people
D) 16,000 people
4) To apply CVP analysis in not-for profit organization ________.
A) managers need to focus on the customer base rather than the cost drivers
B) managers need to focus on measuring their output, which is the same as tangible units sold by
manufacturing and merchandising companies
C) managers need to focus on measuring their input, which is different from the tangible units consumed
by manufacturing and merchandising companies
D) managers need to focus on measuring their output, which is different from the tangible units sold by
manufacturing and merchandising companies
5) Which of the following is an output measure for a hospital?
A) number of doctors needed to cater to patients
B) number of patients admitted every day in a hospital
C) number of days spent by a patient in a hospital
D) charges applicable on the number of days spent by a patient in a hospital
1) Gross margin is ________.
A) sales revenue less variable costs
B) sales revenue less cost of goods sold
C) contribution margin less fixed costs
D) contribution margin less variable costs
2) In the merchandising sector ________.
A) only variable costs are subtracted to determine gross margin
B) fixed overhead costs are subtracted to determine gross margin
C) fixed overhead costs are subtracted to determine contribution margin
D) all operating costs are subtracted to determine contribution margin
3) In the manufacturing sector, ________.
A) only variable costs are subtracted to determine gross margin
B) fixed overhead costs are subtracted to determine gross margin
C) fixed overhead costs are subtracted to determine contribution margin
D) all operating costs are subtracted to determine contribution margin
4) Contribution margin and gross margin are terms that can be used interchangeably.
5) Gross Margin will always be greater than contribution margin.
6) Jacob’s Manufacturing sales is equal to production.If Jacob’s Manufacturing presented a Financial
Accounting Income Statement emphasizing gross margin showing operating income of $180,000, a
Contribution Income Statement emphasizing contribution margin would show a different operating
income.
7) Beta Corp reported the following:
Revenues $2,500
Variable manufacturing costs $ 300
Variable nonmanufacturing costs $ 480
Fixed manufacturing costs $ 350
Fixed nonmanufacturing costs $ 270
Required:
a. Compute contribution margin.
b. Compute gross margin.
c. Compute operating income.
Objective 3.A
1) What would be the expected monetary value for Avalia Corp using the probability method?
Probability Cash Inflows
0.20 $200,000
0.30 $160,000
0.15 $120,000
0.35 $50,000
A) $40,000
B) $188,000
C) $123,500
D) $60,000
2) Lobster Liquidators will make $500,000 if the fishing season weather is good, $200,000 if the weather is
fair, and would actually lose $50,000 if the weather is poor during the season. If the weather service gives
a 40% probability of good weather, a 25% probability of fair weather, and a 35% probability of poor
weather, what is the expected monetary value for Lobster Liquidators?
A) $500,000
B) $232,500
C) $267,500
D) $200,000
Answer the following questions using the information below:
Patrick Ross has three booth rental options at the county fair where he plans to sell his new product. The
booth rental options are:
Option 1: $1,000 fixed fee, or
Option 2: $750 fixed fee + 5% of all revenues generated at the fair, or
Option 3: 20% of all revenues generated at the fair.
The product sells for $37.50 per unit. He is able to purchase the units for $12.50 each.
3) How many actions and events will a decision table contain?
A) 1 action and 3 events
B) 1 action and 6 events
C) 2 actions and 3 events
D) 3 actions and 6 events
4) Which option should Patrick choose to maximize income assuming there is a 40% probability that 70
units will be sold and a 60% probability that 40 units will be sold?
A) Option 1
B) Option 2
C) Option 3
D) All options maximize income equally.
5) An expected value is the weighted average of the outcomes, with the probability of each outcome
serving
as the weight.
7) A decision table is a summary of the alternative actions, events, outcomes, and probabilities of events.
8) Produce Company needs to know the pounds of apples to have on hand each day. Each pound of
apples costs $0.50 and can be sold for $0.80. Unsold apples are worthless at the end of the day. The
following demands were found after studying the last six months’ sales:
200 pounds of apples 30% of the time
300 pounds of apples 40% of the time
400 pounds of apples 30% of the time
Required:
Determine whether Produce Company should order 200, 300, or 400 pounds of apples.
9) Lauren had been a manager of a major hotel chain for 15 years. Due to a hotel owner‘s illness, Lauren
was offered the opportunity to purchase a hotel near a vacation area she had often visited. It was a great
place surrounded by mountains and known for its scenic beauty. After obtaining a lawyer and an
accountant to assist her, Lauren did an analysis of the business and evaluated several contingencies
relating to various scenarios. Since the expected monetary value of the various scenarios was much
higher than the price of the hotel, she decided to purchase the hotel. She resigned her position, obtained a
loan, and purchased the hotel. The following year, there was a severe economic downturn and also a very
bad weather season that reduced the number of guests and also caused a resulting mold situation in the
hotel building that required expensive repair work. Lauren ran short of cash, became emotionally
distraught, and eventually had to sell the hotel at a significant loss. Was it a bad decision for her to
purchase the hotel instead of keeping her other managerial position? Explain.