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25 Minutes, Medium PROBLEM 20.2B
SNUG-AS-A-BUG
a. Sales price per unit:
Budgeted costs 4,800,000$
Add: Budgeted operating income 560,000
b. (1) Total fixed costs:
Manufacturing overhead ($2,400,000 × 90%) 2,160,000$
Selling and administrative expenses ($800,000 × 60%) 480,000
Total fixed costs 2,640,000$
(2) Variable costs and expenses per unit:
Direct materials 18$
Direct labor 2
(3) Unit contribution margin:
Sales price per unit 71$
Less: Variable costs per unit [from (2) ]27
Unit contribution margin 44$
(4) Number of units required to break even:
a.
30 Minutes, Medium
MOOR-N-MORE
Cost-Volume-Profit Graph
Annual Basis
PROBLEM 20.3B
MOOR-N-MORE
PROBLEM 20.3B
MOOR-N-MORE (continued)
The following information is used for parts b. and c. of this problem.
Operating data:
Revenue per mooring-space hour 5$
Variable costs per mooring-space hour 10 cents
Fixed costs per year:
PROBLEM 20.3B
MOOR-N-MORE (concluded)
b. Contribution margin ratio:
Mooring charge per hour 5.00$
Less: Variable costs per unit 0.10
Break-even sales volume:
Fixed costs:
Rent ($5,000 × 12) 60,000$
General Manager's salary 32,940
Wages ($250 × 52 × 3) 39,000
c. (1) New contribution margin ratio per parking-space hour:
Mooring charge per hour 5.00$
Less: Variable costs ($0.10 + $0.20) 0.30
Contribution margin per unit 4.70$
New contribution margin ratio ($4.70 ÷ $5.00) 94%
New level of fixed costs:
Rent ($5,000 × 12) 60,000$
General Manager's salary 32,940
(2) Required sales revenue to produce desired
operating income:
Total fixed costs under new arrangement (above) 112,440$
30 Minutes, Medium
PROBLEM 20.4B
GREEN THUMB
a. Contribution margin ratio:
Unit sales price 20$
Less: Variable costs per unit 12
Break-even sales volume in dollars:
Fixed costs ($5,000 + $2,400 + $1,600) 9,000$
Break-even sales volume in bags:
Break-even sales volume in dollars (above) 22,500$
Unit sales price 20$
Break-even sales volume in bags ($22,500 ÷ $20) 1,125
b. On the following page.
c. Projected operating income at various levels:
1,500 bags 1,800 bags
PROBLEM 20.4B
GREEN THUMB (concluded)
b.
GREEN THUMB
Cost-Volume-Profit Graph
Monthly Basis
40 Minutes, Strong
PROBLEM 20.5B
ED WINSLOW
a. Unit contribution margin:
Sales price per unit 3.20$
Less: Variable costs per unit:
Merchandise 1.10$
Rental commission 0.10 1.20
Unit contribution margin 2.00$
Break-even volume in dollars:
Break-even volume in units (above) 1,500
Unit sales price 3.20$
Break-even volume in dollars (1,500 units × $3.20) 4,800$
b. See following page.
c. Sales volume to produce operating income equal to 12%
return on investment:
Total monthly fixed costs (part a)3,000$
d. New monthly fixed costs [$3,000 + ($45 × 50)] 5,250$
New contribution margin per unit:
PROBLEM 20.5B
ED WINSLOW (concluded)
b.
ED WINSLOW
Cost-Volume-Profit Chart
Monthly Basis
30 Minutes, Strong PROBLEM 20.6B
ELECTRO SYSTEMS
a. Variable costs per unit before 20% increase in the cost
of direct labor 6.00$
Increase in cost of direct labor, 20% of $1.00 0.20
Variable costs and expenses per unit
after 20% increase in the cost of direct labor 6.20$
Because the contribution margin ratio of 60% is
required, the variable costs of $6.20 per unit must
equal 40% of sales price after the wage increase.
c. Current After
Capacity Expansion
210,000 Units 220,500 Units
Total contribution margin ($8.80 per unit) 1,848,000$ 1,940,400$
Less: Fixed costs 1,000,000 1,100,000
Sales volume required to maintain current operating income:
35 Minutes, Strong PROBLEM 20.7B
DORSAL RANCH
a. Raising cod will result in the highest
operating income.
Cod Salmon
Number of salable fish 300,000 200,000
× sale price 5$ 9$
Total revenue 1,500,000$ 1,800,000$
b.
c. and d.
Operating income with new filter material:
Cod Salmon
Number of salable fish 400,000 280,000
× sale price 5$ 9$
Total revenue 2,000,000$ 2,520,000$
The most important factors in determining operating income are survival rates, and
the costs of feeding and water changes.
PROBLEM 20.7B
DORSAL RANCH (concluded)
c. and d.
Operating income with new heating
and lighting equipment: Cod Salmon
Number of salable fish 320,000 220,000
× sale price 5$ 9$
Total revenue 1,600,000$ 1,980,000$
PROBLEM 20.8B
HOMETEAM SPORTS
a. Contribution margins of product lines:
Hats ($6 ÷ $20) 30%
Shirts ($21 ÷ $28) 75%
b. (1) Average contribution margin ratio:
Hats (30% × 40% mix) 12%
(2) Monthly operating income:
Total sales 1,500,000$
Average contribution margin ratio × 57%
Total contribution margin ($1,500,000 × 57%) 855,000$
(3) Monthly break-even sales volume (in dollars):
Fixed costs and expenses 684,000$
Average contribution margin ratio ÷ 57%
Break-even sales volume ($684,000 ÷ 57%) 1,200,000$
c. Assuming new sales mix (shirts, 40%; hats, 60%)
(1) Average contribution margin ratio:
(2) Monthly operating income:
Total sales 1,500,000$
Average contribution margin ratio × 48%
Total contribution margin ($1,500,000 × 48%) 720,000$
(3) Monthly break-even sales volume (in dollars):
Fixed costs and expenses 684,000$
35 Minutes, Strong
PROBLEM 20.8B
HOMETEAM SPORTS (concluded)
d.
In the new sales mix, increased sales of hats have replaced some sales of shirts. Shirts have
SOLUTIONS TO CRITICAL THINKING CASES
CASE 20.1
MULTIPLE PERSPECTIVES—
ATTEND OUR SEMINAR
The vice president of sales for a large automobile company
The vice president of sales plays a critical role in determining her company’s operating
performance. A knowledge of cost-volume-profit relationships will help her to evaluate
important questions related to the decisions she must make. For example, given that a target
20 Minutes, Medium
The following are possible reasons you could give each of the individuals to motivate them to
come to your seminar:
The factory worker who serves as her company’s labor union representative in charge of contract
negotiations
Knowledge of budgeting and budget processes is a source of empowerment in most
The purchasing agent in charge of ordering raw materials for a large manufacturing company
The purchasing agent is also directly involved with one of the company’s largest variable
costs—raw materials inventory. Having a general knowledge of cost-volume-profit relationships
will help him to better understand the impact of his actions on company performance. For
example, what is the impact on operating income of receiving large quantity discounts from a
major supplier? What is the effect of receiving purchase discounts for prompt payment to all
vendors? What is the effect on operating income of selecting one supplier over another? What is
the net effect of paying a premium for high-quality raw materials given a resulting reduction in
waste and scrap?
CASE 20.2
DON’T MESS WITH THE PURPLE COW
a.
1,500
(1) (2)
Reduce Increase
Selling Advertising
Price Expense
$ 12.80 $ 14.80
6.80 6.80
c.
The Purple Cow should adopt neither of the two proposed marketing strategies. Of these
strategies, the increased advertising would be preferable to the reductions in sales prices, as
Memo to Management:
RE: Alternative marketing proposals: price reductions or additional advertising
Less: Variable cost per gallon
40 Minutes, Strong
Average selling price per gallon
b.
Sales (in gallons) required to earn $10,000 per month:
Sales (in gallons) required to break even
Projected monthly results for typical drive-in store:
CASE 20.2
DON’T MESS WITH THE PURPLE COW (concluded)
1,500
Contribution margin per unit of sales over the break-even point
($14.80 sales price, less $6.80 variable costs,
Sales volume in excess of break-even point (in gallons)
(3,000 gallons, less 1,500-gallon break-even point)
CASE 20.3
SEC FORM 8-K
ETHICS, FRAUD AND CORPORATE GOVERNANCE
a.
c.
Given the company has been struggling in recent years to break-even, large charges
10 Minutes, Easy
Section 409 of the Sarbanes-Oxley Act (SOX) requires public companies disclose certain
material events within four business days after they occur. Such events include
CASE 20.4
FORD MOTOR COMPANY
INTERNET
a.
c.
Products with the highest contribution margins contribute most to the bottom line. Thus,
by shifting its sales mix to include more products with high contribution margins, a
15 Minutes, Easy
Approximately 6% of the company's total revenue is generated by its Financial Services
