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3-45 (40 min.) Multi-product CVP and decision making.
Crystal Clear Products produces two types of water filters. One attaches to the faucet and cleans
all water that passes through the faucet. The other is a pitcher-cum-filter that only purifies water
meant for drinking.
The unit that attaches to the faucet is sold for $100 and has variable costs of $35.
The pitcher-cum-filter sells for $120 and has variable costs of $30.
Crystal Clear sells two faucet models for every three pitchers sold. Fixed costs equal $1,200,000.
Required:
1. What is the breakeven point in unit sales and dollars for each type of filter at the current sales
mix?
2. Crystal Clear is considering buying new production equipment. The new equipment will
increase fixed cost by $208,000 per year and will decrease the variable cost of the faucet and
the pitcher units by $5 and $10, respectively. Assuming the same sales mix, how many of
each type of filter does Crystal Clear need to sell to break even?
3. Assuming the same sales mix, at what total sales level would Crystal Clear be indifferent
between using the old equipment and buying the new production equipment? If total sales are
expected to be 24,000 units, should Crystal Clear buy the new production equipment?
SOLUTION
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3-56
3-57
3-46 (20–25 min.) Sales mix, two products.
The Stackpole Company retails two products: a standard and a deluxe version of a luggage
carrier. The budgeted income statement for next period is as follows:
Standard
Carrier
Deluxe
Carrier
Total
Units sold
187,500
62,500
250,000
Revenues at $28 and $50 per unit
$5,250,000
$3,125,000
$8,375,000
Variable costs at $18 and $30 per unit
3,375,000
1,875,000
5,250,000
Contribution margins at $10 and $20 per unit
$1,875,000
$1,250,000
3,125,000
Fixed costs
2,250,000
Operating income
$ 875,000
Required:
1. Compute the breakeven point in units, assuming that the company achieves its planned sales
mix.
2. Compute the breakeven point in units (a) if only standard carriers are sold and (b) if only
deluxe carriers are sold.
3. Suppose 250,000 units are sold but only 50,000 of them are deluxe. Compute the operating
income. Compute the breakeven point in units. Compare your answer with the answer to
requirement 1. What is the major lesson of this problem?
SOLUTION
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3-59
3-60
3-47 (20 min.) Gross margin and contribution margin.
The Museum of America is preparing for its annual appreciation dinner for contributing
members. Last year, 525 members attended the dinner. Tickets for the dinner were $24 per
attendee. The profit report for last year’s dinner follows.
Ticket sales
$12,600
Cost of dinner
15,300
Gross margin
(2,700)
Invitations and paperwork
2,500
Profit (loss)
$(5,200)
This year the dinner committee does not want to lose money on the dinner. To help achieve its
goal, the committee analyzed last year’s costs. Of the $15,300 cost of the dinner, $9,000 were
fixed costs and $6,300 were variable costs. Of the $2,500 cost of invitations and paperwork,
$1,975 were fixed and $525 were variable.
Required:
1. Prepare last year’s profit report using the contribution margin format.
2. The committee is considering expanding this year’s dinner invitation list to include volunteer
members (in addition to contributing members). If the committee expands the dinner
invitation list, it expects attendance to double. Calculate the effect this will have on the
profitability of the dinner assuming fixed costs will be the same as last year.
SOLUTION
3-48 (30 min.) Ethics, CVP analysis.
3-61
Kirk Corporation produces a molded plastic casing, LX201, for desktop computers. Summary
data from its 2013 income statement are as follows:
Revenues
$4,000,000
Variable costs
2,400,000
Fixed costs
1,728,000
Operating income
$ (128,000)
Bridgett Hewitt, Kirk’s president, is very concerned about Kirk Corporation’s poor profitability.
She asks Julian Buckner, production manager, and Seth Madden, controller, to see if there are
ways to reduce costs.
After 2 weeks, Julian returns with a proposal to reduce variable costs to 52% of revenues
by reducing the costs Kirk currently incurs for safe disposal of wasted plastic. Seth is concerned
that this would expose the company to potential environmental liabilities. He tells Julian, “We
would need to estimate some of these potential environmental costs and include them in our
analysis.” “You can’t do that,” Julian replies. “We are not violating any laws. There is some
possibility that we may have to incur environmental costs in the future, but if we bring it up now,
this proposal will not go through because our senior management always assumes these costs to
be larger than they turn out to be. The market is very tough, and we are in danger of shutting
down the company and costing all of us our jobs. The only reason our competitors are making
money is because they are doing exactly what I am proposing.”
Required:
1. Calculate Kirk Corporation’s breakeven revenues for 2013.
2. Calculate Kirk Corporation’s breakeven revenues if variable costs are 52% of revenues.
3. Calculate Kirk Corporation’s operating income for 2013 if variable costs had been 52% of
revenues.
4. Given Julian Buckner’s comments, what should Seth Madden do?
SOLUTION
3-62
3-49 (35 min.) Deciding where to produce.
(CMA, adapted) Portal Corporation produces the same power generator in two Illinois plants, a
new plant in Peoria and an older plant in Moline. The following data are available for the two
plants.
All fixed costs per unit are calculated based on a normal capacity usage consisting of 240
working days. When the number of working days exceeds 240, overtime charges raise the
variable manufacturing costs of additional units by $3.00 per unit in Peoria and $8.00 per unit in
Moline.
Portal Corporation is expected to produce and sell 192,000 power generators during the
coming year. Wanting to take advantage of the higher operating income per unit at Moline, the
company’s production manager has decided to manufacture 96,000 units at each plant, resulting
in a plan in which Moline operates at maximum capacity (320 units per day * 300 days) and
Peoria operates at its normal volume (400 units per day * 240 days).
Required:
1. Calculate the breakeven point in units for the Peoria plant and for the Moline plant.
2. Calculate the operating income that would result from the production manager’s plan to
produce 96,000 units at each plant.
3. Determine how the production of 192,000 units should be allocated between the Peoria and
Moline plants to maximize operating income for Portal Corporation. Show your calculations.
SOLUTION
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