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3-42
3-43
3-39 (30 min.) CVP analysis, shoe stores (continuation of 3-38).
Refer to requirement 3 of Problem 3-38. In this problem, assume the role of the owner of
HighStep.
Required:
1. As owner, which sales compensation plan would you choose if forecasted annual sales of the
new store were at least 10,000 units? What do you think of the motivational aspect of your
chosen compensation plan?
2. Suppose the target operating income is $69,000. How many units must be sold to reach the
target operating income under (a) the original salary-plus-commissions plan and (b) the
higher-fixed-salaries-only plan? Which method would you prefer? Explain briefly.
3. You open the new store on January 1, 2014, with the original salary-plus-commission
compensation plan in place. Because you expect the cost of the shoes to rise due to inflation,
you place a firm bulk order for 11,000 shoes and lock in the $37 price per unit. But toward
the end of the year, only 9,500 shoes are sold, and you authorize a markdown of the
remaining inventory to $50 per unit. Finally, all units are sold. Salespeople, as usual, get paid
a commission of 5% of revenues. What is the annual operating income for the store?
SOLUTION
3-44
3-40 (40 min.) Alternative cost structures, uncertainty, and sensitivity analysis.
Deckle Printing Company currently leases its only copy machine for $1,200 a month. The
company is considering replacing this leasing agreement with a new contract that is entirely
commission based. Under the new agreement, Deckle would pay a commission for its printing at
a rate of $20 for every 500 pages printed. The company currently charges $0.15 per page to its
customers. The paper used in printing costs the company $0.04 per page and other variable costs,
including hourly labor amounting to $0.05 per page.
Required:
1. What is the company’s breakeven point under the current leasing agreement? What is it
under the new commission-based agreement?
2. For what range of sales levels will Deckle prefer (a) the fixed lease agreement (b) the
commission agreement?
3. Do this question only if you have covered the chapter appendix in your class. Deckle
estimates that the company is equally likely to sell 20,000, 30,000, 40,000, 50,000, or 60,000
pages of print. Using informa-tion from the original problem, prepare a table that shows the
expected profit at each sales level under the fixed leasing agreement and under the
commission-based agreement. What is the expected value of each agreement? Which
agreement should Deckle choose?
SOLUTION
3-45
3-46
3-47
3-41 (20-30 min.) CVP, alternative cost structures.
SuperShades operates a kiosk at the local mall, selling sunglasses for $20 each. SuperShades
currently pays $800 a month to rent the space and pays two full-time employees to each work
160 hours a month at $10 per hour. The store shares a manager with a neighboring mall and pays
50% of the manager’s annual salary of $40,000 and benefits equal to 20% of salary. The
wholesale cost of the sunglasses to the company is $5 a pair.
Required:
1. How many sunglasses does SuperShades need to sell each month to break even?
2. If SuperShades wants to earn an operating income of $4,500 per month, how many
sunglasses does the store need to sell?
3. If the store’s hourly employees agreed to a 15% sales–commission-only pay structure,
instead of their hourly pay, how many sunglasses would SuperShades need to sell to earn
an operating income of $4,500?
4. Assume SuperShades pays its employees hourly under the original pay structure, but is
able to pay the mall 8% of its monthly revenue instead of monthly rent. At what sales
levels would SuperShades prefer to pay a fixed amount of monthly rent, and at what sales
levels would it prefer to pay 8% of its monthly revenue as rent?
SOLUTION
3-48
3-42 (30 min.) CVP analysis, income taxes, sensitivity.
(CMA, adapted) Carlisle Engine Company manufactures and sells diesel engines for use in small
farming equipment. For its 2014 budget, Carlisle Engine Company estimates the following:
Selling price $ 4,000
Variable cost per engine $ 1,000
Annual fixed costs $4,800,000
Net income $1,200,000
Income tax rate 20%
The first-quarter income statement, as of March 31, reported that sales were not meeting
expectations. During the first quarter, only 400 units had been sold at the current price of $4,000.
The income statement showed that variable and fixed costs were as planned, which meant that
the 2014 annual net income projection would not be met unless management took action. A
management committee was formed and presented the following mutually exclusive alternatives
to the president:
a. Reduce the selling price by 15%. The sales organization forecasts that at this significantly
reduced price, 2,100 units can be sold during the remainder of the year. Total fixed costs and
variable cost per unit will stay as budgeted.
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b. Lower variable cost per unit by $300 through the use of less-expensive direct materials. The
selling price will also be reduced by $400, and sales of 1,750 units are expected for the
remainder of the year.
c. Reduce fixed costs by 10% and lower the selling price by 30%. Variable cost per unit will be
unchanged. Sales of 2,200 units are expected for the remainder of the year.
Required:
1. If no changes are made to the selling price or cost structure, determine the number of units
that Carlisle Engine Company must sell (a) to break even and (b) to achieve its net income
objective.
2. Determine which alternative Carlisle Engine should select to achieve its net income
objective. Show your calculations.
SOLUTION
3-50
3-43 (30 min.) Choosing between compensation plans, operating leverage.
(CMA, adapted) BioPharm Corporation manufactures pharmaceutical products that are sold
through a network of external sales agents. The agents are paid a commission of 20% of
revenues. BioPharm is considering replacing the sales agents with its own salespeople, who
would be paid a commission of 13% of revenues and total salaries of $2,240,000. The income
statement for the year ending December 31, 2013, under the two scenarios is shown here.
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Required:
1. Calculate BioPharm’s 2013 contribution margin percentage, breakeven revenues, and degree
of operating leverage under the two scenarios.
2. Describe the advantages and disadvantages of each type of sales alternative.
3. In 2014, BioPharm uses its own salespeople, who demand a 16% commission. If all other
cost-behavior patterns are unchanged, how much revenue must the salespeople generate in
order to earn the same operating income as in 2013?
SOLUTION
3-52
3-44 (15–25 min.) Sales mix, three products.
The Ronowski Company has three product lines of belts—A, B, and C— with contribution
margins of $3, $2, and $1, respectively. The president foresees sales of 200,000 units in the
coming period, consisting of 20,000 units of A, 100,000 units of B, and 80,000 units of C. The
company’s fixed costs for the period are $255,000.
Required:
1. What is the company’s breakeven point in units, assuming that the given sales mix is
maintained?
2. If the sales mix is maintained, what is the total contribution margin when 200,000 units are
sold? What is the operating income?
3. What would operating income be if 20,000 units of A, 80,000 units of B, and 100,000 units
of C were sold? What is the new breakeven point in units if these relationships persist in the
next period?
SOLUTION
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