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3-28 (15–25 min.) Sales mix, three products.
The Janowski Company has three product lines of mugs—A, B, and C— with contribution
margins of $5, $4, and $3, respectively. The president foresees sales of 168,000 units in the
coming period, consisting of 24,000 units of A, 96,000 units of B, and 48,000 units of C. The
company’s fixed costs for the period are $405,000.
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 168,000 units are
sold? What is the operating income?
3. What would operating income be if the company sold 24,000 units of A, 48,000 units of B,
and 96,000 units of C? What is the new breakeven point in units if these relationships persist
in the next period?
4. Comparing the breakeven points in requirements 1 and 3, is it always better for a company to
choose the sales mix that yields the lower breakeven point? Explain.
SOLUTION
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3-29 CVP, Not for profit
Genesee Music Society is a not-for-profit organization that brings guest artists to the
community’s greater metropolitan area. The music society just bought a small concert hall in the
center of town to house its performances. The lease payments on the concert hall are expected to
be $4,000 per month. The organization pays its guest performers $1,800 per concert and
anticipates corresponding ticket sales to be $4,500 per concert. The music society also incurs
costs of approximately $1,000 per concert for marketing and advertising. The organization pays
its artistic director $33,000 per year and expects to receive $30,000 in donations in addition to its
ticket sales.
Required:
1. If the Genesee Music Society just breaks even, how many concerts does it hold?
2. In addition to the organization’s artistic director, the music society would like to hire a
marketing direc-tor for $25,500 per year. What is the breakeven point? The music society
anticipates that the addition of a marketing director would allow the organization to increase
the number of concerts to 41 per year. What is the music society’s operating income/(loss) if
it hires the new marketing director?
3. The music society expects to receive a grant that would provide the organization with an
additional $17,000 toward the payment of the marketing director’s salary. What is the
breakeven point if the music society hires the marketing director and receives the grant?
SOLUTION
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3-25
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3-30 (15 min.) Contribution margin, decision making.
McCarthy Men’s Clothing’s revenues and cost data for 2014 are as follows:
Revenues $500,000
Cost of goods sold 250,000
Gross margin 250,000
Operating costs:
Salaries fixed $160,000
Sales commissions (11% of sales) 55,000
Depreciation of equipment and fixtures 15,000
Store rent ($4,000 per month) 48,000
Other operating costs 40,000 318,000
Operating income (loss) $(68,000)
Mr. McCarthy, the owner of the store, is unhappy with the operating results. An analysis of other
operat-ing costs reveals that it includes $35,000 variable costs, which vary with sales volume,
and $5,000 (fixed) costs.
Required:
1. Compute the contribution margin of McCarthy Men’s Clothing.
2. Compute the contribution margin percentage.
3. Mr. McCarthy estimates that he can increase units sold, and hence revenues by 20% by
incurring additional advertising costs of $12,000. Calculate the impact of the additional
advertising costs on operating income.
4. What other actions can Mr. McCarthy take to improve operating income?
SOLUTION
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3-31 (20 min.) Contribution margin, gross margin and margin of safety.
Mirabella Cosmetics manufactures and sells a face cream to small ethnic stores in the greater
New York area. It presents the monthly operating income statement shown here to George
Lopez, a potential investor in the business. Help Mr. Lopez understand Mirabella’s cost
structure.
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Required:
1. Recast the income statement to emphasize contribution margin.
2. Calculate the contribution margin percentage and breakeven point in units and revenues for
June 2014.
3. What is the margin of safety (in units) for June 2014?
4. If sales in June were only 8,000 units and Mirabella’s tax rate is 30%, calculate its net
income.
SOLUTION
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3-32 (30 min.) Uncertainty and expected costs.
Hillmart Corp., an international retail giant, is considering implementing a new business–to–
business (B2B) information system for processing merchandise orders. The current system costs
Hillmart $1,000,000 per month and $45 per order. Hillmart has two options, a partially
automated B2B and a fully automated B2B system. The partially automated B2B system will
have a fixed cost of $5,000,000 per month and a variable cost of $35 per order. The fully
automated B2B system has a fixed cost of $11,000,000 per month and $20 per order.
Based on data from the past two years, Hillmart has determined the following distribution
on monthly orders:
Monthly Number of Orders
Probability
300,000
0.15
400,000
0.20
500,000
0.40
600,000
0.15
700,000
0.10
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Required:
1. Prepare a table showing the cost of each plan for each quantity of monthly orders.
2. What is the expected cost of each plan?
3. In addition to the information systems costs, what other factors should Hillmart consider
before deciding to implement a new B2B system?
SOLUTION
3-31
3-33 (15–20 min.) CVP analysis, service firm.
Lifetime Escapes generates average revenue of $7,500 per person on its 5-day package tours to
wildlife parks in Kenya. The variable costs per person are as follows:
Airfare $1,600
Hotel accommodations 3,100
Meals 600
Ground transportation 300
Park tickets and other costs 700
Total $6,300
Annual fixed costs total $570,000.
Required:
1. Calculate the number of package tours that must be sold to break even.
2. Calculate the revenue needed to earn a target operating income of $102,000.
3. If fixed costs increase by $19,000, what decrease in variable cost per person must be
achieved to maintain the breakeven point calculated in requirement 1?
4. The general manager at Lifetime Escapes proposes to increase the price of the package tour
to $8,200 to decrease the breakeven point in units. Using information in the original problem,
calculate the new breakeven point in units. What factors should the general manager consider
before deciding to increase the price of the package tour?
SOLUTION
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3-34 (30 min.) CVP, target operating income, service firm.
KinderKids provides daycare for children Mondays through Fridays. Its monthly variable costs
per child are as follows:
Lunch and snacks $100
Educational supplies 30
Other supplies (paper products, toiletries, etc.) 20
Total $150
Monthly fixed costs consist of the following:
Rent $1,500
Utilities 150
Insurance 200
Salaries 1,700
Miscellaneous 450
Total $4,000
KinderKids charges each parent $400 per child per month.
Required:
1. Calculate the breakeven point.
2. KinderKids’ target operating income is $5,000 per month. Compute the number of children
who must be enrolled to achieve the target operating income.
3. KinderKids lost its lease and had to move to another building. Monthly rent for the new
building is $2,200. At the suggestion of parents, KinderKids plans to take children on field
trips. Monthly costs of the field trips are $1,100. By how much should KinderKids increase
fees per child to meet the target operating income of $5,000 per month, assuming the same
number of children as in requirement 2?
SOLUTION
3-34
3-35 CVP analysis, margin of safety.
(CMA, adapted) Arvin Tax Preparation Services has total budgeted revenues for 2014 of
$618,000, based on an average price of $206 per tax return prepared. The company would like to
achieve a margin of safety percentage of at least 45%. The company’s current fixed costs are
$327,600, and variable costs average $24 per customer. (Consider each of the following
separately).
Required:
1. Calculate Arvin’s breakeven point and margin of safety in units.
2. Which of the following changes would help Arvin achieve its desired margin of safety?
a. Average revenue per customer increases to $224.
b. Planned number of tax returns prepared increases by 15%
c. Arvin purchases new tax software that results in a 5% increase to fixed costs but e-files
all tax returns, which reduces mailing costs an average $2 per customer.
SOLUTION
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3-36 (30–40 min.) CVP analysis, income taxes.
(CMA, adapted) J.T.Brooks and Company, a manufacturer of quality handmade walnut bowls,
has had a steady growth in sales for the past 5 years. However, increased competition has led Mr.
Brooks, the president, to believe that an aggressive marketing campaign will be necessary next
year to maintain the company’s present growth. To prepare for next year’s marketing campaign,
the company’s controller has prepared and presented Mr. Brooks with the following data for the
current year, 2014:
Variable cost (per bowl)
Direct materials $ 3.00
Direct manufacturing labor 8.00
Variable overhead (manufacturing, marketing, distribution,
and customer service) 7.50
Total variable cost per bowl $ 18.50
Fixed costs
Manufacturing $ 20,000
Marketing, distribution, and customer service 194,500
Total fixed costs $214,500
Selling price $ 35.00
Expected sales, 22,000 units $770,000
Income tax rate 40%
Required:
1. What is the projected net income for 2014?
2. What is the breakeven point in units for 2014?
3. Mr. Brooks has set the revenue target for 2015 at a level of $875,000 (or 25,000 bowls). He
believes an additional marketing cost of $16,500 for advertising in 2015, with all other costs
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remaining constant, will be necessary to attain the revenue target. What is the net income for
2015 if the additional $16,500 is spent and the revenue target is met?
4. What is the breakeven point in revenues for 2015 if the additional $16,500 is spent for
advertising?
5. If the additional $16,500 is spent, what are the required 2015 revenues for 2015 net income
to equal 2014 net income?
6. At a sales level of 25,000 units, what maximum amount can be spent on advertising if a 2015
net income of $108,450 is desired?
SOLUTION
3-38
3-37 (25 min.) CVP, sensitivity analysis.
The Derby Shoe Company produces its famous shoe, the Divine Loafer that sells for $70 per
pair. Operating income for 2013 is as follows:
Sales revenue ($70 per pair)
$350,000
Variable cost ($30 per pair)
150,000
Contribution margin
200,000
Fixed cost
100,000
Operating income
$100,000
Derby Shoe Company would like to increase its profitability over the next year by at least 25%.
To do so, the company is considering the following options:
Required:
1. Replace a portion of its variable labor with an automated machining process. This would
result in a 20% decrease in variable cost per unit but a 15% increase in fixed costs. Sales
would remain the same.
2. Spend $25,000 on a new advertising campaign, which would increase sales by 10%.
3. Increase both selling price by $10 per unit and variable costs by $8 per unit by using a
higher-quality leather material in the production of its shoes. The higher-priced shoe would
cause demand to drop by approximately 20%.
4. Add a second manufacturing facility that would double Derby’s fixed costs but would
increase sales by 60%.
Evaluate each of the alternatives considered by Derby Shoes. Do any of the options meet or
exceed Derby’s targeted increase in income of 25%? What should Derby do?
SOLUTION
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3-38 (20–30 min.) CVP analysis, shoe stores.
The HighStep Shoe Company operates a chain of shoe stores that sell 10 different styles of
inexpensive men’s shoes with identical unit costs and selling prices. A unit is defined as a pair of
shoes. Each store has a store manager who is paid a fixed salary. Individual salespeople receive a
fixed salary and a sales commission. HighStep is considering opening another store that is
expected to have the revenue and cost relationships shown here.
Consider each question independently:
Required:
1. What is the annual breakeven point in (a) units sold and (b) revenues?
2. If 8,000 units are sold, what will be the store’s operating income (loss)?
3. If sales commissions are discontinued and fixed salaries are raised by a total of $15,500,
what would be the annual breakeven point in (a) units sold and (b) revenues?
4. Refer to the original data. If, in addition to his fixed salary, the store manager is paid a
commission of $2.00 per unit sold, what would be the annual breakeven point in (a) units
sold and (b) revenues?
5. Refer to the original data. If, in addition to his fixed salary, the store manager is paid a
commission of $2.00 per unit in excess of the breakeven point, what would be the store’s
operating income if 12,000 units were sold?
SOLUTION