Akmen

Exercise 4-38 Multiple – Product Breakeven

1.      Compute the number of vases and the number of figurines that must be sold for the company to break even.

                              Sales Mix:                                           Fixed Cost: $ 30,000

Vases	:	Figurines
1,000	:	500
2	:	1

Product	Price	_   Variable Cost	=  Contribution Margin	x   Sales Mix	Total Contribution Margin
Vases	$  40	$   30	$   10	2	$   20
Figurines	70	42	28	1	28
Total					$   48

Break-even Packages         =  = 625 units

Break-even Vases               = 2 x 625  = 1,250 units

Break-even Figurines         = 1 x 625   = 625 units

2.      Parker Pottery is considering upgrading its factory to improve the quality of its products. The upgrade will add $5,260 per year to total fixed cost. If the upgrade is successfully, the projected sales vases will be 1,500 and figurine sales will increase to 1,000 units. What is the new break-even point in units for each of the products?

                              Sales Mix                                           

Vases	:	Figurines
1,500	:	1,000
3	:	2

Product	Price	_   Variable Cost	=  Contribution Margin	x   Sales Mix	Total Contribution Margin
Vases	$  40	$   30	$   10	3	$   30
Figurines	70	42	28	2	56
Total					$   86

Break-even Packages         =  = 410 units

Break-even Vases               = 3 x 410   = 1,230 units

Break-even Figurines         = 2 x 410   = 820 units

Problem 4-42 Contribution Margin, Break-Even Units, Break-Even Sales, Margin of                         Savety, Degree of Operating Leverage

1.      Compute the contribution margin per unit, and calculate the break-even point in units. Calculate contribution margin ratio and use it to calculate the break-even sales revenue.

Contribution Margin per Unit       = Price – Variable Cost per Unit

= $70 – ($8,120,000 / 203,000 units)

= $70 - $40

= $30

Contribution Margin Ratio          = $30 / $70

                                                     = 0.4286 = 42.86%

2.      The divisional manager has decided to increase the advertising budget by $250.000. This will increase sales revenues by $1 milion. By how much will operating income increase or decrease as a result of this action?

Break-even in Units                      = $4,945,500 + $250,000 = $5,195,500 = 173,183 units

       $30                           $30

Break-even in Sales                      = 173,183 units x $70       = $12,122,810

                                                                 or

                                                     = $4,945,500+$250,000    = $12,122,810

                                                                   0.4286

Sales ($14.210.000 + $1.000.000)                       $ 15,210,000

Variable Cost                                                            8,120,000

                 Contribution Margin                                7,090,000

Fixed Cost ($4.945.500 + $250.000)                        5,195,500

                 Operating Income                               $   1,894,500

Operating Income Increase: ($1,894,500 - $1,144,500): $750,000

3.      Suppose sales revenues exceed the estimated amount on the income statement by $1,500,000. Without preparing a new income statement, by how much are profits underestimated?

Profit         = Operating Income + add Sales Revenue

                  = $1,894,500 + $1,500,000

                  = $3,394,500

4.      Compute the margin of safety based on original income statement.

Break-even in Units          : $4,945,500 = 164,850 units

                                                         $30

Break-even in Sales          : $164,850 x $70 = $11,539,500

Margin of Safety  = Sales – Breakeven in Sales

                             = $14,210,000 - $11,539,500

                             = $2,670,000

5.      Compute the degree of operating leverage based on the original income statement. If sales revenues are 8% greater than expected, what is percentage increase in operating income?

Sales 8% greater                                        $   15,346,800

Variable Cost                                                   8,120,000

                  Contribution Margin                      7,226,800

Total Fixed Cost                                              4,945,500

                  Operating Income                   $     2,281,300

Degree of Operating Leverage    = Total Contribution Margin

                                                                 Operating Income

                                                     = $7,226,800

                                                        $2,281,300

                                                     = 3.17

Percent Change in Operating Income      = DOL x Percent Change in Sales

                                                                 = 3.17 x 8%

                                                                 = 25.36%

Problem 4-48 Cost-Volume-Profit, Margin of Safety

1.      Compute the break-even point in units and sales dollars calculated using break-even units.

Unit Contribution Margin = Price – Unit Variable Cost

= $42 - $28

= $14

Break-even in Units          =       Total Fixed Cost                    

      Unit Contribution Margin

                                         = $300,000

                                                 $14

                                         = 21,428 units

Break-even in Sales          = 21,428 units x $42

                                         = $900,000

2.      What was the margin of safety for Victoria last year in sales dollars?

Margin of Safety               = Sales – Breakeven in Sales

= $1,218,000 - $900,000

= $318,000

3.      Suppose the Victoria is considering an investment in new technology that will increase fixed cost by $250.000 per year but will lower variable costs to 45% of sales. Units sold will remain unchanged. Prepare a budgeted income statement assuming that Victoria makes this investment. What is the new break-even point in sales dollars, assuming that the investment is made?

Victoria Company

Income Statement

For Last Year

                  Sales (29,000 units)                                                     $  1,218,000

                  Less: Total Variable Cost (lower 45%)                              446,400

                              Contribution Margin                                       $     771,600

                  Less: Total Fixed Cost (increase $250.000)                       550,000

                              Operating Income                                         $    221,600

Contribution Margin Ratio = Total Contribution Margin =   $   771,600 = 0.6335 = 63.35%

                                                            Sales                           $ 1,218,000

Break-even Sales Revenue =        Total Fixed Cost         =   $ 550,000  = $868,192

                                                Total Contribution Margin       0.6335