Charles: Homework Ch 2

Required information [The following information applies to the questions displayed below.] Data for Hermann Corporation are shown below: Per Unit Percent of Sales Selling price $70 100% Variable expenses 49 70 Contribution margin $21 30% Fixed expenses are $74,000 per month and the company is selling 4,400 units per month. Required: 1-a. How much will net operating income increase (decrease) per month if the monthly advertising budget increases by $9,800 and monthly sales increase by $24,000? 1-b. Should the advertising budget be increased?

1-a. & 1-b. The following table shows the effect of the proposed change in monthly advertising budget: Current Sales Sales with Additional Advertising Budget Difference Sales $308,000 $332,000 $24,000 Variable expenses 215,600 232,400 16,800 Contribution margin 92,400 99,600 7,200 Fixed expenses 74,000 83,800 9,800 Net operating income $18,400 $15,800 $(2,600) Assuming no other important factors need to be considered, the increase in the advertising budget should not be approved because it would lead to a decrease in net operating income of $2,600.

Lucido Products markets two computer games: Claimjumper and Makeover. A contribution format income statement for a recent month for the two games appears below: Claimjumper Makeover Total Sales $30,000 $70,000 $100,000 Variable expenses 20,000 50,000 70,000 Contribution margin $10,000 $20,000 30,000 Fixed expenses 24,000 Net operating income $6,000 Required: 1. What is the overall contribution margin (CM) ratio for the company? 2. What is the company's overall break-even point in dollar sales? 3. Prepare a contribution format income statement at the company's break-even point that shows the appropriate levels of sales for the two products.

1. The overall contribution margin ratio can be computed as follows: Overall CM ratio = Total contribution margin Total sales = $30,000/ $100,000 = 30% 2. The overall break-even point in dollar sales can be computed as follows: Overall break-even = Total fixed expenses Overall CM ratio = $24,000/30%= $80,000 3. Claimjumper Makeover Total Original dollar sales $30,000 $70,000 $100,000 Percent of total 30% 70% 100% Sales at break-even $24,000 $56,000 $80,000 Variable expenses: Claimjumper variable expenses: ($24,000/$30,000) × $20,000 = $16,000 Makeover variable expenses: ($56,000/$70,000) × $50,000 = $40,000

Mauro Products distributes a single product, a woven basket whose selling price is $29 per unit and whose variable expense is $26 per unit. The company's monthly fixed expense is $6,300. Required: 1. Calculate the company's break-even point in unit sales. 2. Calculate the company's break-even point in dollar sales. (Do not round intermediate calculations.) 3. If the company's fixed expenses increase by $600, what would become the new break-even point in unit sales? In dollar sales? (Do not round intermediate calculations.)

1. The equation method yields the break-even point in unit sales, Q, as follows: Profit =Unit CM × Q − Fixed expenses $0 = ($29 − $26) × Q − $6,300 $0 = ($3) × Q − $6,300 $3Q = $6,300 Q = $6,300 ÷ $3 Q = 2,100 baskets 2. The equation method can be used to compute the break-even point in dollar sales as follows: Unit sales to break even (a) 2,100 Selling price per unit (b) $29 Dollar sales to break even (a) × (b) $60,900 3. The new break-even point in unit sales, Q, is computed as follows: Profit = Unit CM × Q − Fixed expenses $0 = ($29 − $26) × Q − $6,900 $0 = ($3) × Q − $6,900 $3Q = $6,900 Q = $6,900 ÷ $3 Q = 2,300 baskets The break-even point in dollar sales is computed as follows: Unit sales to break even (a) 2,300 Selling price per unit (b) $29 Dollar sales to break even (a) × (b) $66,700

The Cheyenne Hotel in Big Sky, Montana, has accumulated records of the total electrical costs of the hotel and the number of occupancy-days over the last year. An occupancy-day represents a room rented for one day. The hotel's business is highly seasonal, with peaks occurring during the ski season and in the summer. Month Occupancy-Days Electrical Costs January 3,290 $16,450 February 3,160 $15,800 March 1,800 $9,000 April 4,430 $18,500 May 970 $4,850 June 1,650 $8,250 July 4,150 $18,020 August 4,160 $18,070 September 2,050 $10,250 October 1,110 $5,550 November 780 $3,900 December 2,810 $14,050 Required: 1. Using the high-low method, estimate the fixed cost of electricity per month and the variable cost of electricity per occupancy-day. (Do not round your intermediate calculations. Round your Variable cost answer to 2 decimal places and Fixed cost element answer to nearest whole dollar amount.)

Explanation 1. Occupancy-Days Electrical Costs High activity level (April) 4,430 $18,500 Low activity level (November) 780 3,900 Change 650 $14,600 Variable cost = Change in cost ÷ Change in activity = $14,600 ÷ 3,650 occupancy-days = $4.00 per occupancy-day Total cost (April) $18,500 Variable cost element ($4.00 per occupancy-day × 4,430 occupancy-days) 17,720 Fixed cost element $780 2. Electrical costs may reflect seasonal factors other than just the variation in occupancy days. For example, common areas such as the reception area must be lighted for longer periods during the winter than in the summer. This will result in seasonal fluctuations in the fixed electrical costs. Additionally, fixed costs will be affected by the number of days in a month. In other words, costs like the costs of lighting common areas are variable with respect to the number of days in the month, but are fixed with respect to how many rooms are occupied during the month. Other, less systematic, factors may also affect electrical costs such as the frugality of individual guests. Some guests will turn off lights when they leave a room. Others will not.

Engberg Company installs lawn sod in home yards. The company's most recent monthly contribution format income statement follows: Amount Percent of Sales Sales $125,000 100% Variable expenses 50,000 40% Contribution margin 75,000 60% Fixed expenses 22,000 Net operating income $53,000 Required: 1. What is the company's degree of operating leverage? 2. Using the degree of operating leverage, estimate the impact on net operating income of a 21% increase in sales. 3. Construct a new contribution format income statement for the company assuming a 21% increase in sales.

Explanation 1. The company's degree of operating leverage would be computed as follows: Contribution margin (a) $75,000 Net operating income (b) $53,000 Degree of operating leverage (a) ÷ (b) 1.42 2. A 21% increase in sales should result in a 29.82% increase in net operating income, computed as follows: Degree of operating leverage (a) 1.42 Percent increase in sales (b) 21% Estimated percent increase in net operating income (a) × (b) 29.82% 3. The new income statement reflecting the change in sales is: Net operating income reflecting change in sales $68,750 Original net operating income (a) 53,000 Change in net operating income (b) $15,750 Percent change in net operating income (b) ÷ (a) 29.72%

Lin Corporation has a single product whose selling price is $134 per unit and whose variable expense is $67 per unit. The company's monthly fixed expense is $32,300. Required: 1. Calculate the unit sales needed to attain a target profit of $7,900. (Do not round intermediate calculations.) 2. Calculate the dollar sales needed to attain a target profit of $8,600. (Round your intermediate calculations to the nearest whole number.)

Explanation 1. The equation method yields the required unit sales, Q, as follows: Profit =Unit CM × Q − Fixed expenses $7,900 =($134 − $67) × Q − $32,300 $7,900 =($67) × Q − $32,300 $67 × Q =$7,900 + $32,300 Q = $40,200 ÷ $67 Q = 600 units 2. One approach to solving this requirement is to compute the unit sales required to attain the target profit and then multiply this quantity by the selling price per unit: Profit =Unit CM × Q − Fixed expenses $8,600 =($134 − $67) × Q − $32,300 $8,600 =($67) × Q − $32,300 $67 × Q =$8,600 + $32,300 Q = $40,900 ÷ $67 Q = 610 units Unit sales to attain the target profit (a) 610 Selling price per unit (b) $134 Dollar sales to attain target profit (a) × (b) $81,740

Whirly Corporation's contribution format income statement for the most recent month is shown below: Total Per Unit Sales (8,300 units) $249,000 $30.00 Variable expenses 157,700 19.00 Contribution margin 91,300 $11.00 Fixed expenses 55,900 Net operating income $35,400 Required: (Consider each case independently): 1. What would be the revised net operating income per month if the sales volume increases by 80 units? 2. What would be the revised net operating income per month if the sales volume decreases by 80 units? 3. What would be the revised net operating income per month if the sales volume is 7,300 units?

Explanation 1. The revised net operating income would be: Total Per Unit Sales (8,380 units) $251,400 $30.00 Variable expenses 159,220 19.00 Contribution margin 92,180 $11.00 Fixed expenses 55,900 Net operating income $36,280 2. The revised net operating income would be: Total Per Unit Sales (8,220 units) $246,600 $30.00 Variable expenses 156,180 19.00 Contribution margin 90,420 $11.00 Fixed expenses 55,900 Net operating income $ 34,520 3. The revised net operating income would be: Total Per Unit Sales (7,300 units) $219,000 $30.00 Variable expenses 138,700 19.00 Contribution margin 80,300 $11.00 Fixed expenses 55,900 Net operating income $24,400

Molander Corporation is a distributor of a sun umbrella used at resort hotels. Data concerning the next month's budget appear below: Selling price per unit $25 Variable expense per unit $15 Fixed expense per month $9,000 Unit sales per month 1,050 Required: 1. What is the company's margin of safety? (Do not round intermediate calculations.) 2. What is the company's margin of safety as a percentage of its sales? (Round your percentage answer to 2 decimal places (i.e. .1234 should be entered as 12.34).)

Explanation 1. To compute the margin of safety, we must first compute the break-even unit sales. Profit =Unit CM × Q − Fixed expenses $0 = ($25 − $15) × Q − $9,000 $0 = ($10) × Q − $9,000 $10Q =$9,000 Q = $9,000 ÷ $10 Q = 900 units; or, at $25 per unit, $22,500 Sales (at the budgeted volume of 1,050 units) $26,250 Less break-even sales (at 900 units) 22,500 Margin of safety (in dollars) $3,750 2. The margin of safety as a percentage of sales is as follows: Margin of safety (in dollars) (a) $3,750 Sales (b) $26,250 Margin of safety percentage (a) ÷ (b) 14.29%

Lindon Company is the exclusive distributor for an automotive product that sells for $40.00 per unit and has a CM ratio of 30%. The company's fixed expenses are $246,000 per year. The company plans to sell 23,700 units this year. Required: 1. What are the variable expenses per unit? (Round your "per unit" answer to 2 decimal places.) 2. What is the break-even point in unit sales and in dollar sales? 3. What amount of unit sales and dollar sales is required to attain a target profit of $126,000 per year? 4. Assume that by using a more efficient shipper, the company is able to reduce its variable expenses by $4.00 per unit. What is the company's new break-even point in unit sales and in dollar sales? What dollar sales is required to attain a target profit of $126,000?

Explanation 1. Variable expenses: $40 × (100% - 30%) = $28.00 2. The break-even points in unit sales (Q) and dollar sales are computed as follows: Selling price $ 40.00 100 % Variable expenses 28.00 70 % Contribution margin $ 12.00 30 % Profit = (Unit CM × Q) − Fixed expenses $0 = ($12.00 × Q) − $246,000 12.00Q = $246,000 Q = $246,000 ÷ $12.00 per unit Q = 20,500 units In dollar sales: 20,500 units × $40 per unit = $820,000 3. The unit sales and dollar sales needed to attain the target profit are computed as follows: Profit = (Unit CM × Q) − Fixed expenses $126,000 = ($12.00 × Q) − $246,000 $12.00Q = $126,000 + $246,000 $12.00Q = $372,000 Q = $372,000 ÷ $12.00 per unit Q = 31,000 units In dollar sales: 31,000 units × $40 per unit = $1,240,000 4. The new break-even points in unit sales and dollar sales are computed as follows: The company's new cost/revenue relation will be: Selling price $40.00 100% Variable expenses ($28.00 − $4.00) =24.00 60% Contribution margin $16.00 40% Profit = (Unit CM × Q) − Fixed expenses $0 = ($40 − $24.00) × Q − $246,000 $16.00Q = $246,000 Q = $246,000 ÷ $16.00 per unit Q = 15,375 units In dollar sales: 15,375 units × $40 per unit = $615,000 The dollar sales required to attain the target profit is computed as follows: Profit = CM ratio × Sales − Fixed expenses $126,000 = 0.40 × Sales − $246,000 0.40 × Sales = $372,000 Sales = $372,000 ÷ 0.40 Sales = $930,000

Last month when Holiday Creations, Inc., sold 39,000 units, total sales were $313,000, total variable expenses were $259,790, and fixed expenses were $39,400. Required: 1. What is the company's contribution margin (CM) ratio? 2. What is the estimated change in the company's net operating income if it can increase total sales by $1,400? (Do not round intermediate calculations.)

Explanation 1. The company's contribution margin (CM) ratio is: Total sales $313,000 Total variable expenses 259,790 Total contribution margin (a) $53,210 Total contribution margin (a) $53,210 Total sales (b) $313,000 CM ratio (a) ÷ (b) 17% 2. The change in net operating income from an increase in total sales of $1,400 can be estimated by using the CM ratio as follows: Change in total sales (a) $1,400 CM ratio (b) 17% Estimated change in net operating income (a) × (b) $238