EXAM II

What component of the profit equation should be set equal to zero to find the break-even point?

Profit CM - Fixed Costs = Profit

We are selling a product for 3 dollars a unit. Variable Cost per unit is 1. The fixed cost is 6. How many units do we need to sell to make a profit of 2.

Profit Goal in Units = FC + Profit Goal/CM per unit Profit Goal in Units = (6 + 2)/(2) = 4 Sales: 4 * 3 = 12 VC: 4 * 1 = 4 CM: 8 FC: 6 Profit: 2

Martol, Incorporated, has fixed costs of $198,720 and a contribution margin ratio of 46%. How much sales revenue must be earned for a profit of $131,100?

Profit Target in Sales dollars: FC + Target profit/CM Ratio (198,720 + 131,100)/46% = 717,000

1. Frontier Corporation has fixed costs of $646,020 and net operating income of $222,000. What is its degree of operating leverage?

Sales Less: VC CM Less: FC: $646,020 Profit: 222,000 Degree of Operating Leverage: CM/Profit (222,000 + 646,020)/222,000 = 3.91

Next year Riverside expects to sell 835 canoes. Complete the contribution margin income statement for the company. Contribution Margin Income Statement

Sales Revenue (835 * 520) = 434,200 Less: Variable Costs (136 * 835) = 113,560 Contribution Margin: 320,640 Less: Fixed Costs: 148,100 Profit: 172,540

1. Booble, Incorporated, has a contribution margin ratio of 49%. This month, sales revenue was $213,000, and profit was $47,300. How much are Booble's fixed costs?

Sales Revenues = 213,000 VC = ? CM = 49% * 213,000 = 104,370 FC = ? Profit = 47,300 104,370 - FC = 47,300 FC = 57,070

Contribution margin is defined as

Sales Revenues less variable costs.

Complete the contribution margin income statement for Anita's service assuming she drove 1,150 miles last month. (Assume this falls within the relevant range of operations). CM Income Statement

Sales Revenues: 1150 * .50 = 575 Less: Variable Cost: 1150 * .10 = 115 Contribution Margin: 460 Less: Fixed Costs: 300 Profit: 160

Rodeo, Incorporated, has a contribution margin ratio of 35%. This month, profit was $17,150, and fixed costs were $12,950. How much was Laredo's sales revenue?

Sales Revenues? VC ? CM 35% FC = 12,950 Profit = 17,150 CM = FC + Profit

We are selling a product for 500 a unit. VC/unit is 300 and fixed cost is 80,000. We are selling 500 units.

Sales: 500 *500 = 250,000 Less: VC: 500 * 300 = 150,000 Contribution Margin: 100,000 Less: Fixed Costs: 80,000 Profit: 20,000

1. Harvest Corporation has a contribution margin ratio of 26%, fixed costs of $46,800, and a profit of $32,240. What are total sales?

Sales:? Less: VC ? CM: 79,040 Less: FC: 46,800 Profit: 32,240 CM Ratio = CM/Sales 26% = 79,040/Sales Sales = 79,040/26% = 304,000

1. Juniper Enterprises sells handmade clocks. Its variable cost per clock is $16, and each clock sells for $64. The company's fixed costs total $12,610. Suppose that Juniper's variable costs decrease by $0.50. What is the new break-even point?

Selling Price per unit: 64 VC/Unit: 16 - .50 = 15.50 CM/Unit: 48.5 Fixed Cost: 12.610 Break even in units: FC/CM per unit = 12,610/48.5 = 260

1. Ironwood Incorporated has a variable cost ratio of 64% and fixed costs of $72,000. What sales revenue is needed to generate a $109,800 profit?

Target Profit in Sales Dollars: FC + Target Profit/CM Ratio (72,000 + 109,800)/(1 - 64%) = 505,000 Sales: 505,000 VC: (64% * 505,000) = 323,200 CM: 181800 FC: 72,000 Profit: 109,800 Break Even Sales: FC/CM Ratio = 72,000/36% = 200,000 Margin of Safety: Sales Dollars over the break even in sales dollars Margin Safety: 505000 - 200,000 = 305000

Calculate the number of carts that Ramada must sell to earn $30,000 profit. Ramada sells its carts for $1,050 each.

Target Profit in units = (FC + Target Profit)/CM per unit = (600,000 + 30,000)/630 = 1,000

1. Merlot, Incorporated, has fixed costs of $231,000, sales price of $53, and variable cost of $38 per unit. How many units must be sold to earn a profit of $31,500?

Target profit in units = FC + Target Profit/CM per unit = (231,000 + 31,500)/(53-38) = 17,500 units

The contribution margin ratio = unit contribution margin/unit sales price. 200/500 = .4 It means that for each dollar of sales, you spend .60 cents on variable cost and you keep only 40 cents

The contribution margin is 40% of your sales.

The relevant range is

The range of activity over which we expect our assumptions about cost behavior to hold true.

1. Mustang Corporation has a selling price of $22, variable costs of $12 per unit, and fixed costs of $510,200. How many units must be sold to break even?

Unit Break Even = FC/CM per unit 510,200/(22 - 12) = 51,020 units

Jasmine Corporation has a sales price of $20, variable costs of $16 per unit, and fixed costs of $26,000. Contribution margin is $52,000. How many units did Jasmine sell?

Unit CM = 20 - 16 = 4 Units Sold = 52,000/4 = 13000

1. Sugar Corporation has a sales price of $24, variable costs of $18 per unit, and fixed costs of $22,500. Sugar expects profit of $313,000 at its anticipated level of sales. If Sugar sells 4,700 units more than expected, how much higher will its profits be?

Unit CM = 24 - 18 = 6 4,700 * 6 = 28,200

Orchid Corporation, has a sales price of $14, variable costs of $12 per unit, and fixed costs of $20,000. If Orchid sells 10,500 units, contribution margin will equal

Unit CM = Sales price - VC/Unit = 14 - 12 = 2 10,500 * 2 = 21000

Profit Goals in Sales Dollars

(FC + profit Goal)/CM Ratio

Assume Ramada sold 1,000 carts last year. Without performing any calculations, determine whether Ramada earned a profit last year

Yes, it will make a profit because the break even is 952, so any sales over the break even will generate profit

At the break-even point, the margin of safety will be

Zero

The degree of operating leverage is used to calculate the:

change in profit given a change in sales

Fixed Cost/Unit - Variable Cost/Unit -

changes with activity level does not change with the activity level

Contribution margin is equal to

fixed costs plus net operating income (profit)

The unit contribution margin tells us

how much each additional unit sold will contribute to profit.

The margin of safety tells managers.

how much sales could drop before the firm no longer earns profits.

A cost driver

is an activity that causes total costs to change.

Revelvant Range

range of actvity within which assumptions about cost behavior hold true

The contribution margin ratio is the contribution margin

stated as a % of sales.

Cost behavior is

the way in which costs change when the activity level changes.

1. Riverside Incorporated makes one model of wooden canoe. Partial information for it follows: Number of Canoes Produced and Sold 485 635 785 Variable costs $ 65,960 x 106760 Fixed costs 148,100 148100 148100 Total costs $ 214,060 234460 a Cost per unit Variable cost/unit b 136 136 Fixed cost/unit c 233.23 188.66 Total cost/unit d 369.23 324.66 Fill in the blanks

x = (136 * 635) = 86360 a = 106760 + 148100 = 254860 b = 65960 / 485 = 136 c = 148100 / 485 = 305.36 d = 214060 / 485 = 441.36

what are the three methods to analyze mixed costs, using linear assumption as a base

1. scattergraph 2. High-low method 3. Least squares regression

If I increase my sales by 10%, how much will my profit increase?

10% * 3.24 = 0.324 = 32.4%

1. When Carter, Incorporated, sells 48,000 units, its total variable cost is $115,200. What is its total variable cost when it sells 54,000 units?

115,200/48,000 = 2.4 is VC per unit 54,000 * 2.4 = 129,600

1. Laredo, Incorporated, has a contribution margin ratio of 45%. This month, sales revenue was $203,000, and profit was $31,000. If sales revenue increases by $22,000, by how much will profit increase?

22,000 * 45% = 9900

Cardinal Company uses the high-low method of estimating costs. Cardinal had total costs of $25,930 at its lowest level of activity, when 7,100 units were sold. When, at its highest level of activity, sales equaled 12,700 units, total costs were $39,650. Cardinal would estimate variable cost per unit as

39650-25930/ 12700 -7100 = 2.45

Month Number of Appointments Total Cost January 300 $ 6,100 February 200 $5,000 March 500 $6,650 April 425 $6,050 May 350 $6,500 June 275 $5,050 From the information above. Use the total cost formula to find fixed cost

6650 = fixed cost + 5.5 * 500 Fixed cost = 6650 - (5.5 * 500) Fixed cost = 3900

What is the break even in sales dollars?

9 Break even in sales dollars = Fixed Cost/CM Ratio [CM/Sales Price] CM Ratio = [CM/Sales Price] = 2/3 Break Even in dollars: 6/(2/3) = 9

Variable Cost

A cost that changes with the activity level. Example: wood used to build a table

1. Juniper Enterprises sells handmade clocks. Its variable cost per clock is $38, and each clock sells for $152. The company's fixed costs total $45,060. Suppose that Juniper's fixed costs increase to $45,600. What is the new break-even point?

Break Even in Units: 45,600/(152 - 38) = 400

Calculate Ramada's break-even point in number of units and in sales revenue. Ramada sells its carts for $1,050 each.

Break Even in units = FC/CM per unit 600,000/(1050 - 420) 630 = 952

Quail, Incorporated, has a contribution margin of 52% and fixed costs of $178,204. What is the break-even point in sales dollars?

Break even in sales: FC/CM Ratio 178,204/52% = 342700

1. Skyline Corporation has a selling price of $27 per unit, variable costs of $24 per unit, and fixed costs of $15,300. What sales revenue is needed to break even?

Break even in sales: FC/CM Ratio CM per unit: (27 - 24) = 3 CM Ratio: 3/27 = 0.111 15,300/0.111 = 137,700

We are selling a product for 3 dollars a unit. Variable Cost per unit is 1. The fixed cost is 6. What is my break even in units? Break-even in units: Number of units you need to sell to recover all your variable and fixed costs. In other words, you will have a zero profit.

Break even in units: Fixed Cost/CM per unit Break Even in Units: 6/(3-1) = 3 units Sales: 3 * 3 = 9 VC: 3 * 1 = 3 CM: 6 FC: 6 Profit: 0

1. Bugle Corporation has sales of $480,000, a variable cost ratio of 48%, and a profit of $120,000. If 10,000 units were sold, what is the contribution margin per unit?

CM/Unit? VC ratio = 48%, then what is CM ratio? 52% CM Ratio means CM as a % of Sales CM Ratio = CM/Sales 52% = CM/480,000 CM = 480000 * 52% = 249,600 CM/Unit = 249,600/10,000 = 24.96

Using the degree of operating leverage, calculate the change in Ramada's profit if sales are 10 percent less than expected.

Change in Profit: Degree of Operating Leverage * % change in sales 1.8677 * 10% = 18.677% If the sales are 10% less than expected, profit will be decrease by 18.677%

Contribution Margin Formula

Contribution Margin = Sales Revenue - VC

1. Knox Corporation has a sales price of $22.00, variable costs of $16 per unit, and fixed costs of of $27,000. If Knox sells 12,000 units, the contribution margin ratio will equal:

Contribution Margin Ratio = CM/Sales Price = (22 - 16)/22 = 0.27

Contribution Margin Ratio Formula

Contribution Margin Ratio = Unit Contribution Margin / Unit Sales Price

Calculate Ramada's degree of operating leverage if it sells 2,050 carts. Ramada sells its carts for $1,050 each.

Degree of Operating Leverage: CM/Profit CM = (630 * 2050) = 1,291,500 Profit: CM - FC = 1,291,500 - 600,000 = 691,500 1,291,500/691,500 1.8677

1. Frontier Corporation sells units for $46, has unit variable costs of $24, and fixed costs of $152,000. If Frontier sells 10,000 units, what is its degree of operating leverage?

Degree of Operating Leverage: CM/Profit CM/Unit: (46-24) = 22 CM = 22 * 10,000 = 220,000 CM - FC = Profit 220,000 - 152,000 = 68000 Degree of Operating Leverage: 220,000/68,000 = 3.24

1. Cost structure refers to: the extent to which a company uses fixed costs versus variable costs.

Degree of Operating Leverage: helps us to calculate change in profit given a change in sales.

cost behavior

Describes the way total cost behaves or changes when some measure of activity changes

fixed costs

Does NOT change with the activity level. Example: paying 500 per day to a carpenter regardless of how many tables he builds

The formula for target sales is

FC + Target Profit/CM Ratio

The formula for target units is

FC + Target Profit/CM per unit

The formula for break-even point in terms of sales dollars is:

FC/CM Ratio

Break Even in Sales Revenues

FC/CM Ratio CM Ratio = CM per unit/Sales per Unit CM Ratio = 630/1050 = 60% 600,000/60% = 1 million

The formula for break-even point in terms of units is:

FC/CM per unit

Total Cost Formula

Fixed cost + variable cost / unit * activity level

Suppose Riverside sells its canoes for $520 each. Calculate the contribution margin per canoe and the contribution margin ratio.

Formula: Unit CM = SP/Unit - VC/Unit = 520 - 136 = 384 CM Ratio = Unit CM/Sales per unit = 384/520 = 74%

1. Anita Kaur runs a courier service in downtown Seattle. She charges clients $0.50 per mile driven. Anita has determined that if she drives 2,000 miles in a month, her total operating cost is $500. If she drives 3,100 miles in a month, her total operating cost is $610. Using the high-low method, determine Anita's variable and fixed operating cost components.

High-Low Method VC/Unit: (610-500)/(3100-2000) = 0.10 Total Cost = Fixed Cost + VC/Unit * Activity level Total Cost = Fixed Cost + .10 * Activity Level 610 = Fixed Cost + .10 * 3100 Fixed Cost = 300

Mixed cost

Includes both a variable component and a fixed component. Example: The gas bill you pay is 30 even if you do not use an gas. Charge you 2 for each unit.

1. Jerome Corporation has fixed costs of $331,800 and a contribution margin ratio of 42%. Currently, sales are $1,327,200. What is Jerome's margin of safety?

Margin of Safety = Sales - Break-Even Sales Break even in sales: FC/CM Ratio = 331,800/42% = 790,000 1,327,200 - 1,327,200 - 790,000 = 537,200

Mohave Incorporated, produces approximately 4,000 units per month, and it places a quality assurance logo on each of its units. To use this logo, it must pay the quality assurance firm $5,000 per month plus $1 per unit. The cost to Mohave of using the quality assurance logo would be a

Mixed Cost

1. Complete the Table:

Number of Golf Carts Produced and Sold 1,500 Units 2,000 Units 2,500 Units Variable costs 1500 * 420 = 630000 $840,000 2500 * 420 = 1050000 Fixed costs per year 600000 600,000 600000 Total costs 630k + 600k = 1,230,000 $1,440,000 1050000+600k =1650000 Cost per unit Variable cost per unit 420 840k/2k = 420 420 Fixed cost per unit 600000/1500 = 400 300 240 Total cost per unit 1230000/1500 = 820 720 660

1. Maple Corporation has a sales price of $27, variable costs of $19 per unit, and fixed costs of $24,500. Maple expects profit of $311,000 at its anticipated level of sales. What is Maple's unit contribution margin?

Unit Contribution Margin = Sales Price/Unit - VC/Unit Unit Contribution margin = 27 - 19 = 8

Month Number of Appointments Total Cost January 300 $ 6,100 February 200 $5,000 March 500 $6,650 April 425 $6,050 May 350 $6,500 June 275 $5,050 Using the high-low method, calculate the total fixed cost per month and the variable cost per tanning appointment.

VC / unit: (6650 - 5000) / (500 -200) = 5.5 VARIABLE COST PER APPOINTMENT (UNIT)

Georgia Incorporated, uses the high-low method of estimating costs. Georgia had total costs of $9,200 at its lowest level of activity, when 5,900 units were sold. When, at its highest level of activity, sales equaled 20,700 units, total costs were $79,500. Georgia would estimate variable cost per unit as

VC/Unit = ( 79500 - 9200)/(20,700 - 5,900) = 4.75

1. Elm Company uses the high-low method of estimating costs. Elm had total costs of $289,000 at its lowest level of activity, when 8,700 units were sold. When, at its highest level of activity, sales equaled 15,200 units, total costs were $399,500. Elm would estimate variable cost per unit as:

VC/Unit = (399500 - 289000 )/(15,200-8700 ) = 17

1. Ajax Company uses the high-low method of estimating costs. Ajax had total costs of $46,620 at its lowest level of activity, when 5,100 units were sold. When, at its highest level of activity, sales equaled 19,300 units, total costs were $80,700. Ajax would estimate fixed costs as:

VC/unit = (80700 - 46620 )/(19300 - 5100 ) = 2.4 Total Cost = Fixed Cost + VC/Unit*Activity level 80700 = Fixed Cost + 2.4*19300 Fixed Cost = 34380

Meadow Incorporated uses the high-low method. It had total costs of $309,100 at its lowest level of activity, when 14,200 units were sold. When, at its highest level of activity, sales equaled 19,900 units, total costs were $394,600. Meadow would estimate fixed costs as

VC/unit = 394600 - 309100 / 19900 -14200 =15 Total cost = FC + VC/Unit * Activity Level 394600 = FC + 15 * 19900 FC = 96100

Lark Company, which uses the high-low method, had total costs of $28,570 at its lowest level of activity, when 6,400 units were sold. When, at its highest level of activity, sales equaled 12,100 units, total costs were $39,970. Lark would estimate fixed costs as

VC/unit = 39970 - 28570 / 12100 - 6400 = 39970 = FC - 2 * 12100 FC = 15770

What is the high/low method equation.

Variable cost / unit = difference in total COST associated with highest and lowest activity / difference in highest and lowest activity

1. Juniper Enterprises sells handmade clocks. Its variable cost per clock is $15.40, and each clock sells for $22.00. The company's fixed costs total $11,627. Suppose that Juniper raises its price by 40 percent, but costs do not change.

What is its new break-even point? Sales Price = 22 * 140% = 30.80 VC/Unit: 15.40 CM per unit: 15.40 Break even point in units: FC/CM per unit = 11,627/15.40 = 755