1.
Exercise 2
Cost-Volume-Profit Analysis
1. Gilley, Inc., sells a single product. The company's most
recent income statement is given below.
Sales (4,000 units) $120,000
Less variable expenses(68,000)
Contribution margin
52,000
Less fixed expenses (40,000)
Net income
$ 12,000
Required:
a. Contribution margin per unit is $
………………………….. per unit
b. If sales are doubled to $240,000, total variable costs will
equal $ …………………………..
c. If sales are doubled to $240,000, total fixed costs will
equal $…………………………..
d. If 10 more units are sold, profits will increase by
$…………………………..
e. Compute how many units must be sold to break even. #
…………………………..
f.
Compute how many units must be sold to achieve
profits of $20,000.
# …………………………..
2.
2.
Query Company sells pillows for $25.00 each. The
manufacturing cost, all variable, is $10 per pillow. The
company is planning on renting an exhibition booth for
both display and selling purposes at the annual crafts and
art convention. The convention coordinator allows three
options for each participating company. They are:
1. paying a fixed booth fee of $5,010, or
2. paying an $4,000 fee plus 10% of revenue made at
the convention, or
3. paying 20% of revenue made at the convention.
Required:
a. Compute the breakeven sales in pillows of each option.
b. Which option should Query Company choose,
assuming sales are expected to be 800 pillows?
3.
Bob’s Textile Company sells shirts for men and boys. The
average selling price and variable cost for each product
are as follows:
Men’s
Boys
Selling Price $28.80
Selling Price$24.00
Variable Cost$20.40
Variable Cost$16.80
Fixed costs are $38,400.
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3.
Required:
a. What is the breakeven point in units for each type of
shirt, assuming the sales mix is 2:1 in favor of men's
shirts?
b. What is the operating income, assuming the sales mix
is 2:1 in favor of men's shirts, and sales total 9,000
shirts?
4.
Dolph and Evan started the DE Restaurant in 20x3. They
rented a building, bought equipment, and hired two
employees to work full time at a fixed monthly salary.
Utilities and other operating charges remain fairly constant
during each month.
During the past two years, the business has grown with
average sales increasing 1% a month. This situation
pleases both Dolph and Evan, but they do not understand
how sales can grow by 1% a month while profits are
increasing at an even faster pace. They are afraid that
one day they will wake up to increasing sales but
decreasing profits.
Required:
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4.
Explain why the profits have increased at a faster rate
than sales. Use the terms variable costs and fixed costs
in your response.
5.
Freddie’s company has mostly fixed costs and Valerie’s
company has mostly variable costs. Which company has
the greatest risk of a net loss? Explain why
6.
The WalkRite 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. WalkRite is
considering opening another store that is expected to
have the revenue and cost relationships shown here:
Unit Variable Data
Annual Fixed Costs
per pair of shoes
Selling price
Rent
$ 60,000
salaries
200,000
$30.00
Costs of
Advertising
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80,000
5.
shoes
$19.50
Sales
1.50
Other fixed
commission
cost
Variable cost
Total fixed
20,000
per unit
$21.00
$360,000
costs
Required: Consider each question independently
a. What is the annual breakeven point in (a) units sold and
(b) revenues?
b. If 35,000 units are sold, what will be the store’s
operating income (loss)?
c. If sales commissions are discontinued and fixed
salaries are raised by a total of $81,000, what would be
the annual breakeven point in (a) units sold and (b)
revenues?
d. Refer to the original data. If, in additional to his fixed
salary, the store manager is paid a commission of $0.30
per unit sold, what would be the annual breakeven point
in (a) units sold and (b) revenues ?
e. Refer to the original data. If, in additional to his fixed
salary, the store manager is paid a commission of $0.30
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6.
per unit in excess of the breakeven point, what would be
the store’s operating income if 50,000 units were sold?
7.
The Ronowski Company has three product lines of beltsA, B, and C- with contribution margins of
$3,$2,and$1,respectively.The president foresees sales of
200,000 units in the coming period, considering 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:
a. What is the company’s breakeven point in units,
assuming that the given sales mix is maintained?
b. If the sales mix is maintained, what is the total
contribution margin when 200,000 units are sold? What
is the operating income?
c. 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?
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