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# Exercise2e

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### Exercise2e

1. 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. 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. -2-
3. 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: -3-
4. 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 -4- 80,000
5. 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 -5-
6. 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? -6-
7. 7.  , 6-4, -7 -7- )