ACG 2071 - Managerial Accounting

Study Probes - Chapter 7 Problems

1. Aukens Company produces homework machines. During July of 2004, Aukens produced and sold 600 units at $40 per unit. At Julys level of production, it costs Aukens $18 variable costs per unit and fixed costs of $5 per unit. How much will total sales be if Aukens earns a profit of $8,000?
Total fixed costs at 600 units = $5 x 600 units = $3,000 Total fixed costs at all other levels of production = $3,000 Selling price - Variable costs - Fixed costs = Net income $40 X $18 X $3,000 = $8,000 X= 500 units $40 x 500 units = $20,000

2. Parker Plants provided the following information relating to the production and sales of 500 plants: Sales, $15,000; Variable product costs, $3,800; variable operating expenses, $2,000; fixed product costs, $2,500; and fixed operating expenses, $1,500. A. How many cents out of every sales dollar is available to cover fixed expenses and to go towards profit for Parker Plants? This question describes the nature of the CM ratio. [$15,000 $3,800 $2,000] / $15,000 = 61.33% or 61.33 cents out of every sales dollar B. If Parker sells 600 plants, how much is available to cover fixed expenses and to go towards profit for Parker Plants? This question describes the nature of total CM at 600 units of activity: Selling price per unit: $15,000/500 = $30 per plant VC per unit: [$3,800 + $2,000]/500 = $11.60 per plant Total CM at 600 units = [$30 $11.60]*600 = $11,040 C. How much is available to cover fixed expenses and to go towards profit if Parker sells 1 more plant? [$30 $11.60]*1 = $18.40

3. Best Buy has a contribution margin ratio of 32%, a contribution margin per unit of $5, and fixed costs of $21,160.

A.

How much is sales revenue when Best Buy achieves a target profit of $7,000? _ 0.32 x - 21,160 = 7,000 x = $88,000

B How much does Best Buys profit increase for each $800 increase in revenue? $800*0.32 = $256

4. Outdoor Fun incurred the following costs in producing and selling 6,000 lawn chairs during 2009: Sales (6,000*$21.80) $130,800 Fixed costs (6,000*$3.40) $20,400 Variable costs (6,000*$13.30) $79,800 A. If 150 more chairs are produced and sold, by how much will profit increase? CM per unit = $21.80 - $13.30 = $8.50 Increase in profit = $8.50*150 = $1,275 B. How many chairs must be sold to breakeven? 21.80X - 13.30X - 20,400 = 0 x = 2,400 chairs C. By how many units can Outdoor Fun's sales drop before the company loses his 'cushion'? This question is asking for margin of safety. Margin of safety = Current sales - BE sales = 6,000 2,400 = 3,600 units

5. Donough Company had the following income statement: Sales revenue (800 units) Cost of goods sold: Fixed costs $20,000 Variable costs 18,500 Gross profit Operating expenses: Fixed costs 12,000 Variable costs 13,500 Operating income

$80,000

38,500 $41,500

25,500 $16,000

A. How much is Donough's contribution margin? Sales less variable costs: $80,000 - $18,500 - $13,500 = $48,000 B. How many units must Donough sell in order to break even? CM per unit = $48,000/800 = $60 $60 X - [$20,000 + $12,000] = 0 X = 534 units

6. Evans Company makes and sells cologne. This product has a unit sales price of $40 and a unit variable cost of $24. Fixed expenses are $32,000 per month.

A. Calculate the contribution margin ratio. ($40 - $24)/$40 = .40 or 40% B. Calculate the contribution margin of each unit. $40 - $24 = $16 C. How many units must Evans sell to break even? $32,000/$16 = 2,000 units D. How much will total sales be at break even? 2,000 x $40 = $80,000 E. How much will total variable costs be at break even? 2,000 x $24 = $48,000 F. How many units must Evans sell in order to report income before taxes of $28,000? ($32,000 + $28,000)/$16 = 3,750 units G. If the company sells 3,500 units, how much is: A. the total contribution margin? 3,500 x $16 = $56,000 B. income for the period? ($40 x 3,500) - ($24 x 3,500) - $32,000 = $24,000 C. The margin of safety in dollars? Difference in sales: $140,000 - $80,000 = $60,000

7. Allen Company sells homework machines for $100 each. Variable costs per unit are $75 and total fixed costs are $62,000. Allen is considering the purchase of new equipment that would increase fixed costs to $84,000, but decrease the variable costs per unit to $60. At that level Allen Company expects to sell 3,000 units next year. What is Allens break-even point in units if it purchases the new equipment?
SP VC FC = 0 $100X - $60X 84,000 = 0 X = 2,100 units Assuming the new equipment is acquired, by how much can Allen's sales drop before he loses his 'cushion'? (i.e., How many units can Allen's sales drop before he loses his 'cushion'?) Margin of safety = Current sales in units - breakeven sales in units = 3,000 units - 2,100 units = 900 units

8. Smith Company produces desk lamps. The budget information for June indicated that production and sales of 800 units at $25 per unit would generate variable costs of $15 per unit and fixed costs of $7.50 per unit. A. How much is the contribution margin of each desk lamp? Sales price - variable costs = CM: $25 - $15 = $10 B. How many lamps must be sold to generate profit of $5,000?
Fixed costs = $7.50 x 800 = $6,000 SP - VC - FC = profit $25x - $15x - $6,000 = $5,000 x = 1,100 units At 800 units, the fixed cost per unit was $7.50, however, since fixed costs stay the same in total over any activity level, the total fixed cost will be $6,000 of level. Both fixed and variable costs can be expressed as total costs or unit costs. C. How much sales dollars must Smith generate to break even?

SP - VC - FC = $0 $25x - $10x - 6,000 = $0 x = 600 units 600 units x $25 selling price per unit = $15,000 revenue D. Suppose Smith operates at $5,000 profit during June. By how many units can sales decline before Smith would incur a net loss?
Units sold at $5,000 profit level (from part B) = 1,100 units Units sold at breakeven (from part C) = 600 units

Margin of safety = 1,100 - 600 = 500 units

E. What is the accounting name of the concept you calculated in part D? Margin of safety

9. Margulais, Inc. produces guitars. The selling price is $2,000 per unit and the variable costs are $1,500 per guitar. Fixed costs per month are $40,000. If Margulais sells 10 more units beyond breakeven, how much does profit increase as a result?
($2,000 - $1,500) x 10 = $5,000

10. Panera Bread sells a box of bagels for with a contribution margin of 62.5%. Its fixed costs are $150,000 per year. How much sales dollars does Panera Bread need to break-even per year if bagels are its only product? 0.625x = 150,000; so x = $240,000

11. When fixed costs are $100,000 and variable costs are 20% of the selling price, then how much are breakeven sales? Since VC = 20%, then CM = 80%: $100,000/80% = $125,000 12. Olsen Drug Stores has three product lines: Drugs ($500,000 sales, 25% contribution margin ratio), Cosmetics ($250,000 sales, 50% contribution margin ratio), and Housewares ($100,000 sales, 30% contribution margin ratio). How much is profit expected to increase if drug sales increase by $80,000 and the other product levels stay the same?
$80,000 x .25 = $20,000

13. The following is from Regetta Cos income statement for last month:
Sales (50,000 units) Variable expenses Fixed costs Operating income $2,000,000 1,400,000 339,000 $ 261,000

Calculate the break even point in units. SP per unit = $2,000,000/50,000 = $40 VC per unit = $1,400,000/50,000 = $28 SP x = VC x - FC = 0 40x - 28x - 339,000 = 0 x = 28,250 units Calculate margin of safety in units. Units at current level = 50,000 Units at break even = 28,250 Margin of safety in units = 50,000 - 28,250 = 21,750 units
14. - Martins variable costs are 35% of sales. Its selling price is $100 per unit. If Martin sells one unit more than break even units, how much will profit increase? Increase in profit = contribution margin = $100 - (35%*$100) = $65

15. A firm makes and sells a single product. Monthly fixed expenses are $19,500, monthly unit sales are 3,000, and the unit contribution margin is $20. How much is monthly net profit? $20(3,000) - $19,500 = $40,500

16. A company with a single product has a contribution margin rate of 24%. Total units sold for 2004 was 100. If total fixed costs are $84,000, what is the company's sales volume in dollars at break-even? $84,000/24% = $350,000 17. Schwan, Inc. is a nonprofit organization that captures alligators from residential ponds and releases them in a remote habitat. Fixed costs are $20,000. The cost of capturing each gator is $40.00 each. Schwan is funded by a local philanthropy in the amount of $48,000 for 2003. How many gators can Schwan capture during 2003 under its current funding? Total costs = Variable costs + Fixed costs $48,000 = $40 X + $20,000 X = 700 gators

18. Moore Company has fixed costs of $200,000 and variable costs are 60% of sales. How much will Moore report as sales when its net income equals $20,000?
Since VC = 60% of sales, CM = 40% of sales. Profit equation: 40%x - 200,000 = 20,000 Sales = x = $550,000

19. Zweig Company produces paint brushes, which it sells for $8 each. Each brush
costs $2 to make. During March, 3,000 brushes were sold. Fixed costs for March were $1 per unit for a total of $3,000 for the month. A. How much is the contribution margin ratio for Zweig Company? ($8 - $2)/$8 = .75 or 75% B. How much is the monthly break-even level of sales in dollars for Zweig? 8x - 2x - 3,000 = 0 x = 500 units 500($8) = $4,000 C. How much does Zweigs operating income increase for each $1,000 increase in revenue per month? CM Ratio x Revenue = 75%(from #10) x $1,000 = $750 D. If variable costs decrease by 20%, and fixed costs increase by 20%, what happens to the break-even level of units per month for Zweig? Using the profit equation: 8x - (80%)(2x) - (120%)(3,000) = 0 x = 562.5 units Increase = 562.5 units - 500 units = 62.5 units increase

20. A company requires $600,000 in sales to meet its target net income. Its contribution margin is 40%, and fixed costs are $80,000. How much is the targeted net income? Since CM% = 40%, then VC% = 60% (Because total costs = 100%)' SP - VC - FC = ? $600,000 - .60($600,000) - $80,000 = $160,000 21. Bell Brushes produces hair brushes which are sold for $20 each. The variable costs are $8 per brush. Fixed costs per month are $4,800. If Bell sells 10 more units beyond breakeven, how much does profit increase as a result?

[$20 - $8] x 10 = $120

22. Moore Company has fixed costs of $200,000 and variable costs are 60% of sales. How much will Moore report as sales when its net income equals $20,000? If VC = 60%, then CM = 40%. 0.40X - 200,000 = 20,000 X = $550,000

Multiple Choice Questions 1. In the graph of CVP, the breakeven point is the A. point where the variable costs line crosses the fixed costs line. B. point where the sales revenue line crosses the total costs line. C. point where the variable costs line crosses the sales line. D. point where the variable cost line, the fixed cost line, and the sales line all meet. 2, H55 Company sells two products, beer and wine. Beer has a 10 percent profit margin and wine has a 12 percent profit margin. Beer has a 27 percent contribution margin and wine has a 25 percent contribution margin. If customers want to buy only one product and beer sells for $4, while wine sells for $5, which product should H55 push to customers?

A.
.

Beer

B. Wine C. The product that has the higher sales price D. It should sell an equal quantity of both. E. Selling either results in the same additional income for the company. Sell the product with the higher contribution per unit of product. Beer = $*27% = $1.08; WIne = $5*25% = $1.25 3. What most likely occurs when variable costs per unit increase? A. The breakeven point will decrease B. The selling price will decrease C. The fixed cost per unit increase D. Breakeven sales will increase

CM per unit will go down, so you must sell more units to get the same amount of sales. 4. Cost-volume-profit analysis assumes all EXCEPT
A. all costs are variable or fixed. B. units manufactured equal units sold. C. total variable costs remain the same over the relevant range. D. total fixed costs remain the same over the relevant range. Only variable costs per unit remain the same, not total variable costs.

5. The break-even point is the point where A. total sales revenue equals total expenses. B. total contribution margin equals total fixed expenses. C. both A and B are true. D. neither A nor B is true. 6. A business's normal operating range, which excludes extremely high and low volumes that are not likely to be encountered, is the A. Margin of safety. B. Contribution margin. C. Break-even point. D. Relevant range 7. When graphing cost-volume-profit data on a CVP graph A. Units are plotted on the horizontal axis; costs on the vertical axis B. Units are plotted on the vertical axis; costs on the horizontal axis C. Both units and costs are plotted on the horizontal axis. D. Both units and cost are plotted on the vertical axis Use the information that follows to answer the next two questions. Gessels CVP analysis resulted in the following graph of its costs related to producing widgets during June:

100

200

300

400

500

600

700

8. Gessels break even point in units is about A. 2,500 units B. 350 units C. 250 units D. not enough information provided Where B and C lines cross is the BEP. Units are on the vertical axis at 350 units. 9. Total costs to produce 200 units is approximately A. $2,000 B. $3,000

C. $4,000 D. $1,300 Line C is the total cost line. It is approximately $4,000 at 200 units. 10. Todd Company sells two products, Fred and Barney. Fred has a 40 percent contribution margin and Barney has a 20 percent contribution margin. If customers plan to spend a total of $50, what should Todd Company do?

A. It should sell more Barney units. B. It should sell more Fred units. C. It should sell an equal number of each. D. No recommendation can be made from the data given Products with higher contribution margin ratios contribute a larger portion of each sales dollar to profits. 11. When other factors remain constant, a decrease in sales price A. increases the number of units needed to earn profits. B. decreases the number of units needed to earn profits. C. has no effect on the number of units needed to earn profits. D. causes management to make irrational decisions.
Less selling price means smaller contribution margin. 12. A firm will break even when A. Revenues = variable costs fixed costs B. Its sales exceed its fixed costs. C .Revenues = variable costs + fixed cost D. Either b or c Algebra is used to view the profit equation in different formats.

13. In cost-volume-profit analysis, all costs are classified into which two categories? a. fixed costs and variable costs b. sunk costs and fixed costs c. opportunity costs and sunk costs d. product and period costs Answer D would be appropriate for GAAP basis income statements. 14. Which of the following would have no effect on the break-even point in units? A. Sales volume increases B. Sales price increases
C. D. Fixed costs increases Variable cost per unit decreases

No matter what the sales volume, the number of units to be sold to break even stay the same. An increase in sales volume causes CM to increase which impacts the BEP. 15. Why must a company determine what its relevant range is? A. It directly impacts the indirect cost allocated to a product or service. B. It is a relevant cost. C. GAAP requires companies to report this information. D. Cost behavior outside of the relevant range is generally distorted

The relevant range is the normal activity level. Costs may change outside of this range because of economies of scale.
16. Which is not part of a CVP graph? A. Total cost line C. Revenue line B. Fixed cost line D. Variable cost line You will not find a separate variable cost line on a CVP graph because the cost line includes both fixed and variable.

17. Which of the following would have no effect on the break-even point in units? A. Sales price is reduced. B. Sales price increases
C. D. E. Fixed costs increases Variable cost per unit decreases None of these. They all affect the break-even point.

18. Which of the following statements is true when making decisions using CVP analysis? A. As long as the contribution margin is a positive number, net income will be positive. B. As long as variable costs are more than fixed costs, net income will be negative. C. As long as the contribution margin is greater than fixed costs, net income will be positive. D. As long as the sales price per unit is greater than fixed costs per unit, net income will be positive. Since CM less FC = profits, this amount will be positive when CM is greater than FC. Answer A is wrong because if fixed costs are greater than CM, then the company will have a net loss. Answer B does not address sales which could likely be less than the total of VC and FC. Answer D is wrong because it does not consider that VC could be large enough to cause Revenue to be less than total costs, creating a loss. 19. Carver Companys management established its target net income for the year. What did Carver do? A. It estimated its break-even income level for the year. B. It calculated its contribution margin. C. It allocated its costs to cost objects. D. It established its desired annual income for its product lines.

Target net income a level of net income that the company hopes to achieve. 20.What is a relevant range of activity? A. The geographical locations in which the company operates B. The activity level at which profits are maximized C. The levels of activity over which the company expects to operate D. The level of activity in which all costs are constant This is the range we expect variable costs per unit and fixed costs in total to stay the same. 21. Max, Inc. was evaluating its margin of safety. Which one of the following is true? A. The margin of safety ignores fixed costs. B. The higher the margin of safety, the lower the operating leverage. C. The higher the margin of safety, the lower the amount of sales revenue. D. The higher the margin of safety, the more cushion the company has.

Margin of safety = the amount by which sales at the current profit level exceed sales at break even. This is a calculation of sales, not costs. Operating leverage relates to the proportion of fixed compared to variable costs which has no direct relation to sales. Margin of safety is a cushion for management in that it is the amount by which sales can drop before a manager incurs a loss.
22. In CVP analysis, what does the term "cost" mean? A. It includes all fixed and variable costs of products, but excludes period costs. B. It includes all costs which are part of cost of goods sold, plus variable operating expenses. C. It includes all manufacturing costs and operating expenses. D. It includes only manufacturing costs. Manufacturing costs are product costs which include both fixed and variable. Operating expenses are period costs which include both fixed and variable.

23.

Which statement describes a fixed cost?

A. It varies in total at every level of activity. B. The unit cost varies directly to the activity level. C. Its unit cost varies inversely to the level of activity. D. It remains the same per unit regardless of activity level. Answer D is wrong because fixed cost "per unit" declines as activity increases. Only fixed costs in total remain the same at different levels of activity.

Study Probes - Chapter 8 Solutions

1. Munchies prepared the following concerning its bags of snacks:

Units Revenue Variable costs Fixed costs Operating income Selling price per unit Contribution margin per unit Profit margin per unit

Crunchy 4,000 $100,000 56,000 20,000 $24,000 $25.00 $11.00 $6.00

Chewy 12,000 $180,000 105,000 40,000 $35,000 $15.00 $6.25 $2.92

Totals 16,000 $280,000 161,000 60,000 $59,000

A. If customers are willing to spend a fixed sum of money, which product should the sales people push? Briefly justify why. Product choice = Crunchy CMR - Crunchy: $11.00/ $25.00 = 44.00% CMR - Chewy: $6.25/$15.00 = 41.67% Each sales dollar from the sale of Crunchy generates 44 cents of additional profit, while the sale of Chewy generates only 41.67 cents per sales dollar.

B. If a customer wants to buy one bag of snacks and is indifferent as to which bag,
which product should the sales people push? Briefly justify why. Product choice = Crunchy Each unit sold of Crunchy generates $11 of additional profit, while the sale of each Chewy generates only $6.25 per unit.

2. Verret, Inc. produces tacos and burritos with a stable sales mix. Its tax rate is 40%. May information follows:
Units Sales revenue Fixed costs Variable costs Income Tacos Burritos 1,000 4,000 $50,000 $150,000 6,000 12,000 $32,000 38,000 78,000 $34,000

How much is the breakeven point in total sales dollars?

CM ratio = CM/Sales = ($200,000 - $90,000) / $200,000 = 55.00% 0.55 x - 44,000 = 0 x = $80,000

How much is the breakeven point in units?

CM per unit = CM/units = ($200,000 - $90,000) / 5,000 = $22.00 22 x - 44,000 = 0 x = 2,000 How much will total sales be at breakeven for tacos? Sales mix in sales revenue: $50,000 : $150,000 which is 1 : 3 Tacos = 1/4 * $80,000 = $20,000 How much will total sales be at breakeven for burritos? Sales mix in sales revenue: $50,000 : $150,000 which is 1 : 3 Burritos = 3/4 * $80,000 = $60,000 How many tacos will be sold at breakeven? Sales mix in units: 1,000 : 4,000 which is 1: 4 Tacos = 1/5 * 2,000 = 400

3. Sam Company makes 2 products, footballs and baseballs. Additional information follows:
Units Sales Variable costs Fixed costs Net income Profit per unit Contribution margin per unit Footballs 2,000 $60,000 24,000 10,000 $26,000 $13.00 $18.00 Baseballs 3,000 $25,000 13,750 5,250 $6,000 $2.00 $3.75

A. Calculate the weighted average contribution margin ratio and the weighted average contribution margin per unit. Which of these two amounts will you use to determine the breakeven point in sales revenue? Explain. Sales Variable costs CM $60,000 24,000 $36,000 $25,000 13,750 $11,250

WA CM ratio: [$36,000 + $11,250] / [$60,000 + $25,000] =

55.59%

The weighted average CM ratio will be used because it is based on sales revenue (i.e., the denominator) and the requirement is to determine break even 'sales.' B. Which product should the company 'push' if customers spend $200 per visit? Explain. Footballs CM ratio = [$60,000 - $24,000]/$60,000 = 60.00% Baseballs CM ratio = [$25,000 - $13,750]/$25,000 = 45.00% Push footballs because the company will earn 60 cents out of every dollar of sales, while earning only 45 cents of every sales dollar for selling baseballs. C. Why is the weighted average contribution margin ratio you calculated in part A different from the average of the two contribution margin ratios calculated in part B? The WACM in part A is weighted based on the number of units sold of the two products (2,000 versus 3,000), i.e., the average is weighted. The average of the two amounts in part B assumes that the same number of units sold are the same for both products.

4. Eng Company produces two models of buckets, Tiny and Jumbo. Information regarding these products for May follows:
Number of units Sales revenue Fixed costs Variable costs Net Income Selling price per unit Jumbo Tiny 6,000 14,000 $120,000 $140,000 24,000 50,000 60,000 42,000 $36,000 $48,000 $20 $10

A. Calculate the weighted average contribution margin ratio. Total CM/Total Sales = [$120,000 + $140,000 $60,000 $42,000] / [$120,000 + $140,000] = 60.77% B. Express sales mix for Eng in two forms Units = 6,000 : 14,000 3 : 7 Sales dollars = $120,000 : $140,000 6 : 7 5. Music Company produces two products, Outkast and Green Day. Information regarding the products is summarized for the month of April in the following table: Outkast 1,200 $48,000 Green Day 1,800 $36,000 Total 3,000 $

Number of units Sales

Fixed costs Variable costs Net Income Profit per unit

15,000 21,000 $12,000 $10.00

12,000 14,400 $9,600 $ 5.33

84,000 27,000 35,400 $21,600

A. State sales mix in lowest terms two different ways. (Use correct notation.) Units: 1,200 : 1,800 =2:3 Revenue: 48,000 : 36,000 =4:3 B. How much is the weighted average contribution margin ratio? CM / Sales = [$84,000 - $35,400] / $84,000 = 57.86%
C. Which product should the sales managers push if demand is limited for both products and customers plan to spend exactly $400 total? Support your answer with computations. The product with the higher contribution margin per unit should be selected--- Green Day. CM ratio: Outkast Green Day [$48,000 - $21,000] / $48,000 = 56.25% [$36,000 - $14,400] / $36,000 = 60.00%
Outkast generates about 56 cents out of each dollar of sales towards covering fixed costs and going to profit while Green Day generates about 60 cents. It is better to earn 60 cents out of each dollar compared to 56 cents.

6. Music Company produces two models, P Diddy and Eminem. Information regarding the products is summarized for the month of April in the following table: P Diddy Eminem Total 600 400 1,000 $24,000 $12,000 $36,000 6,000 5,400 11,400 12,600 3,600 16,200 $ 5,400 $ 3,000 $ 8,400 $9.00 $7.50

Number of units Sales revenue Fixed costs Variable costs Operating Income Profit per unit

A. How much is the weighted average contribution margin ratio based on sales dolalrs? [$36,000 - $16,200] / $36,000 = 55.00%

B. What level of sales does Music need to earn a before tax profit of $10,000 assuming the current mix?
(Sales - VC) (x) CM (x) 55.00% X - FC = Profit - FC = Profit - $11,400 = $10,000 X= $38,909

C. How much will total sales be for Eminems at a profit of $10,000? Sales mix in sales dollars: 24,000 : 12,000 which is 2 : 1 Eminems: 1/3 * $38,909 = $12,970 D. How many Eminems will be sold at a profit of $10,000? CM per unit = [$36,000 - $16,200] / 1,000 = $19.80 per unit
(Sales - VC) (x) CM (x) 19.80 X - FC = Profit - FC = Profit - $11,400 = $10,000 1,080.81 = 1,081 X=

Sales mix in units = 600 : 400 which is 3 : 2 Units of Eminem to be sold: 2/5 * 1,080.81 = 432.324 = 433 E. If you were a salesman for Music, which product would you push to customers to achieve the highest profit for your company if customers want to buy exactly one unit and are indifferent as to which product? Show calculations and briefly justify your answer.
Contribution margin of P Diddy per unit: [$24,000 - $12,600] / 600 = $19 Contribution margin of Eminem per unit: [$12,000 - $3,600] / 400 = $21 Since Eminem contributes additional profit of $21 compared to $19 generated by the sale of P DIddy, the salesman should sell Eminem.

7. Tarjee, Inc. prepared the following concerning its 3 products. Tics Tacs 2,500 4,500 Sales $150,000 $280,000 Variable expenses 120,000 210,000 Contribution $ 30,000 $ 70,000 Toes 3,000 $320,000 160,000 $160,000 Total 10,000 $750,000 490,000 260,000

margin Fixed expenses Profit

100,000 $160,000

How much is the weighted average contribution margin ratio? Interpret this amount. $260,000/$750,000 = 34.666666% = 34.67% For each dollar of sales, Tarjee generates a little less than 35 cents to cover fixed costs and contribute to profit. How much is the weighted average contribution margin per unit? Interpret this amount. $260,000/10,000 = $26.00 per unit For each additional unit of product sold, Trajee generates $26 to cover fixed costs and contribute to profit. If Tarjee sells a total of 8,000 units, how many of these will be Tacs? Since the question asks about units, use the sales mix per unit. Sales mix = 2500 : 4500 : 3000 which is 5 : 9 : 6 8,000 * 9/20 = 3,600 tacs 8. Glorias Guineas sells both long-hair and short-hair guinea pigs. Information for June follows: Long-Hair Short-Hair Totals Number sold 1,200 1,800 3,000 Sales $30,000 $36,000 $66,000 Fixed costs 7,000 5,000 12,000 Variable costs 8,400 9,000 17,400 Operating Income $14,600 $22,000 $36,600 Selling price per unit Contribution margin per unit $25.00 $18.00 $20.00 $15.00

A. State the sales mix in two formats using proper notation and in lowest terms: 1. in units: 1,200 : 1,800 = 2 : 3 2. in sales dollars: 30,000 : 36,000 = 5 : 6 B. How much is the weighted average contribution margin per unit? Total CM / total units = [$66,000 - $17,400] / 3,000 = $16.20 per unit

C. How much is the weighted average contribution margin ratio? (2 decimals) Total CM / Total sales = [$66,000 - $17,400] / $66,000 = 73.64% D. How many total guinea pigs will Glorias sell in order to break even assuming the current sales mix? Because the problem is asking how many units, use the $16.20 per unit WACM from part B: 16.20 X - 12,000 = 0 X = 740.74 = 741 units Cannot sell a partial unit E. At break even, how many long-hair guinea pigs will the company sell assuming the companys sales mix is steady? Because the problem is asking how many out of the total will be long haired (as compared to short-hair), we must look at the sales mix. Since the question asks about units, we use the unit sales mix. Unit sales mix = 2 : 3, for a total of 5 parts. Long-haired = 2/5 of the total: 2/5*740.74 = 296.29 = 297 long-hair guinea pigs

ACG 2071 - Managerial Accounting Study Probes - Chapters 4, 5, and 6

Problems

1.

Marx Inc. supplied the following data: Month January February March April Miles 60,000 70,000 50,000 80,000 Total Cost $95,000 103,000 83,000 101,000

Use the high-low method, to calculate variable cost per unit, total fixed costs, and the cost equation (in good form). Choose March and April....lowest activity levels.

VC per unit = [$101,000 $83,000] / [80,000 50,000] = $0.60 per mile

TC = VCx + FC $101,000 = $0.60*80,000 + FC FC = $53,000

TC = 0.60X + 53,000

2. Accustaff Company's high and low level of activity was 8,000 units during March and 3,000 units produced in August. Machine maintenance costs were $29,000 in March and $12,000 in August. Using the high-low method, how much will total maintenance cost be in January of the following year if production is expected to be 7,000 units?

VC per unit = [$29,000 $12,000] / [8,000 3,000] = $3.40 per unit

TC = VCx + FC $29,000 FC = $1,800 = [8,000*$3.40] + FC

TC at 7,000 units: TC = 7,000*$3.40 + $1,800 TC = $25,600

3. The following totals are available from accounting records of Steering Company in May when it sold 1,000 widgets with sales totaling $35,000: Fixed product costs Variable product costs $8,000 12,000 Variable operating costs Fixed operating costs $6,000 10,000

How much is contribution margin per unit? What information does this amount provide?

[$35,000 $12,000 $6,000] / 1,000 = $17 per unit Steering Company has $17,000 available to cover fixed costs and to contribute to profit.

How much is the gross profit ratio? What information does this amount provide?

[$35,000 $12,000 $8,000] / $35,000 = 42.86% Steering Company has about 43 cents out of every sales dollar available to cover operating costs and to contribute to profit.

4. Clark Company produces flash drives for computers, which it sells for $20 each. Each flash drive costs $6 of variable costs to make. During April, 1,000 drives were sold. Fixed costs for March were $2 per unit for a total of $1,000 for the month.

How much is the contribution margin ratio for April?

CMR for April: [$20 - $6] / $20 = 70%

Operating income?

Operating income: [$20 - $6]*1,000 $1,000 = $13,000

5.

Two costs at Watson, Inc. appear below for specific months of operations.

Month Delivery costs January February March

Amount $42,000 42,000 42,000

Units Produced 40,000 60,000 54,000

Utilities

January February March

$ 84,000 126,000 113,400

40,000 60,000 54,000

Which type of costs are these? Justify.

Delivery: Fixed cost since total cost at all 3 activity levels is the same total.

Utilities: FC ruled out since total cost at both activity levels is different. VC per unit is $84,000/40,000 = $$2.10; and $126,000/60,000 = $2.10; and $113.400/54,000 = $2.10; Since VC per unit is the same for all activity levels, the cost is variable.

6. Regression output appears below. How much is the total expected cost is 3,100 units are produced and sold? Regression Statistics Multiple R R Square Adjusted R Square 0.9565485 0.914985

0.9064835

Standard Error Observations ANOVA

67.799432 12

df Regression Residual Total 1 10 11

SS 49432.37 45967.62 540700

MS 494732 4596.7629

F 107.6

Significance F 1E-06

Coefficients Intercept X Variable 1 847.98299 1.3150781

Standard Error 407 0.127

t Stat

Pvalue

Lower 95% -58.8 1.033

Upper 95% 1755 1.598

Lower 95.0% -58.8 1.033

Upper 95.0% 1755 1.598

2.084 0.064 10.37 0.006

y = 1.3150781*3,100 + 847.98299 = $4,925

7. Butts, Inc. collected the following production data for the past month:
Units Produced

Total Cost
$44,000

1,600 1,300 1,500

1,000

38,000 45,000
33,000

If the high-low method is used, what is the monthly total cost equation? [$44,000 - $33,000] / [1,600 - 1,000] = $18.33 per unit $44,000 = $18.33333*1,600 + FC FC = $14,667

TC = $18.33x + $14,667

8. Golden Company produced 1,000 items and had the following costs-Depreciation, $10,000; Materials, $8,000; Rent, $5,000, and Labor, $15,000. How much is variable cost per unit? [$8,000 + 15,000] / 1,000 = $23 per unit

9. Information concerning amounts for Bridges, Inc. appears below:

Cost Units January $100,000 1,200 February 120,000 1,600 March 90,000 1,100 April 85,000 1,250 May 110,000 1,300 Using the high-low method, what is the fixed portion of costs?

[$120,000 - $90,000] / [1,600 - 1,100] = $60 per unit $120,000 = $60*1,600 + FC FC = $24,000

10. The following costs were incurred related to providing 80,000 car washes:

Car wash labor Soap, cloth, and supplies Water

$240,000 Electric power to move conveyor belt 32,000 Depreciation 28,000 Supervisory salaries

$72,000 64,000 46,000

How much is the variable cost per car to the nearest whole cent?

Car wash labor Soap, cloth, and supplies

$ 240,000 32,000

Water Electric power to move conveyor belt Total variable cost

28,000 72,000 $372,000

Variable cost per unit = $372,000/80,000 =

$ 4.65

11. Total costs amount to $6,000 when labor hours total 400, and $5,000 when labor hours total is 300. Using the high-low method, what would be the total cost when labor hours amount to 450 hours?

[$6,000 - $5,000] / [400 - 300] = $10 per hour = variable cost Total cost = Variable cost + Fixed cost $6,000 = $10 (400) + FC; so FC = $2,000; $10(450) + $2,000 = $6,500

12. Page Companys accountants provided the following information for its sales and production of one product:

Volume direct labor-hours per month Total cost per month

June 50,000 $15,000

July 60,000 $14,900

August 70,000 $18,000

September 80,000 $23,000

October 90,000 $22,800

When using the high-low method, which months data will be used to estimate costs?

Choose June and October from the Units column. [$22,800 - $15,000] / [90,000 - 50,000] = $0.195 per unit TC = VC x + FC $15,000 = 0.195 (50,000) + FC, so FC = $5,250 How do the results using regression differ from those using the high-low method conceptually and why do they differ? Which is better?

Regression uses all the data points (all 5 months) while high-low uses only the highest and lowest activity points. The high-low points can be outliers (extremes) that are not representative of the linear function, so the regression is more accurate as it reflects all activity.

Draw a large scale scattergraph (the larger the scale, the more accurate). Write the cost equation based on your graph.

Extending the trendline to the y-axis shows that the line crosses at about $3,300 (fixed costs). The variable cost is rise over run, in this case, approximately: $10,000/2,500 units = $4 per unit TC = 4.00x + 3,300

13. RMA Companys accountants provided the following information:

June Miles per month 13,000

July
9,000

August 9,500

September 11,500

October
14,000

Total cost per month $210,000 $164,000 Use the high-low method for parts A, B, and C. A. Calculate the unit variable cost.

$160,000

$180,000

$208,000

($208,000 - $164,000) / (14,000 - 9,000) = $8.80 per unit

B. Calculate total fixed cost. TC = VC x + FC

$164,000 = $8.80(9,000) + FC so FC = $84,800

C. Write the total cost equation:

y = 8.80X + 84,800 14. Sale Company produced and sold 5,000 tuples. At this level of production, each unit has a selling price of $22, a variable cost of $10, and a fixed cost of $5. How much is the total cost if Sale produces and sells 4,000 tuples?

Total fixed cost at 5,000 units = 5,000 x $5 = $25,000 Fixed cost is the same in total regardless of the number of units, so at 4,000 units, FC = $25,000. Total cost at 4,000 units: Variable cost = 4,000 x $10 = $40,000 Fixed cost = $25,000 Total cost = $65,000

15. Which of the following costs are variable?

Cost 1 2 3
.

8,000 Units $100,000 40,000 80,000

10,000 Units $125,000 50,000 110,000

Costs 1 and 2 are variable since the cost per unit is the same at both levels. Variable costs per unit are the same at any level of activity. Costs per unit are: Cost 1: $100,000/8,000 = $12.50 and $125,000/10,000 = $12.50 Cost 2: $40,000/8,000 = $5.00 and $50,000/10,000 = $5.00

Cost 3 is a mixed cost since the total cost is different, however, since the cost per unit is not the same at both levels, this is a mixed cost. Cost 3: $80,000/8,000 = $10.00 and $110,000/10,000 = $11.00

16. Acustaff Company's high and low level of activity was 10,000 units during March and 6,000 units produced in August. Machine maintenance costs were $24,000 in March and $19,000 in August. Using the high-low method, how much will total maintenance cost be in January of the following year if production is expected to be 8,250 units?

Cost per unit using high-low method: [$24,000 - $19,000]/[10,000 - 6,000] = $1.25 per unit Total costs = VC + FC: $24,000 = (10,000*$1.25) + FC; so FC = $11,500 Total costs at 8,250 units = (8,250*$1.25) + $11,500 = $21,813 How does the concept of relevant range apply to this problem? The cost function is assumed to be linear in a company's relevant range...its normal level of operating activity. In this case, it appears that operating anywhere between 6,000 and 10,000 units. When operating outside this range, the company cannot expect the fixed and variable costs to behave the same as within the relevant range.

17. Foress Company reported the following date for four months of 2004:

Total Cost January 60,000 $95,000 February 70,000 103,000 March 50,000 88,000 April 80,000 118,000 In applying the high-low method, how much is the variable cost per unit?
First the high and low activity levels are chosen---50,000 and 80,000. The costs correlating to these levels are then chosen: [$118,000 - $88,000]/[80,000 - 50,000] = $1.00 per mile

Month

Miles

How much is the y-intercept value?

y-intercept = fixed costs: $118,000 = $1*80,000 + FC;; FC = $38,000 Write the total cost equation in good form. TC = 1.00x + 38,000

18. The following costs were incurred related to providing 20,000 oil changes:

Oil change labor $24,000 Electric power to pump oil Oil and filters 3,000 Depreciation Supplies 2,000 Supervisory salaries How much is the variable cost per oil change to the nearest whole cent?
Identify the variable costs: $24,000 + $3,000 + $2,000 + $7,000 = $36,000 (all these costs increase when the number of oil changes increase.) VC per unit = $36,000/20,000 = $1.80 per oil change

$7,000 2,000 6,000

19. Clinton Cookies bakes chocolate chip cookies and ships them to fast food restaurants for sale to customers. Clinton charges the restaurants $1.25 per cookie. The company has projected the following costs for sales of 3,000 and 4,000 cookies for the next months operation: Cost Items Cookie batter Baking employees Packaging Facilities Shipping charges Marketing Total costs 3,000 cookies $ 600 1,150 450 300 160 420 $3,080 4,000 cookies $ 800 1,300 600 300 200 420 $3,620

Calculate the variable cost of each cookie and total fixed cost.

variable cost/unit Cookie batter $ Baking employees 0.15 Packaging 0.15 Facilities Shipping charges 0.04 Marketing 0.20 $

fixed cost 700 300 40 420

Total costs $ 0.54 $ 1,460

Calculations of mixed costs:

Baking: $1,300 - $1,150 4,000 - 3,000 = $0.15 per unit

$1,300 = 0.154,000 + FC FC = $700 Shipping: $200 - $160 4,000 - 3,000 =

$0.04
per unit

$200 = .04*4,000 +FC FC = $40

20. Handley Company's activity for the first four months of 2004 is as follows: Machine Hours January February March April May 4,000 4,800 4,600 3,800 4,400 Electrical Cost $2,800 $3,500 $3,600 $3,000 $3,100

Using the high-low method, how much is the cost per machine hour?

[$3,500 - $3,000]/[4,800 - 3,800] = $0.50; Note that the high and low amounts are chosen from the activity column (machines hours), then the corresponding costs are used.

21. Hanks Toys used high-low data from March and May to determine its unit variable cost of $0.50.

Month March May

Units produced 14,000 18,000

Total costs $25,600 27,600

If Hank produces 15,000 units in September, how much is its total cost expected to be?

Variable rate = [$27,600 - $25,600]/[18,000 - 14,000] = $0.50 per unit $25,600 = $0.50(14,000) + FC; so FC = $18,600 TC = $18,600 + $0.50(15,000) = $26,100

22. Johnson Manufacturing paid $5,000 for materials, $4,000 for production labor, $3,500 depreciation of manufacturing equipment, $2,500 depreciation of office furniture, and $5,000 for sales salaries. What is the average cost per unit to produce 50 units? ($4,000 + $5,000 + $3,500)/50 units = $250 each

23. At Fruit Company, the total cost to produce 50,000 units is $750,000. Total fixed costs are $250,000. What is the expected cost to produce 48,000 units?

VC = ($750,000 - $250,000) = $500,000 VC per unit = $500,000/50,000 = $10 Cost at 48,000 units = $10(48,000) + $250,000 = $730,000

24. At Richetti Company, the total variable cost to produce 15,000 units is $45,000. Total fixed costs are $21,000. What is the expected cost to produce 13,000 units?

VC per unit = $45,000/15,000 = $3 per unit Total cost = variable cost + fixed costs = [$3*13,000] + $21,000 = $60,000 Note that product costs include both fixed and variable amounts. If the question asked for the incremental cost, then $39,000, the variable cost would be the answer, only if the difference in units was 13,000.

25. Duffy Company produced and sold 10,000 nits. At this level of production, the selling price per unit is $10, the variable cost per unit is $4, and the fixed cost per unit is $2. How much is the total cost per unit if management produces and sells 12,500 units?

Fixed costs cost $2 per unit when the company produces and sells 10,000 units....giving a total fixed cost of $20,000. No matter how many units are produced and sold, fixed costs don't change...they remain at $20,000. Variable costs: $4 x 12,500 = Fixed costs Total costs at 12,500 units Cost per unit: $70,000/12,500 = $50,000 20,000 $70,000 $5.60

26. At Adeniran Company, the material and labor cost to produce 800 units is $5,000. Total fixed costs are $6,000. What is the expected cost to produce 900 units?

VC per unit = $5,000/800 = $6.25; At 900 units: [$6.25 x 900] + $6,000 = $11,625