ch003.lam2e tb

7/22/2019 Ch003.Lam2e Tb

1/25

Chapter 3

Fundamentals of Cost-Volume-Profit Analysis

True/False Questions

T F 1. The basic profit equation used for cost-volume-profit (CVP) analysis is based on theincome statement.

ns!er" True #ifficulty" $imple %earnin& 'bective" 1

AACSB: Analytic

T F . *oth total revenues (T+) and total costs (TC) are li,ely to be affected by chan&es in theoutput.

ns!er" True #ifficulty" $imple %earnin& 'bective" 1AACSB: Analytic

T F . Costs and epenses are either variable or fied.

ns!er" False #ifficulty" $imple %earnin& 'bective" 1

AACSB: Analytic

T F /. Cost-volume-profit (CVP) analysis assumes that the production volume equals sales

volume so that chan&es in unit prices can be i&nored.

ns!er" False #ifficulty" 0oderate %earnin& 'bective" 1

AACSB: Analytic

T F . The total contribution mar&in is the unit contribution mar&in multiplied by the number ofunits minus the fied component of the total costs (TC).


AACSB: Analytic

T F 2. 'peratin& profit is the unit contribution mar&in multiplied by the number of units minusthe fied component of the total costs (TC).

ns!er" True #ifficulty" 0oderate %earnin& 'bective" 1

AACSB: Analytic

%anen3 nderson3 0aherFundamentals of Cost Accounting3 e 4

7/22/2019 Ch003.Lam2e Tb

2/25

T F 5. 6n financial accountin&3 costs are classified as either manufacturin& or non-manufacturin&but not as fied or variable.


AACSB: Analytic

T F 7. 6f the avera&e sellin& price is 8.24 per unit3 the avera&e variable cost is 8.2 per unit3 andthe total fied costs are 813443 then sales of 13444 units !ill result in operatin& profitsof 83244.


AACSB: Analytic

T F 9. 6f the avera&e sellin& price is 8.24 per unit3 the avera&e variable cost is 8.2 per unit3 andthe total fied costs are 813443 then sales of 73444 units !ill result in a brea,-even point

of 234 units.

ns!er" True #ifficulty" Comple %earnin& 'bective" 1

AACSB: Analytic

T F 14. 6f the avera&e sellin& price is 8.24 per unit3 the avera&e variable cost is 8.2 per unit3 andthe total fied costs are 813443 then operatin& profits of 8944 !ill require a sales volumeof 344 units.


AACSB: Analytic

T F 11. The contribution mar&in ratio is the contribution mar&in per unit divided by the sellin&price per unit.

ns!er" True #ifficulty" 0oderate %earnin& 'bective" 1

AACSB: Analytic

T F 1. 6f the fied costs are 83/443 tar&eted operatin& profit is 813443 and the contributionmar&in ratio is /4:3 then the brea,-even point is 823444.


AACSB: Analytic

%anen3 nderson3 0aherFundamentals of Cost Accounting3 e1

7/22/2019 Ch003.Lam2e Tb

3/25

T F 1. 6f the fied costs are 83/443 tar&eted operatin& profit is 813443 sellin& price per unit is83 and the contribution mar&in ratio is /4:3 then the sales volume is 93444 units.

ns!er" False #ifficulty" Comple %earnin& 'bective" 1

AACSB: Analytic

T F 1/. The brea,-even point in sales dollars is fied costs divided by the contribution mar&inratio.


AACSB: Analytic

T F 1. The brea,-even point in sales dollars is !hen the total contribution mar&in equals the

total fied costs.


AACSB: Analytic

T F 12. The brea,-even point in sales dollars is !hen the total contribution mar&in equals thetotal costs.


AACSB: Analytic

T F 15. The vertical ais on the cost-volume-profit (CVP) &raph represents the volume of activityfor a period.

ns!er" False #ifficulty" $imple %earnin& 'bective" 1

AACSB: Analytic

T F 17. n or&ani;ation

7/22/2019 Ch003.Lam2e Tb

4/25

T F 4. The slope of the profit line in profit-volume analysis is the operatin& profit per unit.

ns!er" False #ifficulty" 0oderate %earnin& 'bective"

AACSB: Analytic

T F 1. n or&ani;ation

7/22/2019 Ch003.Lam2e Tb

5/25

T F 5. n increase in an or&ani;ation

7/22/2019 Ch003.Lam2e Tb

6/25

ns!er" True #ifficulty" 0oderate %earnin& 'bective" /

AACSB: Analytic

T F /. 6f the fied costs are 83/443 tar&eted before-ta operatin& profit is 813443 ta rate is:3 sellin& price per unit is 83 and contribution mar&in ratio is /4:3 then the salesvolume is 93444 units.

ns!er" False #ifficulty" Comple %earnin& 'bective" /

AACSB: Analytic

T F . Cost-volume-profit (CVP) analysis is more complicated for or&ani;ations !ith multipleproducts because each product has a different contribution mar&in ratio.

ns!er" True #ifficulty" $imple %earnin& 'bective" /

AACSB: Analytic

T F 2. The ?@ 0anufacturin& Company sells t!o products3 ? and @. ? has a hi&her contributionmar&in ratio than @. 6f the product mi shifts to!ards @3 the company

7/22/2019 Ch003.Lam2e Tb

7/25

9. Bhich of the follo!in& !ould not cause the brea,even point to chan&e) $ales price increases.*) Fied costs decreases.C) $ales volume decreases.#) Variable costs per unit increases.D) Product mi shifts to!ards the cheaper products.

ns!er" C #ifficulty" 0oderate %earnin& 'bective" 1

AACSB: Analytic

/4. 6f the fied costs for a product decrease and the variable costs (as a percenta&e of sales dollars)decrease3 !hat !ill be the effect on the contribution mar&in ratio and the brea,even point

respectivelyContribution *rea,even0ar&in +atio Point

) decreased increased*) increased decreasedC) decreased decreased#) increased increased

ns!er" * #ifficulty" 0oderate %earnin& 'bective" 1

AACSB: Analytic

/1. The *lue Company is currently sellin& its sin&le product for 81. Variable costs are estimated toremain at 54: of the current sellin& price and fied costs are estimated to be 8/3744 per month.6f *lue increases its sellin& price by 14:3 its variable cost ratio !ill) not chan&e*) decreaseC) increase

ns!er" * #ifficulty" 0oderate %earnin& 'bective" 1

AACSB: Analytic+esponse"81(.54) E 814.481(1.14) E 812.4

814.4812.4 E 2.2: (vs. 54:)

/. Dpense is a fied cost epense3 * is a variable cost. #urin& the current year the volume ofoutput has decreased. 6n terms of cost per unit of output3 !e !ould epect that) epense has remained unchan&ed.*) epense * has decreased.

Test *an,3 Chapter 3 2

7/22/2019 Ch003.Lam2e Tb

8/25

C) epense has decreased.#) epense * has remained unchan&ed.

ns!er" # #ifficulty" $imple %earnin& 'bective" 1

AACSB: Analytic

/. 6f both the variable cost per unit and the sellin& price per unit decrease3 the ne! contributionmar&in ratio in relation to the old contribution mar&in ratio !ill be") lo!er.*) Gi&her.C) Hnchan&ed.#) Iot enou&h information to tell.

ns!er" # #ifficulty" Comple %earnin& 'bective" 1

AACSB: Analytic//. company

7/22/2019 Ch003.Lam2e Tb

9/25

C) decrease in the brea,-even point.#) decrease in the variable cost per unit.

ns!er" #ifficulty" Comple %earnin& 'bective"

AACSB: Analytic

/7. fter-ta operatin& profits are equal to the before-ta operatin& profits !hen !hich of thefollo!in& occurs") income taes are added.*) income taes are subtracted.C) multiplied by (1 > ta rate).#) divided by (1 > ta rate).

ns!er" # #ifficulty" $imple %earnin& 'bective" / (*oth * and # are correct)

AACSB: Analytic

Part B" Computational Auestions

/9. t a brea,-even point of /44 units3 variable costs !ere 8/44 and fied costs !ere 844. Bhat

!ill the /41stunit sold contribute to operatin& profits before income taes) 8 .4*) 81.44C) 81.4#) 8.44D) some other ans!er JJJJJJJJJJJJJJJ.

ns!er" #ifficulty" $imple %earnin& 'bective" 1

AACSB: Analytic+esponse" Variable costs E 8/44/44 E 81.44/44 E 844(sellin& price - 81.44)K sellin& price E 81.481.4 1.44 E 8 .4

4. *arnes Corporation manufactures s,ateboards and is in the process of preparin& net year

7/22/2019 Ch003.Lam2e Tb

10/25

The brea,even point (rounded to the nearest dollar) for *arnes Corporation for the current year is) 81/23/1.*) 82232/.C) 859354.#) 81713717.D) 82735.

ns!er" * #ifficulty" $imple %earnin& 'bective" 1

AACSB: Analytic+esponse"843444 N 143444 N 53444 N 443444 E 8253444(813443444 - 253444)13443444 E :(81443444 N 43444). E 82232/

1. *arnes Corporation manufactures s,ateboards and is in the process of preparin& net year

7/22/2019 Ch003.Lam2e Tb

11/25

Per Unit Total

$ales 81 8/3444%ess variable epenses 9 53444Contribution mar&in 2 173444%ess fied epenses 13444'peratin& profit 8 23444

6f sales decrease by 44 units3 ho! much !ill fied epenses have to be reduced by to maintainthe current operatin& profit of 823444) 893444.*) 85344.C) 823444.#) 83444.D) $ome other ans!er JJJJJJJJJJJ.

ns!er" # #ifficulty" Comple %earnin& 'bective" 1

AACSB: Analytic+esponse"

8/34441 E 3444 units(81 - 9)(3444 - 44)Q -FC E 823444FC E 893444K thus FC !ill have to decrease by 83444

. ROS Company

7/22/2019 Ch003.Lam2e Tb

12/25

#) 8.D) $ome other ans!er JJJJJJJJJJJJJJJJJJJJJ.

ns!er" C #ifficulty" Comple %earnin& 'bective" 1


(8443444 N 843444 N 813444 N 85344)43444 E 8.5($P - 8.5)$P E ./4$P E 89.7

. Fo!ler 0anufacturin& Company has a fied cost of 83444 for the production of tubes.Dstimated sales are 143444 units. before ta profit of 813444 is desired by the controller. 6fthe tubes sell for 8 each3 !hat unit contribution mar&in is required to attain the profit tar&et) 8.44.*) 8..C) 81./5.#) 8 .94.

D) $ome other ans!er JJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJ.

ns!er" * #ifficulty" $imple %earnin& 'bective" 1

AACSB: Analytic+esponse"(C0 per unit 143444) - 3444 E 813444C0 per unit E 8.

2. ?? 0otors 6nc. employs / sales personnel to mar,et their line of luury automobiles. Theavera&e car sells for 834443 and a 2 percent commission is paid to the salesperson. ?? 0otors isconsiderin& a chan&e to the commission arran&ement !here the company !ould pay eachsalesperson a salary of 83444 per month plus a commission of percent of the sales made by thatsalesperson. The amount of total monthly car sales at !hich ?? 0otors !ould be indifferent as to!hich plan to select is) 8343444.*) 83444.444.C) 813443444.#) 81343444.D) 8/3443444.

ns!er" #ifficulty" Comple %earnin& 'bective"

AACSB: Analytic+esponse"83444 N (.4)(units)(83444) E (.42)(units)(83444)Hnits E .1591.1591(/)(83444) E 8343444

5. The follo!in& data relate to a year

7/22/2019 Ch003.Lam2e Tb

13/25

Per Unit

$ellin& price 8.44Variable manufacturin& costs 81.44Variable sellin& costs 8.44Fied manufacturin& costs (based on 1443444 units) 8 .Fied sellin& costs (based on 1443444 units) 8 .2

Total fied costs remain unchan&ed !ithin the relevant ran&e of 3444 units to total capacity of1243444 units.

Bhat is the bud&eted operatin& levera&e assumin& the Patsy Corporation produced and sold1143444 units) 1.5.*) 1.44.C) 1.29.#) .225.D) /.444.F) $ome other ans!er JJJJJJJJJJJJJJJ.

ns!er" C #ifficulty" Comple %earnin& 'bective"

AACSB: Analytic+esponse"(8.44 - 1.44 - .44) 1143444Q E 843444843444843444 - (8. N .2) 1443444Q E 1.29

7. Liven the follo!in& information"

$ales 83444Fied Dpenses 3444

Variable Dpenses 1354

Bhat !ould epected net income be if the company eperienced a 14 percent increase in fiedcosts and 14 percent increase in sales volume) 81354.*) 8134.C) 8134.#) 8135.D) $ome other ans!er JJJJJJJJJJJJJ.

ns!er" # #ifficulty" $imple %earnin& 'bective"

AACSB: Analytic

+esponse" 83444 - 81354)1.14Q (83444) - (1.14) E 8135

9. Liven the follo!in& data"

Per Unit Total

$ales 81 8/3444%ess variable epenses 9 53444


7/22/2019 Ch003.Lam2e Tb

14/25

Per Unit Total

Contribution mar&in 2 173444%ess fied epenses 13444Iet income 8 23444

6f sales decrease by 44 units3 by !hat : !ould fied epenses have to be reduced by to maintaincurrent net income) 4.4:.*) .:.C) .4:.#) 12.5:.D) $ome other percenta&e JJJJJJJJJJJJ.

ns!er" C #ifficulty" Comple %earnin& 'bective"


8/34441 E 3444 units(81 - 9) (3444 - 44)Q -FC E 823444FC E 893444K thus FC !ill have to decrease by 83444 8344413444 E :

24. The #ooley Co. manufactures t!o products3 baubles and trin,ets. The follo!in& are proections for the comin& year"

BAUBLE T!I"#ET

Units Amount Units Amount

$ales 143444 8143444 3444 8143444Costs"Fied 3444 /3244Variable 23444 /34446ncome before taes 73444 8 3444 73444 8 13/44

Go! many *aubles !ill be sold at the brea,even point3 assumin& that the facilities are ointlyused and the sales mi !ill remain constant) 93944*) 73744C) 23244

#) 3444D) 344

ns!er" C #ifficulty" Comple %earnin& 'bective" /

AACSB: Analytic+esponse"(8234448143444)(14344413444) N (8/344483444)(344413444) E .22225(83444 N /3244).22225 E 93944 total units


7/22/2019 Ch003.Lam2e Tb

15/25

93944 (14344413444) E 23244

Part C" Professional Damination Auestions

21. 6f sales dollars are used to measure activity levels3 total costs and total revenues may be read fromthe R and O ais as follo!s" (CP adapted3 94)

Total Costs Total +evenues) R or O R or O*) R or O R onlyC) O only R or O#) O only R only


AACSB: Analytic

2. *rea,even analysis assumes that over the relevant ran&e (CP3 adapted 9)") Total Fied Costs are nonlinear.*) Total Costs are unchan&ed.C) Hnit Variable Costs are unchan&ed.#) Hnit +evenues are nonlinear.

ns!er" C #ifficulty" $imple %earnin& 'bective" 1

AACSB: Analytic

2. t the brea,-even point the contribution mar&in equals total" (CP adapted3 119)) Variable costs*) $ales revenuesC) $ellin& and administrative costs#) Fied costs


AACSB: Analytic

2/. The relevance of a particular cost to a decision is determined by the" (C0 adapted3 192)

) ris,iness of the decision.*) number of decision variables.C) amount of the cost.#) potential effect on the decision.D) accuracy of the cost.

ns!er" # #ifficulty" $imple %earnin& 'bective"

AACSB: Analytic

Test *an,3 Chapter 3 2/

7/22/2019 Ch003.Lam2e Tb

16/25

2. 6n a decision analysis situation3 !hich one of the follo!in& costs is not li,ely to contain a variable

cost component (C0 adapted3 292)) %abor*) 'verheadC) #epreciation#) $ellin&D) 0aterial

ns!er" C #ifficulty" $imple %earnin& 'bective" 1

AACSB: Analytic

22. 'n ?anuary 13 4423 %a,e Co. increased its direct labor !a&e rates. ll other bud&eted costs and

revenues !ere unchan&ed. Go! did this increase affect %a,e

7/22/2019 Ch003.Lam2e Tb

17/25

27. The follo!in& information pertains to $yl Co."

$ales 87443444Variable Costs 1243444Fied Costs /43444

Bhat is $yl

7/22/2019 Ch003.Lam2e Tb

18/25

#irect 0aterials 4#irect %abor 1Variable 0anufacturin& 'verhead 1Fied 0anufacturin& 'verhead 4Variable $ellin& Fied $ellin& and dministrative 14

Total Costs 94 'peratin& 0ar&in 8 24

#urin& the net year3 sales of @*-92 are epected to be 143444 units. ll costs !ill remain thesame ecept for fied manufacturin& overhead3 !hich !ill increase 4:3 and material3 !hich !illincrease 14:. The sellin& price per unit for net year !ill be 8124. *ased on this data3 @ator6nc.

7/22/2019 Ch003.Lam2e Tb

19/25

$P - (. 1.)Q$P E 54:$P E 814.44

5. The number of T-shirts #onnelly Corporation must sell to brea, even in the comin& year is) 153444.*) 1934.C) 43444.#) 3444.D) $ome other amount JJJJJJJJJJJJJJJJ.

ns!er" * #ifficulty" Comple %earnin& 'bective" /

AACSB: Analytic+esponse"FC (last year) E (85.4 - .) 43444 units E 8143444FC (this year) E 8143444 1.14 E 811344

811344(9 - ) E 1934

5. $ales for the comin& year are epected to eceed last year

7/22/2019 Ch003.Lam2e Tb

20/25

3444 89 E 8453444

Essay Questions

5. The @atie Corporation has bud&eted fied costs of 813444 and an estimated sellin& price of812.4 per unit. The contribution mar&in ratio is /4: and the company plans to sell 3444 unitsin 445.

e!uired"

(a) Compute the mar&in of safety ratio for 445.(b) Compute the operatin& levera&e for 445.

ns!er"(a)

*D E 813444./4 E 81344Dstimated sales E 3444 units R 812.4 E 8/13440ar&in of safety E (8/1344 > 1344)/1344 E /.:(b)C0 E 8/1344(./4) E 8123444'peratin& profits E 8123444 > 13444 E 8/43444'peratin& levera&e E 8123444/43444 E /.1

AACSB: Analytic

52. The president of 0L Dnterprises is considerin& epandin& sales by producin& three differentversions of their product. Dach !ill be tar&eted by the mar,etin& department to different incomelevels and hence !ill be produced from three different qualities of materials. fter revie!in& thesales forecasts3 the sales department feels that for every item of sold3 / of 0 can be sold and 7of L can be sold.

The follo!in& information has been assembled by the sales department and the productiondepartment.

A $ %

$ales price (per unit) 81.44 814.44 8.440aterial Cost .44 /.44 .44#irect %abor .44 1.4 1.Variable 'verhead .44 1.4 1.

The fied costs associated !ith the manufacture of these three products are 853444 per year.

e!uired"#etermine the number of units of each product that !ould be sold at the brea,even point.

ns!er"Bei&hted avera&e C0 E (1-9)(1) N (14-5)(/) N ( > /.4)(7)Q(1 N / N 7) E 81.291


7/22/2019 Ch003.Lam2e Tb

21/25

*D E 8534441.291 E //319 total units E //319 (11) E 3/140 E //319 (/1) E 1325L E //319 (71) E 535/

AACSB: Analytic

55. $tanley Clipper3 no! retired3 o!ns the Campus *arber $hop. Ge employs five () barbers andpays each a base rate of 844 per month. 'ne of the barbers serves as the mana&er and receivesan etra 844 per month. 6n addition to the base rate3 each barber also receives a commission of8 per haircut. barber can do as many as 4 haircuts a day3 but the avera&e is 1/ haircuts perday. The Campus *arber $hop is open / days a month.

'ther costs are incurred as follo!s"

dvertisin& 844 per month+ent 8/44 per month*arber $upplies 8.94 per haircutHtilities 815 per month plus 8. per haircut0a&a;ines 8 per monthCleanin& $upplies 8.1 per haircut

$tanley currently char&es 87 per haircut.

e!uired" (For parts a throu&h d3 income taes can be i&nored (sole proprietors also have to paytaes)(a) Compute the brea,-even point in (1) number of haircuts3 () total sales dollars3 and () as apercenta&e of capacity.(b) 6n 0arch3 13/44 haircuts !ere &iven. Compute the operatin& profits for the month.(c) $tanley !ants a 83124 operatin& profit in pril. Compute the number of haircuts that mustbe &iven in order to achieve this &oal.(d) 6f 1344 haircuts are &iven in pril3 compute the sellin& price that !ould have to be char&ed inorder to have 83124 in operatin& profits.(For parts e and f3 assume the Campus *arber $hop is a corporation !ith a 4: ta rate.)(e) $tanley !ants to earn 83124 in after-ta operatin& profits. Compute the number of haircutsthat must be &iven to reach this &oal in ?uly.(f) 6n ?uly3 only 1344 haircuts !ere &iven. Compute the price per haircut that $tanley shouldhave char&ed in ?uly to earn 83124 in after-ta operatin& profits.

ns!er"Fied costs E (844) N 844 N 844 N 8/44 N 815 N 8 E 83244Variable costs E 8.44 N 84.94 N 84. N 84.1 E 8/./4 per haircut

(a) (1) 83244(87 > /./4) E 13444 haircuts () 13444 87.44 E 873444 () 13444( 1/ /) E 9.:(b) (87.44 > /./4) 13/44Q - 83244 E 813//4(c) (83244 N 83124)(87.44 > /./4) E 13244 haircuts(d) (8$P > /./4) 1344Q > 3244 E 3124K $P E 87./ per haircut.(e) (87 > /./) number of haircutsQ > 3244 E 83124(1 - .)K number of haircuts E 1377


7/22/2019 Ch003.Lam2e Tb

22/25

(f) (8$P > /./4)1344Q > 3244 E 3124(1 - .4)K $P E 87.72 per haircut.

AACSB: Analytic

57. Oou have been provided !ith the follo!in& information re&ardin& the %L 0anufacturin&Company"

$ales price 8 Variable manufacturin& cost per unit 1Variable mar,etin& cost per unit Fied manufacturin& costs 1743444Fied administrative costs /43444

This information is based on forecasted sales of 3444 units.

e!uired"(a) Bhat are the epected operatin& profits for the upcomin& year(b) Bhat is the brea,-even point in units(c) Bhat is the brea,-even point in dollars(d) 6f 8743444 of operatin& profits is desired3 ho! many units must be sold(e) Go! much in sales dollars is required to &enerate an operatin& profit of 853444ns!er"

(a) (8 > 1 > ) 3444Q > (1743444 N /43444) E 843444(b) 843444814 E 3444 units(c) 3444 8 E 843444(d) (843444 N 743444)14 E 43444 units(e) (843444 N 53444)14 E 9344 units 8 E 855344

AACSB: Analytic

59. lmo Company manufactures and sells adustable canopies that attach to motor homes andtrailers. The mar,et covers both ne! unit purchasers as !ell as replacement canopies. lmodeveloped its 445 business plan based on the assumption that canopies !ould sell at a price of8/44 each. The variable costs for each canopy !ere proected to be 8443 and the annual fiedcosts !ere bud&eted at 81443444. The &oal for lmo

7/22/2019 Ch003.Lam2e Tb

23/25

reduced price3 3544 units can be sold durin& the remainder of 445. Total fied and variable unitcosts !ill stay as bud&eted.(b) %o!er variable costs per unit by 8 throu&h the use of less epensive materials and li&htlymodified manufacturin& techniques. The sales price !ill also be reduced by 84. These chan&es!ill yield sales of 344 for the remainder of 445.(c) Cut fied costs by 8143444 and lo!er the sales price by :. Variable costs per unit !ill be

unchan&ed. $ales of 3444 units can be epected for the remainder of 445.AACSB: Analytic

e!uired"

(a) 6f no chan&es are made to the sellin& price or cost structure3 determine the number of unitsthat lmo must sell(1.) in order to brea,-even3 and(.) in order to achieve its after-ta operatin& profit obective.(b) #etermine !hich one of the alternatives lmo should select to achieve its after-ta operatin&profit obective. *e sure to support your selection !ith appropriate computations.

ns!er"

'nly alternative achieves the tar&eted operatin& profit obective of 8/434443 althou&halternative * is close.

(a) (1) 81443444(8/44 > 44) E 44 units () 81443444 N /43444(1 - ./4)Q(/44 > 44) E 344 units

(b)()U(/44 > 44)4Q N U(24 > 44)3544Q > 943444(1 - ./4) E 8/1344(*) U(/44 > 44)4Q N (54 > 15)344Q > 1443444(1 - ./4) E 893/44(C)U(/44 > 44)4Q N (74 > 44)3444Q > 1443444(1 - ./4) E 84/3444

AACSB: Analytic

74. T-Tunes3 6nc. is considerin& the introduction of a ne! music player !ith the follo!in& price andcost characteristics"

$ales price 8 1 eachVariable costs 5 eachFied costs 1743444 per year

+equired(a) Bhat number must T-Tunes sell to brea, even

(b) Bhat number must T-Tunes sell to ma,e an operatin& profit of 8143444 for the year

Consider requirements (b)3 (c)3 and (d) independent of each other3 assumin& that the proectednumber for the year is 5344 units.

(c) Bhat !ill the operatin& profit be(d) Bhat is the impact on operatin& profit if the sellin& price per unit decreases by 1:(e) Bhat is the net income if variable costs per unit increase by 1: and T-Tunes has a 7: tarate


7/22/2019 Ch003.Lam2e Tb

24/25

ns!er"(a) 81743444(1 > 5) E 3244(b) (81743444 N 143444)(1 > 5) E 23444(c) (81 > 5)5344Q > 1743444 E 8193444(d) (8142. > 5)5344Q > 1743444 E 8/353a decrease of 5:

(e) U(81 > 72.)5344Q > 1743444Q(1 - .7) E 827375.4AACSB: Analytic

71. Carson Corporation produces and sells three products. The three products3 lpha3 *eta3 andLamma3 are sold in a local mar,et and in a re&ional mar,et. t the end of the first quarter of thecurrent year3 the follo!in& income statement (in thousands of dollars) has been prepared"

Total %ocal +e&ional$ales revenue 8344 8/3444 81344Cost of &oods sold /34/4 3144 9/4Lross mar&in 13124 944 24

0ar,etin& costs /4 /4 174dministrative costs 47 124 /7Total mar,etin& andadministrative 27 /44 7'peratin& profits 8 844 8

0ana&ement has epressed special concern !ith the re&ional mar,et because of the etremelypoor return on sales. This mar,et !as entered a year a&o because of ecess capacity. 6t !asori&inally believed that the return on sales !ould improve !ith time3 but after a year3 nonoticeable improvement can be seen from the results as reported in the above quarterly statement.6n attemptin& to decide !hether to eliminate the re&ional mar,et3 the follo!in& information hasbeen &athered"

Products * L$ales revenue 83444 813244 813244Variable manufacturin& costs as a

percenta&e of sales revenue24: 54: 24:

Variable mar,etin& costs as apercenta&e of sales revenue

: : :

Product $ales by 0ar,ets %ocal +e&ional 813244 8/44* 1344 /44C 1344 /44

ll administrative costs and fied manufacturin& costs are common to the three products and thet!o mar,ets and are fied for the period. +emainin& mar,etin& costs are fied for the period andseparable by mar,et. ll fied costs have been arbitrarily allocated to mar,ets.!e&uired'

(a) ssumin& there are no alternative uses for the Carson Corporation

7/22/2019 Ch003.Lam2e Tb

25/25

allocate fied costs to products.(c) 6t is believed that a ne! product can be ready for sale net year if the Carson Corporationdecides to &o ahead !ith continued research. The ne! product can be produced by simplyconvertin& equipment presently used in producin& product Lamma. This conversion !ill increasefied costs by 8/43444 per quarter. Bhat must be the minimum contribution mar&in per quarterfor the ne! product to ma,e the chan&eover financially feasible

ns!er"(a.) The re&ional mar,et should not be dropped as this mar,et not only covers all the variablecosts and separable fied costs but also &ives net mar,et contribution of 823444 to!ard thecommon fied costs.

$ales E 81344Variable manufacturin& costs E (.2 8/44) N (.5 81/44) N (.2 8/44) E 8524

Variable 0ar,etin& costs E 870ar,etin& costs E 8174

Iet mar,et contribution E 8 (E 81344 > 8524 > 8174)

(b.) Auarterly income statement (in thousands)"

Product lpha Product*eta

ProductLamma

Total

$ales revenue 83444 813244 813244 8344

%ess variable costs"

0anufacturin& 1344 1314 924 374

0ar,etin& 24 1/

Total variable cost 1324 131 99 3/4/

Contribution mar&in 5/4 //7 247 13592

%ess fied costs"

0anufacturin& (8/34/4 > 8374) 524

0ar,etin& (8/4 > 81/) 92

dministrative 47

Total fied costs 132/

'peratin& profit 8

(c.) The ne! product must contribute at least 82/7 (E 8247 N 8/4) per quarter so as not to leavethe company !orse off !hen product C is replaced.

AACSB: Analytic

ch003.lam2e tb

Documents