Q12SE - Horngren'S Financial And Managerial Accounting

Question

Question: Use the following information to complete Short Exercises S20-10 through S20-15. 

Funday Park competes with Cool World by providing a variety of rides. Funday Park sells tickets at \(70 per person as a one-day entrance fee. Variable costs are \)42 per person, and fixed costs are \(170,800 per month. 

 

Using the Funday Park information presented, do the following tasks. 

Requirements 

1. Suppose Funday Park cuts its ticket price from \)70 to \(56 to increase the number of tickets sold. Compute the new breakeven point in tickets and in sales dollars. 

2. Ignore the information in Requirement 1. Instead, assume that Funday Park increases the variable cost from \)42 to $56 per ticket. Compute the new breakeven point in tickets and in sales dollars.

 

Step-by-Step Solution

Answer

Answer

 

The breakeven sales in dollars is $683,200. 

The breakeven sales in dollars is $854,000

Step 1: Calculation of Contribution margin ratio, breakeven point in sales dollars, breakeven point tickets sold if ticket price decrease from $70 to $56

$$\begin{gathered} \mathbf{Contributionmargin}\mathbf{=}\mathbf{Salesprice}\mathbf{-}\mathbf{-}\mathbf{Variablecost} \\ \mathbf{=}\mathbf{\$}\mathbf{56}\mathbf{-}\mathbf{\$}\mathbf{42} \\ \mathbf{=}\mathbf{\$}\mathbf{14} \\ \mathbf{Contributionmarginratio}\mathbf{=}\frac{\mathbf{Contributionmarginperunit}}{\mathbf{Salesrevenue}} \\ \mathbf{=}\frac{\mathbf{\$}\mathbf{14}}{\mathbf{\$}\mathbf{56}} \\ \mathbf{=}\mathbf{25}\mathbf{\%} \\ \mathbf{Salesrequiredindollars}\mathbf{=}\frac{\mathbf{Fixedcost}\mathbf{+}\mathbf{Targetprofit}}{\mathbf{Contributionmarginratio}} \\ \mathbf{=}\frac{\mathbf{\$}\mathbf{170}\mathbf{,}\mathbf{800}\mathbf{+}\mathbf{\$}\mathbf{0}}{\mathbf{25}\mathbf{\%}} \\ \mathbf{=}\mathbf{\$}\mathbf{683}\mathbf{,}\mathbf{200} \\ \mathbf{Salesrequiredintickets}\mathbf{=}\frac{\mathbf{Fixedcost}\mathbf{+}\mathbf{Targetprofit}}{\mathbf{Contributionmarginperunit}} \\ \mathbf{=}\frac{\mathbf{\$}\mathbf{170}\mathbf{,}\mathbf{800}\mathbf{+}\mathbf{\$}\mathbf{0}}{\mathbf{\$}\mathbf{14}} \\ \mathbf{=}\mathbf{12}\mathbf{,}\mathbf{200} \end{gathered}$$

Step 2: Calculation of Contribution margin ratio, breakeven point in sales dollars, breakeven point tickets sold if variable cost increase from $42 to $56

$$\begin{gathered} \mathbf{Contributionmargin}\mathbf{=}\mathbf{Salesprice}\mathbf{-}\mathbf{-}\mathbf{Variablecost} \\ \mathbf{=}\mathbf{\$}\mathbf{70}\mathbf{-}\mathbf{\$}\mathbf{56} \\ \mathbf{=}\mathbf{\$}\mathbf{14} \\ \mathbf{Contributionmarginratio}\mathbf{=}\frac{\mathbf{Contributionmarginperunit}}{\mathbf{Salesrevenue}} \\ \mathbf{=}\frac{\mathbf{\$}\mathbf{14}}{\mathbf{\$}\mathbf{70}} \\ \mathbf{=}\mathbf{20}\mathbf{\%} \\ \mathbf{Salesrequiredindollars}\mathbf{=}\frac{\mathbf{Fixedcost}\mathbf{+}\mathbf{Targetprofit}}{\mathbf{Contributionmarginratio}} \\ \mathbf{=}\frac{\mathbf{\$}\mathbf{170}\mathbf{,}\mathbf{800}\mathbf{+}\mathbf{\$}\mathbf{0}}{\mathbf{20}\mathbf{\%}} \\ \mathbf{=}\mathbf{\$}\mathbf{854}\mathbf{,}\mathbf{000} \\ \mathbf{Salesrequiredintickets}\mathbf{=}\frac{\mathbf{Fixedcost}\mathbf{+}\mathbf{Targetprofit}}{\mathbf{Contributionmarginperunit}} \\ \mathbf{=}\frac{\mathbf{\$}\mathbf{170}\mathbf{,}\mathbf{800}\mathbf{+}\mathbf{\$}\mathbf{0}}{\mathbf{\$}\mathbf{14}} \\ \mathbf{=}\mathbf{12}\mathbf{,}\mathbf{200} \end{gathered}$$