Cost-Volume-Profit Analysis

Preparing a contribution margin income statement 

Gabelman Company sells a product for \(95 per unit. Variable costs are \)40 per unit, and fixed costs are $2,200 per month. The company expects to sell 570 units in September. Prepare an income statement for September using the contribution margin format

Calculating breakeven point in units, contribution margin given Mackler, Inc. sells a product with a contribution margin of \(50 per unit. Fixed costs are \)8000 per month. How many units must Mackler sell to break even?

Calculating breakeven point in units, contribution margin ratio given 

Ocean Company sells a product with a contribution margin ratio of 80%. Fixed costs are \(2,800 per month. What amount of sales (in dollars) must Ocean Company have to break even? If each unit sells for \)30, how many units must be sold to break even?

Question: Computing contribution margin, units and required sales to break even, and units to achieve target profit 

Compute the missing amounts for the following table. 

                                                                                    A                  B              C             Sales price per unit                                               \( 200          \) 4,000     $ 5,220 Variable costs per unit                                             80               1,000        2,088 Total fixed costs                                                    73,200          660,000   3,758,400 Target profit                                                          266,760       3,000,000  3,132,000 Calculate:                              

Contribution margin per unit                                 

Contribution margin ratio                                 

Required units to break even                                 

Required sales dollars to break even   

 Required units to achieve target profit

S20-9 Computing contribution margin, units and required sales to break even, units to achieve target profit 

Compute the missing amounts for the following table: 

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. 

S20-10 Computing contribution margin per unit, breakeven point in sales units 

Compute the contribution margin per unit and the number of tickets Funday Park must sell to break even. Perform a numerical proof to show that your answer is correct.

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. 

Compute Funday Park’s contribution margin ratio. Carry your computation to two decimal places. Use the contribution margin ratio approach to determine the sales revenue Funday Park needs to break even

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.

What is cost stickiness? Why do managers need to be aware of cost stickiness?

Determining cost behavior 

Identify each cost below as variable (V), fixed (F), or mixed (M), relative to units sold. Explain your reason. 

Units Sold                                                      25             50           75                 100

a. Total phone cost                                   \( 150        \) 200      \( 250         \) 300

b. Materials cost per unit                            35             35           35                  35

c. Manager’s salary                                   3,000      3,000       3,000          3,000

d. Depreciation cost per unit                     60            30            20                 15

e. Total utility cost                                     400          650          900             1,150

f. Total cost of goods sold                     3,125        6,250        9,375          12,500

Question: Determining total variable cost 

For each variable cost per unit listed below, determine the total variable cost when units produced and sold are 25, 50, and 100 units. 

Direct materials              $ 40

 Direct labor                       80 

Variable overhead               9 

Sales commission              12

Determining mixed costs—the high-low method 

The manager of Trusty Car Inspection reviewed the monthly operating costs for the past year. The costs ranged from \(4,300 for 1,300 inspections to \)3,900 for 900 inspections. 

Requirements 

1. Use the high-low method to calculate the variable cost per inspection. 

2. Calculate the total fixed costs. 

3. Write the equation and calculate the operating costs for 1,000 inspections. 

4. Draw a graph illustrating the total cost under this plan. Label the axes, and show the costs at 900, 1,000, and 1,300 inspections.

 Calculating contribution margin ratio, preparing contribution margin income statements For its top managers, Worldwide Travel formats its income statement as follows:

Worldwide’s relevant range is between sales of \(253,000 and \)368,000. Requirements 

1. Calculate the contribution margin ratio. 

2. Prepare two contribution margin income statements: one at the \(253,000 sales level and one at the \)368,000 sales level. (Hint: The proportion of each sales dollar that goes toward variable costs is constant within the relevant range.)

Question: Determining fixed cost per unit 

For each total fixed cost listed below, determine the fixed cost per unit when sales are 50, 100, and 200 units. 

Store rent                    $ 5,000 

Manager’s salary           3,000 

Equipment lease               500 

Depreciation on fixtures   250

Question: Determining total mixed cost 

John Street Barber Shop pays \(25 per month for water for the first 8,000 gallons and \)3.50 per thousand gallons above 8,000 gallons. Calculate the total water cost when the barber shop uses 7,000 gallons, 10,000 gallons, and 13,000 gallons.

Question: Computing contribution margin in total, per unit, and as a ratio

Complete the table below for contribution margin per unit, total contribution margin, and contribution margin ratio: 

                                                                                A                  B                     C Number of units                                                                                                     1,720 units     14,920 units    4,620 units 

Sales price per unit                                   \( 1,800             \) 4,500            $ 5,550 

Variable costs per unit                                  720                  3,600                1,665 

Calculate:                                                                                                                       

Contribution margin per unit                                                                                             

Total contribution margin                                                                                

Contribution margin ratio  

Complete the table below for the missing amounts:

                                                                            A              B             C

Number of units                               2,064 units            (d)      2,570 units

Sales price per unit                               \( 250               \) 125             $ (g)

Variable costs per unit                                  (a)              50              4,528

Contribution margin per unit                         125           (e)                   (h)

Total contribution margin                               (b)        1,567,500            (i)

Contribution margin ratio                               (c)               (f)                 20%

No Slip Co. produces sports socks. The company has fixed costs of \(91,080 and variable costs of \)0.81 per package. Each package sells for $1.80.

Requirements

1. Compute the contribution margin per package and the contribution margin ratio. (Round your answers to two decimal places.)

2. Find the breakeven point in units and in dollars using the contribution margin approach.

Owner Shan Mu is considering franchising her Noodles by Mu restaurant concept. She believes people will pay \(10.00 for a large bowl of noodles. Variable costs are \)5.00 per bowl. Mu estimates monthly fixed costs for a franchise at \(9,000.

Requirements

1. Use the contribution margin ratio approach to find a franchise’s breakeven sales in dollars.

2. Mu believes most locations could generate \)61,500 in monthly sales. Is franchising a good idea for Mu if franchisees want a minimum monthly operating income of $21,000? Explain your answer.

Question: Gilbert’s Steel Parts produces parts for the automobile industry. The company has monthly fixed costs of \(640,220 and a contribution margin of 85% of revenues.

Requirements

1. Compute Gilbert’s monthly breakeven sales in dollars. Use the contribution margin ratio approach.

2. Use contribution margin income statements to compute Gilbert’s monthly operating income or operating loss if revenues are \)500,000 and if they are $1,050,000.

3. Do the results in Requirement 2 make sense given the breakeven sales you computed in Requirement 1? Explain.

Analyzing a cost-volume-profit graph

Nolan Rouse is considering starting a Web-based educational business, e-Prep MBA. He plans to offer a short-course review of accounting for students entering MBA programs. The materials would be available on a password-protected Web site; students would complete the course through self-study. Rouse would have to grade the course assignments, but most of the work would be in developing the course materials, setting up the site, and marketing. Unfortunately, Rouse’s hard drive crashed before he finished his financial analysis. However, he did recover the following partial CVP chart:

Requirements 

1. Label each axis, the sales revenue line, the total costs line, the fixed costs line, the operating income area, and the breakeven point. 

2. If Rouse attracts 300 students to take the course, will the venture be profitable? Explain your answer. 

3. What are the breakeven sales in students and dollars?

Determine how each change effects the elements of the cost-volume-profit graph by placing an X in the appropriate column(s).

Mi Tierra Driving School charges \(680 per student to prepare and administer written and driving tests. Variable costs of \)408 per student include trainers’ wages, study materials, and gasoline. Annual fixed costs of \(63,920 include the training facility and fleet of cars. 

Requirements 

1. For each of the following independent situations, calculate the contribution margin per unit and the breakeven point in units by first referring to the original data provided: 

a. Breakeven point with no change in information. 

b. Decrease sales price to \)544 per student. 

c. Decrease variable costs to \(340 per student. 

d. Decrease fixed costs to \)53,040. 

2. Compare the impact of changes in the sales price, variable costs, and fixed costs on the contribution margin per unit and the breakeven point in units.  

The Circle Clock Company sells a particular clock for \(25. The variable costs are \)13 per clock and the breakeven point is 250 clocks. The company expects to sell 300 clocks this year. If the company actually sells 400 clocks, what effect would the sale of additional 100 clocks have on operating income? Explain your answer.  

Computing margin of safety

Robbie’s Repair Shop has a monthly target profit of \(31,000. Variable costs are 20%of sales, and monthly fixed costs are \)19,000.

Requirements

1. Compute the monthly margin of safety in dollars if the shop achieves its income goal.

2. Express Robbie’s margin of safety as a percentage of target sales.

3. Why would Robbie’s management want to know the shop’s margin of safety?

Following is the income statement for Marrow Mufflers for the month of June 2018:

MARROW MUFFLERS

Contribution Margin Income Statement

Month Ended June 30, 2018

Net Sales Revenue (140 units _ \(250)                       \) 35,000

Variable Costs (140 units _ \(50)                                  7,000

Contribution Margin                                                      28,000

Fixed Costs                                                                    11,500

Operating Income                                                         \) 16,500

Requirements 

1. Calculate the degree of operating leverage. (Round to four decimal places.) 

2. Use the degree of operating leverage calculated in Requirement 1 to estimate the change in operating income if total sales increase by 40% (assuming no change in sales price per unit). (Round interim calculations to four decimal places and final answer to the nearest dollar.) 

3. Verify your answer in Requirement 2 by preparing a contribution margin income statement with the total sales increase of 40%.   

Scotty’s Scooters plans to sell a standard scooter for \(55 and a chrome scooter for \)70. Scotty’s purchases the standard scooter for \(30 and the chrome scooter for \)40. Scotty’s expects to sell one standard scooter for every three chrome scooters. Scotty’s monthly fixed costs are \(23,000. 

Requirements 

1. How many of each type of scooter must Scotty’s Scooters sell each month to break even? 

2. How many of each type of scooter must Scotty’s Scooters sell each month to earn \)25,300? 

3. Suppose Scotty’s expectation to sell one standard scooter for every three chrome scooters was incorrect and for every four scooters sold two are standard scooters and two are chrome scooters. Will the breakeven point of total scooters increase or decrease? Why? (Calculation not required.)   

The budgets of four companies yield the following information: 

                                                                              Company 

                                                                Beach        Lake       Mountain      Valley 

Net Sales Revenue                             \( 1,615,000    \)(d)        \( 1,050,000    \)(j) 

Variable Costs                                      (a)               60,000       525,000     100,800 

Fixed Costs                                             (b)             232,000         260,000      (k) 

Operating Income (Loss)                     285,600          (e)                 (g)         31,500 

Units Sold                                               170,000       10,000             (h)           (l) 

Contribution Margin per Unit                   \( 3.80         \) (f)            \( 75.00    \) 9.00 

Contribution Margin Ratio                         (c)                  80%           (i)         30% 

Requirements 

1. Fill in the blanks for each missing value. (Round the contribution margin per unit to the nearest cent.) 

2. Which company has the lowest breakeven point in sales dollars? 

3. What causes the low breakeven point?   

England Productions performs London shows. The average show sells 1,300 tickets at\(60 per ticket. There are 175 shows per year. No additional shows can be held as thetheater is also used by other production companies. The average show has a cast of65, each earning a net average of \)340 per show. The cast is paid after each show. Theother variable cost is a program-printing cost of \(8 per guest. Annual fixed costs total\)728,000.

Requirements

1. Compute revenue and variable costs for each show.

2. Use the equation approach to compute the number of shows England Productionsmust perform each year to break even.

3. Use the contribution margin ratio approach to compute the number of showsneeded each year to earn a profit of $5,687,500. Is this profit goal realistic? Giveyour reasoning.

4. Prepare England Productions’s contribution margin income statement for175 shows performed in 2018. Report only two categories of costs: variableand fixed.

Crandall Company sells flags with team logos. Crandall has fixed costs of \(583,200 per year plus variable costs of \)4.80 per flag. Each flag sells for \(12.00. 

Requirements 

1. Use the equation approach to compute the number of flags Crandall must sell each year to break even. 

2. Use the contribution margin ratio approach to compute the dollar sales Crandall needs to earn \)33,000 in operating income for 2018. (Round the contribution margin ratio to two decimal places.) 

3. Prepare Crandall’s contribution margin income statement for the year ended December 31, 2018, for sales of 70,000 flags. (Round your final answers up to the next whole number.)

 4. The company is considering an expansion that will increase fixed costs by 21% and variable costs by $0.60 per flag. Compute the new breakeven point in units and in dollars. Should Crandall undertake the expansion? Give your reasoning. (Round your final answers up to the next whole number.)   

National Investor Group is opening an office in Portland, Oregon. Fixed monthly costs are office rent (\(8,100), depreciation on office furniture (\)1,700), utilities (\(2,000), special telephone lines (\)1,500), a connection with an online brokerage service (\(2,500), and the salary of a financial planner (\)5,200). Variable costs include payments to the financial planner (9% of revenue), advertising (11% of revenue), supplies and postage (4% of revenue), and usage fees for the telephone lines and computerized brokerage service (6% of revenue).

Requirements 

1. Use the contribution margin ratio approach to compute National’s breakeven revenue in dollars. If the average trade leads to \(1,000 in revenue for National, how many trades must be made to break even? 
2. Use the equation approach to compute the dollar revenues needed to earn a monthly target profit of \)12,600. 
3. Graph National’s CVP relationships. Assume that an average trade leads to \(1,000 in revenue for National. Show the breakeven point, the sales revenue line, the fixed cost line, the total cost line, the operating loss area, the operating income area, and the sales in units (trades) and dollars when monthly operating income of \)12,600 is earned. 
4. Suppose that the average revenue National earns increases to $1,500 per trade. Compute the new breakeven point in trades. How does this affect the breakeven point?

The contribution margin income statement of Sugar Lips Donuts for August 2018 follows:

Sugar Lips sells three dozen plain donuts for every dozen custard-filled donuts. A dozen plain donuts sells for \(4.00, with total variable cost of \)1.80 per dozen. A dozen custard-filled donuts sells for \(8.00, with total variable cost of \)3.60 per dozen. 

Requirements 

1. Calculate the weighted-average contribution margin. 

2. Determine Sugar Lips’s monthly breakeven point in dozens of plain donuts and custard-filled donuts. Prove your answer by preparing a summary contribution margin income statement at the breakeven level of sales. Show only two categories of costs: variable and fixed. 

3. Compute Sugar Lips’s margin of safety in dollars for August 2018. 

4. Compute the degree of operating leverage for Sugar Lips Donuts. Estimate the new operating income if total sales increase by 30%. (Round the degree of operating leverage to four decimal places and the final answer to the nearest dollar. Assume the sales mix remains unchanged.) 

5. Prove your answer to Requirement 4 by preparing a contribution margin income statement with a 30% increase in total sales. (The sales mix remains unchanged.)  

The budgets of four companies yield the following information: 

                                                                                        Company 

                                                                              Blue         Red          Green         Yellow                

 Net Sales Revenue                                     \( 1,900,000    \) (d)         \( 1,500,000    \) (j)                           Variable Costs                                                    (a)             47,250            1,050,000  256,200                        Fixed Costs                                                 (b)           168,000       159,000        (k)                           Operating Income (Loss)                                  298,500          (e)                (g)         97,800 

Units Sold                                                         190,000         9,000              (h)           (l) Contribution         Margin per Unit                                                  \( 3.00           \) (f)            \( 75.00   \) 18.00 

Contribution Margin Ratio                                       (c)                80%              (i)             30% 

Requirements 

1. Fill in the blanks for each missing value. (Round the contribution margin per unit to the nearest cent.) 

2. Which company has the lowest breakeven point in sales dollars? 

3. What causes the low breakeven point?  

Calculating breakeven sales and sales to earn a target profit;preparing a contribution margin income statement

Famous Productions performs London shows. The average show sells 1,000 ticketsat \(60 per ticket. There are 175 shows a year. No additional shows can be held as thetheater is also used by other production companies. The average show has a cast of60, each earning a net average of \)320 per show. The cast is paid after each show. Theother variable cost is a program-printing cost of \(8 per guest. Annual fixed costs total\)459,200.

Requirements

1. Compute revenue and variable costs for each show.

2. Use the equation approach to compute the number of shows Famous Productionsmust perform each year to break even.

3. Use the contribution margin ratio approach to compute the number of showsneeded each year to earn a profit of $4,264,000. Is this profit goal realistic? Giveyour reasoning.

4. Prepare Famous Productions’s contribution margin income statement for 175shows performed in 2018. Report only two categories of costs: variable andfixed.

White Company sells flags with team logos. White has fixed costs of \(639,600 per year plus variable costs of \)4.20 per flag. Each flag sells for \(12.00. 

Requirements 

1. Use the equation approach to compute the number of flags White must sell each year to break even. 

2. Use the contribution margin ratio approach to compute the dollar sales White needs to earn \)32,500 in operating income for 2018. (Round the contribution margin to two decimal places.) 

3. Prepare White’s contribution margin income statement for the year ended December 31, 2018, for sales of 73,000 flags. (Round your final answers up to the next whole number.) 

4. The company is considering an expansion that will increase fixed costs by 23% and variable costs by $0.60 per flag. Compute the new breakeven point in units and in dollars. Should White undertake the expansion? Give your reasoning. (Round your final answers up to the next whole number.)   

Diversified Investor Group is opening an office in Boise, Idaho. Fixed monthly costs are office rent (\(8,000), depreciation on office furniture (\)1,700), utilities (\(2,400), special telephone lines (\)1,500), a connection with an online brokerage service (\(2,500), and the salary of a financial planner (\)11,900). Variable costs include payments to the financial planner (9% of revenue), advertising (11% of revenue), supplies and postage (4% of revenue), and usage fees for the telephone lines and computerized brokerage service (6% of revenue).

Requirements 

1. Use the contribution margin ratio approach to compute Diversified’s breakeven revenue in dollars. If the average trade leads to \(800 in revenue for Diversified, how many trades must be made to break even? 
2. Use the equation approach to compute the dollar revenues needed to earn a monthly target profit of \)11,200. 
3. Graph Diversified’s CVP relationships. Assume that an average trade leads to \(800 in revenue for Diversified. Show the breakeven point, the sales revenue line, the fixed cost line, the total cost line, the operating loss area, the operating income area, and the sales in units (trades) and dollars when monthly operating income of \)11,200 is earned. 
4. Suppose that the average revenue Diversified earns increases to $2,000 per trade. Compute the new breakeven point in trades. How does this affect the breakeven point?

Calculating breakeven point for two products, margin of safety, andoperating leverage

The contribution margin income statement of Delectable Donuts for May 2018follows:

Delectable sells five dozen plain donuts for every dozen custard-filled donuts. A dozenplain donuts sells for \)4.00, with a variable cost of \(1.60 per dozen. A dozen custardfilled donuts sells for \)8.00, with a variable cost of $3.20 per dozen.

Requirements

1. Calculate the weighted-average contribution margin.

2. Determine Delectable’s monthly breakeven point in dozens of plain donuts and custard-filled donuts. Prove your answer by preparing a summary contribution nmargin income statement at the breakeven level of sales. Show only two categories of costs: variable and fixed.

3. Compute Delectable’s margin of safety in dollars for May 2018.

4. Compute the degree of operating leverage for Delectable Donuts. Estimate thenew operating income if total sales increase by 20%. (Round the degree of operating leverage to four decimal places and the final answer to the nearest dollar.Assume the sales mix remains unchanged.)

5. Prove your answer to Requirement 4 by preparing a contribution marginincome statement with a 20% increase in total sales. (The sales mix remainsunchanged.)

Question: This problem continues the Piedmont Computer Company situation from Chapter 19. Piedmont Computer Company manufactures personal computers and tablets. Based on the latest information from the cost accountant, using the current sales mix, the weighted-average sales price per unit is \(750 and the weighed-average variable cost per unit is \)450. The company does not expect the sales mix to vary for the next year. Average fixed costs per month are \(156,000.

Requirements 

1. What is the number of units that must be sold each month to reach the breakeven point?

 2. If the company currently sells 945 units per month, what is the margin of safety in units and dollars? 

3. If Piedmont Computer Company desires to make a profit of \)15,000 per month, how many units must be sold? 

4. Piedmont Computer Company thinks it can restructure some costs so that fixed costs will be reduced to \(90,000 per month, but the weighted-average variable cost per unit will increase to \)525 per unit. What is the new breakeven point in units? Does this increase or decrease the margin of safety? Why or why not?

The Jacksonville Shirt Company makes two types of T-shirts: basic and custom. Basic shirts are plain shirts without any screen printing on them. Custom shirts are created using the basic shirts and then adding a custom screen printing design. 

The company buys cloth in various colors and then makes the basic shirts in two departments, Cutting and Sewing. The company uses a process costing system (weighted-average method) to determine the production cost of the basic shirts. In the Cutting Department, direct materials (cloth) are added at the beginning of the process and conversion costs are added evenly through the process. In the Sewing Department, no direct materials are added. The only additional material, thread, is considered an indirect material because it cannot be easily traced to the finished product. Conversion costs are added evenly throughout the process in the Sewing Department. The finished basic shirts are sold to retail stores or are sent to the Custom Design Department for custom screen printing. 

The Custom Design Department creates custom shirts by adding screen printing to the basic shirt. The department creates a design based on the customer’s request and then prints the design using up to four colors. Because these shirts have the custom printing added, which is unique for each order, the additional cost incurred is determined using job order costing, with each custom order considered a separate job. 

For March 2018, the Jacksonville Shirt Company compiled the following data for the Cutting and Sewing Departments:

Department Item Amount Units 

Cutting Beginning balance \( 0 0 shirts 

Started in March 1,200 shirts 

Direct materials added in March 1,920 

Conversion costs 1,320 

Completed and transferred to Sewing ??? 1,200 shirts 

Ending balance 0 0 shirts 

Sewing Beginning balance, transferred in, \)1,350; 

conversion costs, \(650 \) 2,000 500 shirts 

Transferred in from Cutting ??? ??? 

Conversion costs added in March 1,196 

Completed and transferred to Finished Goods ??? 1,000 shirts 

Ending balance, 60% complete ??? ??? 

For the same time period, the Jacksonville Shirt Company compiled the following data for the Custom Design Department: 

Job Quantity Design Fee Printing Status 

367 400 Yes 3 colors Complete 

368 150 No 2 colors Complete 

369 100 Yes 5 colors Complete 

370 500 Yes 4 colors Complete

The Jacksonville Shirt Company has previously determined that creating and programming the design cost \(80 per design. This is a one-time charge. If a customer places another order with the same design, the customer is not charged a second time. Additionally, the cost to print is \)0.20 per color per shirt. 

Requirements 

1. Complete a production cost report for the Cutting Department and the Sewing Department. What is the cost of one basic shirt? 

2. Determine the total cost and the average cost per shirt for jobs 367, 368, 369, and 370. If the company set the sales price at 200% of the total cost, determine the total sales price of each job. 

3. In addition to the custom jobs, the Jacksonville Shirt Company sold 1,000 basic shirts (assume the beginning balance in Finished Goods Inventory is sufficient to make these sales, and the unit cost of the basic shirts in Finished Goods Inventory is the same as the unit cost incurred this month). If the company set the sales price at 125% of the cost, determine the sales price per unit, total sales revenue, total cost of goods sold, and total gross profit for the basic shirts. 

4. Calculate the total revenue, total cost of goods sold, and total gross profit for all sales, basic and custom. 

5. Assume the company sold only basic shirts (no custom designs) and incurred fixed costs of \(700 per month. 

a. Calculate the contribution margin per unit, contribution margin ratio, required sales in units to break even, and required sales in dollars to break even. 

b. Determine the margin of safety in units and dollars. 

c. Graph Jacksonville Shirt Company’s CVP relationships. Show the breakeven point, the sales revenue line, the fixed cost line, the total cost line, the operating loss area, and the operating income area. 

d. Suppose the Jacksonville Shirt Company wants to earn an operating income of \)1,000 per month. Compute the required sales in units and dollars to achieve this profit goal. 

6. The Jacksonville Shirt Company is considering adding a new product line, a cloth shopping bag with custom screen printing that will be sold to grocery stores. If the current market price of cloth shopping bags is \(2.25 and the company desires a net profit of 60%, what is the target cost? The company estimates the full product cost of the cloth bags will be \)0.80. Should the company manufacture the cloth bags? Why or why not?

Question: Steve and Linda Hom live in Bartlesville, Oklahoma. Two years ago, they visited Thailand. Linda, a professional chef, was impressed with the cooking methods and the spices used in Thai food. Bartlesville does not have a Thai restaurant, and the Homs are contemplating opening one. Linda would supervise the cooking, and Steve would leave his current job to be the maître d’. The restaurant would serve dinner Tuesday through Saturday. Steve has noticed a restaurant for lease. The restaurant has seven tables, each of which can seat four. Tables can be moved together for a large party. Linda is planning on using each table twice each evening, and the restaurant will be open 50 weeks per year. The Homs have drawn up the following estimates: 

Average revenue, including beverages and desserts \( 45 per meal Average cost of food 15 per meal Chef’s and dishwasher’s salaries 5,100 per month Rent (premises, equipment) 4,000 per month Cleaning (linen, premises) 800 per month Replacement of dishes, cutlery, glasses 300 per month Utilities, advertising, telephone 2,300 per month

Requirements 

1. Compute the annual breakeven number of meals and sales revenue for the restaurant. 

2. Compute the number of meals and the amount of sales revenue needed to earn operating income of \)75,600 for the year. 

3. How many meals must the Homs serve each night to earn their target profit of $75,600?

 4. What factors should the Homs consider before they make their decision as to whether to open the restaurant?

Before you begin this assignment, review the Tying It All Together feature in the chapter. 

Best Buy Co., Inc. is a leading provider of technology products. Customers can shop at more than 1,700 stores or online. The company is also known for its Geek Squad for technology services. Suppose Best Buy is considering a particular HDTV for a major sales item for Black Friday, the day after Thanksgiving, known as one of the busiest shopping days of the year. Assume the HDTV has a regular sales price of \(900, a cost of \)500, and a Black Friday proposed discounted sales price of \(650. Best Buy’s 2015 Annual Report states that failure to manage costs could have a material adverse effect on its profitability and that certain elements in its cost structure are largely fixed in nature. Best Buy, like most companies, wishes to maintain price competitiveness while achieving acceptable levels of profitability. (Item 1A. Risk Factors.) 

Requirements 

1. Calculate the gross profit of the HDTV at the regular sales price and at the discounted sales price. 

2. Assume that during the November/December holiday season last year, Best Buy sold an average of 150 of this particular HDTV per store. If the HDTVs are marked down to \)650, how many would each store have to sell this year to make the same total gross profit as last year? 

3. Relative to Sales Revenue, what type of costs would Best Buy have that are fixed? What type of costs would be variable? 

4. Because Best Buy stated that its cost structure is largely fixed in nature, what might be the impact on operating income if sales decreased? Does having a cost structure that is largely fixed in nature increase the financial risk to a company? Why or why not? 

5. In the Tying It All Together feature in the chapter, we looked at the cost of advertising. Is advertising a fixed or variable cost? If the company has a small margin of safety, how would increasing advertising costs affect Best Buy’s operating income? What would be the effect of decreasing advertising costs?

You have just begun your summer internship at Omni Instruments. The company supplies sterilized surgical instruments for physicians. To expand sales, Omni is considering paying a commission to its sales force. The controller, Matthew Barnhill, asks you to compute: (1) the new breakeven sales figure, and (2) the operating profit if sales increase 15% under the new sales commission plan. He thinks you can handle this task because you learned CVP analysis in your accounting class. 

You spend the next day collecting information from the accounting records, performing the analysis, and writing a memo to explain the results. The company president is pleased with your memo. You report that the new sales commission plan will lead to a significant increase in operating income and only a small increase in breakeven sales. 

The following week, you realize that you made an error in the CVP analysis. You overlooked the sales personnel’s $2,800 monthly salaries, and you did not include this fixed selling cost in your computations. You are not sure what to do. If you tell Matthew Barnhill of your mistake, he will have to tell the president. In this case, you are afraid Omni might not offer you permanent employment after your internship. 

Requirements 

1. How would your error affect breakeven sales and operating income under the proposed sales commission plan? Could this cause the president to reject the sales commission proposal? 

2. Consider your ethical responsibilities. Is there a difference between (a) initially making an error and (b) subsequently failing to inform the controller? 

3. Suppose you tell Matthew Barnhill of the error in your analysis. Why might the consequences not be as bad as you fear? Should Barnhill take any responsibility for your error? What could Barnhill have done differently? 

4. After considering all the factors, should you inform Barnhill or simply keep quiet?