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Chapter 20: Q20-20RQ (page 1119)
What is sensitivity analysis? How do managers use this tool
Answer
A sensitivity analysis is a 鈥渨hat if鈥� technique.
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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鈥檚 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
Calculating contribution margin
Glenn Company sells a product for \(80 per unit. Variable costs are \)60 per unit, and fixed costs are $800 per month. The company expects to sell 560 units in September. Calculate the contribution margin per unit, in total, and as a ratio.
Calculating breakeven point for two products, margin of safety, andoperating leverage
The contribution margin income statement of Delectable Donuts for May 2018follows:
DELECTABLE DONUTS Contribution Margin Income Statement Month Ended May 31, 2018 |
Net Sales Revenue | \(125,000 | |
Variable cost | ||
Cost of goods sold | \)32,100 | |
Selling cost | 17,400 | |
Administrative cost | 500 | \(50,000 |
Contribution Margin | \)75,000 | |
Fixed cost | ||
Selling cost | \(37,800 | |
Administrative cost | 12,600 | \)50,400 |
Operating income | \(24,600 |
Delectable sells five dozen plain donuts for every dozen custard-filled donuts. A dozenplain donuts sells for \)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鈥檚 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鈥檚 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.)
Calculating contribution margin ratio, preparing contribution margin income statements For its top managers, Worldwide Travel formats its income statement as follows:
Worldwide鈥檚 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.)
What effect does an increase in sales price have on contribution margin? An increase in fixed costs? An increase in variable costs?
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