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Chapter 20: Q2RQ (page 1119)
What is a fixed cost? Give an example.
Fixed costs are the costs that persistent consistency in total amount.
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Scotty鈥檚 Scooters plans to sell a standard scooter for \(55 and a chrome scooter for \)70. Scotty鈥檚 purchases the standard scooter for \(30 and the chrome scooter for \)40. Scotty鈥檚 expects to sell one standard scooter for every three chrome scooters. Scotty鈥檚 monthly fixed costs are \(23,000.
Requirements
1. How many of each type of scooter must Scotty鈥檚 Scooters sell each month to break even?
2. How many of each type of scooter must Scotty鈥檚 Scooters sell each month to earn \)25,300?
3. Suppose Scotty鈥檚 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.)
Question: Gilbert鈥檚 Steel Parts produces parts for the automobile industry. Thecompany has monthly fixed costs of \(640,220 and a contribution margin of85% of revenues.
Requirements
1. Compute Gilbert鈥檚 monthly breakeven sales in dollars. Use the contributionmargin ratio approach.
2. Use contribution margin income statements to compute Gilbert鈥檚 monthlyoperating income or operating loss if revenues are \)500,000 and if they are$1,050,000.
3. Do the results in Requirement 2 make sense given the breakeven sales youcomputed in Requirement 1? Explain.
Using the high-low method
Mark owns a machine shop. In reviewing the shop鈥檚 utility bills for the past 12 months, he found that the highest bill of \(2,600 occurred in August when the machines worked 1,200 machine hours. The lowest utility bill of \)2,300 occurred in December when the machines worked 600 machine hours.
Requirements
1. Use the high-low method to calculate the variable cost per machine hour and the total fixed utility cost.
2. Show the equation for determining the total utility cost for the machine shop.
3. If Mark anticipates using 800 machine hours in January, predict the shop鈥檚 total utility bill using the equation from Requirement 2.
What effect does an increase in sales price have on contribution margin? An increase in fixed costs? An increase in variable costs?
What is the margin of safety? What are the three ways it can be expressed?
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