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Chapter 20: Q33E (page 1128)

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.

Short Answer

Expert verified

The operating income increase to $1,200 with an additional sale of $100 clock, due to increased sales revenue and contribution margin.

Step by step solution

01

Statement showing operating income

Sales Volume

Contribution margin per unit

($25-$13)

Total contribution margin (Contribution margin x Quantity)

Fixed cost

Operating income

250

$12

$3,000

$3,000

$0

300

$12

$3,600

$3,000

$600

400

$12

$4,800

$3,000

$1,200

02

Sensitivity analysis

The increase in sales of 100 units increased operating income by $1,200 (100 units x $12 contribution margin per unit).

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Most popular questions from this chapter

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

Use the following information to complete Short Exercises S20-16 and S20-17.

Wild Waters Swim Park sells individual and family tickets. With a ticket, each person receives a meal, three beverages, and unlimited use of the swimming pools. Wild Waters has the following ticket prices and variable costs for 2018:

Individual Family Sales price per ticket \( 50 \) 150 Variable cost per ticket 35 140

Wild Waters expects to sell one individual ticket for every four family tickets. Wild Waters鈥檚 total fixed costs are $27,500.

S20-17 Calculating breakeven point for two products

For 2019, Wild Waters expects a sales mix of four individual tickets for every one family ticket.

Requirements

1. Compute the new weighted-average contribution margin per ticket.

2. Calculate the total number of tickets Wild Waters must sell to break even.

3. Calculate the number of individual tickets and the number of family tickets the company must sell to break even.

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

Why is the calculation to determine the target profit considered a variation of the breakeven calculation?
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