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Chapter 20: Q37PGA (page 1130)

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?

Short Answer

Expert verified

(1)(a) $969,000

(b) 360,000

(c) 40%

(d) $300,000

(e) $8,000

(f) $24

(g) $265,000

(h) 7,000

(i) 50%

(j) $144,000

(k) $11,700

(l) 4,800

(2) The lowest breakeven point in sales dollars equals $39,000.

(3) Lower contribution margin ratio and lower fixed costs

Step by step solution

01

Calculation of (a), (b), (c)

Net sales revenue

$1,615,000

Variable costs ($1,615,000 / 170,000)-$3.80 ) x 170,000

(a)$969,000

Fixed costs ($1,615,000-$969,000 -$285,600)

(b)$360,400

Operating income (Loss)

$285,600

Units sold

170,000

Contribution margin per unit

$3.80

Contribution margin ratio (($3.80 x 170,000) / $1,615,000)

(c)40%

02

Calculation of (d), (e), (f)

Net sales revenue ($60,000 / (1-80%)

(d) $300,000

Variable costs

$60,000

Fixed costs

$232,000

Operating income (Loss) ($300,000-$60,000-$232,000)

(e) $8,000

Units sold

10,000

Contribution margin per unit ($300,000-$60,000)/10,000

(f)$24

Contribution margin ratio

80%

03

Calculation of (g), (h), (i)

Net sales revenue

$1,050,000

Variable costs

$525,000

Fixed costs

$260,000

Operating income (Loss) ($1,050,000-$525,000-$260,000)

(g) $265,000

Units sold ($1,050,000-$525,000) / $75

(h) 7,000

Contribution margin per unit

$75

Contribution margin ratio ($1,050,000-$525,000)/$1,050,000)

(i)50%

04

Calculation of (j), (k), (l) 

Net sales revenue ($100,800 / (1-30%))

(j)$144,000

Variable costs

$100,800

Fixed costs ($144,000-$100,800-$31,500)

(k)$11,700

Operating income (Loss)

$31,500

Units sold ($144,000 - $100,800)/$9)

(l)4,800

Contribution margin per unit

$9

Contribution margin ratio ($144,000-$100,800)/$144,000)

30%

Step 4: Calculation of breakeven sales in dollars

Breakevensales(Beach)=FixedcostsContributionmarginratio=$360,40040%=$901,000

Breakevensales(Lake)=FixedcostsContributionmarginratio=$232,00080%=$290,000

Breakevensales(Mountain)=FixedcostsContributionmarginratio=$260,00050%=$520,000

Breakevensales(Valley)=FixedcostsContributionmarginratio=$11,70030%=$39,000

Valley has the lowest breakeven point that is $39,000.

Step 4: Reason for low breakeven point

Low contribution margin causes the low breakeven point. Valley has the lowest contribution margin ratio that is why it has the lowest breakeven point.

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Most popular questions from this chapter

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鈥檚 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

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鈥檚 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鈥檚 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鈥檚 $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?

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.)

What is cost-volume-profit analysis?
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