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Chapter 20: Q7RQ (page 1119)
A chain of convenience stores has one manager per store who is paid a monthly salary. Relative to Store #36 located in Atlanta, Georgia, is the manager鈥檚 salary fixed or variable? Why?
The manager鈥檚 salary is a fixed cost.
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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鈥檚 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?
What is cost stickiness? Why do managers need to be aware of cost stickiness?
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鈥檚 contribution margin income statement for 175shows performed in 2018. Report only two categories of costs: variable andfixed.
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.)
How does a contribution margin income statement differ from a traditional income statement?
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