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Chapter 20: Q8RQ (page 1119)
A chain of convenience stores has one manager per store who is paid a monthly salary. Relative to the number of stores, is the manager鈥檚 salary fixed or variable? Why?
The manager鈥檚 salary is a variable cost.
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Question: Determining total mixed cost
John Street Barber Shop pays \(25 per month for water for the first 8,000 gallons and \)3.50 per thousand gallons above 8,000 gallons. Calculate the total water cost when the barber shop uses 7,000 gallons, 10,000 gallons, and 13,000 gallons.
White Company sells flags with team logos. White has fixed costs of \(639,600 per year plus variable costs of \)4.20 per flag. Each flag sells for \(12.00.
Requirements
1. Use the equation approach to compute the number of flags White must sell each year to break even.
2. Use the contribution margin ratio approach to compute the dollar sales White needs to earn \)32,500 in operating income for 2018. (Round the contribution margin to two decimal places.)
3. Prepare White鈥檚 contribution margin income statement for the year ended December 31, 2018, for sales of 73,000 flags. (Round your final answers up to the next whole number.)
4. The company is considering an expansion that will increase fixed costs by 23% and variable costs by $0.60 per flag. Compute the new breakeven point in units and in dollars. Should White undertake the expansion? Give your reasoning. (Round your final answers up to the next whole number.)
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?
Describe the three steps of the high-low method.
Why is the calculation to determine the target profit considered a variation of the breakeven calculation?
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