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Chapter 25: Q25-3SE (page 1407)

Refer to details about Skiable Acres from Short Exercise S25-2. Assume that Skiable Acres鈥檚 reputation has diminished and other resorts in the vicinity are charging only \(85 per lift ticket. Skiable Acres has become a price-taker and will not be able to charge more than its competitors. At the market price, Skiable Acres managers believe they will still serve 725,000 skiers and snowboarders each season.

Requirements

1. If Skiable Acres cannot reduce its costs, what profit will it earn? State your answer in dollars and as a percent of assets. Will investors be happy with the profit level?

2. Assume Skiable Acres has found ways to cut its fixed costs to \)30,000,000. What is its new target variable cost per skier/snowboarder?

Short Answer

Expert verified

Answer

No, the investors will not be satisfied with the currentprofit level.

Step by step solution

01

Step-by-Step SolutionStep 1: Meaning of Investor

An investor is an individual, business, or group of institutions that invest their surplus funds in required areas to generate additional income or returns. Generally, investors invest in stock, bonds, and commodities.

02

Computation of profit earned by Skiable

Particulars

Amounts ($)

Revenue at market price (725,000*85)

61,625,000

Less: Total cost (Working note)

36,800,000

Operating income

$24,825,000

Working Note:

Computation of Total Cost:

Particulars

Amounts ($)

Variable cost ($8*725,000)

5,800,000

Add: Fixed cost

31,000,000

Total Cost

$36,800,000

Profit as a percent of assets:

Percent of asset=Operating incomeAssets脳100=$24,825,000$270,000,000脳100=9.19%

Comment: The investors will not be happy with the current profit level because the rate of return is 9.19%, which is less than the desired, i.e. 10%.

03

Computation of new target variable cost

Particulars

Amounts ($)

Revenue at market price

61,625,000

Less: Desired profit (10% of assets)

(27,000,000)

Target full cost

34,625,000

Less: Reduced level of fixed cost

(30,000,000)

Target total variable cost

4,625,000

Divide: Number of skier

725,000

Target variable cost per skier

$6.37

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Most popular questions from this chapter

Brinn, located in Port St. Lucie, Florida, produces two lines of electric toothbrushes: deluxe and standard. Because Brinn can sell all the toothbrushes it can produce, the owners are expanding the plant. They are deciding which product line to emphasize. To make this decision, they assemble the following data:

Per Unit

Deluxe Toothbrush Standard Toothbrush

Sales price \(86 \)56

Variable costs 20 18

Contribution margin \(66 \)38

Contribution margin ratio 76.7% 67.9%

After expansion, the factory will have a production capacity of 4,100 machine hours per month. The plant can manufacture either 50 standard electric toothbrushes or 35 deluxe electric toothbrushes per machine hour.

Requirements

1. Identify the constraining factor for Brinn.

2. Prepare an analysis to show which product line to emphasize.

StoreAll produces plastic storage bins for household storage needs. The company makes two sizes of bins: large (50 gallon) and regular (35 gallon). Demand for the products is so high that StoreAll can sell as many of each size as it can produce. The company uses the same machinery to produce both sizes. The machinery can be run for only 3,300 hours per period. StoreAll can produce 10 large bins every hour, whereas it can produce 17 regular bins in the same amount of time. Fixed costs amount to \(115,000 per period. Sales prices and variable costs are as follows:

Regular Large

Sales price per unit \)8.00 $10.40

Variable cost per unit 3.50 4.40

Requirements

1. Which product should StoreAll emphasize? Why?

2. To maximize profits, how many of each size bin should StoreAll produce?

3. Given this product mix, what will the company鈥檚 operating income be?

McCollum Company manufactures two products. Both products have the same sales price, and the volume of sales is equivalent. However, due to the difference in production processes, Product A has higher variable costs and Product B has higher fixed costs. Management is considering dropping Product B because that product line has an operating loss.

MCCOLLUM COMPANY

Income Statement

Month Ended June 30, 2018

Total Product A Product B

Net Sales Revenue \(150,000 \)75,000 \(75,000

Variable Costs 90,000 55,000 35,000

Contribution Margin 60,000 20,000 40,000

Fixed Costs 50,000 5,000 45,000

Operating Income/(Loss) \)10,000 \(15,000 \)(5,000)

  1. If fixed costs cannot be avoided, should McCollum drop Product B? Why or why not?
  2. If 50% of Product B鈥檚 fixed costs are avoidable, should McCollum drop Product B? Why or why not?

Thomas Company makes a product that regularly sells for \(12.50 per unit. The product has variable manufacturing costs of \)8.50 per unit and fixed manufacturing costs of \(2.00 per unit (based on \)200,000 total fixed costs at current production of 100,000 units). Therefore, the total production cost is \(10.50 per unit. Thomas Company receives an offer from Wesley Company to purchase 5,000 units for \)9.00 each. Selling and administrative costs and future sales will not be affected by the sale, and Thomas does not expect any additional fixed costs.

1. If Thomas Company has excess capacity, should it accept the offer from Wesley? Show your calculations.

2. Does your answer change if Thomas Company is operating at capacity? Why or why not?

Top managers of Video Avenue are alarmed by their operating losses. They are considering dropping the DVD product line. Company accountants have prepared the following analysis to help make this decision:

VIDEO AVENUE

Income Statement

For the Year Ended December 31, 2018

Total Blu-ray Discs DVD Discs

Net Sales Revenue \(437,000 \)308,000 \(129,000

Variable Costs 250,000 154,000 96,000

Contribution Margin 187,000 154,000 33,000

Fixed Costs:

Manufacturing 132,000 76,000 56,000

Selling & Administrative 65,000 51,000 14,000

Total Fixed Expenses 197,000 127,000 70,000

Operating Income (Loss) \)(10,000) \(27,000 \)(37,000)

Total fixed costs will not change if the company stops selling DVDs.

Requirements

1. Prepare a differential analysis to show whether Video Avenue should drop the DVD product line.

2. Will dropping DVDs add $37,000 to operating income? Explain.
See all solutions

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