5-11
Fill in the missing amounts in each of the eight case situations below. Each case is independent of the others. (Hint: One way to find the missing amounts would be to prepare a contribution format income statement for each case, enter the known data, and then compute the missing items.)
Contribution Net Operating
Units Variable Margin Fixed Income
Case Sold Sales Expenses per Unit Expenses (Loss)
Average
Contribution Net Operating
Variable Margin Fixed Income Case Sales Expenses Ratio Expenses (Loss)
5-20
Northwood Company manufactures basketballs. The company has a ball that sells for $25. At present, the ball is manufactured in a small plant that relies heavily on direct labor workers. Thus, variable expenses are high, totaling $15 per ball, of which 60% is direct labor cost.
Last year, the company sold 30,000 of these balls, with the following results:
Sales (30,000 balls) $750,000
Variable expenses 450,000
Contribution margin 300,000
Fixed expenses 210,000
Net operating income $ 90,000 Required:
Unit sales to = Fixed expenses
break even Unit contribution margin
$210,000
=
$10
= 21,000 balls
Degree of = Contribution margin
operating leverage Net operating income
$300,000
= = 3.33 (rounded)
$90,000
Selling price ............................. $25 100% Variable expenses .................... 18 72%
Contribution margin ............... $ 7 28%
Unit sales to = Fixed expenses
break even Unit contribution margin
$210,000
=
$7
= 30,000 balls
3.
Unit sales to attain = Target profit + Fixed expenses
target profit Unit contribution margin
$90,000 + $210,000
= = 42,857 balls
$7
price, then:
P = $18 + 0.40P
0.60P = $18 P = $18 ÷ 0.60
P = $30
To verify:
Selling price ............................. $30 100% Variable expenses ................... 18 60%
Contribution margin ............... $12 40%
Therefore, to maintain a 40% CM ratio, a $3 increase in variable costs would require a $5 increase in the selling price.
Selling price ................................... $25 100% Variable expenses .......................... 9 36%
Contribution margin ..................... $16 64%
The new break-even point would be:
Unit sales to = Fixed expenses
break even Unit contribution margin
$420,000
= = 26,250 balls
$16
Although this new break-even point is greater than the company’s present breakeven point of 21,000 balls [see Part (1) above], it is less than the break-even point will be if the company does not automate and variable labor costs rise next year [see Part (2) above].
Unit sales to attain = Target profit + Fixed expenses target profit Unit contribution margin
= $90,000 + $420,000
$16
= 31,875 balls
Thus, the company will have to sell 1,875 more balls (31,875 – 30,000 = 1,875) than now being sold to earn a profit of $90,000 per year. However, this is still less than the 42,857 balls that would have to be sold to earn a $90,000 profit if the plant is not automated and variable labor costs rise next year [see Part (3) above].
Sales (30,000 balls × $25 per ball) .................................... |
$750,000 |
Variable expenses (30,000 balls × $9 per ball) ................. |
270,000 |
Contribution margin ........................................................... |
480,000 |
Fixed expenses .................................................................... |
420,000 |
Net operating income ......................................................... |
$ 60,000 |
Degree of = Contribution margin
operating leverage Net operating income
$480,000
= = 8
$60,000
There is no clear answer as to whether one should have been in favor of constructing the new plant.
5-22
Due to erratic sales of its sole product—a high-capacity battery for laptop computers—PEM, Inc., has been experiencing financial difficulty for some time. The company’s contribution format income statement for the most recent month is given below:
Sales (19,500 units × $30 per unit) $585,000
Variable expenses 409,500
Contribution margin 175,500
Fixed expenses 180,000
Net operating loss $ (4,500)
Required:
Total Per Unit Percent of Sales
Sales (19,500 units) ................. $585,000 $30.00 100%
Variable expenses .................... 409,500 21.00 70%
Contribution margin ............... $175,500 $ 9.00 30%
The break-even point is:
Unit sales to = Fixed expenses
break even Unit contribution margin
= = 20,000 units
Dollar sales to = Fixed expenses
break even CM ratio
= = $600,000 in sales
$80,000 increased sales × 0.30 CM ratio .......................... $24,000
Less increased advertising cost .............................................. 16,000 Increase in monthly net operating income ............................ $ 8,000
Since the company is now showing a loss of $4,500 per month, if the changes are adopted, the loss will turn into a profit of $3,500 each month ($8,000 – $4,500 =
$3,50
3. Sales (39,000 units @ $27.00 per unit) ....................... Variable expenses (39,000 units @ $21.00 per unit) ... Contribution margin ..................................................... Fixed expenses ($180,000 + $60,000) ........................ Net operating loss .......................................................... |
$1,053,000 819,000 234,000 240,000 $ (6,000) |
4.
Unit sales to attain = Target profit + Fixed expenses
target profit CM per unit
$9,750 + $180,000
=
$8.25**
= 23,000 units
Per Unit Percent of Sales
Sales ..................................... $30.00 100% Variable expenses ................ 18.00 60%
Contribution margin ............ $12.00 40%
The new break-even point would be:
Unit sales to = Fixed expenses
break even Unit contribution margin
$180,000 + $72,000
=
$12.00
= 21,000 units
Dollar sales to = Fixed expenses
break even CM ratio
$180,000 + $72,000
=
0.40
= $630,000
Not Automated Automated
Sales (26,000 |
Per Total Unit |
% |
Total |
Per Unit |
% |
units) ................... |
$780,000 $30.00 |
100 |
$780,000 |
$30.00 |
100 |
Variable expenses .. Contribution |
546,000 21.00 |
70 |
468,000 |
18.00 |
60 |
margin ................. |
234,000 $ 9.00 |
30 |
312,000 |
$12.00 |
40 |
Fixed expenses ....... Net operating |
180,000 |
252,000 |
|||
income ................ |
$ 54,000 |
$ 60,000 |
5-28
Carbex, Inc., produces cutlery sets out of high-quality wood and steel. The company makes a Standard set and a Deluxe set and sells them to retail department stores throughout the country. The Standard set sells for $60, and the Deluxe set sells for $75. The variable expenses associated with each set are given below.
Standard |
Deluxe |
Variable production costs $15.00 $30.00
Sales commissions (15% of sales price) $9.00 $ 11.25 The company’s fixed expenses each month are:
Advertising $105,000
Depreciation $ 21,700
Administrative $63,000
Mary Parsons, the financial vice president, watches sales commissions carefully and has noted that they have risen steadily over the last year. For this reason, she was shocked to find that even though sales have increased, profits for the current month—May—are down substantially from April. Sales, in sets, for the last two months are given below:
Standard |
Deluxe |
Total |
April 4,000 2,000 6,000
May 1,000 5,000 6,000
Required:
Standard Deluxe Total |
|
Amount Percent Amount Percent Amount Percent |
Sales Etc.
Place the fixed expenses only in the Total column. Do not show percentages for the fixed expenses.
1.
Carbex, Inc.
Income Statement For April
Standard Deluxe Total
Amount % Amount % Amount %
Sales ...................................... $240,000 100 $150,000 100 $390,000 100.0
Variable expenses:
Production ........................ 60,000 25 60,000 40 120,000 30.8
Sales commission .............. 36,000 15 22,500 15 58,500 15.0
Total variable expenses ........ 96,000 40 82,500 55 178,500 45.8
Contribution margin ............ $144,000 60 $ 67,500 45 $211,500 54.2
Fixed expenses:
Advertising ........................ 105,000
Depreciation ..................... 21,700
Administrative .................. 63,000
Total fixed expenses ............. 189,700
Net operating income ........... $ 21,800
Carbex, Inc.
Income Statement For May
Standard Deluxe Total
Amount % Amount % Amount %
Sales ...................................... $60,000 100 $375,000 100 $435,000 100.0
Variable expenses:
Production ........................ 15,000 25 150,000 40 165,000 37.9
Sales commission .............. 9,000 15 56,250 15 65,250 15.0 Total variable expenses ........ 24,000 40 206,250 55 230,250 52.9
Contribution margin ............ $36,000 60 $168,750 45 204,750 47.1
Fixed expenses:
Advertising ........................ 105,000 Depreciation ..................... 21,700
Administrative .................. 63,000 Total fixed expenses ............. 189,700
Net operating income ........... $ 15,050
Dollar sales to = Fixed expenses = $189,700 = $350,000
break even CM ratio 0.542
5-30
Angie Silva has recently opened The Sandal Shop in Brisbane, Australia, a store that specializes in fashionable sandals. In time, she hopes to open a chain of sandal shops. As a first step, she has gathered the following data for her new store:
Sales price per pair of sandals $40
Variable expenses per pair of sandals 16
Contribution margin per pair of sandals $24 Fixed expenses per year:
Building rental $ 15,000
Equipment depreciation 7,000
Selling 20,000
Administrative 18,000
Total fixed expenses $60,000 Required:
Sales (3,000 pairs) $120,000
Variable expenses 48,000
Contribution margin 72,000
Fixed expenses 60,000
Net operating income $ 12,000
1.
Unit sales to = Fixed expenses = $60,000 = 2,500 pairs
break even CM per unit $24.00
Dollar sales to = Fixed expenses = $60,000 = $100,000 break even CM ratio 0.60
3.
Unit sales to attain = Target profit + Fixed expenses
target profit Unit contribution margin
$18,000 + $60,000
= = 3,250 pairs
$24.00
4. Incremental contribution margin: |
|
$25,000 increased sales × 60% CM ratio ................. |
$15,000 |
Incremental fixed salary cost ........................................ |
8,000 |
Increased net income .................................................... |
$ 7,000 |
Yes, the position should be converted to a full-time basis.
operating leverage Net operating income $12,000
$48,000.
5-33
Pittman Company is a small but growing manufacturer of telecommunications equipment. The company has no sales force of its own; rather, it relies completely on independent sales agents to market its products. These agents are paid a sales commission of 15% for all items sold.
Barbara Cheney, Pittman’s controller, has just prepared the company’s budgeted income statement for next year as follows:
Pittman Company
Budgeted Income Statement
For the Year Ended December 31
Sales $ 16,000,000
Manufacturing expenses:
Variable $7,200,000
Fixed overhead 2,340,000 9,540,000 Gross margin 6,460,000
Selling and administrative expenses:
Commissions to agents 2,400,000
Fixed marketing expenses 120,000*
Fixed administrative expenses 1,800,000 4,320,000
Net operating income 2,140,000
Fixed interest expenses 540,000
Income before income taxes 1,600,000
Income taxes (30%) 480,000
Net income $ 1,120,000
*Primarily depreciation on storage facilities.
As Barbara handed the statement to Karl Vecci, Pittman’s president, she commented, “I went ahead and used the agents’ 15% commission rate in completing these statements, but we’ve just learned that they refuse to handle our products next year unless we increase the commission rate to 20%.”
“That’s the last straw,” Karl replied angrily. “Those agents have been demanding more and more, and this time they’ve gone too far. How can they possibly defend a 20% commission rate?”
“They claim that after paying for advertising, travel, and the other costs of promotion, there’s nothing left over for profit,” replied Barbara.
“I say it’s just plain robbery,” retorted Karl. “And I also say it’s time we dumped those guys and got our own sales force. Can you get your people to work up some cost figures for us to look at?”
“We’ve already worked them up,” said Barbara. “Several companies we know about pay a 7.5% commission to their own salespeople, along with a small salary. Of course, we would have to handle all promotion costs, too. We figure our fixed expenses would increase by $2,400,000 per year, but that would be more than offset by the $3,200,000 (20% × $16,000,000) that we would avoid on agents’ commissions.”
The breakdown of the $2,400,000 cost follows:
Salaries:
Sales manager $ 100,000
Salespersons 600,000
Travel and entertainment 400,000
Advertising 1,300,000
Total $2,400,000
“Super,” replied Karl. “And I noticed that the $2,400,000 equals what we’re paying the agents under the old 15% commission rate.”
“It’s even better than that,” explained Barbara. “We can actually save $75,000 a year because that’s what we’re paying our auditors to check out the agents’ reports. So our overall administrative expenses would be less.”
“Pull all of these numbers together and we’ll show them to the executive committee tomorrow,” said Karl. “With the approval of the committee, we can move on the matter immediately.”
Required:
Use income before income taxes in your operating leverage computation.
Before proceeding with the solution, it is helpful first to restructure the data into contribution format for each of the three alternatives. (The data in the statements below are in thousands.)
15% Commission 20% Commission Own Sales Force
Sales ............................................... |
$16,000 |
100% |
$16,000 |
100% |
$16,000.00 100.0% |
Variable expenses: |
|
||||
Manufacturing ........................... |
7,200 |
7,200 |
7,200.00 |
||
Commissions (15%, 20% 7.5%) . |
2,400 |
3,200 |
1,200.00 |
||
Total variable expenses ................. |
9,600 |
60% |
10,400 |
65% |
8,400.00 52.5% |
Contribution margin ..................... |
6,400 |
40% |
5,600 |
35% |
7,600.00 47.5% |
Fixed expenses: |
|
||||
Manufacturing overhead ........... |
2,340 |
2,340 |
2,340.00 |
||
Marketing .................................. |
120 |
120 |
2,520.00 |
||
Administrative ........................... |
1,800 |
1,800 |
1,725.00 |
||
Interest ....................................... |
540 |
540 |
540.00 |
||
Total fixed expenses ...................... |
4,800 |
4,800 |
7,125.00 |
||
Income before income taxes ......... |
1,600 |
800 |
475.00 |
||
Income taxes (30%) ...................... |
480 |
240 |
142.50 |
||
Net income .................................... |
$ 1,120 |
$ 560 |
$ 332.50 |
Dollar sales to = Fixed expenses = $4,800,000 = $12,000,000 break even CM ratio 0.40
Dollar sales to = Fixed expenses = $4,800,000 = $13,714,286 break even CM ratio 0.35
Dollar sales to = Fixed expenses = $7,125,000 = $15,000,000 break even CM ratio 0.475
$1,600,000 in income before taxes. Therefore,
Dollar sales to = Target income before taxes + Fixed expenses
attain target CM ratio
$1,600,000 + $4,800,000
=
0.35
$6,400,000
= = $18,285,714
0.35
X = Total sales revenue
0.65X + $4,800,000 = 0.525X + $7,125,000
0.125X = $2,325,000
X = $2,325,000 ÷ 0.125
X = $18,600,000
Thus, at a sales level of $18,600,000 either plan would yield the same income before taxes and net income. Below this sales level, the commission plan would yield the largest net income; above this sales level, the sales force plan would yield the largest net income.
15% Commission |
20% Commission |
Own Sales Force |
|
Contribution margin (Part 1) (a) .............. |
$6,400,000 |
$5,600,000 |
$7,600,000 |
Income before taxes (Part 1) (b) ................ |
$1,600,000 |
$800,000 |
$475,000 |
Degree of operating leverage: (a) ÷ (b) .... |
4 |
7 |
16 |
First, use of the sales agents would have a less dramatic effect on net income.
Second, use of the sales agents for at least one more year would give the company more time to hire competent people and get the sales group organized.
Third, the sales force plan doesn’t become more desirable than the use of sales agents until the company reaches sales of $18,600,000 a year. This level probably won’t be reached for at least one more year, and possibly two years.
Fourth, the sales force plan will be highly leveraged since it will increase fixed costs (and decrease variable costs). One or two years from now, when sales have reached the $18,600,000 level, the company can benefit greatly from this leverage. For the moment, profits will be greater and risks will be less by staying with the agents, even at the higher 20% commission rate.
5A-4
To prepare a scattergraph plot in Excel, begin by highlighting the data in cells B4 through C10 (as shown in Exhibit 5A–4). From the Charts group within the Insert tab, select the “Scatter” subgroup and then click on the choice that has no lines connecting the data points. This should produce a scattergraph plot similar to the one shown in Exhibit 5A–5. Notice that the number of patient-days is plotted on the X-axis and the maintenance cost is plotted on the Y-axis.7 As we saw verified earlier in Exhibit 5A–1, the data is approximately linear, so it makes sense to proceed with estimating a regression equation that minimizes the sum of the squared errors.
Yes, there is an approximately linear relationship between the number of units shipped and the total shipping expense.
Units Shipped Shipping Expense
High activity level (June) ............. 8 $2,700
Low activity level (July) ............... 2 1,200 Change .......................................... 6 $1,500
Variable cost element:
Change in expense $1,500
= =$250 per unit.
Change in activity 6 units
Fixed cost element:
Shipping expense at high activity level ........................................ $2,700 Less variable cost element ($250 per unit × 8 units) .................. 2,000
Total fixed cost ............................................................................. $ 700
The cost formula is $700 per month plus $250 per unit shipped or Y = $700 + $250X,
where X is the number of units shipped.
The scattergraph on the following page shows the straight line drawn through the high and low data points.
Units Shipped
Earn back money you have spent on downloaded sample
To export a reference to this article please select a referencing stye below.
Assignment Hippo (2022) . Retrive from https://www.assignmenthippo.com/sample-assignment/fill-in-the-missing-amounts
"." Assignment Hippo ,2022, https://www.assignmenthippo.com/sample-assignment/fill-in-the-missing-amounts
Assignment Hippo (2022) . Available from: https://www.assignmenthippo.com/sample-assignment/fill-in-the-missing-amounts
[Accessed 25/05/2022].
Assignment Hippo . ''(Assignment Hippo,2022) https://www.assignmenthippo.com/sample-assignment/fill-in-the-missing-amounts accessed 25/05/2022.
Want to order fresh copy of the Sample Template Answers? online or do you need the old solutions for Sample Template, contact our customer support or talk to us to get the answers of it.
Our motto is deliver assignment on Time. Our Expert writers deliver quality assignments to the students.
Get reliable and unique assignments by using our 100% plagiarism-free.
Get connected 24*7 with our Live Chat support executives to receive instant solutions for your assignment.
Get Help with all the subjects like: Programming, Accounting, Finance, Engineering, Law and Marketing.
Get premium service at a pocket-friendly rate at AssignmentHippo
I was struggling so hard to complete my marketing assignment on brand development when I decided to finally reach to the experts of this portal. They certainly deliver perfect consistency and the desired format. The content prepared by the experts of this platform was simply amazing. I definitely owe my grades to them.
Get instant assignment help