exercises: set b - higher ed ebooks & digital learning ... variable cost per month (increased,...

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ExErcisEs: sEt BIdentification of Variable and Fixed CostsE1B. Indicate whether each of the following costs of productive output is usually (a) variable or (b) fixed: 1. Packing materials for stereo

components 2. Real estate taxes 3. Gasoline for a delivery truck 4. Property insurance

5. Depreciation expense of buildings (calculated with the straight-line method)

6. Supplies 7. Indirect materials 8. Bottles used to package liquids

Variable Cost AnalysisE2B. Benin Oil Change has been in business for six months. The company pays $0.50 per quart for the oil it uses in servicing cars. Each job requires an average of 4 quarts of oil. The company estimates that in the next three months, it will service 240, 288, and 360 cars. 1. Compute the cost of oil for each of the three months and the total cost for all three

months. 2. Complete the following sentences by choosing the words that best describe the cost

behavior at Benin:a. Cost per unit (increased, decreased, remained constant).b. Total variable cost per month (increased, decreased) as the quantity of oil used

(increased, decreased).

Mixed Costs: High-Low MethodE3B. Whitehouse Company manufactures major appliances. Because of growing interest in its products, it has just had its most successful year. In preparing the budget for next year, its controller compiled these data:

Month Volume in Machine Hours Electricity CostJuly 6,000 $ 60,000August 5,000 53,000September 4,500 49,500October 4,000 46,000November 3,500 42,500December 3,000 39,000Six-month total 26,000 $290,000

Using the high-low method, determine the variable electricity cost per machine hour and the monthly fixed electricity cost. Estimate the total variable electricity costs and fixed electricity costs if 4,800 machine hours are projected to be used next month.

Mixed Costs: High-Low MethodE4B. When Burundi Company’s monthly costs were $75,000, sales were $80,000; when its monthly costs were $60,000, sales were $50,000. Use the high-low method to develop a monthly cost formula for Burundi’s coming year.

Contribution Margin Income Statement and RatioE5B. Senora Company manufactures a single product that sells for $110 per unit. The company projects sales of 500 units per month. Projected costs follow.

Type of Cost Manufacturing NonmanufacturingVariable $10,000 $5,000Nonvariable $12,500 $7,500

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2 Chapter 5: Cost-Volume-Profit Analysis

1. Prepare a contribution margin income statement for the month. 2. What is the contribution margin ratio? (Round to the nearest whole percentage.) 3. What volume, in terms of units, must the company sell to break even?

Contribution Margin Income Statement and Breakeven AnalysisE6B. Using the data in the contribution margin income statement for Sedona, Inc., that follows, calculate (a) selling price per unit, (b) variable costs per unit, and (c) breakeven point in units and in sales dollars.

Sedona, Inc.Contribution Margin Income Statement

For the Year Ended December 31

Sales (10,000 units) $16,000,000Less variable costs:

Cost of goods sold $8,000,000Selling, administrative, and general 4,000,000Total variable costs 12,000,000

Contribution margin $ 4,000,000Less fixed costs:

Overhead $1,200,000Selling, administrative, and general 800,000Total fixed costs 2,000,000

Operating income $ 2,000,000

Breakeven AnalysisE7B. Techno Designs produces head covers for golf clubs. The company expects to gen-erate a profit next year. It anticipates fixed manufacturing costs of $126,500 and fixed general and administrative expenses of $82,030 for the year. Variable manufacturing and selling costs per set of head covers will be $4.65 and $2.75, respectively. Each set will sell for $13.40. 1. Compute the breakeven point in sales units. 2. Compute the breakeven point in sales dollars. 3. If the selling price is increased to $14 per unit and fixed general and administrative

expenses are cut by $33,465, what will the new breakeven point be in units? 4. Prepare a graph to illustrate the breakeven point computed in 2.

Breakeven Point for Multiple ProductsE8B. Saline Aquarium, Inc., manufactures and sells aquariums, water pumps, and air fil-ters. The sales mix is 1:2:2 (i.e., for every one aquarium sold, two water pumps and two air filters are sold). Using the contribution margin approach, find the breakeven point in units for each product. The company’s fixed costs are $26,000. Other information follows.

Selling Price per Unit Variable Costs per UnitAquariums $60 $25Water pumps 20 12Air filters 10 3

Breakeven Point for Multiple ProductsE9B. Melilla Company sells hamburgers, drinks, and fries. The sales mix is 1:3:2 (i.e., for every one hamburger sold, three drinks and two fries are sold). Using the contribution

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margin approach, find the breakeven point in units for each product. The company’s fixed costs are $2,040. Other information follows.

Selling Price per Unit Variable Costs per Unit

Hamburgers $0.99 $0.27Drinks 0.99 0.09Fries 0.99 0.15

Sales Mix AnalysisE10B. Ella Mae Simpson is the owner of a hairdressing salon in Palm Coast, Florida. Her salon provides three basic services: shampoo and set, permanent, and cut and blow dry. The following are its operating results from the past quarter:

Type of ServiceNumber of Customers Total Sales

Contribution Margin in Dollars

Shampoo and set 1,200 $24,000 $14,700Permanent 420 21,000 15,120Cut and blow dry 1,000 15,000 10,000

2,620 $60,000 $39,820Total fixed costs 30,000Profit $ 9,820

Compute the breakeven point in units based on the weighted-average contribution margin for the sales mix.

Cost Behavior in a Service BusinessE11B. BusinEss ApplicAtion ▶ Luke Ricci, CPA, is the owner of a firm that provides tax services. The firm charges $50 per return for the direct professional labor involved in preparing standard short-form tax returns. In January, the firm prepared 850 such returns; in February, 1,000; and in March, 700. Service overhead (telephone and utili-ties, depreciation on equipment and building, tax forms, office supplies, and wages of clerical personnel) for January was $18,500; for February, $20,000; and for March, $17,000. 1. Determine the variable and fixed cost components of the firm’s Service Overhead

account. 2. What would the estimated total cost per tax return be if the firm prepares 825 stan-

dard short-form tax returns in April? (Round to two decimal places.)

CVP Analysis and Profit PlanningE12B. BusinEss ApplicAtion ▶ Target Systems, Inc., makes heat-seeking missiles. It has recently been offered a government contract from which it may realize a profit. The contract purchase price is $130,000 per missile, but the number of units to be purchased has not yet been decided. The company’s fixed costs are budgeted at $3,973,500, and variable costs are $68,500 per unit. 1. Compute the number of units the company should agree to make at the stated con-

tract price to earn a profit of $1,500,000. 2. Using a lighter material, the variable unit cost can be reduced by $1,730, but total

fixed overhead will increase by $27,500. How many units must be produced to make $1,500,000 in profit? (Round to the nearest whole number.)

3. Given the figures in 2, how many additional units must be produced to increase profit by $1,264,600? (Round to the nearest whole number.)

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Planning Future SalesE13B. BusinEss ApplicAtion ▶ Short-term automobile rentals are the specialty of ASAP Auto Rentals, Inc. Average variable operating costs have been $12.50 per day per automobile. The company owns 60 automobiles. Fixed operating costs for the next year are expected to be $145,500. Average daily rental revenue per automobile is expected to be $34.50. Management would like to earn a profit of $47,000 during the year. 1. Calculate the total number of daily rentals the company must have during the year

to earn the targeted profit. 2. On the basis of your answer to 1, determine the average number of days each auto-

mobile must be rented. (Round to the nearest whole number.) 3. Determine the total revenue needed to achieve the targeted profit of $47,000. 4. What would the total rental revenue be if fixed operating costs could be lowered by

$5,180 and the targeted profit increased to $70,000?

CVP Analysis in a Service BusinessE14B. BusinEss ApplicAtion ▶ Flossmoor Inspection Service specializes in inspecting cars that have been returned to automobile leasing companies at the end of their leases. Flossmoor’s charge for each inspection is $50; its average cost per inspection is $15. Tony Lomangeno, Flossmoor’s owner, wants to expand his business by hiring another employee and purchasing an automobile. The fixed costs of the new employee and auto-mobile would be $3,000 per month. How many inspections per month would the new employee have to perform to earn Lomangeno a profit of $1,200?

CVP and Breakeven Analysis and PricingE15B. McLennon Company has a plant capacity of 100,000 units per year, but its bud-get for this year indicates that only 60,000 units will be produced and sold. The entire budget for this year follows.

Sales (60,000 units at $4) $240,000Less cost of goods produced (based on production of 60,000 units):

Direct materials (variable) $60,000Direct labor (variable) 30,000Variable overhead costs 45,000Fixed overhead costs 75,000Total cost of goods produced 210,000

Gross margin $ 30,000Less selling and administrative expenses:

Selling (fixed) $24,000Administrative (fixed) 36,000Total selling and administrative expenses 60,000

Operating income (loss) $ (30,000)

1. Given the budgeted selling price and cost data, how many units would McLennon have to sell to break even? Round to the nearest whole number. (Hint: Be sure to consider selling and administrative expenses.)

2. Market research indicates that if McLennon were to drop its selling price to $3.80 per unit, it could sell 100,000 units. Would you recommend the drop in price? What would the new operating income or loss be?

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exercises: set b - higher ed ebooks & digital learning ... variable cost per month (increased,...

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