s:.300.000. \\:trat amount should the group budget for key professional personnel salal-iesl Graph the

relationships on un u*rrul basis, ustg tire two.ppt""trt"t illustrated in Exhibit 2-6 or.page 52'

Indicate the relevant range on each graph. yor, ,r.'.'J not use graph paper; simply approximate the

graphicai relationshiPs'

?42 Comparing Contribution Margin percentages

Below are actual statements of operating income for "'r"'' 'r''ri; and * ' ""' ' t "i; i'':rrlri;'il' (in millions):

l-r3 Cost R

- ;:S, :r: --l: B,;

irn',1'!:l:- i:: t]l"L l::s:;'il'

" - - ---:--, : ---;; -11

;rrlliTil: .d 3I-: I:i

ttMni: :f.]i"L-ie a.-,--: - t- -.-i ll.' ,f - l: I

uf':::r: :.' :.11- l

r!,\1"- -- i --t

.'- -.-. -._-:I !lH'r ;;-:l:

: , :,- Lil

''T ,f,", :[: ; : .t if"--.- - i--- :

lL! r :il1

Procter & GambleMicrosoft

RevenuesCost of revenue

Research and develoPment

Sales and MarketingGeneral and administrative

$39,7886,2006,184a,677

Net salesCost of Products sold

Selling, general' and

administrative exPenses

$6a,22233,r25

2t,a48$L324e4,166 Operating income

operating income $14Eq1

Assume that the only variable cost for Microsoft is "cost of revenue" and for Procter & Gamble it is

"cost of Products sold."

l.Computethecontribution-marginpercentage^ofMicrosoftandthatofProcter&Gamble.Whydo-' t;;J"pp*e the percentages are so different?

L-- oln *:r;^h r-nmnrrre the increase in operating2. Suppose .u.r, .olnpuny iicreases its revenue by $10 million. compute the increase in operating

income for each company' --- ^-^a:^+3. Explain how the coitribution margin percentage helps you predict the effects on operatlng

income of changes in sales volume. Wfrut u.ro-piio"r ao ylo *ut . in forming such a prediction?

?-,** Movie ManagerMaliaMahleristhemanagerofStanford,s.traditionalsundayFlicks'Eachsunday,afilmhastwoshowings. The admission;?; " deliberately s"""i

" "".y r"* $3. She s^ells a maximum of 500 tick-

ets for each showing. The ienial of tne uoOito,-lu* i' $:30 and labor is $435' including $90 for Mahler'

Mahler must pay the film distributor a guarantee, ;";&g from $300 to $900, or 50oh of gross admis-

't";".?:'lJ';r:HliJ;iillitj,l,'rn. seus refreshments; these sales average r2%o or gross admission

receipts and yield a contribution margin of 40o/o'

1. On June 3, Mahler screened Little Miss Sunshine.Thefilm grossed $2,250. The guarantee to the

distributor was $750, or 50yo of gross "d*il;i;; receipts, itrti"rtltl is higher' what operating

income *u, proOui"a for the Stuients'Association, *tti.tt sponsored the showings?

2. Recompute ihe results if the film grossed $1'400'

3. The ..four-wall,, concept is increasingly t.iog uaopt.d by movie producers' In this plan' the

movie,s producer pays a fixed rental-to the theaf,r owner for, say' a week's showing of a movie' As

a theater owneq how would you evaluate a "four-wall" offer?

k-#,& Pramotion of a Rock ConcertBBTProductions'Ltd.,ispromotingarockconcertinLondon.Thebandswillreceiveaflatfeeoff7 million in cash. rne concert will be shown wJl;i; "t

closed-circuit television' BBT will collect

100% of the receipts "tJ

*i1 ** 30% to tht;;;;id""i local closed-circuit theater managers' BBT

expects to sell 1.1 million seats at u n"t uut'ugtqii;if f l eall^S"l] will also receive [300'000

from the London arena (which has sold out its I 9,500 seats, ranging. from f l 50 for box seats to f,20

for general ua*irrior,,?Jr;;;;;.;""."". orl.zi-iition);'ser"*ill not share the f300,000 withthe

local Promoters.

1. The general manager of BBT Productions is trying to decide what amount to spend for advertis-

ing. What i, tfr. *'ori gSi "orrtO

spend and stiit Ureat< even on overall operations' assuming sales

of I .1 million tickets?

2.IfBBTdesiresanoperatingincomeoff5o0'000,howmanyseatswouldithavetosell?Assumethat the avefase;;;;;;t;"d the total-fi'Jtosts (including f,2,000,000 in advertising) are

f9 million.

!

- 5: i' : ;1ia_ _ _ --_:-

,r.ar,,a.3 a;lt:::::rf

-.1:t::::I:l rr.ni

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ar,: :-.::,J.,5 :*_.

__ :- - - i.r :*--::-

'lL-i -lflii

-t, -

*:i

- -':: ::-'" 3:

* -: tsasicrttitru:r,,i u -r :..,: :

lllllliir,rtr! ::: i,:tltltttLlllli: . : r:.S.

:,'trl:t: :e::-. -_. .;

llr:.illrea:<.

.:.1":r: -:: B

:lillilEilur:,B' : ntroduction to Cost Behavior and Cost-Volume Relationships

- :,- Leverage At *ffiAyrrrrrr jiil{l:" had $4.6 billion in revenue and net income over $1 billion. eBay's mission is to "pro-

rrr uur a .l-lbal trading platform where practically anyone can trade practically anything." However,$Lrrllurlil[fl]s ias not always been as profitable for eBay. The company is one of the survivors of the tech-lilLr uirrr, ;,:,llapse in 2001 and2002. Consider eBay's situation at that time. In the first quarter of 2001,rllltu, -l,,.ned revenue of $ 154 million and operating expenses of $ 123 million, for an operating profitm ,iii; :,:llion. In the first quafier of 2002, eBay reported that revenue had increased 59%, to $245rmuLL'.lrln, :Ba)"s fixed costs were $37 million and variable costs vary with the amount of revenue.

- :rr:ule eBay's operating income for the first quarter of 2002 and its percentage increase in,rry.:rt1ns income between 2001 and2002.

- :-r:.rrn how eBay managed to increase its income so much with only a 59oh increase in revenue.

Adding a Frmdcret3i:'.r. Pub, iocated near State University, serves as a gathering place for the university's morer-trlars. Mac sells draft beer and all brands of bottled beer at a contribution margin of $.60 a

rr,t"l; is considering also selling hamburgers during selected hours. His reasons are twofold. First,rirrrrLfinrul',,ll--:'is uould attract daytime customers. A hamburger and a beer are a quick lunch. Second, he

lllllllllllr :i.1 :,fft competition from other local bars, some of which provide more extensive menus.,![;,r malvzed the costs as follows:

Per Month Per Hamburger

83

rlill{t[]lri i

ii{il [LlliuJ

lllilliti]jtr

llhfrilly fixed expenses Variable expenses

filLl'mgss :' part-time cooki.itill'rlgr

:iirrunmtl

$.L2

$1,560

,iiillinittuc I r.mled a selling price of $ I .20 per hamburger to lure many customers. For all questions, assume

i, .ilirllLi,."0nr, nonth.

lu' i;i are the monthly and daily break-even points, in number of hamburgers?l ,Tr'' r: are the monthly and daily break-even points, in dollar sales?'l r.,; ie end of 2 months, Mac finds he has sold 3,600 hamburgers. What is the operating profit per

nr: L-.:rL on hamburgers?uu qi,rtk- :hirrks that at least 60 extra beers are sold per day because he has these hamburgers available.

Jrl:i means that 60 extra people come to the bar or that 60 buy an extra beer because they are

ur";'red by the hamburgers. How does this affect Mac's monthly operating income?.r 4.;::r ro requirement 3. How many extra beers would have to be sold per day so that the overall

:'s:;ts of the hamburger sales on monthly operating income would be zero?

I :* Governrr?#sit Srgenizatimnq" ulrllur:;L,*elfareagencyhasagovernmentbudgetappropriationfor20XT of$900,000.Theagency'sililrllffri,nr :r:;ion is to help disabled persons who are unable to hold jobs. On the average, the agency sup-lurliLrllivrtur::s each person's income by $5,000 annually. The agency's fixed costs are $290,000. There are

tnllll firilxii: .'osts.

i r'& rnany disabled persons were helped during 20X7?F: r ltlX8, the agency's budget appropriation has been reduced by 15%. If the agency continuesthe :ame level of monetary support per person, how many disabled persons will be helped inl. -"t3 .' Compute the percentage decline in the number of persons helped."t;i"nne a budget reduction of l5%, as in requirement 2. The manager of the agency has discre-r{:r as to how much to supplement each disabled person's income. She does not want to reduce1lrc :umber of persons served. On the average, what is the amount of the supplement that can be

g'' 3n to each person? Compute the percentage decline in the annual supplement.

$1,200360

RollsMeat @ $2.80 per pound

(7 hamburgers per pound)

OtherTotal

.40

.18$.70

n

St

rg

he

en

3S.

-'d-

is

mg

(es

the

ntaaine

ated

nbo

l the

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mda, The

itli'lni4r€r 2: lntroduction to Cost Behavior and Cost-Volume Relationships

[ompare the sales cost structure of Kellogg's with that of Post. Which has the larger fixed cost?In-.hich has the larger variable cost? How will this affect each company's risk? (Focus on how theiompany's profits change with changes in volume.)Tthat incentives does each pay system provide for the sales force?\frght either incentive system create potential ethical dilemmas for the sales personnel? Explain.

I"ES Sales-Mix Analysisiuu,r,ut-' -{ppendix 24. The Rocky Mountain Catering Company specializes in preparing Mexican din-rnums -r.at it freezes and ships to restaurants in the Denver area. When a diner orders an item, the restau-urmr leats and serves it. The budget data for 20X5 are

Product

Ghicken Tacos Beef Enchiladas

85

Selling price to restaurantsVariable expensesContribution marginNumber of units

$53

$2250,000

$74

$3125,000

"llflihu :r:mpany prepares the items in the same kitchens, delivers them in the same trucks, and so forthllllllM:re. decisions about the individual products do not affect the fixed costs of $735,000.

u, ,Jcmpute the planned net income for 20X5.L J.:mpute the break-even point in units, assuming that the

Trn L,il J;r:rpute the break-even point in units if the company

sncmladas.ur 5rn6'cse the company sells 78,750 units of enchiladas and 236,250 units of tacos, for a total of

: : r . iJ00 units. Compute the net income. Compute the new break-even point with this new sales

mr:t- \\hat is the major lesson of this problem?

BET Hospital Patient Mix$lllfrulrqr '$.rendix 2A. Hospitals measure their volume in terms of patient-days. We calculate patient-Lilluum,* q' :nultiplying the number of patients by the number of days that the patients are hospitalized.$llturrmrynru*: a iarge hospital has fixed costs of $54 million per year and variable costs of $600 per patient-rtllXiusl Daii', revenues vary among classes of patients. For simpliciry assume that there are two classes:

lli ll ilffiir_r"B) patients (S) who pay an average of $1,000 per day and (2) non-self-pay patients (G) whounfir; lfrse =sponsibility of insurance companies and government agencies and who pay an average of$frlllllflilltl|l pr,Ja1.. Twenty percent of the patients are self-pay.

i lnpute the break-even point in patient-days, assuming that the hospital maintains its plannedm:*. :,ipatients.

l*. $r,rcc,r'se that the hospital achieves 225,000 patient-days but that 25%o of the patient-days werermf*:.4 (instead of 20%). Compute the net income. Compute the break-even point.

S 56 *ncome Taxe$ on Hotelst$liltllrtfu, s;rendix 28. The Four Winds Hotel in downtorvn Phoenix has annual fixed costs applicable tonrmrrrrnmrns :: S9.2 million for its 600-room hotel, average daily room rates of $105, and average variableurrrrunmrL lr 515 for each room rented. It operates 365 days per year. The hotel is subject to an income taxnrmB, rf .t _r:0.

- htrn, many rooms must the hotel rent to earn a net income after taxes of $720,000? Of 5360,000?ll, ,l,lml'ute the break-even point in number of rooms rented. What percentage occupancy for the

,*nw rs needed to break even?l uas:rne rhat the volume level of rooms sold is 150,000. The manager is wondering how much

iru;:'me couid be generated by adding sales of 15,000 rooms. Compute the additional net income

rufm rares.

8&3 Tax Effects, Multiple Choicelllillttutudh' ,rqpendix 28. Victor Company is a wholesaler of compact disks. The projected after-tax net

llllullrfrrmle :or the current year is $120,000, based on a sales volume of 200,000 CDs. Victor has been

wrlllillliiinry ie CDs at $16 each. The variable costs consist of the $10 unit purchase price and a handling

company maintains its planned sales

sells only tacos and if it sells only