Question 1: Kozy Enterprises is considering manufacturing a new product. It projects the cost of direct materials and rent for a range of output as shown below.
|
|
Output
in Units
|
Rent
Expense
|
Direct
Materials
|
|
|
1,000
|
|
$5,000
|
|
$4,000
|
|
|
|
2,000
|
|
5,000
|
|
6,000
|
|
|
|
3,000
|
|
5,000
|
|
7,800
|
|
|
|
4,000
|
|
7,000
|
|
8,000
|
|
|
|
5,000
|
|
7,000
|
|
10,000
|
|
|
|
6,000
|
|
7,000
|
|
12,000
|
|
|
|
7,000
|
|
7,000
|
|
14,000
|
|
|
|
8,000
|
|
7,000
|
|
16,000
|
|
|
|
9,000
|
|
7,000
|
|
18,000
|
|
|
|
10,000
|
|
10,000
|
|
23,000
|
|
|
|
11,000
|
|
10,000
|
|
28,000
|
|
|
|
12,000
|
|
10,000
|
|
36,000
|
|
Determine the relevant range of activity for this product.
Calculate the variable cost per unit within the relevant range.
Indicate the fixed cost within the relevant range.
Question 2: Mozena Corporation manufactures a single product. Monthly production costs incurred in the manufacturing process are shown below for the production of 3,000 units. The utilities and maintenance costs are mixed costs.The fixed portions of these costs are $300 and $200, respectively.
|
|
Production in Units
|
3,000
|
|
|
Production Costs
|
|
|
|
Direct Materials
|
$7,500
|
|
|
Direct labor
|
15,000
|
|
|
Utilities
|
1,800
|
|
|
Property taxes
|
1,000
|
|
|
Indirect labor
|
4,500
|
|
|
Supervisory salaries
|
1,800
|
|
|
Maintenance
|
1,100
|
|
|
Depreciation
|
2,400
|
Identify the above costs as variable, fixed, or mixed. Put an "X" in the column which applies and the letter "O" if it does not.
Fixed Variable Mixed
Direct Materials
Direct labor
Utilities
Property taxes
Indirect labor
Supervisory salaries
Maintenance
Depreciation
Calculate the expected costs when production is 5,000 units.
Question 3: Airport Connection provides shuttle service between four hotels near a medical center and an international airport. Airport Connection uses two 10 passenger vans to offer 12 round trips per day. A recent month's activity in the form of a cost-volume-profit income statement is shown below.
|
Fare revenues (1,440 fares)
|
|
$36,000
|
|
Variable costs
|
|
|
|
Fuel
|
$5,040
|
|
|
Tolls and Parking
|
3,100
|
|
|
Maintenance
|
500
|
8,640
|
|
Contribution margin
|
|
27,360
|
|
Fixed costs
|
|
|
|
Salaries
|
13,000
|
|
|
Depreciation
|
1,300
|
|
|
Insurance
|
1,128
|
15,428
|
|
Net income
|
|
$11,932
|
Calculate the break-even point in (1) dollars and (2) number of fares.
Without calculations, determine the contribution margin at the break-even point.
Question 4: Moran Company reports the following operating results for the month of August: Sales $350,000 (units 5,000); variable costs $210,000; and fixed costs $90,000. Management is considering the following independent courses of action to increase net income.
1. Increase selling price by 10% with no change in total variable costs.
2. Reduce variable costs to 55% of sales.
Compute the net income to be earned under each alternative.
Which course of action will produce the highest net income?
Question 5: Utech Company bottles and distributes Livit, a diet soft drink. The beverage is sold for 50 cents per 16-ounce bottle to retailers, who charge customers 75 cents per bottle. For the year 2008, management estimates the following revenues and costs.
|
Net sales
|
$1,800,000
|
|
Selling expenses-variable
|
$70,000
|
|
Direct materials
|
430,000
|
|
Selling expenses-fixed
|
65,000
|
|
Direct labor
|
352,000
|
|
Administrative expenses-variable
|
20,000
|
|
Manufacturing overhead-variable
|
316,000
|
|
Administrative expenses-fixed
|
60,000
|
|
Manufacturing overhead-fixed
|
283,000
|
|
|
|
Prepare a CVP income statement for 2008 based on management's estimates.
Compute the break-even point in (1) units and (2) dollars.
Compute the contribution margin ratio and the margin of safety ratio.
Determine the sales dollars required to earn net income of $238,000.
Question 6: Alice Shoemaker is the advertising manager for Value Shoe Store. She is currently working on a major promotional campaign. Her ideas include the installation of a new lighting system and increased display space that will add $34,000 in fixed costs to the $270,000 currently spent. In addition, Alice is proposing that a 5% price decrease ($40 to $38) will produce a 20% increase in sales volume (20,000 to 24,000). Variable costs will remain at $22 per pair of shoes. Management is impressed with Alice's ideas but concerned about the effects that these changes will have on the break-even point and the margin of safety.
Compute the current break-even point in units, and compare it to the break-even point in units if Alice's ideas are used.
Compute the margin of safety ratio for current operations and after Alice's changes are introduced.
Prepare a CVP income statement for current operations and after Alice's changes are introduced.
VALUE SHOE STORE
CVP Income Statement
Current New
Sales
Variable expenses
Contribution margin
Fixed expenses
Net income
Would you make the changes suggested?