Problem 1. Prepare a CVP income statement, compute break-even point, contribution margin ratio, margin of safety ratio and sales for target net income
Jorge Company bottles and distributes B-Lite, 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 2017, management estimates the following revenues and costs.
| Sales |
$1,800,000 |
| Direct materials |
430,000 |
| Direct labor |
360,000 |
| Manufacturing overhead- variable |
380,000 |
| Manufacturing overhead -fixed |
280,000 |
| Selling expenses - variable |
$70,000 |
| Selling expenses - fixed |
65,000 |
| Administrative expenses - variable |
20,000 |
| Administrative expenses - fixed |
60,000 |
Instructions
(a) Prepare a CVP income statement for 2017 based on management estimates. (show column for total amounts only.)
(b) Compute the break-even point in (1) units and (2) dollars.
(c ) Compute the contribution margin ratio and the margin of safety ratio. (Round to the nearest full percent.)
(d) Determine the sales dollars required to earn net income of $180,000.
Problem 2: CURRENT DESIGNS Bill Johnson, sales manager, and Diane Buswell, controller at Current Designs are beginning to analyze the cost considerations for one of the composite models of the kayak division. They have provided the following production and operational costs necessary to produce one composite kayak.
| Kevlar |
|
$250 per kayak |
| Resin and supplies |
$100 per kayak |
| Finishing kit (seat, rudder, ropes, etc.) |
$170 per kayak |
| Labor |
|
$420 per kayak |
| Selling and administrative expenses - variable |
$400 per kayak |
| Selling and administrative expenses - fixed |
$119,000 per year |
| Manufacturing overhead - fixed |
$240,000 per year |
Bill and Diane have asked you to provide a cost-volume-profit analysis, to help them finalize the budget projections for the upcoming year. Bill has informed you that the selling price of the composite kayak will be $2,000.
Instructions
(a) Calculate variable cost per unit.
(b) Determine the unit contribution margin.
(c ) Using the unit contribution margin, determine the break-even point in units for this product line.
(d) Assume that Current Designs plans to earn $270,000 on this product line. Using the unit contribution margin, calculate the number of units that need to be sold to achieve this goal.
(e) Based on the most recent sales forecast, Current Design plans to sell 1,000 units of this model. Using your results from part (c ), calculate the margin of safety and the margin of safety ratio.
Problem 3: Compute net income under different alternatives
Barnes Company reports the following operating results for the month of August: sales $325,000 (units 5,000); variable costs $210,000; and fixed costs $75,000. 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 or sales volume.
2. Reduce variable costs to 58% of sales.
3. Reduce fixed costs by $15,000.
Instructions
Compute the net income to be earned under each alternative. Which course of action will produce the highest net income?
Problem 4:
CURRENT DESIGNS
Current Designs manufactures two different types of kayak, rotomolded kayaks and composite kayaks.
The following information is available for each product line.
| |
Rotomolded |
Composite |
| Sales price/unit |
$950 |
$2,000 |
| Variable costs/unit |
$570 |
$1,340 |
The company's fixed costs are $820,000. An analysis of the sales mix identifies that rotomolded kayaks make up 80% of the total units sold.
Instructions
(a) Determine the weighted-average unit contribution margin for Current Designs.
(b) Determine the break-even points in units for Current Designs and identify how many units of each type of kayak will be sold at the break-even point. (Round to the nearest whole number.)
(c ) Assume that the sales mix changes, and rotomolded kayaks now make up 70% of total units sold. Calculate the total number of units that would need to be sold to earn a net income of $2,000,000 and identify how many units of each type of kayak will be sold at this level of income. (Round to the nearest whole number.)
(d) Assume that Current Designs will have sales of $3,000,000 with two-thirds of the sales dollars in rotomolded kayaks and one-third of the sales dollars in composite kayaks. Assuming $660,000 of fixed costs are allocated to the rotomolded kayaks and $160,000 to the composite kayaks, prepare a CVP income statement for each product line.
(e) Using the information in part (d), calculate the degree of operating leverage for each product line and interpret your findings. (Round to two decimal places.)
Determine if product should be sold or processed further.
Problem 5:
Thompson Industrial Products Inc. (TIPI) is a diversified industrial-cleaner processing company. The company's Dargar plant produces two products: a table cleaner and a floor cleaner from a common set of chemical inputs (CDG). Each week 900,000 ounces of chemical input are processed at a cost of $210,000 into 600,000 ounces of floor cleaner and 300,000 ounces of table cleaner. The floor cleaner has no market value until it is converted into a polish with the trade name FloorShine. The additional processing costs for this conversion amount to $240,000.
FloorShine sells at $20 per 30-ounce bottle. The table cleaner can be sold for $17 per 25-ounce bottle. However, the table cleaner can be converted into two other products by adding 300,000 ounces of another compound (TCP) to the 300,000 ounces of table cleaner. This joint process will yield 300,000 ounces each of table stain remover (TSR) and table polish (TP). The additional processing costs for this process amounts to $100,000. Both table products can be sold for $14 per $25-ounce bottle. The company decided not to process the table cleaner into TSR and TP based on the following analysis.
| |
|
Process Further |
| |
Table |
Table Stain |
Table |
|
| |
Cleaner |
Remover (TSR) |
Polish (TP) |
Total |
| Production in ounces |
300,000 |
300,000 |
300,000 |
|
| Revenue |
$204,000 |
$168,000 |
$168,000 |
$336,000 |
| Costs: |
|
|
|
|
| CDG costs |
70000* |
52,500 |
52,500 |
105,000 |
| TCP costs |
0 |
50,000 |
50,000 |
100,000 |
| Total costs |
70,000 |
102,500 |
102,500 |
205,000 |
| Weekly gross profit |
$134,000 |
$65,500 |
$65,500 |
$131,000 |
*If table cleaner is not processed further, it is allocated 1/3 of the $210,000 of CDG cost, which is equal to 1/3 of the total physical output.
** If table cleaner is processed further, total physical output is 1,200,000 ounces. TSR and TP combined account for 50% of the total physical output and are each allocated 25% of the CDG cost.
Instructions:
(a) Determine if management made the correct decision to not process the table cleaner further by doing the following.
(1) Calculate the company's total weekly gross profit assuming the table cleaner is not processed further.
(2) Calculate the company's total weekly gross profit assuming the table cleaner is processed further.
(3) Compare the resulting net incomes and comment on management's decision.
(b) Compare the resulting net incomes and comment on management's decision.CURRENT DESIGNS Current Designs faces a number of important decisions that require incremental analysis. Consider each of the following situations independently.
Problem 6:
Situation 1
Recently, Mike Cichanowski, owner and CEO of Current Designs, received a phone call from the president of a brewing company. He was calling to inquire about the possibility of Current Designs producing "floating coolers" for a promotion his company was planning. These coolers resemble a kayak but are about one-third the size. They are used to float food and beverages while paddling down the river on a weekend leisure trip.
The company would be interest in purchasing 100 coolers for the upcoming summer. It is willing to pay $250 per cooler. The brewing company would pick up the coolers upon completion of the order. Mike met with Diane Buswell, controller, to identify how much it would cost Current Designs to produce the coolers. After careful analysis, the following costs were identified.
Current Designs would be able to modify an existing mold to produce the coolers. The cost of these modifications would be approximately $2,000.
Instructions
(a) Prepare an incremental analysis to determine whether Current Designs should accept this special order to produce the coolers.
(b) Discuss additonal factors that Mike and Diane should consider if Current Designs is currently operating at full capacity.
Situation 2
Current Designs is always working to identify ways to increase efficiency while becoming more environmentally conscious. During a recent brainstorming session, one employee suggested to Diane Buswell, controller, that the company should consider replacing the current rotomold oven as a way to realize savings from reduced energy consumption. The oven operates on natural gas, using 17,000 therms of natural gas for an entire year. A new, energy-efficient rotomold oven would operate on 15,000 therms of natural gas for an entire year.
After seeking out price quotes from a few suppliers, Diane determined that it would cost approximately $250,000 to purchase a new, energy-efficient rotomold oven. She determines that the expected useful life of the new oven would be 10 years, and it would have no salvage value at the end of its useful life. Current Designs would be able to sell the current oven for $10,000
Instructions
(a) Prepare an incremental analysis to determine if Current Designs should purchase the new rotomold oven, assuming that the average price for natural gas over the next 10 years will be $0.65 per therm.
(b) Diane is concerned that natural gas prices might increase at a faster rate over the next 10 years. If the company projects that the average natural gas price of the next 10 years could be as high as $0.85 per therm, discuss how that might change your conclusion in (a).
Situation 3
One of Current Designs' competitive advantages is found in the ingenuity of its owners and CEO, Mike Cichanowski. His involvement in the design of kayak molds and production techniques has led to Current Designs being recognized as an industry leader in the design and production of kayaks. This ingenuity was evident in an improved design of one of the most important component of a kayak, the seat. The "Revolution Seating System" is one-of-a-kind, rotating axis seat that gives unmatched, full contact, under-leg support. It is quickly adjustable with a lever-lock system that allows for a customizable seat position that maximizes comfort for the rider.
Having just designed the "Revolution Seating System", Current Designs must now decide whether to produce the seats internally or buy them from an outside supplier. The costs for Current Designs to produce the seats are as follows.
Current Designs will need to produce 3,000 seats this year; 25% of the fixed overhead will be avoided if the seats are purchased from an outside vendor. After soliciting prices from outside suppliers, the company determined that it will cost $50 to purchase a seat from an outside vendor.
Instructions
(a) Prepare an incremental analysis showing whether Current Designs should make or buy the "Revolution Seating System."
(b) Would your answer in (a) change if the productive capacity released by not making the seats could be used to produce income of $20,000?