Selected Exercises in preparation of Question 3 on BA 6601 (Section 9) Compressive Exam Question 1 The Atkins Company manufactures and sells one product. The sales price, $30 per unit, remains constant regardless of volume. Last year’s sales were 15,000 units and operating profits (Profit before tax) were $200,000. Fixed costs depend on production levels, as the following table showed. Variable cost per unit are 40 percent higher for level 2 (day and night shift) than for level 1 (day shift only). This is because additional labour costs result primarily from higher wages required to employ workers for the night shift.
Annual production range (in units)
Annual total fixed costs
Level 1 (Day shift)
0 - 20,000
$ 100,000
Level 2 (Day and night shifts)
20,001 - 36,000 (Max capacity)
$ 164,000
Atkins expects last year’s cost structure and selling price not to change in this year. The company is able to sells all unit it
produces. Required :
1. Compute the contribution contribution margin margin per unit for last year year for day and night shift. 2. Compute the break-even break-even points in units for last year year for each of the two production production level. 3. Compute the volume in units that will maximise operating profits. profits.
Question 2 The leaded Bottoms Company manufactures manufactures kewpie dolls for carnivals and sells them for $2 per kewpie. The variable costs of manufacturing and selling are $1.00 and $0.25 per kewpie, respectively. The fixed costs are based upon the following ranges of activity. Range of Activity
0 - 40,000 kewpies
Fixed costs
$ 35,000
40,001 - 75,000 kewpies
50,000
75,001 - 125,000 kewpies (maximum capacity)
70,000
During this year Leaded Bottoms produced and sold 45,000 kewpies. Required :
1.
Determine the net income for Lead Bottoms for this year.
2.
How many additional units (above the 45,000) would Leaded Bottoms need to sell in order to break- even if the additional units will be sold for only $1.90 ?
3.
How many additional units (above the 45,000) would Leaded Bottoms need to sell in order to generate a profit of $6,000 if the additional units will be sold for only $1.90 ?
4.
What is the maximum profit that could be earned by Leaded Bottom [disregard (2) and (3)]?
5.
Leaded Bottoms wants to produce and sell 85,000 units but does not want to incur any additional fixed costs. The company production supervisor decided to pay double time for labour in order to produce the 10,000 kewpies above the second range of activity. If the labour costs are three-fourths of the variable manufacturing costs, determine the profit that the company should earn.
6.
For the next year , it is proposed to add another product line (product Y) whose selling
price
would be $ 3 per unit with a variable cost ratio of 60 percent. Total fixed costs for production of both product X and Y are not subjected to step fixed cost scheme but it is collectively estimated at $100,000. The sales sales mix of X : Y would be 7 : 3. The company is subjected to an an income tax level of 30 percent. At what level of sales (in dollar) next year would the company achieve target profit after tax amount of $14,000 ?
Question 3 Bell Bang Company furnishes the following income statement : Bell Bang Company Income Statement year ended For the first half of the year ended 30 June 20xx
Sales
$ 200,000
Less : Cost of goods sold : Direct materials
30,000
Direct labor
35,000
Factory overhead (of which $22,000 is fixed expense)
37,000
Gross profit
102,000 98,000
Less : Operating expense : Salaries expense
13,000
Commission expense
20,000
Depreciation Depreciat ion expense Advertising expense
5,000 10,000
48,000
Income before tax
50,000
Less : Income tax expense
20,000
Net income
30,000
Required :
Answer which following questions independently 1. Reconstruct the above income income statement into contribution margin margin income statement. 2. For the first half of the year ended ended 30 June 20xx, compute : 2.1 Contribution margin ratio 2.2 Break-even point in dollars. 2.3 Margin of safety ratio 3. Compute the expected expected sales sales volume for the second half of the year ended ended 31 December 20xx if Bell Bang had projected a loss of $10,000 for the second half of the year, assuming that sale price and fixed expenses remain unchanged. 4. How much additional additional sales from (3) would Bell Bang need to make in order to break-even break-even if the variable cost of the additional sales is decreased by 20%.
5. How much sales should should Bell Bang make for for the whole year ending ending 31 December to generate a net profit after tax of $120,000? 6. If the sales sales commission in next year are are discontinued in exchange for additional annual annual salaries of $25,000. How much sales would have to make for the next whole year to to generate a net profit after tax of $120,000.
Question 4 Mayberry owns and operates a BEAUTIFUL CUT company, a small salon. The only service that is offered is haircuts at a price of $8 a clip. Tip is also another source source of the company which average average about 15% of the price. The number of hairdressers (in addition to Mayberry) that Mayberry employs depends on the number of estimated haircuts for the year. As long as Mayberry expects fewer than 4,000 cuts in a year, he will operate the shop by himself. In case he estimated the number of haircuts will exceed exceed 4,000 cuts, he will hire additional hairdressers (employees) to meet following yearly demands :
Number of additional employees
Expected number of haircuts for year
1
4,001 - 8,000
2
8,001 - 15,000
All hairdressers including Mayberry Mayberry shares all work equally. For example, if the numbers numbers of haircuts is 12,000 cuts, Mayberry will hire 2 additional employees and thereby each hairdresser (including Mayberry) will work for 12,000 3 = 4,000 haircuts. The compensations that Mayberry pay to his individual employee employee are as follows :
1)
Salary amount of $5,000 per year,
2)
Commission at the rate of 25% of the price. Payment of commission is made to the employees for his or her services provided to customers.
3)
Tip, which average about 15% of the price. Payment of tip is made to the employees for his or her services provided to customers.
As being the owner of the company, Mayberry takes no salary, commission and tip for his work. The other costs of operating the company are $6,000 per year and $2 per haircut. Required :
1.
If the number of haircuts was less than 4,000, determine the number of haircuts that enable the company to reach break-even point.
2.
If the number of haircuts is expected to increase to 9,000, what will be the profit (loss) for the company (Mayberry’s income)?
Question 5 Marston Corporation manufactures manufactures pharmaceutical products that are sold through a net work of independent i ndependent sales agents located in the United States and Canada. The agents are currently paid an 18% commission on sales. Marston used this percentage in preparing the following budgeted income statement statement for the fiscal year ending 30 June 20xx : (In thousands) Sales
26,000
Cost of goods sold : Variable Fixed
11,700 2,870
Gross margin
14,570 11,430
Marketing & administrative expenses : Sales commissions Fixed marketing expenses Fixed administrative administr ative expenses
4,680 750 1,850
7,280
Operating Operatin g income
4,150
Interest expenses
650
Net income before taxes
3,500
Income taxes
1,400
Net income
2,100
Since preparing this budgeted income statement, Marston has learned that its agents are demanding an increase i ncrease in the commission rate to 23% for the upcoming year. As a result, Marston’s president has decided to investigate t he possibility of hiring it own sales staff in place of the network of sales agents and has asked Tom Ross, Marston’s
controller, to gather information on the cost associated with this alternative. Ross estimates that Marston will have to hire eight salespeople to cover the current market area. The annual payroll cost of each of these employees will average $80,000, including fringe benefit costs. Travel and entertainment cost are expected to total $600,000 for the year, and the annual cost of sales manager and sales secretary will be $150,000. In addition to their salary, the eight salespeople will each earn commissions at the rate of 10% on the first $2 million in sales and 15% on all sales over $2 million. Ross expects that all eight salespeople will exceed the $2 million and that sales will be at the level originally projected ($26,000,000). Ross believes that Marston should also increase its marketing budget by $500,000.
Required : 1) Calculate Marston Corporation’s breakeven point in sales doll ars for the fiscal year ending 30 June
20xx if the company hires its own sales force and increase its marketing costs. 2) If Marston Corporation Corporation continues continues to sell through its network of sales sales agent and and pays the higher commission commission rate, determine how many percent increase of dollar sales for the fiscal year ending 30 June 20xx would be to generate the same net income as projected in the budgeted income statement statement presented above.
Solution to Cost Volume Profit Question Question 1 1) Day shift 30(15,000) - 15,000VC - 100,000 = 200,000 VC = 10 CMU = P - VC = 30 - 10 = 20 Night shift
VC = 140% 10 = 14 CMU = 30 - 14 = 16 2) Break-even point of production level 1 S - (10/30)S - 100,000 = 0 S = 150,000 Q = 150,000/30 = 5,000 Break-even point of production level 2
Let X = number of units in excess of 20,000 units 30(20,000 + x) – [(10)(20,000) + 14x] - 164,000 = 0 x = 19,000 Q + x = 20,000 + 19,000 = 39,000 3) Q = 20,000
Q = 36,000
Sales
600,000
1,080,000
Total variable expenses
200,000
424,000
Total contribution margin
400,000
656,000
Total fixed expenses
100,000
164,000
Operating profits
300,000
492,000
The volume volume that that will maximise operating profits = 36,000 units
Question 2 1) 2(45,000) - 1.25(45,000) - 50,000 = -16,250
2) Let x = additional additional units above above 45,000 45,000 units [(245,000) +( 1.90x)] – [1.25(45,000 + x)] - 50,000 = 0 x = 25,000 Q + x = 45,000 + 25,000 = 70,000
70,000 units is
valid for 50,000 fixed expenses
The additional units (above 45,000) would lead bottoms need to sell in order to break even is 25,000 units
3) Let x = additional additional units above above 45,000 45,000 units [(245,000) +( 1.90x)] – [1.25(45,000 + x)] - 50,000 = 6,000 x = 34,231 Q + x = 45,000 + 34,231 = 79,231 79,231 units is invalid for 50,000 fixed expenses try at 70,000 fixed Expenses [(245,000) + (1.90x)] – [1.25(45,000 + x)] - 70,000 = 6,000 x = 65,000 Q = 45,000 + 65,000 = 110,000
110,000 units is valid
for 70,000 fixed expenses
Therefore, the additional unit (above 45,000) would lead bottoms need to sell in order to generate profit of 6,000 are 65,000 units 4) Q = 40,000
Q = 75,000
Q = 125,000
Sales
80,000
150,000
250,000
Total variable expenses
50,000
93,750
156,250
Total contribution contrib ution margin
30,000
56,250
93,750
Total fixed expenses
35,000
50,000
70,000
Operating profits
(5,000)
6,250
23,750
5) Sales (85,000@2)
170,000
Total variable expenses [(75,
[email protected] + 10,000@[1.25+(1*3/4)] 10,000@[1.25 +(1*3/4)]
113,750
Total contribution margin
56,250
Total fixed expenses
50,000
Operating profits
6,250
6) Product X
P
= 2, VC per unit = 1.25
Product Y P = 3, VC per unit = 3*60% = 1.8 TFC for both products = 100,000 Sales mix X : Y = 7 : 3 Tax rate = 30%
Let Q = the number of composite composite units sold (X and Y in bundle) [[(2 – 1.25)(7/10) + (3 – 1.8)(3/10)]Q – 100,000](1 – 0.3) = 14,000 Q = 135,594 units units of product X sold = 135,594(7/10) = 94,916
sales in dollar = (94,916)(2) =
unit of product Y sold = 135,594(3/10) = 40,678
sales
in dollar = (40,678)(3) =
Total sales
=
189,832 122,034 311,866
Question 3 1) Bell Bang Company Income Statement For the first half of the year ended 30 June 20xx Sales
200,000
Less : Variable expenses : Direct materials
30,000
Direct labor
35,000
Variable overhead
15,000
Commission expense
20,000
Total contribution margin
100,000 100,000
Less : Fixed expenses : Fixed overhead
22,000
Salaries expense
13,000
Depreciation Depreciat ion expense
5,000
Advertising expense
10,000
50,000
Income before tax
50,000
Less : Income tax 40%
20,000
Net income
30,000
2) Contribution margin ratio = 100,000 / 200,000 = 0.50 Break-even point in dollar : S - 0.50S - 50,000 = 0 S = 100,000 Margin of safety ratio = (200,000 - 100,000) / 200,000 = 0.50
3) S - 0.50S - 50,000 = -10,000 S = 80,000
4) Let x = additional sales sales (80,000 + x) - (40,000 + 0.40x) - 50,000 = 0 x = 16,667
5) Tax rate = 20,000 / 50,000 = 0.4 0.4 [S - 0.50S - (50,000 2)] (1-0.40) = 120,000 S = 600,000
6) [S - 0.40S - 125,000] (1-0.40) = 120,000 S = 541,667
Question 4
1)
S – [2/(8 + (8*0.15)]S - 6,000 = 0 S = 7,666.67 Q = 7666.67 / (8 + (8*0.15)) = 834
2) Hair cut revenue (9,000@8)
72,000
Tip [3,000@(8*0.15)]
3,600
Total revenue
75,600
Variable expenses : Commission (6,000@2)
12,000
Other operating operatin g expense (9,000@2)
18,000
Total contribution margin
30,000 45,600
Fixed expenses : Salaries (2@5,000) Other operating expense Operating profits
10,000 6,000
16,000 29,600
Question 5 Current situation : Sales = 26,000,000 26,000,000 : Total variable expenses = 11,700,000 + 4,680,000 = 16,380,000 : Total fixed expense
= 2,870,000 + 750,000 + 1,850,000 + 650,000 = 6,120,000
: Tax rate = 1,400,000 / 3,500,000 = 0.40 New situation ( Increasing commission) commission) : Sales = 26,000,000 : Total variable expense = 11,700,000 + [(23%/18%)*4,680,000] [(23%/18%)*4,680, 000] = : Total fixed expense
17,680,000
= 2,870,000 + 750,000 + 1,850,000 + 650,000 = 6,120,000
: Tax rate = 0.40 (unchanged) New situation : (Arranging own sale force)
Sales = 26,000,000 Variable expense : Sales dollar
Variable cost ratio (based on sales at 2,600,000)
0 - 2,000,000
[11,700,000 + (26,000,000*10%)]/ (26,000,000*10%) ]/ 26,000,000 = 0.55
2,000,000 and over
[11,700,000 + (26,000,000*15%)]/ (26,000,000*15%) ]/ 26,000,000 = 0.60
Total fixed expense = 2,870,000 + (750,000 + 500,000) + 1,850,000 + 650,000 + 640,000 + 600,000 + 150,000 = 8,010,000
1)
Let S = Sales dollars above $ 2,000,000 (2,000,000 + S) –[0.55(2,000,000) [0.55(2,000,000 ) + 0.6S] - 8,010,000 = 0 S = 17,775,000 Total sales at breakeven point = 2,000,000 2,000 ,000 + 17,775,000 = 19,775,000
2)
S – (17,680,000 / 26,000,000)S - 6,120,000 = 3,500,000 S = 30,062,500 Therefore sales have to increase by (30,062,500 – 26,000,000)/26,000,000 = 15.625%
