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Termpaperwarehouse

1163 words - 5 pages

Problem 6-26 (30 minutes)
1. The contribution margin per unit on the first 16,000 units is:

Per Unit
Sales price \$3.00
Less variable expenses 1.25
Contribution margin \$1.75

The contribution margin per unit on anything over 16,000 units is:

Per Unit
Sales price \$3.00
Less variable expenses 1.40
Contribution margin \$1.60

Thus, for the first 16,000 units sold, the total amount of contribution margin generated would be:

16,000 units × \$1.75 per unit = \$28,000

Since the fixed costs on the first 16,000 units total \$35,000, the \$28,000 contribution margin above is not enough to permit the com-pany to break even. Therefore, in order to break even, more ...view middle of the document...

The desired monthly profit would be:

25% × (\$35,000 + \$1,000) = \$9,000

Thus,

Therefore, the company must sell 6,000 units above the break-even point to earn a profit of \$9,000 each month. These units, added to the 21,000 units required to break even, would equal total sales of 27,000 units each month.

Problem 6-27 (30 minutes)
1. The contribution margin per sweatshirt would be:

Selling price \$13.50
Less variable expenses:
Purchase cost of the sweatshirts \$8.00
Commission to the student salespersons 1.50 9.50
Contribution margin \$ 4.00

Since there are no fixed costs, the number of unit sales needed to yield the desired \$1,200 in profits can be obtained by dividing the target \$1,200 profit by the unit contribution margin:

2. Since an order has been placed, there is now a “fixed” cost associated with the purchase price of the sweatshirts (i.e., the sweatshirts can’t be returned). For example, an order of 75 sweatshirts requires a “fixed” cost (investment) of \$600 (75 sweatshirts × \$8.00 per sweatshirt = \$600). The variable cost drops to only \$1.50 per sweatshirt, and the new contribution margin per sweatshirt becomes:

Selling price \$13.50
Less variable expenses (commissions only) 1.50
Contribution margin \$12.00

Since the “fixed” cost of \$600 must be recovered before Mr. Hooper shows any profit, the break-even computation would be:

If a quantity other than 75 sweatshirts were ordered, the answer would change accordingly.

Problem 6-28 (60 minutes)
1. The income statements would be:

Present Proposed
Amount Per Unit % Amount Per Unit %
Sales \$450,000 \$30 100% \$450,000 \$30 100%
Less variable expenses 315,000 21 70 180,000 12* 40
Contribution margin 135,000 \$ 9 30% 270,000 \$18 60%
Less fixed expenses 90,000 225,000
Net operating income \$ 45,000 \$ 45,000

*\$21 – \$9 = \$12.

2. Present Proposed
a. Degree of operating leverage

b. Break-even point in dol-lars \$300,000 \$375,000

c. Margin of safety = Total sales – Break-even sales:
\$450,000 – \$300,000 \$150,000
\$450,000 – \$375,000 \$75,000
Margin of safety per-centage = Margin of safety ÷ Total sales:
\$150,000 ÷ \$450,000 33 1/3%
\$75,000 ÷ \$450,000 16 2/3%

Problem 6-28 (continued)
3. The major...

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