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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


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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