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Review 18-1 Helena Company reports the following total costs at two levels of production.
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Review 18-1

Helena Company reports the following total costs at two levels of production.

Classify each cost as variable, fixed, or mixed.

   

5,000 Units

 

10,000 Units

   

Indirect labor

 

$ 3,000

 

$ 6,000

   

Property taxes

 

7,000

 

7,000

   

Direct labor

 

28,000

 

56,000

   

Direct materials

 

22,000

 

44,000

   

Depreciation

 

4,000

 

4,000

   

Utilities

 

5,000

 

7,000

   

Maintenance

 

9,000

 

11,000

   

 

Exercise 18-4

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Family Furniture Corporation incurred the following costs.

Identify the costs as variable, fixed, or mixed.

1.

 

Wood used in the production of furniture.

 

2.

 

Fuel used in delivery trucks.

 

3.

 

Straight-line depreciation on factory building.

 

4.

 

Screws used in the production of furniture.

 

5.

 

Sales staff salaries.

 

6.

 

Sales commissions.

 

7.

 

Property taxes.

 

8.

 

Insurance on buildings.

 

9.

 

Hourly wages of furniture craftsmen.

 

10.

 

Salaries of factory supervisors.

 

11.

 

Utilities expense.

 

12.

 

Telephone bill.

 

 

Exercise 18-6

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PCB 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

 

18,000

Utilities

 

2,100

Property taxes

 

1,000

Indirect labor

 

4,500

Supervisory salaries

 

1,900

Maintenance

 

1,100

Depreciation

 

2,400

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Identify the above costs as variable, fixed, or mixed.

Cost

   

Direct materials

 

Direct labor

 

Utilities

 

Property taxes

 

Indirect labor

 

Supervisory salaries

 

Maintenance

 

Depreciation

 

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Your answer is correct.

Calculate variable costs per unit, variable cost per unit for utilities and variable cost per unit for maintenance. 

Variable cost per unit

 

Variable cost per unit for utilities

 

Variable cost per unit for maintenance

 

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Your answer is correct.

Calculate the expected costs when production is 5,000 units.

Cost to produce 5,000 units

 

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Do It! Review 18-2

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Westerville Company accumulates the following data concerning a mixed cost, using units produced as the activity level.

   

Units Produced

 

Total Cost

March

 

10,000

 

$18,000

April

 

9,000

 

16,650

May

 

10,500

 

18,580

June

 

8,800

 

16,200

July

 

9,500

 

17,100

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Compute the variable cost per unit using the high-low method. 

Variable cost per unit

 

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Compute the fixed cost elements using the high-low method.

Fixed cost

 

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Estimate the total cost if the company produces 9,200 units.

Total cost to produce 9,200 units

 

 

Exercise 18-3

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The controller of Furgee Industries has collected the following monthly expense data for use in analyzing the cost behavior of maintenance costs.

Month

 

Total Maintenance Costs

 

Total Machine Hours

January

 

$2,500

 

300

February

 

3,000

 

350

March

 

3,600

 

500

April

 

4,500

 

690

May

 

3,200

 

400

June

 

4,900

 

700

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Determine the variable cost components using the high-low method. 

Variable cost per machine hour

   

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Determine the fixed components using the high-low method. 

Total fixed costs

   

 

Exercise 18-13

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Cannes Company has the following information available for September 2014.

Unit selling price of video game consoles

 

$400

Unit variable costs

 

$275

Total fixed costs

 

$52,000

Units sold

 

600


(a) Compute the contribution margin per unit.

Contribution margin per unit

 


(b) Prepare a CVP income statement that shows both total and per unit amounts.

CANNES COMPANY
CVP Income Statement
For the Month Ended September 30, 2014

   

Total

 

Per Unit


(c) Compute Cannes' break-even point in units.

Break-even point in units

   

 units


(d) Prepare a CVP income statement for the break-even point that shows both total and per unit amounts.

CANNES COMPANY
CVP Income Statement
For the Month Ended September 30, 2014

   

Total

 

Per Unit

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Do It! Review 18-3

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Larissa Company has a unit selling price of $250, variable cost per unit of $170, and fixed costs of $140,000.

Compute the break-even point in units using (a) the mathematical equation and (b) contribution margin per unit.

   

(a) Mathematical Equation

 

(b) Contribution margin per unit

 

Break-even point

   

 units

   

units


 

               

 

Exercise 18-8

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All That Blooms provides environmentally friendly lawn services for homeowners. Its operating costs are as follows.

Depreciation

 

$1,400

 per month

Advertising

 

$200

 per month

Insurance

 

$2,000

 per month

Weed and feed materials

 

$12

 per lawn

Direct labor

 

$10

 per lawn

Fuel

 

$2

 per lawn


All That Blooms charges $60 per treatment for the average single-family lawn.

Determine the company’s break-even point in (a) number of lawns serviced per month and (b) dollars.

(a)

 

Break-even point

 

(b)

 

Break-even point

 

 

Exercise 18-9

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The Green Acres Inn is trying to determine its break-even point. The inn has 50 rooms that it rents at $60 a night. Operating costs are as follows.

Salaries

 

$6,200

 per month

Utilities

 

$1,100

 per month

Depreciation

 

$1,000

 per month

Maintenance

 

$100

 per month

Maid service

 

$11

 per room

Other costs

 

$28

 per room


Determine the inn’s break-even point in (1) number of rented rooms per month and (2) dollars.

(1)

 

Break-even point

 

(2)

 

Break-even point

 

 

Exercise 18-10

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In the month of March, Style Salon services 560 clients at an average price of $120. During the month, fixed costs were $21,024 and variable costs were 60% of sales.

(a) Determine the contribution margin in dollars, per unit, and as a ratio.

Contribution margin

 

Contribution margin per unit

 

Contribution margin ratio

 


(b) Using the contribution margin technique, compute the break-even point in dollars and in units.

Break-even sales

 

Break-even sales

 

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Exercise 18-11

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Kare Kars provides shuttle service between four hotels near a medical center and an international airport. Kare Kars 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

 

860

 

9,000

Contribution margin

     

27,000

Fixed costs

       

    Salaries

 

12,700

   

    Depreciation

 

1,300

   

    Insurance

 

1,000

 

15,000

Net income

     

$12,000


(a) Calculate the break-even point in (1) dollars and (2) number of fares.

(1)

 

Break-even point

 

(2)

 

Break-even point

 


(b) Without calculations, determine the contribution margin at the break-even point.

Contribution margin at the break-even point

 

 

Exercise 18-12

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In 2013, Manhoff Company had a break-even point of $350,000 based on a selling price of $5 per unit and fixed costs of $112,000. In 2014, the selling price and the variable cost per unit did not change, but the break-even point increased to $420,000.

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Compute the variable cost per unit and the contribution margin ratio for 2013. 

Variable cost per unit

 

Contribution margin ratio

 

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Compute the increase in fixed costs for 2014. 

Increase in fixed cost

 

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Exercise 18-14

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Naylor Company had $210,000 of net income in 2013 when the selling price per unit was $150, the variable costs per unit were $90, and the fixed costs were $570,000. Management expects per unit data and total fixed costs to remain the same in 2014. The president of Naylor Company is under pressure from stockholders to increase net income by $52,000 in 2014.

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Compute the number of units sold in 2013.

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Compute the number of units that would have to be sold in 2014 to reach the stockholders’ desired profit level.

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Assume that Naylor Company sells the same number of units in 2014 as it did in 2013. What would the selling price have to be in order to reach the stockholders’ desired profit level? 

New selling price

 

 

Exercise 18-15

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Cottonwood Company reports the following operating results for the month of August: sales $400,000 (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 or units sold.

2.

 

Reduce variable costs to 45% of sales.


Compute the net income to be earned under each alternative. 

1.

 

Net Income

 

2.

 

Net Income

 


Which course of action will produce the highest net income? Entry field with correct answer

 

Do It! Review 18-4

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Presto Company makes radios that sell for $30 each. For the coming year, management expects fixed costs to total $220,000 and variable costs to be $18 per unit. 
(a) Compute the break-even point in dollars using the contribution margin (CM) ratio.

Break-even point

 


(b) Compute the margin of safety ratio assuming actual sales are $800,000. 

Margin of safety

 


(c) Compute the sales dollars required to earn net income of $140,000.

Required sales

 

 

Exercise 18-17

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Oak Bucket Co., a manufacturer of wood buckets, had the following data for 2013.

Sales

 

2,600

 units

Sales price

 

$40

 per unit

Variable costs

 

$16.00

 per unit

Fixed costs

 

$19,500

 

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What is the contribution margin ratio?

Contribution margin ratio

 

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What is the break-even point in dollars?

Break-even point

 

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What is the margin of safety in dollars and as a ratio? 

Margin of safety

   

Margin of safety ratio

 

 %

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If the company wishes to increase its total dollar contribution margin by 30% in 2013, by how much will it need to increase its sales if all other factors remain constant? 

Total increase in sales required:

 

 

Problem 18-2A

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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 2014, management estimates the following revenues and costs.

Sales

 

$ 1,800,000

 

Selling expenses—variable

 

$ 70,000

Direct materials

 

430,000

 

Selling expenses—fixed

 

65,000

Direct labor

 

360,000

 

Administrative expenses—variable

 

20,000

Manufacturing overhead—variable

 

380,000

 

Administrative expenses—fixed

 

60,000

Manufacturing overhead—fixed

 

280,000

       

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Prepare a CVP income statement for 2014 based on management’s estimates.

JORGE COMPANY
CVP Income Statement (Estimated)
For the Year Ending December 31, 2014

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Calculate variable cost per bottle. 

Variable cost per bottle

 

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Compute the break-even point in (1) units and (2) dollars. 

(1)

 

Compute the break-even point

   

(2)

 

Compute the break-even point

   

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Compute the contribution margin ratio and the margin of safety ratio. 

Contribution margin ratio

 

 %

Margin of safety ratio

 

 %

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Determine the sales dollars required to earn net income of $ 180,000 . 

Required sales dollars

   

 

Problem 18-3A

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Dousmann Corp.’s sales slumped badly in 2014. For the first time in its history, it operated at a loss. The company’s income statement showed the following results from selling 500,000 units of product: sales $2,500,000; total costs and expenses $2,600,000; and net loss $100,000. Costs and expenses consisted of the amounts shown below.

   

Total

 

Variable

 

Fixed

Cost of goods sold

 

$2,140,000

 

$1,540,000

 

$600,000

Selling expenses

 

250,000

 

92,000

 

158,000

Administrative expenses

 

210,000

 

68,000

 

142,000

   

$2,600,000

 

$1,700,000

 

$900,000


Management is considering the following independent alternatives for 2015.

1.

 

Increase unit selling price 20% with no change in costs, expenses, and sales volume.

2.

 

Change the compensation of salespersons from fixed annual salaries totaling $150,000 to total salaries of $60,000 plus a 5% commission on sales.


(a) Compute the break-even point in dollars for 2014. 

Break-even point

   


(b) Compute the contribution margin under each of the alternative courses of action. 

Contribution margin for alternative 1

 

Contribution margin for alternative 2

 



Compute the break-even point in dollars under each of the alternative courses of action.

Break-even point for alternative 1

 

Break-even point for alternative 2

 


Which course of action do you recommend? Entry field with correct answer

 

Problem 18-4A

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Mary Willis is the advertising manager for Bargain 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 $24,000 in fixed costs to the $270,000 currently spent. In addition, Mary 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 $24 per pair of shoes. Management is impressed with Mary’s ideas but concerned about the effects that these changes will have on the break-even point and the margin of safety.

(a) Compute the current break-even point in units, and compare it to the break-even point in units if Mary’s ideas are used]

Current break-even point

   

 pairs of shoes

New break-even point

 

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 pairs of shoes


(b) Compute the margin of safety ratio for current operations and after Mary’s changes are introduced. 

Current margin of safety ratio

   

 %

New margin of safety ratio

 

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 %


(c) Prepare a CVP income statement for current operations and after Mary’s changes are introduced.

 
         
         
         
         
         
         

 

Would you make the changes suggested?

   

 

 

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