activity based questions

Cost-Volume-Profit Analysis, Multiple Products

76. Boise Company manufactures and sells three products: Good, Better, and Best. Annual fixed costs are $3,315,000, and data about the three products follow.

	Good	Better	Best
Sales mix in units	30%	50%	20%
Selling price	$250		$350		$500
Variable cost	100		150		250

Required:

A. Determine the weighted-average unit contribution margin.

B. Determine the break-even volume in units for each product.

C. Determine the total number of units that must be sold to obtain a profit for the company of $234,000.

D. Assume that the sales mix for Good, Better, and Best is changed to 50%, 30%, and 20%, respectively. Will the number of units required to break-even increase or decrease? Explain. Hint: Detailed calculations are not needed to obtain the proper solution.

Cost-Volume-Profit Analysis, Multiple Products

77. Alphabet Corporation sells three products: J, K, and L. The following information was taken from a recent budget:

	J	K	L
Unit sales	40,000	130,000	30,000
Selling price	$60	$80	$75
Variable cost	40	65	50

Total fixed costs are anticipated to be $2,450,000.

Required:

A. Determine Alphabet's sales mix.

B. Determine the weighted-average contribution margin.

C. Calculate the number of units of J, K, and L that must be sold to break even.

D. If Alphabet desires to increase company profitability, should it attempt to increase or decrease the sales of product K relative to those of J and L? Briefly explain.

Traditional and Contribution Income Statements

78. Price Publications, Inc., produces and sells business books. The results of the company's operations for the year ended December 31, 20x1, are given below.

Sales revenue	$400,000
Manufacturing costs:
Fixed	100,000
Variable	200,000
Selling costs:
Fixed	10,000
Variable	20,000
Administrative costs:
Fixed	24,000
Variable	6,000

Required:

A. Prepare a traditional income statement for the company.

B. Prepare a contribution income statement for the company.

C. Which income statement (traditional or contribution) would an operating manager most likely use to study changes in operating income that are caused by changes in sales? Why?

Traditional and Contribution Income Computations

79. High Point Corporation reported sales revenues of $1,850,000 for the period just ended. Cost of goods sold, selling expenses, and administrative expenses totaled $1,200,000, $280,000, and $170,000, respectively. A detailed analysis of the latter three amounts revealed respective fixed cost components of $780,000, $60,000, and $130,000.

Required:

A. Determine the amounts that High Point would report on a traditional income statement for (1) gross margin, (2) contribution margin, and (3) net income.

B. Determine the amounts that High Point would report on a contribution income statement for (1) gross margin, (2) contribution margin, and (3) net income.

C. Which of the two income statements (traditional or contribution) is more useful for studying a company's cost-volume-profit relationships.

Cost Structure, Operating Leverage

80. Once upon a time, two brothers (Barry and Larry) dreamt about owning and operating companies in the same line of business. Barry believed in maintaining a very large, highly efficient manual labor force; Larry, on the other hand, favored automated-production processes. One business was located in Madison and the other was located in Austin. Recent data follow.

	Madison		Austin
Sales	$2,000,000		$2,000,000
Contribution margin	1,700,000		400,000
Net income	150,000		150,000

Required:

A. Which of the two businesses, Madison or Austin, has the highest level of (1) variable cost and (2) highest level of fixed cost? Explain how you determined your answer.

B. Determine the probable owner of the firm located in (1) Madison and (2) Austin. Briefly explain your logic.

C. Compute the operating leverage factor for Madison and Austin.

D. Suppose that both Madison and Austin had the opportunity to increase sales by 10%. Which of the two locations would experience a larger percentage change in net income? Why?

Operating Leverage

81. Metropolitan Enterprises is studying the addition of a new product that would have an expected selling price of $160 and expected variable cost of $100. Anticipated demand is 8,000 units.

A new salesperson must be hired because the company's current sales force is working at capacity. Two compensation plans are under consideration:

Plan 1: An annual salary of $32,000 plus 10% commission based on gross sales dollars

Plan 2: An annual salary of $140,000 and no commission

Required:

A. What is meant by the term "operating leverage"?

B. Calculate the contribution margin and net income of the two plans at 8,000 units.

C. Compute the operating leverage factor of the two plans at 8,000 units. Which of the two plans is more highly leveraged? Why?

D. Assume that a general economic downturn occurred during year no. 2, with product demand falling from 8,000 to 6,400 units. By using the operating leverage factors, determine and show which plan would produce a larger percentage decrease in net income.

DISCUSSION QUESTIONS

Cost-Volume-Profit Analysis

82. The BoSan Corporation makes major household appliances such as refrigerators, stoves, and dishwashers. Sales are heavily dependent on the number of housing starts and the level of disposable income. Next year, the number of housing starts in the Central region is expected to be the same as this year's; however, about two-thirds of these starts will be for rental apartments as compared to an historical average of one-third. The remaining housing starts will be for single-family homes and upscale condominiums.

BoSan generally makes two models of each product: Economy (fully functional, but with few special features) and Prestige (with the most popular special features). BoSan assumes a product mix of 40% Economy and 60% Prestige.

Required:

A. Explain how a cost-volume-profit (CVP) analysis may be used by management.

B. One of the assumptions that underlies CVP analysis is a constant sales mix over the relevant range of activity. What are three other assumptions of CVP analysis?

C. Describe how the percentage change in rental units could create a problem with BoSan's CVP analysis.

Contribution Margin

83. Maddox Corporation's product no. H647 has a negative contribution margin. How can such a situation arise? Should the company continue to stock and sell product no. H647? Explain.

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Cost Structure and Operating Leverage

84. Operating leverage is an important concept for many companies.

Required:

A. Define operating leverage.

B. Assume that a firm pays no income taxes and is planning to increase its selling price. If sales volume in units does not change, what will be the effect on the operating leverage factor? Explain.

C. Assume that another firm that pays no income taxes is planning to increase fixed manufacturing costs and decrease variable manufacturing costs per unit. At the present volume of production, the total manufacturing costs will be unchanged. What will this change do to the operating leverage factor? Explain.

Advanced Manufacturing Effects on Cost-Volume-Profit Relationships

85. Many firms are moving toward flexible manufacturing systems and adopting the just-in-time (JIT) philosophy.

Required:

A. How is cost behavior altered in the typical flexible manufacturing environment as compared to a traditional manufacturing system? What is the impact on the break-even point? Explain.

B. One of the assumptions underlying cost-volume profit analysis is that sales volume and production volume are equal. Stated another way, inventories are assumed to remain constant. Is this assumption likely to be violated under an ongoing JIT philosophy? Explain.