The Effect of Changes in Activity Part 2

QUESTION 8: Exercise 5-12 Multiproduct Break-Even Analysis Olongapo Sports Corporation distributes two premium golf balls—Flight Dynamic and Sure Shot. Monthly sales and the contribution margin ratios for the two products follow: Sales CM ratio Product Flight Total Dynamic Sure Shot $ 150,000 $250,000 $400,000 80% 36% ? Fixed expenses total $183,750 per month. Required: 1. Prepare a contribution format income statement for the company as a whole. 2. What is the company's break-even point in dollar sales based on the current sales mix? 3. If sales increase by $100,000 a month, by how much would you expect the monthly net operating income to increase? Explanation 1. Total contribution margin percentage: ($210,000 ÷ $400,000) = 52.5% 2. The break-even point for the company as a whole is: Dollar sales to break even = Fixed expenses Overall CM ratio = $183,750 = $350,000 0.525 3. The additional contribution margin from the additional sales is computed as follows: $100,000 × 52.5% CM ratio = $52,500 QUESTION 9: Exercise 5-13 Changes in Selling Price, Sales Volume, Variable Cost per Unit, and Total Fixed Costs Miller Company’s contribution format income statement for the most recent month is shown below: Sales (20,000 units) Variable expenses Contribution margin Fixed expenses Net operating income Total Per Unit $300,000 $ 15.00 180,000 9.00 120,000 $ 6.00 70,000 $ 50,000 Required: (Consider each case independently): 1. What is the revised net operating income if unit sales increase by 15%? 2. What is the revised net operating income if the selling price decreases by $1.50 per unit and the number of units sold increases by 25%? 3. What is the revised net operating income if the selling price increases by $1.50 per unit, fixed expenses increase by $20,000, and the number of units sold decreases by 5%? 4. What is the revised net operating income if the selling price per unit increases by 12%, variable expenses increase by 60 cents per unit, and the number of units sold decreases by 10%? Explanation 1. Total Sales (20,000 units × 1.15 = 23,000 units) Variable expenses Contribution margin Fixed expenses Net operating income Per Unit $345,000 $ 15.00 207,000 9.00 138,000 $ 6.00 70,000 $ 68,000 2. Total Sales (20,000 units × 1.25 = 25,000 units) Variable expenses Contribution margin Fixed expenses Net operating income $337,500 Per Unit $ 13.50 225,000 9.00 112,500 $ 4.50 70,000 $ 42,500 3. Total Per Unit Sales (20,000 units × 0.95 = 19,000 units) Variable expenses Contribution margin Fixed expenses Net operating income $313,500 $ 16.50 171,000 9.00 142,500 $ 7.50 90,000 $ 52,500 4. Total Sales (20,000 units × 0.90 = 18,000 units) Variable expenses Contribution margin Fixed expenses Net operating income $302,400 $ 16.80 172,800 9.60 129,600 $ 7.20 70,000 $ 59,600 Per Unit QUESTION 10: Exercise 5-14 Break-Even and Target Profit Analysis Lindon Company is the exclusive distributor for an automotive product that sells for $40 per unit and has a CM ratio of 30%. The company’s fixed expenses are $180,000 per year. The company plans to sell 16,000 units this year. Required: 1. What are the variable expenses per unit? 2. What is the break-even point in unit sales and in dollar sales? 3. What amount of unit sales and dollar sales is required to attain a target profit of $60,000 per year? 4. Assume that by using a more efficient shipper, the company is able to reduce its variable expenses by $4 per unit. What is the company’s new break-even point in unit sales and in dollar sales? What dollar sales is required to attain a target profit of $60,000? Explanation 1. Variable expenses: $40 × (100% – 30%) = $28 2. The break-even points in unit sales (Q) and dollar sales are computed as follows: Selling price Variable expenses Contribution margin $40 100% 28 70% $12 30% Profit = (Unit CM × Q) − Fixed expenses $0 = ($12 × Q) − $180,000 $12Q=$180,000 Q = $180,000 ÷ $12 per unit Q = 15,000 units In dollar sales: 15,000 units × $40 per unit = $600,000 3. The unit sales and dollar sales needed to attain the target profit are computed as follows: Profit = (Unit CM × Q) − Fixed expenses $60,000 = ($12 × Q) − $180,000 $12Q = $60,000 + $180,000 $12Q=$240,000 Q = $240,000 ÷ $12 per unit Q = 20,000 units In dollar sales: 20,000 units × $40 per unit = $800,000 4. The new break-even points in unit sales and dollar sales are computed as follows: The company’s new cost/revenue relation will be: Selling price Variable expenses ($28 − $4) Contribution margin 24 $40 100% 60% $16 40% Profit = (Unit CM × Q) − Fixed expenses $0 = ($40 − $24) × Q − $180,000 $16Q=$180,000 Q = $180,000 ÷ $16 per unit Q = 11,250 units In dollar sales: 11,250 units × $40 per unit = $450,000 The dollar sales required to attain the target profit is computed as follows: CM ratio × Sales − Fixed Profit= expenses $60,000 = 0.40 × Sales − $180,000 $0.40 × =$240,000 Sales Sales = $240,000 ÷ 0.40 Sales=$600,000 QUESTION 11: Exercise 5-15 Operating Leverage Magic Realm, Inc., has developed a new fantasy board game. The company sold 15,000 games last year at a selling price of $20 per game. Fixed expenses associated with the game total $182,000 per year, and variable expenses are $6 per game. Production of the game is entrusted to a printing contractor. Variable expenses consist mostly of payments to this contractor. Required: 1-a. Prepare a contribution format income statement for the game last year. 1-b. Compute the degree of operating leverage. 2. Management is confident that the company can sell 18,000 games next year (an increase of 3,000 games, or 20%, over last year). Given this assumption: a. What is the expected percentage increase in net operating income for next year? b. What is the expected amount of net operating income for next year? (Do not prepare an income statement; use the degree of operating leverage to compute your answer.) Explanation 1-a. Sales: 15,000 games × $20 = $300,000 1-b. The degree of operating leverage is: Degree of operating leverage= Contribution margin Net operating income = $210,000 $28,000 = 7.5 2. a. Sales of 18,000 games represent a 20% increase over last year’s sales. Because the degree of operating leverage is 7.5, net operating income should increase by 7.5 times as much, or by 150% (7.5 × 20%). b. The expected total dollar amount of net operating income for next year would be: Last year's net operating income Expected increase in net operating income next year (150% × $28,000) Total expected net operating income $28,000 42,000 $70,000