Problem 19-6B

Cost Behavior and Cost-Volume-Profit Analysis Warren / Reeve / Duchac Problem 19-6B solution

Contribution margin, break-even sales, cost-volume-profit chart, margin of safety, and operating leverage

Steamboat Co. expects to maintain the same inventories at the end of 2010 as at the beginning of the year. The total of all production costs for the year is therefore assumed to be equal to the cost of goods sold. With this in mind, the various department heads were asked to submit estimates of the costs for their departments during 2010. A summary report of these estimates is as follows:

It is expected that 30,000 units will be sold at a price of $60 a unit. Maximum sales within the relevant range are 45,000 units.

1. Prepare an estimated income statement for 2010.

STEAMBOAT CO.
Estimated Income Statement
For the Year Ended December 31, 2010

Sales 1,800,000
Cost of goods sold:
Direct Materials 450,000
Direct Labor 300,000
Factory Overhead 345,000
Cost of goods sold 1,095,000
Gross profit 705,000
Expenses:
Selling expenses:
Sales salaries and commissions 108,500
Advertising 14,500
Travel 3,500
Misc. Selling Expense 56,500
Total selling expenses 183,000
Administrative expenses:
Office and officers' salaries 70,000
Supplies 28,500
Misc. administrative expense 63,500
Total administrative expenses 162,000
Total expenses 345,000
Income from operations 360,000

2. What is the expected contribution margin ratio? Round to nearest whole percent.
40%

3. Determine the break-even sales in units.
15,000 units

4. Construct a cost-volume-profit chart (on your own paper) indicating the break-even sales.
$900,000

5. What is the expected margin of safety in dollars and as a percentage of sales?
Dollars: $900,000
Percentage: 50%

6. Determine the operating leverage. Round to nearest whole number.
2

Problem 19-2B

Cost Behavior and Cost-Volume-Profit Analysis Warren / Reeve / Duchac Problem 19-2B solution

Break-even sales under present and proposed conditions
Gaelic Industries Inc., operating at full capacity, sold 22,350 units at a price of $150 per unit during 2010. Its income statement for 2010 is as follows:

The division of costs between fixed and variable is as follows:

Management is considering a plant expansion program that will permit an increase of $900,000 in yearly sales. The expansion will increase fixed costs by $242,500, but will not affect the relationship between sales and variable costs.

1. Determine for 2010 the total fixed costs and the total variable costs.
Fixed costs: $1,582,500
Variable costs: $1,117,500

2. Determine for 2010 (a) the unit variable cost and (b) the unit contribution margin.
Unit variable cost: $50
Unit contribution margin: $100

3. Compute the break-even sales (units) for 2010.
15,825 units

4. Compute the break-even sales (units) under the proposed program.
18,250 units

5. Determine the amount of sales (units) that would be necessary under the proposed program to realize the $652,500 of income from operations that was earned in 2010.
24,775 units

6. Determine the maximum income from operations possible with the expanded plant.
$1,010,000

7. If the proposal is accepted and sales remain at the 2010 level, what will the income or loss from operations be for 2011?
$410,000 Income

Problem 19-2A

Cost Behavior and Cost-Volume-Profit Analysis Warren / Reeve / Duchac Exercise 19-13 solution

Break-even sales under present and proposed conditions

Battonkill Company, operating at full capacity, sold 112,800 units at a price of $150 per unit during 2010. Its income statement for 2010 is as follows:

The division of costs between fixed costs and variable costs is as follows:

Management is considering a plant expansion program that will permit an increase of $1,500,000 in yearly sales. The expansion will increase fixed costs by $200,000, but will not affect the relationship between sales and variable costs.

1. Determine for 2010 the total fixed costs and the total variable costs.
Total fixed costs: $5,160,000
Total variable costs: $5,640,000

2. Determine for 2010 the (a) unit variable cost and (b) the unit contribution margin.
a. Unit variable cost: $50
b. Unit contribution margin: $100

3. Compute the break-even sales in units for 2010.
51,600 units

4. Compute the break-even sales in units under the proposed program.
53,600 units

5. Determine the amount of sales in units that would be necessary under the proposed program to realize the $6,120,000 of income from operations that was earned in 2010.
114,800 units

6. Determine the maximum income from operations possible with the expanded plant.
$6,920,000

7. If the proposal is accepted and sales remain at the 2010 level, what will the income or loss from operations be for 2011?
$5,920,000 Income

Exercise 19-21

Cost Behavior and Cost-Volume-Profit Analysis Warren / Reeve / Duchac Exercise 19-21 solution

Sales mix and break-even sales

New Wave Technology Inc. manufactures and sells two products, MP3 players and satellite radios. The fixed costs are $300,000, and the sales mix is 40% MP3 players and 60% satellite radios. The unit selling price and the unit variable cost for each product are as follows:

a. Compute the break-even sales in units for both products combined.

10,000 units

b. How many units of each product, MP3 players and satellite radios, would be sold at the break-even point?

MP3 players: 4,000 units
Satellite radios: 6,000 units

Exercise 19-13

Cost Behavior and Cost-Volume-Profit Analysis Warren / Reeve / Duchac Exercise 19-13 solution

Break-even sales

Currently, the unit selling price of a product is $280, the unit variable cost is $230, and the total fixed costs are $525,000. A proposal is being evaluated to increase the unit selling price to $300.

a. Compute the current break-even sales (units).
10,500 units

b. Compute the anticipated break-even sales (units), assuming that the unit selling price is increased and all costs remain constant.
7,500 units

Exercise 19-11

Cost Behavior and Cost-Volume-Profit Analysis Warren / Reeve / Duchac Exercise 19-11 solution

Break-even sales and sales to realize income from operations.

For the current year ending March 31, Jwork Company expects fixed costs of $440,000, a unit variable cost of $50, and a unit selling price of $75.

a. Compute the anticipated break-even sales (units).
17,600 units

b. Compute the sales (units) required to realize income from operations of $90,000.
21,200 units