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Archer Industries sells three different sets of sportswear. Sleek sells for $30 and has variable costs of $18; Smooth sells for $50 and has variable costs of $30; Potent sells for $70 and has variable costs of $45. The sales mix of the three sets is: Sleek, 50%; Smooth, 30%; and Potent, 20%. Instructions What is the weighted-average unit contribution margin? BE 127 Lazaro Inc. sells two product lines. The sales mix of the product lines is: Standard, 60%; and Deluxe, 40%. The contribution margin ratio of each line is: Standard, 40%; and Deluxe, 45%. Lazaro’s fixed costs are $1,995,000. Instructions What is the dollar amount of Deluxe sales at the break-even point? BE 128 Hunt, Inc. provided the following information concerning two products: Product 12 Product 43 Contribution margin per unit $22 $18 Machine hours required for one unit 2 hours 1.5 hours Instructions Compute the contribution margin per unit of limited resource for each product. Which product should Hunt tell its sales personnel to “push” to customers? BE 129 Gallery Corporation makes two products, footballs and baseballs. Additional information follows: Footballs Baseballs Units 2,000 2,500 Sales $60,000 $25,000 Variable costs 24,000 13,750 Fixed costs 10,000 5,250 Net income $26,000 $ 6,000 Yards of leather per unit 1.25 0.25 Profit per unit $13.00 $2.40 Contribution margin per unit $18.00 $4.50 Assume that Gallery is able to order an additional 2,500 yards of leather and wishes to maximize its income. Of the additional units it produces, at least 400 of each product are necessary for sales. Instructions How many units of each must be produced? BE 130 Marina Manufacturing is considering buying new equipment for its factory. The new equipment will reduce variable labor costs but increase depreciation expense. Contribution margin is expected to increase from $250,000 to $300,000. Net income is expected to remain the same at $100,000. Instructions Compute the degree of operating leverage before and after the purchase of the new equipment and interpret your results. . BE 131 The degree of operating leverage for Gurney, Inc.. and Dough Company are 2.4 and 5.6 respectively. Both have net incomes of $60,000. Determine their respective contribution margins. aBE 132 Swift Co. produces footballs. It incurred the following costs this year: Direct materials $35,000 Direct labor 31,000 Fixed manufacturing overhead 22,000 Variable manufacturing overhead 38,000 Fixed selling and administrative expenses 23,000 Variable selling and administrative expenses 14,000 Instructions What are the total product costs for the company under variable costing? aBE 133 Swift Co. produces footballs. It incurred the following costs this year: Direct materials $35,000 Direct labor 31,000 Fixed manufacturing overhead 22,000 Variable manufacturing overhead 38,000 Fixed selling and administrative expenses 23,000 Variable selling and administrative expenses 14,000 Instructions What are the total product costs for the company under absorption costing? aBE 134 During 2013, Basler Manufacturing produced 60,000 units and sold 55,000 for $10 per unit. Variable manufacturing costs were $4 per unit. Annual fixed manufacturing overhead was $120,000 ($2 per unit). Variable selling and administrative costs were $1 per unit sold, and fixed selling and administrative costs were $30,000. Instructions Prepare a variable costing income statement. aBE 135 During 2013, Basler Manufacturing produced 60,000 units and sold 55,000 for $10 per unit. Variable manufacturing costs were $4 per unit. Annual fixed manufacturing overhead was $120,000 ($2 per unit). Variable selling and administrative costs were $1 per unit sold, and fixed selling and administrative costs were $30,000. Instructions Prepare an absorption costing income statement. Exercises Ex. 136 Kindle, Inc. manufactures cosmetic products that are sold through a network of sales agents. The agents are paid a commission of 12.5% of sales. The income statement for the year ending December 31, 2013, is as follow. KINDLE, INC. Income Statement Year Ending December 31, 2013 Sales $130,000 Cost of goods sold Variable $58,500 Fixed 14,350 72,850 Gross margin 57,150 Selling and marketing expenses Commissions $16,250 Fixed costs 17,100 33,350 Operating income $ 23,800 The company is considering hiring its own sales staff to replace the network of agents. It will pay its salespeople a commission of 10% and incur additional fixed costs of $13 million. Instructions (a) Under the current policy of using a network of sales agents, calculate Kindle, Inc.’s break-even point in sales dollars for the year 2013. (b) Calculate the company’s break-even point in sales dollars for the year 2013 if it hires its own sales force to replace the network of agents. (c) Calculate the degree of operating leverage at sales of $130 million if (1) Kindle, Inc. uses sales agents, and (2) Kindle, Inc. employs its own sales staff. Ex. 137 Qwik Service has over 200 auto-maintenance service outlets nationwide. It provides primarily two lines of service: oil changes and brake repair. Oil change-related services represent 75% of its sales and provide a contribution margin ratio of 20%. Brake repair represents 25% of its sales and provides a 60% contribution margin ratio. The company’s fixed costs are $12,000,000 (that is, $60,000 per service outlet). Instructions (a) Calculate the dollar amount of each type of service that the company must provide in order to break even. (b) The company has a desired net income of $45,000 per service outlet. What is the dollar amount of each type of service that must be provided by each service outlet to meet its target net income per outlet? Ex. 138 Seaver Corporation manufactures mountain bikes. It has fixed costs of $4,140,000. Seaver’s sales mix and contribution margin per unit is shown as follows: Sales Mix Contribution Margin Green 25% $120 Brown 45% $ 60 Blue 30% $ 40 Instructions Compute the number of each type of bike that the company would need to sell in order to break even under this product mix. Ex. 139 DeMont Tax Services provides primarily two lines of service: accounting and tax. Accounting-related services represent 60% of its revenue and provide a contribution margin ratio of 30%. Tax services represent 40% of its revenue and provide a 40% contribution margin ratio. The company’s fixed costs are $4,250,000. Instructions (a) Calculate the revenue from each type of service that the company must achieve to break even. (b) The company has a desired net income of $1,700,000. What amount of revenue would DeMont earn from tax services if it achieves this goal with the current sales mix? Ex. 140 Blue Chance Co. sells computers and video game systems. The business is divided into two divisions along product lines. Variable costing income statements for the current year are presented below: Computers VG Systems Total Sales $700,000 $300,000 $1,000,000 Variable costs 420,000 210,000 630,000 Contribution margin $280,000 $ 90,000 370,000 Fixed costs 296,000 Net income $ 74,000 Ex 140 (cont.) Instructions (a) Determine the sales mix and contribution margin ratio for each division. (b) Calculate the company’s weighted-average contribution margin ratio. (c) Calculate the company’s break-even point in dollars. (d) Determine the sales level, in dollars, for each division at the break-even point.

Archer Industries sells three different sets of sportswear. Sleek sells for $30 and has variable costs of $18; Smooth sells for $50 and has variable costs of $30; Potent sells for $70 and has variable costs of $45. The sales mix of the three sets is: Sleek, 50%; Smooth, 30%; and Potent, 20%.

Instructions

What is the weighted-average unit contribution margin?

 

BE 127

Lazaro Inc. sells two product lines. The sales mix of the product lines is: Standard, 60%; and Deluxe, 40%. The contribution margin ratio of each line is: Standard, 40%; and Deluxe, 45%. Lazaro’s fixed costs are $1,995,000.

Instructions

What is the dollar amount of Deluxe sales at the break-even point?

 

BE 128

Hunt, Inc. provided the following information concerning two products:

Product 12 Product 43

Contribution margin per unit $22 $18

Machine hours required for one unit 2 hours 1.5 hours

Instructions

Compute the contribution margin per unit of limited resource for each product. Which product should Hunt tell its sales personnel to “push” to customers?

 

BE 129

Gallery Corporation makes two products, footballs and baseballs. Additional information follows:

Footballs Baseballs

Units 2,000 2,500

Sales $60,000 $25,000

Variable costs 24,000 13,750

Fixed costs 10,000 5,250

Net income $26,000 $ 6,000

Yards of leather per unit 1.25 0.25

Profit per unit $13.00 $2.40

Contribution margin per unit $18.00 $4.50

Assume that Gallery is able to order an additional 2,500 yards of leather and wishes to maximize its income. Of the additional units it produces, at least 400 of each product are necessary for sales.

Instructions

How many units of each must be produced?

 

BE 130

Marina Manufacturing is considering buying new equipment for its factory. The new equipment will reduce variable labor costs but increase depreciation expense. Contribution margin is expected to increase from $250,000 to $300,000. Net income is expected to remain the same at $100,000.

Instructions

Compute the degree of operating leverage before and after the purchase of the new equipment and interpret your results.

.

BE 131

The degree of operating leverage for Gurney, Inc.. and Dough Company are 2.4 and 5.6 respectively. Both have net incomes of $60,000. Determine their respective contribution margins.

 

aBE 132

Swift Co. produces footballs. It incurred the following costs this year:

Direct materials $35,000

Direct labor 31,000

Fixed manufacturing overhead 22,000

Variable manufacturing overhead 38,000

Fixed selling and administrative expenses 23,000

Variable selling and administrative expenses 14,000

Instructions

What are the total product costs for the company under variable costing?

 

aBE 133

Swift Co. produces footballs. It incurred the following costs this year:

Direct materials $35,000

Direct labor 31,000

Fixed manufacturing overhead 22,000

Variable manufacturing overhead 38,000

Fixed selling and administrative expenses 23,000

Variable selling and administrative expenses 14,000

Instructions

What are the total product costs for the company under absorption costing?

 

aBE 134

During 2013, Basler Manufacturing produced 60,000 units and sold 55,000 for $10 per unit. Variable manufacturing costs were $4 per unit. Annual fixed manufacturing overhead was $120,000 ($2 per unit). Variable selling and administrative costs were $1 per unit sold, and fixed selling and administrative costs were $30,000.

Instructions

Prepare a variable costing income statement.

 


aBE 135

During 2013, Basler Manufacturing produced 60,000 units and sold 55,000 for $10 per unit. Variable manufacturing costs were $4 per unit. Annual fixed manufacturing overhead was $120,000 ($2 per unit). Variable selling and administrative costs were $1 per unit sold, and fixed selling and administrative costs were $30,000.

Instructions

Prepare an absorption costing income statement.

 

Exercises

Ex. 136

Kindle, Inc. manufactures cosmetic products that are sold through a network of sales agents. The agents are paid a commission of 12.5% of sales. The income statement for the year ending December 31, 2013, is as follow.

KINDLE, INC.

Income Statement

Year Ending December 31, 2013

Sales $130,000

Cost of goods sold

Variable $58,500

Fixed 14,350 72,850

Gross margin 57,150

Selling and marketing expenses

Commissions $16,250

Fixed costs 17,100 33,350

Operating income $ 23,800

The company is considering hiring its own sales staff to replace the network of agents. It will pay its salespeople a commission of 10% and incur additional fixed costs of $13 million.

Instructions

(a) Under the current policy of using a network of sales agents, calculate Kindle, Inc.’s break-even point in sales dollars for the year 2013.

(b) Calculate the company’s break-even point in sales dollars for the year 2013 if it hires its own sales force to replace the network of agents.

(c) Calculate the degree of operating leverage at sales of $130 million if (1) Kindle, Inc. uses sales agents, and (2) Kindle, Inc. employs its own sales staff.

 

Ex. 137

Qwik Service has over 200 auto-maintenance service outlets nationwide. It provides primarily two lines of service: oil changes and brake repair. Oil change-related services represent 75% of its sales and provide a contribution margin ratio of 20%. Brake repair represents 25% of its sales and provides a 60% contribution margin ratio. The company’s fixed costs are $12,000,000 (that is, $60,000 per service outlet).

Instructions

(a) Calculate the dollar amount of each type of service that the company must provide in order to break even.

(b) The company has a desired net income of $45,000 per service outlet. What is the dollar amount of each type of service that must be provided by each service outlet to meet its target net income per outlet?

 

Ex. 138

Seaver Corporation manufactures mountain bikes. It has fixed costs of $4,140,000. Seaver’s sales mix and contribution margin per unit is shown as follows:

Sales Mix Contribution Margin

Green 25% $120

Brown 45% $ 60

Blue 30% $ 40

Instructions

Compute the number of each type of bike that the company would need to sell in order to break even under this product mix.

 

Ex. 139

DeMont Tax Services provides primarily two lines of service: accounting and tax. Accounting-related services represent 60% of its revenue and provide a contribution margin ratio of 30%. Tax services represent 40% of its revenue and provide a 40% contribution margin ratio. The company’s fixed costs are $4,250,000.

Instructions

(a) Calculate the revenue from each type of service that the company must achieve to break even.

(b) The company has a desired net income of $1,700,000. What amount of revenue would DeMont earn from tax services if it achieves this goal with the current sales mix?

 

Ex. 140

Blue Chance Co. sells computers and video game systems. The business is divided into two divisions along product lines. Variable costing income statements for the current year are presented below:

Computers VG Systems Total

Sales $700,000 $300,000 $1,000,000

Variable costs 420,000 210,000 630,000

Contribution margin $280,000 $ 90,000 370,000

Fixed costs 296,000

Net income $ 74,000

Ex 140 (cont.)

Instructions

(a) Determine the sales mix and contribution margin ratio for each division.

(b) Calculate the company’s weighted-average contribution margin ratio.

(c) Calculate the company’s break-even point in dollars.

(d) Determine the sales level, in dollars, for each division at the break-even point.

 

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