Chapter 18: 18DQ (page 832)
_____ of _____ reflects expected sales in excess of the level of break-even sales.
Answer
Percentage of Margin of Safety reflects expected sales in excess of the level of break-even sales.
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Patriot Co. manufactures and sells three products: red, white, and blue. Their unit selling prices are red, \(20; white, \)35; and blue, \(65. The per unit variable costs to manufacture and sell these products are red, \)12; white, \(22; and blue, \)50. Their sales mix is reflected in a ratio of 5:4:2 (red:white:blue). Annual fixed costs shared by all three products are \(250,000. One type of raw material has been used to manufacture all three products. The company has developed a new material of equal quality for less cost. The new material would reduce variable costs per unit as follows: red, by \)6; white, by \(12; and blue, by \)10. However, the new material requires new equipment, which will increase annual fixed costs by $50,000. (Round answers to whole composite units.)
Required
1. If the company continues to use the old material, determine its break-even point in both sales units and sales dollars of each individual product.
2. If the company uses the new material, determine its new break-even point in both sales units and sales dollars of each individual product.
Analysis Component
3. What insight does this analysis offer management for long-term planning?
Following are five series of costs A through E measured at various volume levels. Identify each series as either fixed, variable, mixed, step-wise, or curvilinear.
Volume (units) | Series A | Series B | Series C | Series D | Series E |
0 | \(0 | \)2,500 | \(0 | \)1,000 | \(5,000 |
400 | \)3,600 | 3,100 | 6,000 | 1,000 | 5,000 |
800 | \(7,200 | 3,700 | 6,600 | 2,000 | 5,000 |
1,200 | \)10,800 | 4,300 | 7,200 | 2,000 | 5,000 |
1,600 | \(14,400 | 4,900 | 8,200 | 3,000 | 5,000 |
2,000 | \)18,000 | 5,500 | 9,600 | 3,000 | 5,000 |
2,400 | $21,600 | 6,100 | 13,500 | 4,000 | 5,000 |
Assume that a straight line on a CVP chart intersects the vertical axis at the level of fixed costs and has a positive slope that rises with each additional unit of volume by the amount of the variable costs per unit. What does this line represent?
Henna Co. produces and sells two products, T and O. It manufactures these products in separate factories and markets them through different channels. They have no shared costs. This year, the company sold 50,000 units of each product. Sales and costs for each product follow.
Product T | Product O | |
Sales | \(2,000,000 | \)2,000,000 |
Variable cost | 1,600,000 | 250,000 |
Contribution margin | 400,000 | 1,750,000 |
Fixed costs | 125,000 | 1,475,000 |
Income before taxes | 275,000 | 275,000 |
Income taxes (32% rate) | 88,000 | 88,000 |
Net income | \(187,000 | \)187,000 |
Required
1. Compute the break-even point in dollar sales for each product. (Round the answer to whole dollars.)
2. Assume that the company expects sales of each product to decline to 30,000 units next year with no change in unit selling price. Prepare forecasted financial results for next year following the format of the contribution margin income statement as just shown with columns for each of the two products (assume a 32% tax rate). Also, assume that any loss before taxes yields a 32% tax benefit.
3. Assume that the company expects sales of each product to increase to 60,000 units next year with no change in unit selling price. Prepare forecasted financial results for next year following the format of the contribution margin income statement shown with columns for each of the two products (assume a 32% tax rate).
Analysis Component
4. If sales greatly decrease, which product would experience a greater loss? Explain.
5. Describe some factors that might have created the different cost structures for these two products.
When output volume increases, do fixed costs per unit increase, decrease, or stay the same within the relevant range of activity? Explain.
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