Chapter 18: 5QS (page 833)
Compute and interpret the contribution margin ratio using the following data: sales, \(5,000; total variable cost, \)3,000.
Answer
The contribution margin ratio is 0.40 or 40%.
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A manufacturer reports the information below for three recent years. Compute income for each of the three years using absorption costing.
Year 1 | Year 2 | Year 3 | |
Variable costing income | \(110,000 | \)114,400 | \(118,950 |
Beginning finished goods inventory (units) | 0 | 1,200 | 700 |
Ending finished goods inventory (units) | 1,200 | 700 | 800 |
Fixed manufacturing overhead per unit | \)2.50 | \(2.50 | \)2.50 |
Labor costs of an auto repair mechanic are seldom based on actual hours worked. Instead, this labor cost is based on an industry average of time estimated to complete a repair job. This means a customer can pay, for example, $120 for two hours of work on a car when the actual time worked was only one hour. Many experienced mechanics can complete repair jobs faster than the industry average. Assume that you are asked to complete such a survey for a repair center. The survey calls for objective input, and many questions require detailed cost data and analysis. The mechanics and owners know you have the survey and encourage you to complete it in a way that increases the average billable hours for repair work.
Required
Write a one-page memorandum to the mechanics and owners that describes the direct labor analysis you will undertake in completing this survey.
Listed here are four series of separate costs measured at various volume levels. Examine each series and identify whether it is best described as a fixed, variable, step-wise, or curvilinear cost. (It can help to graph each cost series.)
Volume (units) | Series 1 | Series 2 | Series 3 | Series 4 |
0 | \(0 | \)450 | \(800 | \)100 |
100 | 800 | 450 | 800 | 105 |
200 | 1,600 | 450 | 800 | 120 |
300 | 2,400 | 450 | 1,600 | 145 |
400 | 3,200 | 450 | 1,600 | 190 |
500 | 4,000 | 450 | 2,400 | 250 |
600 | 4,800 | 450 | 2,400 | 320 |
Praveen Co. manufactures and markets a number of rope products. Management is considering the future of Product XT, a special rope for hang gliding, that has not been as profitable as planned. Since Product XT is manufactured and marketed independently of the other products, its total costs can be precisely measured. Next year’s plans call for a \(200 selling price per 100 yards of XT rope. Its fixed costs for the year are expected to be \)270,000, up to a maximum capacity of 700,000 yards of rope. Forecasted variable costs are \(140 per 100 yards of XT rope.
Required
1. Estimate Product XT’s break-even point in terms of (a) sales units and (b) sales dollars.
2. Prepare a CVP chart for Product XT like that in Exhibit 18.14. Use 7,000 units (700,000 yards/100 yards) as the maximum number of sales units on the horizontal axis of the graph, and \)1,400,000 as the maximum dollar amount on the vertical axis.
3. Prepare a contribution margin income statement showing sales, variable costs, and fixed costs for Product XT at the break-even point.
Astro Co. sold 20,000 units of its only product and incurred a \(50,000 loss (ignoring taxes) for the current year, as shown here. During a planning session for year 2018’s activities, the production manager notes that variable costs can be reduced 50% by installing a machine that automates several operations. To obtain these savings, the company must increase its annual fixed costs by \)200,000. The maximum output capacity of the company is 40,000 units per year.
| ASTRO COMPANY | |
| Contribution Margin Income Statement | |
| For Year Ended December 31, 2017 | |
| Sales | \(1,000,000 |
| Variable cost | 800,000 |
| Contribution margin | 200,000 |
| Fixed cost | 250,000 |
| Net loss | (\)50,000) |
Required
1. Compute the break-even point in dollar sales for year 2017.
2. Compute the predicted break-even point in dollar sales for year 2018 assuming the machine is installed and there is no change in the unit selling price.
3. Prepare a forecasted contribution margin income statement for 2018 that shows the expected results with the machine installed. Assume that the unit selling price and the number of units sold will not change, and no income taxes will be due.
4. Compute the sales level required in both dollars and units to earn $200,000 of target pretax income in 2018 with the machine installed and no change in unit sales price. Round answers to whole dollars and whole units.
5. Prepare a forecasted contribution margin income statement that shows the results at the sales level computed in part 4. Assume no income taxes will be due.
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