Chapter 20: Q18RQ (page 1119)
Why is the calculation to determine the target profit considered a variation of the breakeven calculation?
Answer
The target profit is considered as variation of break-even calculation because at break-even profit is zero whereas in target profit amount of profit is pre-decided.
Over 30 million students worldwide already upgrade their learning with Vaia!
All the tools & learning materials you need for study success - in one app.
Get started for free
Determining cost behavior
Identify each cost below as variable (V), fixed (F), or mixed (M), relative to units sold. Explain your reason.
Units Sold 25 50 75 100
a. Total phone cost \( 150 \) 200 \( 250 \) 300
b. Materials cost per unit 35 35 35 35
c. Manager’s salary 3,000 3,000 3,000 3,000
d. Depreciation cost per unit 60 30 20 15
e. Total utility cost 400 650 900 1,150
f. Total cost of goods sold 3,125 6,250 9,375 12,500
Owner Shan Mu is considering franchising her Noodles by Murestaurant concept. She believes people will pay \(10.00 for a large bowl ofnoodles. Variable costs are \)5.00 per bowl. Mu estimates monthly fixed costsfor a franchise at \(9,000.
Requirements
1. Use the contribution margin ratio approach to find a franchise’s breakevensales in dollars.
2. Mu believes most locations could generate \)61,500 in monthly sales. Isfranchising a good idea for Mu if franchisees want a minimum monthlyoperating income of $21,000? Explain your answer.
Before you begin this assignment, review the Tying It All Together feature in the chapter.
Best Buy Co., Inc. is a leading provider of technology products. Customers can shop at more than 1,700 stores or online. The company is also known for its Geek Squad for technology services. Suppose Best Buy is considering a particular HDTV for a major sales item for Black Friday, the day after Thanksgiving, known as one of the busiest shopping days of the year. Assume the HDTV has a regular sales price of \(900, a cost of \)500, and a Black Friday proposed discounted sales price of \(650. Best Buy’s 2015 Annual Report states that failure to manage costs could have a material adverse effect on its profitability and that certain elements in its cost structure are largely fixed in nature. Best Buy, like most companies, wishes to maintain price competitiveness while achieving acceptable levels of profitability. (Item 1A. Risk Factors.)
Requirements
1. Calculate the gross profit of the HDTV at the regular sales price and at the discounted sales price.
2. Assume that during the November/December holiday season last year, Best Buy sold an average of 150 of this particular HDTV per store. If the HDTVs are marked down to \)650, how many would each store have to sell this year to make the same total gross profit as last year?
3. Relative to Sales Revenue, what type of costs would Best Buy have that are fixed? What type of costs would be variable?
4. Because Best Buy stated that its cost structure is largely fixed in nature, what might be the impact on operating income if sales decreased? Does having a cost structure that is largely fixed in nature increase the financial risk to a company? Why or why not?
5. In the Tying It All Together feature in the chapter, we looked at the cost of advertising. Is advertising a fixed or variable cost? If the company has a small margin of safety, how would increasing advertising costs affect Best Buy’s operating income? What would be the effect of decreasing advertising costs?
On the CVP graph, where is the breakeven point shown? Why?
A furniture manufacturer specializes in wood tables. The tables sell for \(100 per unit and incur \)40 per unit in variable costs. The company has \(6,000 in fixed costs per month. The company desires to earn an operating profit of \)12,000 per month.
10. Calculate the required sales in units to earn the target profit using the equation method.
11. Calculate the required sales in units to earn the target profit using the contribution margin method.
12. Calculate the required sales in dollars to earn the target profit using the contribution margin ratio method.
13. Calculate the required sales in units to break even using the contribution margin method.
What do you think about this solution?
We value your feedback to improve our textbook solutions.
