Chapter 20: Q20-21RQ (page 1120)
What effect does an increase in sales price have on contribution margin? An increase in fixed costs? An increase in variable costs?
Answer
There is an inverse relationship between variable cost and contribution margin.
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A chain of convenience stores has one manager per store who is paid a monthly salary. Relative to Store #36 located in Atlanta, Georgia, is the manager’s salary fixed or variable? Why?
Diversified Investor Group is opening an office in Boise, Idaho. Fixed monthly costs are office rent (\(8,000), depreciation on office furniture (\)1,700), utilities (\(2,400), special telephone lines (\)1,500), a connection with an online brokerage service (\(2,500), and the salary of a financial planner (\)11,900). Variable costs include payments to the financial planner (9% of revenue), advertising (11% of revenue), supplies and postage (4% of revenue), and usage fees for the telephone lines and computerized brokerage service (6% of revenue).
Requirements
The Jacksonville Shirt Company makes two types of T-shirts: basic and custom. Basic shirts are plain shirts without any screen printing on them. Custom shirts are created using the basic shirts and then adding a custom screen printing design.
The company buys cloth in various colors and then makes the basic shirts in two departments, Cutting and Sewing. The company uses a process costing system (weighted-average method) to determine the production cost of the basic shirts. In the Cutting Department, direct materials (cloth) are added at the beginning of the process and conversion costs are added evenly through the process. In the Sewing Department, no direct materials are added. The only additional material, thread, is considered an indirect material because it cannot be easily traced to the finished product. Conversion costs are added evenly throughout the process in the Sewing Department. The finished basic shirts are sold to retail stores or are sent to the Custom Design Department for custom screen printing.
The Custom Design Department creates custom shirts by adding screen printing to the basic shirt. The department creates a design based on the customer’s request and then prints the design using up to four colors. Because these shirts have the custom printing added, which is unique for each order, the additional cost incurred is determined using job order costing, with each custom order considered a separate job.
For March 2018, the Jacksonville Shirt Company compiled the following data for the Cutting and Sewing Departments:
Department Item Amount Units
Cutting Beginning balance \( 0 0 shirts
Started in March 1,200 shirts
Direct materials added in March 1,920
Conversion costs 1,320
Completed and transferred to Sewing ??? 1,200 shirts
Ending balance 0 0 shirts
Sewing Beginning balance, transferred in, \)1,350;
conversion costs, \(650 \) 2,000 500 shirts
Transferred in from Cutting ??? ???
Conversion costs added in March 1,196
Completed and transferred to Finished Goods ??? 1,000 shirts
Ending balance, 60% complete ??? ???
For the same time period, the Jacksonville Shirt Company compiled the following data for the Custom Design Department:
Job Quantity Design Fee Printing Status
367 400 Yes 3 colors Complete
368 150 No 2 colors Complete
369 100 Yes 5 colors Complete
370 500 Yes 4 colors Complete
The Jacksonville Shirt Company has previously determined that creating and programming the design cost \(80 per design. This is a one-time charge. If a customer places another order with the same design, the customer is not charged a second time. Additionally, the cost to print is \)0.20 per color per shirt.
Requirements
1. Complete a production cost report for the Cutting Department and the Sewing Department. What is the cost of one basic shirt?
2. Determine the total cost and the average cost per shirt for jobs 367, 368, 369, and 370. If the company set the sales price at 200% of the total cost, determine the total sales price of each job.
3. In addition to the custom jobs, the Jacksonville Shirt Company sold 1,000 basic shirts (assume the beginning balance in Finished Goods Inventory is sufficient to make these sales, and the unit cost of the basic shirts in Finished Goods Inventory is the same as the unit cost incurred this month). If the company set the sales price at 125% of the cost, determine the sales price per unit, total sales revenue, total cost of goods sold, and total gross profit for the basic shirts.
4. Calculate the total revenue, total cost of goods sold, and total gross profit for all sales, basic and custom.
5. Assume the company sold only basic shirts (no custom designs) and incurred fixed costs of \(700 per month.
a. Calculate the contribution margin per unit, contribution margin ratio, required sales in units to break even, and required sales in dollars to break even.
b. Determine the margin of safety in units and dollars.
c. Graph Jacksonville Shirt Company’s CVP relationships. Show the breakeven point, the sales revenue line, the fixed cost line, the total cost line, the operating loss area, and the operating income area.
d. Suppose the Jacksonville Shirt Company wants to earn an operating income of \)1,000 per month. Compute the required sales in units and dollars to achieve this profit goal.
6. The Jacksonville Shirt Company is considering adding a new product line, a cloth shopping bag with custom screen printing that will be sold to grocery stores. If the current market price of cloth shopping bags is \(2.25 and the company desires a net profit of 60%, what is the target cost? The company estimates the full product cost of the cloth bags will be \)0.80. Should the company manufacture the cloth bags? Why or why not?
What is sensitivity analysis? How do managers use this tool?
Calculating breakeven sales and sales to earn a target profit;preparing a contribution margin income statement
Famous Productions performs London shows. The average show sells 1,000 ticketsat \(60 per ticket. There are 175 shows a year. No additional shows can be held as thetheater is also used by other production companies. The average show has a cast of60, each earning a net average of \)320 per show. The cast is paid after each show. Theother variable cost is a program-printing cost of \(8 per guest. Annual fixed costs total\)459,200.
Requirements
1. Compute revenue and variable costs for each show.
2. Use the equation approach to compute the number of shows Famous Productionsmust perform each year to break even.
3. Use the contribution margin ratio approach to compute the number of showsneeded each year to earn a profit of $4,264,000. Is this profit goal realistic? Giveyour reasoning.
4. Prepare Famous Productions’s contribution margin income statement for 175shows performed in 2018. Report only two categories of costs: variable andfixed.
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