Chapter 20: Q20-22RQ (page 1120)
What is cost stickiness? Why do managers need to be aware of cost stickiness?
Answer
Variable cost and contribution margin have an inverse connection.
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You have just begun your summer internship at Omni Instruments. The company supplies sterilized surgical instruments for physicians. To expand sales, Omni is considering paying a commission to its sales force. The controller, Matthew Barnhill, asks you to compute: (1) the new breakeven sales figure, and (2) the operating profit if sales increase 15% under the new sales commission plan. He thinks you can handle this task because you learned CVP analysis in your accounting class.
You spend the next day collecting information from the accounting records, performing the analysis, and writing a memo to explain the results. The company president is pleased with your memo. You report that the new sales commission plan will lead to a significant increase in operating income and only a small increase in breakeven sales.
The following week, you realize that you made an error in the CVP analysis. You overlooked the sales personnel’s $2,800 monthly salaries, and you did not include this fixed selling cost in your computations. You are not sure what to do. If you tell Matthew Barnhill of your mistake, he will have to tell the president. In this case, you are afraid Omni might not offer you permanent employment after your internship.
Requirements
1. How would your error affect breakeven sales and operating income under the proposed sales commission plan? Could this cause the president to reject the sales commission proposal?
2. Consider your ethical responsibilities. Is there a difference between (a) initially making an error and (b) subsequently failing to inform the controller?
3. Suppose you tell Matthew Barnhill of the error in your analysis. Why might the consequences not be as bad as you fear? Should Barnhill take any responsibility for your error? What could Barnhill have done differently?
4. After considering all the factors, should you inform Barnhill or simply keep quiet?
The budgets of four companies yield the following information:
Company
Beach Lake Mountain Valley
Net Sales Revenue \( 1,615,000 \)(d) \( 1,050,000 \)(j)
Variable Costs (a) 60,000 525,000 100,800
Fixed Costs (b) 232,000 260,000 (k)
Operating Income (Loss) 285,600 (e) (g) 31,500
Units Sold 170,000 10,000 (h) (l)
Contribution Margin per Unit \( 3.80 \) (f) \( 75.00 \) 9.00
Contribution Margin Ratio (c) 80% (i) 30%
Requirements
1. Fill in the blanks for each missing value. (Round the contribution margin per unit to the nearest cent.)
2. Which company has the lowest breakeven point in sales dollars?
3. What causes the low breakeven point?
What is a mixed cost? Give an example.
Complete the table below for the missing amounts:
A B C
Number of units 2,064 units (d) 2,570 units
Sales price per unit \( 250 \) 125 $ (g)
Variable costs per unit (a) 50 4,528
Contribution margin per unit 125 (e) (h)
Total contribution margin (b) 1,567,500 (i)
Contribution margin ratio (c) (f) 20%
Why is the calculation to determine the target profit considered a variation of the breakeven calculation?
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