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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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
Question: Computing contribution margin in total, per unit, and as a ratio
Complete the table below for contribution margin per unit, total contribution margin, and contribution margin ratio:
A B C Number of units 1,720 units 14,920 units 4,620 units
Sales price per unit \( 1,800 \) 4,500 $ 5,550
Variable costs per unit 720 3,600 1,665
Calculate:
Contribution margin per unit
Total contribution margin
Contribution margin ratio
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.
White Company sells flags with team logos. White has fixed costs of \(639,600 per year plus variable costs of \)4.20 per flag. Each flag sells for \(12.00.
Requirements
1. Use the equation approach to compute the number of flags White must sell each year to break even.
2. Use the contribution margin ratio approach to compute the dollar sales White needs to earn \)32,500 in operating income for 2018. (Round the contribution margin to two decimal places.)
3. Prepare White’s contribution margin income statement for the year ended December 31, 2018, for sales of 73,000 flags. (Round your final answers up to the next whole number.)
4. The company is considering an expansion that will increase fixed costs by 23% and variable costs by $0.60 per flag. Compute the new breakeven point in units and in dollars. Should White undertake the expansion? Give your reasoning. (Round your final answers up to the next whole number.)
What is cost stickiness? Why do managers need to be aware of cost stickiness?
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