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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What is target profit?
Question: Use the following information to complete Short Exercises S20-10 through S20-15.
Funday Park competes with Cool World by providing a variety of rides. Funday Park sells tickets at \(70 per person as a one-day entrance fee. Variable costs are \)42 per person, and fixed costs are $170,800 per month.
S20-10 Computing contribution margin per unit, breakeven point in sales units
Compute the contribution margin per unit and the number of tickets Funday Park must sell to break even. Perform a numerical proof to show that your answer is correct.
Crandall Company sells flags with team logos. Crandall has fixed costs of \(583,200 per year plus variable costs of \)4.80 per flag. Each flag sells for \(12.00.
Requirements
1. Use the equation approach to compute the number of flags Crandall must sell each year to break even.
2. Use the contribution margin ratio approach to compute the dollar sales Crandall needs to earn \)33,000 in operating income for 2018. (Round the contribution margin ratio to two decimal places.)
3. Prepare Crandall’s contribution margin income statement for the year ended December 31, 2018, for sales of 70,000 flags. (Round your final answers up to the next whole number.)
4. The company is considering an expansion that will increase fixed costs by 21% and variable costs by $0.60 per flag. Compute the new breakeven point in units and in dollars. Should Crandall undertake the expansion? Give your reasoning. (Round your final answers up to the next whole number.)
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.
Determine how each change effects the elements of the cost-volume-profit graph by placing an X in the appropriate column(s).
| EFFECT | ||||||||
| Sales Line | Fixed Cost Line | Total cost line | Breakeven point | |||||
Change | Slope Increases | Slope decreases | Shifts up | Shifts Down | Slope Increases | Slope Decreases | Increases | Decreases |
Sales price per unit Increases | ||||||||
Sales price per unit Decreases | ||||||||
Variable cost per unit Increases | ||||||||
Variable cost per unit decreases | ||||||||
Total fixed cost increases | ||||||||
Total fixed cost decreases | ||||||||
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