Chapter 20: Q20-23RQ (page 1120)
What is the margin of safety? What are the three ways it can be expressed?
Answer
The margin of safety is a cushion between profit and loss.
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What effect does an increase in sales price have on contribution margin? An increase in fixed costs? An increase in variable costs?
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.)
Following is a list of costs for a furniture manufacturer that specializes in wood tables. Classify each cost as variable, fixed, or mixed relative to the number of tables produced and sold.
1. Wood used to build tables
2. Depreciation on saws and other manufacturing equipment
3. Compensation for sales representatives paid on a salary plus commission basis
4. Supervisor’s salary
5. Wages of production workers
Use the following information to complete Short Exercises S20-16 and S20-17.
Wild Waters Swim Park sells individual and family tickets. With a ticket, each person receives a meal, three beverages, and unlimited use of the swimming pools. Wild Waters has the following ticket prices and variable costs for 2018:
Individual Family Sales price per ticket \( 50 \) 150 Variable cost per ticket 35 140
Wild Waters expects to sell one individual ticket for every four family tickets. Wild Waters’s total fixed costs are $27,500.
S20-17 Calculating breakeven point for two products
For 2019, Wild Waters expects a sales mix of four individual tickets for every one family ticket.
Requirements
1. Compute the new weighted-average contribution margin per ticket.
2. Calculate the total number of tickets Wild Waters must sell to break even.
3. Calculate the number of individual tickets and the number of family tickets the company must sell to break even.
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
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