Chapter 20: Q21RQ (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.
Over 30 million students worldwide already upgrade their learning with Vaia!
All the tools & learning materials you need for study success - in one app.
Get started for free
On the CVP graph, where is the breakeven point shown? Why?
Analyzing a cost-volume-profit graph
Nolan Rouse is considering starting a Web-based educational business, e-Prep MBA. He plans to offer a short-course review of accounting for students entering MBA programs. The materials would be available on a password-protected Web site; students would complete the course through self-study. Rouse would have to grade the course assignments, but most of the work would be in developing the course materials, setting up the site, and marketing. Unfortunately, Rouse’s hard drive crashed before he finished his financial analysis. However, he did recover the following partial CVP chart:
Requirements
1. Label each axis, the sales revenue line, the total costs line, the fixed costs line, the operating income area, and the breakeven point.
2. If Rouse attracts 300 students to take the course, will the venture be profitable? Explain your answer.
3. What are the breakeven sales in students and dollars?
Calculating breakeven point for two products, margin of safety, andoperating leverage
The contribution margin income statement of Delectable Donuts for May 2018follows:
DELECTABLE DONUTS Contribution Margin Income Statement Month Ended May 31, 2018 |
Net Sales Revenue | \(125,000 | |
Variable cost | ||
Cost of goods sold | \)32,100 | |
Selling cost | 17,400 | |
Administrative cost | 500 | \(50,000 |
Contribution Margin | \)75,000 | |
Fixed cost | ||
Selling cost | \(37,800 | |
Administrative cost | 12,600 | \)50,400 |
Operating income | \(24,600 |
Delectable sells five dozen plain donuts for every dozen custard-filled donuts. A dozenplain donuts sells for \)4.00, with a variable cost of \(1.60 per dozen. A dozen custardfilled donuts sells for \)8.00, with a variable cost of $3.20 per dozen.
Requirements
1. Calculate the weighted-average contribution margin.
2. Determine Delectable’s monthly breakeven point in dozens of plain donuts and custard-filled donuts. Prove your answer by preparing a summary contribution nmargin income statement at the breakeven level of sales. Show only two categories of costs: variable and fixed.
3. Compute Delectable’s margin of safety in dollars for May 2018.
4. Compute the degree of operating leverage for Delectable Donuts. Estimate thenew operating income if total sales increase by 20%. (Round the degree of operating leverage to four decimal places and the final answer to the nearest dollar.Assume the sales mix remains unchanged.)
5. Prove your answer to Requirement 4 by preparing a contribution marginincome statement with a 20% increase in total sales. (The sales mix remainsunchanged.)
The Circle Clock Company sells a particular clock for \(25. The variable costs are \)13 per clock and the breakeven point is 250 clocks. The company expects to sell 300 clocks this year. If the company actually sells 400 clocks, what effect would the sale of additional 100 clocks have on operating income? Explain your answer.
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 \(170,800 per month.
Refer to the original information (ignoring the changes considered in Short Exercise S20-12). Suppose Funday Park increases fixed costs from \)170,800 per month to $231,000 per month. Compute the new breakeven point in tickets and in sales dollars.
What do you think about this solution?
We value your feedback to improve our textbook solutions.
