Chapter 20: Q22RQ (page 1122)
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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Why is the calculation to determine the target profit considered a variation of the breakeven calculation?
Following is the income statement for Marrow Mufflers for the month of June 2018:
MARROW MUFFLERS
Contribution Margin Income Statement
Month Ended June 30, 2018
Net Sales Revenue (140 units _ \(250) \) 35,000
Variable Costs (140 units _ \(50) 7,000
Contribution Margin 28,000
Fixed Costs 11,500
Operating Income \) 16,500
Requirements
1. Calculate the degree of operating leverage. (Round to four decimal places.)
2. Use the degree of operating leverage calculated in Requirement 1 to estimate the change in operating income if total sales increase by 40% (assuming no change in sales price per unit). (Round interim calculations to four decimal places and final answer to the nearest dollar.)
3. Verify your answer in Requirement 2 by preparing a contribution margin income statement with the total sales increase of 40%.
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.
6. Prepare a contribution margin income statement for one month if the company sells 200 tables.
7. What is the total contribution margin for the month when the company sells 200 tables?
8. What is the unit contribution margin?
9. What is the contribution margin ratio?
What is a company’s cost structure? How can cost structure affect a company’s profits?
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?
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